Jim Rogers - Central planners' policies are punishing the prudent in favor of rescuing the irresponsible

I read the following by financial commentator Jim Rogers and it really fits with what I think has been happening for the last couple of years:

To Rogers, the bigger danger that concerns him is the hollowing out of the 'saving class' resulting from this situation. Central planners' policies are punishing the prudent in favor of rescuing the irresponsible. This has happened before in world history, and the aftermath has always had grievous economic, social -- and often human -- costs:

Throughout our history – any country’s history – the people who save their money and invest for their future are the ones that you build an economy, a society, and a nation on.

In America, many people saved their money, put it aside, and didn’t buy four or five houses with no job and no money down. They did what most people would consider the right thing, and what historically has been the right thing. But now, unfortunately, those people are being wiped out, because they are getting 0% return, or virtually no return, on their savings and their investments. We’re wiping them out at the expense of people who went deeply into debt, people who did what most people would consider the wrong thing at the expense of people who did the right thing. This, long-term, has terrible consequences for any nation, any society, any economy.

If you go back in history, you'll see what happed to the Germans when they wiped out their savings class in the 1920s. It didn’t lead to good things down the road for Germany. It didn’t lead to good things for Italy, which did the same thing. There were plenty of countries where it wiped out the people who saved and invested for their future. It’s usually a serious, political reaction, desperation in some cases, and looking for a savior and easy answers is usually what happens when you destroy the people who save and invest for the future.

- PeakProsperity.com

The United States all of a sudden has no shortage of irresponsible people. Nothing is anyone's fault anymore. Too many demand free money and more from the Government. And all too often Liberals and even Conservatives are giving it to them, in exchange for votes at election time.

Don't get me wrong, some people do legitimately deserve assistance, but way less than we are supporting now. And none of these people are going to help build a better country. It is the saver who invest and it is investment that drivers our country and others to an ever better future. It is also savings and investment that improves the welfare of many. Take the 'evil' oil companies. If they really were making so much money and were such cash cows, why not say 'me too' and put some money into these corporations? You can do direct investing in ExxonMobil for as little as $250. Is that too much money, well that is the point of saving. You save until you have enough to buy what you want. Point to someone who has no money and I bet I can point to their way too expensive sneakers, sunglasses, clothing, car, gadgets, vacations, etc... that they also don't have money for but somehow manage to get anyway.

Worse, many of them are liable to have children that will also require support for most of their lives. The Democrats are counting on this, because these people will continues to be their base voters for years to come. 

This is also why the Democrats are pushing to legalize illegal aliens and provide them with a 'Path to Citizenship'. Many of these illegal aliens are 'High Needs' parents. It does not mean that there is something wrong with their children or that their children need special care. Instead, it is the parents that need to be told and reminded about everything about being a good parent to their children. This was as explained to me by a pediatrician in Washington, DC. My kid's first pediatrician. This was during a checkup where she was advising us that she was leaving because she was being burned out due to all the high needs parents she had to deal with. It just so happened that these 'high needs' parents bills were being paid by tax payers. Even the co-pay. It was not that the parents did not have $10, $15 or even $20 to pay for the ability to take their kid to the doctor. It was simply because if they did have to pay anything, they would not take their kid to see a doctor. 

This is the heart of the problem. And this problem will only grow until we stop paying out like a broken ATM.

Go hear to listen to the entire Jim Rogers Interview on Peak Prosperity.

-------------------- --------------------

Obama Refuses Return of TARP Money: "the system still needs government capital."

As the news has been reporting, a number of banks and financial institutions are desperate to return the Government TARP money to get out from under the Government restrictions that are coming about to impact their businesses, restrictions that have come out months after the money has come out in wake of the fake AIG furor. Some banks have already returned the money but other banks are being told by the Government to keep the money for now, apparently on direction of President Obama:

JPMorgan’s Dimon spoke first. He began by complimenting the president on the economic team he’d assembled. And he said his industry needs to explain more directly to the American people that the economic recovery plans are already working. Dimon also insisted that he’d like to give the government’s TARP money back as soon as practical, and asked the president to “streamline” that process.

