Both risk averse and yield-hungry investors who have created a bubble in the market for bonds – including both US Treasuries and corporate junk bonds – are in for a rude awakening if things do not go just right, according to an August 22, 2010 InvestmentNews article, “The dangers of the growing bond bubble.”
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The Financial Industry Regulatory Authority on Tuesday said it ordered Morgan Stanley to pay $800,000 for failing to disclose conflicts of interests in thousands of equity-research reports and public appearances of its research analysts since 2006.
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Buried in the 2,300 pages of the new Dodd-Frank Financial Reform Act is a provision called Section 922 that provides for substantial financial rewards for any person who provides “original information” to the SEC that leads to a successful enforcement action relating to the violation of federal securities laws. The whistleblower may be an investor, an employee or other industry insider, or any other member of the public not employed by a law enforcement or regulatory agency. If the whistleblower’s tip leads to a monetary sanction of over $1 million, the whistleblower will be entitled to between 10% and 30% of the amount recovered by the SEC. The new law also provides whistleblowers with legal protection from retaliation, giving them the right to sue for damages if they lose their jobs or are blackballed by the industry. Together, these new provisions provide a powerful incentive for investors and financial professionals to report misconduct in the securities industry, which will hopefully have the long-term effect of deterring fraud and other abuses.
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One good thing that might come out of the Dodd-Frank financial reform act is better self-policing by Wall Street. Not that Wall Street has changed its unscrupulous ways. But the Securities and Exchange Commission is expecting a big increase in tips from senior employees and third parties because of whistleblowing incentives in the new law that can reach seven-figures, as reported by CNBC in an August 9, 2010 article entitled “Wall Street Rewards to Trigger a Surge in Informants.”
A recent USA today article highlights the fact that investment scams usually increase when there is an economic downturn. The article refers to The North American Securities Administrators Association’s recently released list of Top 10 Investor Traps: The list and discussion points, which are located at http://www.nasaa.org/nasaa_newsroom/current_nasaa_headlines/13048.cfm are as follows:
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Mainstream USAToday editors expressed amazement over the “just say no” partisanship of the Republican party and the unnecessarily long and contentious battle to pass the financial reform package (“Mindless partisanship mars passage of banking reform,” July 16, 2010). The editors had though that “the worst financial meltdown since the Depression” would have provided sufficient motivation to rise above the partisan excess that was unfortunately displayed. For instance, they thought that the “chastened banks” would accept change. “But that’s not quite how things worked out. After a few weeks of remorse, Wall Street got its swagger back and fought like mad to preserve its profits.”
Investors will soon be able to see more customer complaints, criminal convictions and rulings against brokers when they check out their broker on the Financial Industry Regulatory Authority’s (FINRA’s) web site through its free online BrokerCheck service, according to a July 14th article in InvestmentNews. While the absence of complaints does not guarantee that brokers will always adhere to “high standards of commercial honor and just and equitable principles of trade,” as FINRA purports to demand, investors should always avail themselves of this opportunity, preferably before doing business with a broker.
Continue reading "Soon You Will Be Able to Learn More about Your Financial Adviser" »
Retention bonuses and other perks are not enough to quiet brokers’ yearning to leave their wirehouse firms for advisory firms or non-wirehouse brokerage firms, according to a recent InvestmentNews article by Hilary Johnson titled “Exodus of brokers still a big threat for wirehouses.” Just 29% of brokers who did not receive a “lock-in” bonus (usually because they do not generate big commissions) said they are “satisfied” with their firm. Tip: As an investor, you should consider it a plus if your broker is not a “big producer.”
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The U.S. Securities and Exchange Commission is investigating misleading marketing by Wall Street banks of so-called “principal protection” notes, according to a recent Bloomberg article by Zeke Faux and Joshua Gallu. The investigation focuses on notes issued by now-bankrupt Lehman Brothers that prominently featured the words “principal protection” or "principal protected" in brochures provided to investors and that were sold as safe investments. Safety-minded investors were shocked when Lehman Brothers went bankrupt and the value of the notes collapsed. Investors had never been told that the notes were really options combined with an unsecured obligation of Lehman Brothers.
