Running Out Of Time

by Lisa Doby, Rebel Traders | June 9, 2008

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It's time to get very serious about your hard-earned money. Is it in an IRA or 401(k)? How much of your savings will still be there when you need it? People tell me they aren't smart enough to understand "investment strategies" or they don't have time and "that's why I have a professional handling it," or "I contribute to my company 401(k), I don't need to understand it." Understanding your investments doesn't require a PhD, just the ability to read and add. 

I've been meaning to write about the Bear Stearns bailout, and about the topic of conversation on my cross-country trips. Sorry, but time gets away from me. Much has been written about Bear and JP Morgan by people who know many more details than I do. So I will give you my "bottom line" analysis, which leads right into the "topic of conversation" story.

The alphabet soup of derivatives, (SIV, CDO, CDS, RMBS, etc.) is confusing. The financial instruments that investment banks, and others, have concocted to try and make money, are so complicated, that a whole library of books needs to be written about them. What most of us need to know is, what does this mean to our retirement funds? I'm only going to mention "mortgage bundles", but the following does involve the whole laundry list of derivatives. The mortgages that were bundled up and used as investment vehicles, were then sold to "investors." Who were those investors? A lot of unsuspecting people. Most people, in fact, with any kind of retirement fund being managed by an investment group. Are you saving for retirement using the company plan, diligently setting aside, maybe even by weekly allotment, a certain percentage of your earnings? Do you really know what happens to that money once it has left your hands? Is it at all safe? Sure, there will be ups and downs in the markets, but please carefully consider the following:

JP Morgan's CEO, Jamie Dimon, testified before the Senate regarding the Bear Stearns bailout. This is the part of the prepared statement that should be a huge red flag to everyone:

"...Finally, let me turn briefly to the Committee’s interest in the implications of this rescue for American taxpayers. The key point, in my view, is this: Bear Stearns would have failed without this effort, and the consequences could have been disastrous. The idea that the Bear Stearns fallout would have been limited to a few Wall Street firms just isn’t so. People all over America -- union members, retirees, small business owners, and our parents and children -- are now invested in the financial system through pensions, 401(k)s, mutual funds and the like." (Bold: mine)

In other words, whether or not Mom & Pop and the rest of "Main Street" knew it , their retirement money was at major risk of being decimated. He was saying that the bailout needed to happen; that it was in the best interest of the American people to save Bear Stearns. And, lest you think this was a one time event, or that the risk of further downside has left the building, I highly recommend reading the testimony given that day by Bernanke, Cox (SEC), Steel (Treasury), Geithner (Fed Res of NY), Dimon and Schwartz (CEO of Bear).

As investment banks and government officials continue to try to keep a lid on this boiling pot, there is good news and bad news for all of us "common folk." First, the bad news: the government is loaning money (taxpayer money, YOUR money) at unprecedented levels through the term auction facilities they opened. As the collateral of the borrowing banks deteriorates, which it will because housing prices are falling, the government will simply change the rules on what constitutes worthy collateral. If there comes a time when a bank is not able to repay these "loans" from the Federal Reserve, then they will just extend the loan period. At some point this has to end. Make no mistake, the American taxpayer is bailing out investment banks, which are private firms, regardless of when these pawnshops are closed. But, even now they are discussing the idea of making the auction facility a permanent fixture. Don't like inflation or higher priced oil now? What do you think will happen if they make this permanent? What's next...nationalizing all banks?

I have been traveling quite a bit lately, and everywhere I drive, I talk to people about what is going on in our financial markets. I talk to small business owners, truckers, retirees, near-retirees and young people. Everyone is worried and I don't blame them. But, here is a bit of good news: you may still have time to preserve your capital; and keep the investment companies from using your hard-earned money in order to avoid paying the consequences of their bad financial decisions. While the Federal Reserve, et al., keeps jerking the markets around, you still have time to decide if you will be a better steward of your money than an investment company. If you do want to take your money out of the hands of banks/investment firms, be prepared for a possible struggle. They will, of course, not want you to take your money away them. They may tell you that, due to inflation, being in cash and not some other investment, will simply devalue your money. The rate of return most people are getting now isn't beating the inflation rate, but being in cash means you won't lose what capital you have left. Can they guarantee no loss of capital? Of course not. They will try to convince you that they know better than you how to invest, that they are smarter than you. Is it YOUR money or THEIRS? Have you been told your investments are safe, that it's in instruments that are "as good as" being in cash?

Franklin Biddar wants his money, and says Bank of America Corp. won't let him have it.

The 65-year-old real estate investor from Toms River, New Jersey, said he hasn't had access to cash the bank invested for him in auction-rate preferred shares ever since the market seized up in mid-February. Even when Biddar agreed to sell $100,000 worth of the securities to Fieldstone Capital Group, Charlotte, North Carolina-based Bank of America wouldn't release the bonds, saying the transaction wasn't in his interest, he said. 

``I can't do anything,'' said Biddar, who was so eager to unlock his money that he was willing to accept 11 percent less than what he paid for the securities. ``Bank of America got me into these securities that are supposed to be as safe as a money market, and now they won't get me out.'' 

Bank of America, UBS AG, Wachovia Corp. and at least four dozen other firms that sold $330 billion of securities with rates set through periodic bidding are thwarting attempts to create a secondary market that would allow investors to access their cash, according to investors. Dealers claim they are saving customers from needless losses on securities they marketed as similar to cash-like instruments. 

And, it's not a bad idea to know just what the Sam Hill is being done with your pension money. Would you vote to have your pension money used in the manner noted below?

THE STATE OF WASHINGTON'S PENSION FUND HAS PLEDGED TO INVEST $300M IN A NEW BUYOUT FUND - SOURCE - The fund is looking to raise between $15B-$20b

In the July 28, 2007 Houston Chronicle, I read that the board of the Texas Teacher Retirement System was to invest in real estate. This article is an incredible story, in and of itself! (The archived link didn't work, sorry)

If you don't understand the EXACT nature of an investment, then you might not want your money in it. Do not fall for the argument that these investment professionals know what's best for YOU. I really do hate to paint all of these people with such a broad brush of distrust. Most of them are not "bad" people; they are doing the best job they can within the scope of their knowledge. I may personally like an investment advisor, but that doesn't mean I'm going to risk losing my retirement money, just because he's a nice guy. From this moment on, anyone wanting to be in charge of other people's money, needs to EARN the trust of the people. I hope honesty and integrity come back in style. And every trustworthy, intelligent, independent money manager needs to start speaking up! I know they are out there. 

My point is, it's up to you to decide whether you are willing to protect your own money for the future. There are options available to, at the least, minimize the damage that could occur to your accounts. One example: one can roll over an IRA from one investment company and park it in an online brokerage IRA. That way you know your money is "in cash", and not something "as good as cash." I do recommend Scottrade to everyone I speak to, as they have earned my trust. I have spoken to people in many of their offices around the country, and every single person has been friendly and knowledgeable. They are not investment advisors, but they will walk you through the process of opening any kind of account you want. It's one option. CD's in regional banks are another option. The interest rate isn't great, but it's better than a stick in the eye. You do have options, and it's time to investigate those options that are best for you. It's the money you worked for, and it should be invested in your best interest, not someone else's.

Copyright © 2008 Lisa Doby
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Lisa Doby | Rebel Traders | Palmyra, NJ USA | Email | Website

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