But Obama didn’t like that idea — arguing that the system still needs government capital. - Politico

This is complete B.S. Maybe it serves these banks well to be trapped into a now forced relationship with the President. And maybe the President is enjoying that the anger with TARP is partly being directed at bank executives. Still, this is not the way Government is supposed to work.

If the Government really thinks that the 'system' still needs Government capital, then they should go and open up bank accounts in these banks. The banks will then be able to loan out a portion of that money or have the money on hand for whatever their business requirements may need it for. On top of that, the Government can earn interest on those deposits.

Better yet, give me some of that money. I will do my best to stimulate the economy!

UPDATE - 4 April 09:
The Wall Street Journal is on the story:

Fast forward to today, and that same bank is begging to give the money back. The chairman offers to write a check, now, with interest. He's been sitting on the cash for months and has felt the dead hand of government threatening to run his business and dictate pay scales. He sees the writing on the wall and he wants out. But the Obama team says no, since unlike the smaller banks that gave their TARP money back, this bank is far more prominent. The bank has also been threatened with "adverse" consequences if its chairman persists. That's politics talking, not economics.

Think about it: If Rick Wagoner can be fired and compact cars can be mandated, why can't a bank with a vault full of TARP money be told where to lend? And since politics drives this administration, why can't special loans and terms be offered to favored constituents, favored industries, or even favored regions? Our prosperity has never been based on the political allocation of credit -- until now.

Which brings me to the Pay for Performance Act, just passed by the House. This is an outstanding example of class warfare. I'm an Englishman. We invented class warfare, and I know it when I see it. This legislation allows the administration to dictate pay for anyone working in any company that takes a dime of TARP money. This is a whip with which to thrash the unpopular bankers, a tool to advance the Obama administration's goal of controlling the financial system. - WSJ

First the banks. Then the health care professionals because you know the Democrats can't stand to see doctors make money for saving lives. And once the Government starts paying for the care, they sure as hell are going to dictate compensation for doctors and nurses just like they plan to do for bankers. And just like it is the bankers fault that you're poor, it will be the doctor's fault that you're sick! (See: Government Health Care - Government Dictated Salaries!)

-------------------- --------------------

Now the US Government Has A Problem With Short Sales?!?!?!

It is funny how all of a sudden the US Government takes an interest in something once it becomes liable for the cost.

Takes this news item:

US regulators will take emergency action to stop abusive short-selling in shares of financial institutions such as mortgage financiers Fannie Mae, Freddie Mac and Lehman Brothers.

Christopher Cox, Securities and Exchange Commission chairman, told legislators yesterday that the agency would issue an emergency rule to stop so-called "naked" short-selling of shares in significant financial entities. The SEC will also consider new rules to extend those trading limits to the rest of the market.

In "naked" short-selling, traders aim to profit from selling shares they do not own and have not borrowed. The emergency rule would require any person making a short sale to borrow the securities before the short sale is effected and deliver the securities on the settlement date. - FT.com

So now that the US Treasury might be dealing with the collapse of Fannie Mae and Freddie Mac stock, they have a problem with short sales of stock, especially in cases of naked shorting. Keep in mind that up to this point the Government and stock market regulators have basically dismissed ALL complaints about stock market short sale abuses.  But now, not only do they appear to admit that there is substantial naked shorting, but that there is also 'abusive' naking shorting as well.

Still, this is pretty damn short sided since it only applies to certain large companies specifically named in the order. I guess it is still ok to abusively short other stocks.  This limited order might oddly push abusive short sellers to other stocks increasing the effect on them of this abusive practice. Lets forget naked shorting for a minute and just concentrate on the shorting of stock.