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Billionaire investor George Soros recently told Bloomberg: “The collapse of the financial system as we know it is real, and the crisis is far from over,” Soros said today at a conference in Vienna. “Indeed, we have just entered Act II of the drama.” See article by Zoe Schneeweiss and Andrew MacAskill (“Soros Say ‘We Have Just Entered Act II’ of Crisis”).
Continue reading "Billionaire Investor Believes that the Economy is Still in the Danger Zone" »
Big Wall Street banks have until 2022 to comply with the Volcker Rule and unwind their in-house hedge funds. They spent untold sums on lobbyist to fight the Volcker Rule and protect their hedge fund and proprietary trading operations. A research paper on insider trading by hedge funds, soon to be published in the Journal of Financial Economics, may shed some light on what the banks fought so hard to protect.
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The bond market is a bubble about to burst, investor Jim Rogers told CNBC on Thursday. Rogers also said he sees rising inflation in this country right now – anyone who shops sees it, he says. He says some governments – notably the U.S. and the U.K. – are “lying” about inflation for political reasons, because signs of inflation would make the massive government stimulus and bailout spending (bailing out Fannie and Freddie alone is expected to cost $1 trillion) seem unwise. Other countries – Rogers identifies Australia, China and Norway – acknowledge the existence of inflation and are tightening their monetary policies to fight it.
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Exchange Traded Funds have morphed from their origins as more liquid versions of broad-based stock index mutual funds into more extreme varieties that mimic high-risk hedge funds. Edward Robinson described them as “ETFs Gone Wild” in his recent Bloomberg article, and wonders whether they are a financial disaster in the making.
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Historically, municipal bonds have been at the low end of the risk spectrum, but economic realities are changing that assumption. According to a May 28 article in CNNMoney by Sara Behunet titled “Three American cities on the brink of broke,” in 2009, 183 municipal issuers defaulted on $6.4 billion of bond payments – up from 31 defaults on $348 million in 2008. That’s an 1800% increase in dollars and a 590% increase in municipalities in default. This alarming trend is expected to continue, according to the article.
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It’s crunch time for financial reform, and Wall Street banks are lobbying hard to keep a central pillar of financial reform from becoming law, and, at the same time, are planning ways of getting around whatever financial reform restrictions do become law, according to a recent New York Times article by Eric Dash and Nelson D. Schwart titled “Banking Lobbyists Make a Run at Reform Measures.”
Default by a municipal bond issuer has been an exceedingly rare occurrence, but a number of signs suggest that the municipal bond market may be on shakier ground than anyone dreamed possible, according to a recent SmartMoney article by Russell Pearlman, “Municipal Bonds: Derailed.”
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Two recent Wall Street Journal articles may cause investors to reconsider their assumptions about the supposed benefits of exchange traded funds: “Flash Crash May Prove Blemish for ETFs,” by Ian Salisbury (May 13, 2010), and “Danger: Falling ETFs,” by Eleanor Laise (May 29, 2010).
Liz Ann Sonders, Charles Schwab’s chief investment strategist, is skeptical about bonds and emerging markets and believes that “[i]nvestors are doing what they do well, which is chase past performance,” according to a recent article by Mina Kims posted on CNNMoney.com, “Bond investors are chasing the past.”
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The large number of bank failures over the past two years has resulted in big financial losses for investors owning stock in those banks. In most cases, failed banks are taken over by the FDIC, which arranges for the operations to be assumed by another bank -- free of the liabilities of the failed bank. While most account holders’ deposits are safe because they are insured against loss by the FDIC, those who invested in the bank are typically left holding stock that is now worthless. In some cases, shareholders have the option of legal action to recover their losses.
Continue reading "Investors Have Sustained Huge Losses Investing in Small Banks" »
The $2.8 trillion municipal bond market, long considered one of the safest havens for investors, is actually fraught with risk, according to a recent CNBC article titled “More Cities on Brink of Bankruptcy.”
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