A person ‘shorts’ a stock by borrowing it and then selling it. He then hopes to make a profit by buying the stock back at a lower price. Short selling is normally defined as an ‘accepted’ practice in the Stock Market.

Short selling:

An investor who sells stock short borrows shares from a brokerage house and sells them to another buyer. Proceeds from the sale go into the shorter's account. He must buy those shares back (cover) at some point in time and return them to the lender.

Shorting has the effect of increasing the total number of shares available. Imagine a company that has ten shares of stock. I own five of the shares and you own five. Your shares are borrowed by a broker who then sells them. The end result, I own five shares, you own five shares, buyer ‘x’ owns five shares. That totals fifteen shares. The way the professionals reason that this is ok is because somewhere there is shorter ‘y’ who owes fives shares. In this basic example, the total number of shares available was increased by 50%. However, there are plenty of stocks with five and even ten percent of the stock ‘float’ shorted. That increases the number of shares available by millions.

Not very fair is it?  Now this situation is with the shares being properly 'borrowed'.  I question the validity of being able to short a stock. Unfortunately for stockholders, shorting a stock has the result of increasing the amount of shares that are available for sale.

A result of short sales is an increase in the supply of shares available to be sold at every price level and reducing the pressure on the stock price to rise in order to meet a demand for the shares, even if all the stockholders have no intention of selling, since others are willing to take your shares and sell them (for you.) It is almost if the system is stacked to the side of selling.

Now imagine the increase in the available pool of shares when brokers start naked selling them.

Let’s say that none of a company's stockholders are interested in selling their stock and none are available to borrow to short, but a broker has a client (if not himself) who is just dying to short it. This brings us to the practice/abuse of ‘naked shorting.’

Naked shorting is when a stock is sold short but the ‘borrowed share’ is never delivered three days later at settlement time. Essentially, the broker sold the share without ever buying or borrowing it.

In the U.S., in order to sell stocks short, the seller must arrange for a broker-dealer to confirm that it is able to make delivery of the shorted securities. This is referred to as a "locate", and it is a legal requirement that U.S. regulated broker-dealers not permit their customers to short securities without first obtaining a locate. Brokers have a variety of means to borrow stocks in order to facilitate locates and make good delivery of the shorted security. The vast majority of stocks borrowed by U.S. brokers come from loans made by the leading custody banks and fund management companies (see list below). Sometimes, brokers are able to borrow stocks from their customers who own "long" positions. In these cases, if the customer has fully paid for the long position, the broker can not borrow the security without the express permission of the customer, and the broker must provide the customer with collateral and pay a fee to the customer. In cases where the customer has not fully paid for the long position (meaning, the customer borrowed money from the broker in order to finance the purchase of the security), the broker will not need to inform the customer that the long position is being used to effect delivery of another client's short sale. - Wikipedia

This is not an acceptable way to run a market. Not only that but the “locating” of these shares is deceptive. Take a look at how the regulators define locating stock to short:

Question 4.1: How should broker-dealers determine “reasonableness” to satisfy the locate requirement of Regulation SHO?

Answer: Rule 203(b)(1)(ii) permits a broker or dealer to accept a short sale order in an equity security if the broker-dealer has reasonable grounds to believe that the security can be borrowed so that it can be delivered on the settlement date. “Reasonableness” is determined based on the facts and circumstances of the particular transaction. What is reasonable in one context may not be reasonable in another context. The Commission provided some examples of reasonableness in the Adopting Release. (69 FR at 48014 and Footnotes 58, 61 and 62).

Why on earth is the settlement day for trades still three days later when we have electronic trading? How is it possible for a broker to sell shares of a stock that it does not have, without landing in jail? This is criminal behavior.  It only the regulations that permit this sort of behavior. How is it that a broker is permitted to sell short shares if he has a reasonable certainty that he will be able to locate shares to borrow? How is it that I cannot buy actual shares unless they are sure I have the funds in my account before I even place the order, let alone let me provide funds on the settlement date. The rule should be simple; you cannot short a stock unless you have the borrowed shares in-hand.

Better yet, they should do away with short selling of stock.  If you want to sell a stock, you should buy it first!

Previous Related Posts:
"the biggest global margin call in history" - 20 Aug 07
You should not be trading on Margin - 9 Jan 2006 (READ)
Congress Should Investigate Short Selling Records - 9 June 2006
Are Brokers 'Screwing' Stockholders through Short Selling? - 6 April 2006
Criminal Charges for Hedge Fund Over Naked Shorting - 9 Dec 2006
Morgan Stanley fined $2.9 Million for Rogue Trading - 26 Oct 2006
Do You Know If You Have A Margin Account? - 2 May 2007





**********

Stockbrokers Caught Abusing Client's Money - Oct 2007

Here are some excerpts from the FINRA (formerly known as NASD) October, 2007 Disciplinary Actions Report where stockbrokers were caught either taking liberties with their client's accounts without permission or borrowing/stealing their client's money.

The total amount of money misused/stolen from investors listed below is $242,000. (Some entries do not list the amount taken.)

Individuals Barred or Suspended

Ramona Marie Bianchi (CRD #3126133, Registered Representative, Harrisburg, Pennsylvania) submitted a Letter of Acceptance, Waiver and Consent in which she was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Bianchi consented to the described sanction and to the entry of findings that she obtained possession of an automatic teller machine (ATM) card for a public customer’s account and, without the customer’s knowledge or authorization, used the ATM card to make unauthorized cash withdrawals from the customer’s bank account, and unauthorized purchases totaling $68,000 for her own benefit. (FINRA Case #2007008767001)

Brandon W. Cade (CRD #5062931, Registered Representative, Chicago, Illinois) was barred from association with any FINRA member in any capacity. The sanction was based on findings that Cade withdrew $1,300 from his teller cash drawer at a bank affiliate of his member firm without permission and used the funds for his own purposes. The findings stated that Cade failed to respond to FINRA requests for information. (FINRA Case #2006006367801)

Wayne Kenneth Campbell Jr. (CRD #4676905, Registered Representative, Dover, New Hampshire) submitted a Letter of Acceptance, Waiver and Consent in which he was fined $5,000 and suspended from association with any FINRA member in any capacity for 90 days. The fine must be paid before Campbell re associates with a FINRA member following the suspension, or prior to any application or request for relief from statutory disqualification is filed. Without admitting or denying the findings, Campbell consented to the described sanctions and to the entry of findings that he signed public customers’ names to account transfer forms and to documents used in connection with the purchase of variable annuities without the customers’ knowledge, authorization or consent. The suspension in any capacity is in effect from September 17, 2007, through December 15, 2007. (FINRA Case #2006006481301)

Dale Lewis Cash (CRD #4909387, Registered Representative, Oxford, Alabama) submitted a Letter of Acceptance, Waiver and Consent in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Cash consented to the described sanction and to the entry of findings that he affixed a bank financial specialist’s signature to an instrument without the specialist’s authorization, knowledge or consent in order to withdraw $5,100 from the bank for a public customer’s benefit, but failed to assign the funds to any customer account. The findings stated that Cash’s failure to assign the funds to a customer account prevented the bank from identifying the customer, thereby incurring a loss for the bank. (FINRA Case #2006006319201)

James Richard Clayborn (CRD #4844986, Registered Representative, Bristol, Indiana) submitted a Letter of Acceptance, Waiver and Consent in which he was barred from association with any FINRA member firm in any capacity and required to pay $118,287.39, plus interest, in restitution to public customers. The restitution must be paid before Clayborn re associates with a FINRA member following the suspension, or prior to the filing of any application or request for relief from statutory disqualification.

Without admitting or denying the findings, Clayborn consented to the described sanctions and to the entry of findings that he misused approximately $150,000 from public customers, for his personal expenses. The findings stated that Clayborn, in an effort to conceal his misappropriation of funds from the customers, created and distributed a false account statement that purportedly verified that $80,000 was invested with his member firm for the customers. (FINRA Case #2006005927801)

Thomas Anthony DeMarco (CRD #4608717, Registered Representative, Springfield, Illinois) submitted a Letter of Acceptance, Waiver and Consent in which he was barred from association with any FINRA member firm in any capacity. Without admitting or denying the findings, DeMarco consented to the described sanction and to the entry of findings that he directed that $5,000 were withdrawn from a public customer’s savings account to purchase additional shares in mutual funds, but the funds were not used as directed. The findings stated that DeMarco discovered the funds in his desk drawer six weeks later, at which time he forwarded the funds to his member firm. The findings also stated that DeMarco failed to timely respond to FINRA requests for information. (FINRA Case #2006004803301)

Carolyn Sue Everhard (CRD #2344119, Registered Representative, Cincinnati, Ohio) was barred from association with any FINRA member in any capacity. The sanction was based on findings that Everhard received $6,400 from a public customer for investment purposes and converted the funds to her own use and benefit without the customer’s knowledge, authorization or consent. The findings stated that Everhard failed to fully respond in a timely manner to FINRA requests for information. (FINRA Case #20050025930)

Norman R. Flemens (CRD #3212865, Registered Representative, Las Vegas, Nevada) submitted a Letter of Acceptance, Waiver and Consent in which he was fined $5,000 and suspended from association with any FINRA member in any capacity for 18 months. The fine must be paid immediately upon re association with a FINRA member firm following the suspension, or prior to the filing of any application or request for relief from statutory disqualification. Without admitting or denying the findings, Flemens consented to the described sanctions and to the entry of findings that he received checks and/or letters of application from public customers to transfer funds to effect the purchase of mutual fund company shares, and delayed entering the checks on his member firm’s checks-received blotter and delayed forwarding the checks and processing applications to effect the purchases, thereby failing to execute customer orders.

The suspension in any capacity is in effect from September 4, 2007, through March 3, 2009. (FINRA Case #2006005294301)

Daniel Stephan Flitt (CRD #2965169, Registered Representative, Buffalo, NewYork) submitted a Letter of Acceptance, Waiver and Consent in which he was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Flitt consented to the described sanction and to the entry of findings that he borrowed $2,660 from a public customer without his member firm’s approval and contrary to his firm’s written procedures prohibiting representatives from borrowing money from customers. The findings stated that Flitt failed to respond to FINRA requests for information. (FINRA Case #2006005734401)

Michael J. Menendez (CRD #4895632, Registered Representative, Chandler, Arizona) was barred from association with any FINRA member in any capacity. The sanction was based on findings that Menendez misappropriated approximately $3,000 that belonged to his member firm’s affiliated bank and failed to respond to FINRA requests for information. (FINRA Case #2006005688201)

David Anthony Nagler (CRD #1190128, Registered Supervisor, Santa Fe, New Mexico) submitted an Offer of Settlement in which he was fined $10,000 and suspended from association with any FINRA member in any capacity for 20 business days. The fine is due and payable either immediately upon re association with any FINRA member firm following the suspension, or prior to the filing of any application or request for relief from statutory disqualification. Without admitting or denying the allegations, Nagler consented to the described sanctions and to the entry of findings that he borrowed $3,000 from a public customer contrary to his member firm’s written procedures prohibiting its registered representatives from borrowing or lending money from or to a client under any circumstances. The findings stated that Nagler failed to request or obtain his firm’s permission to borrow money from a public customer. The findings also stated that Nagler misled another member firm during the hiring process when he failed to advise the firm that he had been permitted to resign from a previous firm for violating its policy prohibiting borrowing funds from customers.

The suspension in any capacity was in effect from September 4, 2007, through October 1, 2007. (FINRA Case 2005003406001)

Claudia Reyes (CRD #4815334, Registered Representative, Los Lunas, New Mexico) submitted a Letter of Acceptance, Waiver and Consent in which she was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Reyes consented to the described sanction and to the entry of findings that she received more than $3,000 from customers of an insurance company affiliate of her member firm. Reyes either failed to forward the full amount of the customers’ payments or did not forward any of the payments to the insurance company affiliated with her member firm. The findings stated that Reyes acted without the customers’ knowledge and consent, thereby improperly using customer funds. (FINRA Case #2006006912001)

Decisions Issued

Their Note: "The Office of Hearing Officers (OHO) issued the following decision, which has been appealed to or called for review by the NAC as of August 31, 2007. The NAC may increase, decrease, modify or reverse the findings and sanctions imposed in the decision. Initial decisions which time for appeal has not yet expired will be reported in subsequent FINRA Notices."

Brian James Kelly (CRD #2270427, Registered Representative, Severna Park, Maryland) was barred from association with any FINRA member in any capacity. The sanction was based on findings that Kelly churned a public customer’s account and engaged in trading in the account that was unsuitable due to the quantity of trades and excessive use of margin. The findings stated that Kelly exercised discretion in the customer’s account without his member firm’s prior written approval.

This decision has been appealed to the NAC and the sanction is not in effect pending consideration of the appeal. (FINRA Case #E9A2004048801)

Joseph Andrew Zaragoza Jr. (CRD #2417735, Registered Representative, Chicago, Illinois) was barred from association with any FINRA member in any capacity. The sanction was based on findings that Zaragoza effected discretionary transactions in a public customer’s account without the customer’s prior written authorization and his firm’s prior written acceptance of the account as discretionary. The findings stated that Zaragoza recommended and effected excessive trading in the customer’s account despite the customer’s investment objectives and financial situation. The findings also stated that Zaragoza failed to submit email correspondence to his firm for review and approval before sending it to the customer. The findings also included that Zaragoza engaged in outside business activity for compensation and failed to give his member firm prompt written notice.

This decision has been appealed to the NAC and the sanction is not in effect pending consideration of the appeal. (FINRA Case #E8A2002109804)

Source: October FINRA Report (PDF Format)

Of course, you have to wonder about how much of this activity is going on without being noticed.

NASD Monthly Disciplinary Actions 2007


Previous:
Stockbrokers Caught Abusing Client's Money - Jan 2007
Stockbrokers Caught Abusing Their Client's Money - Dec 2006

Are Brokers 'Screwing' Stockholders through Short Selling? - 6 Apr 06

You should not be trading on Margin - 9 Jan 06
Do You Know If You Have A Margin Account? - 2 May 07

"the biggest global margin call in history" - 20 Aug 07

No Bailout for Homeowners in Trouble

Who says the US has no Social Welfare System?

As most of us know, with a couple of exceptions for flippers in denial, there is a huge problem in real estate with homeowners unable to pay their mortgage payments.

As a result there have been increasing calls for the Government to bail out these 'unfortunate' struggling homeowners who are now in a real mess. A mess partly created by those who are in trouble now.

Many homebuyers took out adjustable-rate mortgages to take advantage of low interest payments for the first two or three years. When their rates reset higher after the initial period, those buyers couldn't handle the bigger bills. - Forbes

Stupid. Simply stupid. Especially considering that fixed rate mortgages were at their lowest levels in a long time.

People have forgotten a couple basic facts:

- Your house is not an ATM machine.
- You don't buy something that you can't afford.
- A house is not an investment you trade like a stock.

Now take a look at who will benefit by a bailout:

A presidential bailout of homeowners who can't pay their mortgages would likely be a boon for the companies making the mortgages. Originators like Countrywide Financial (nyse: CFC), Accredited Home Lenders (nasdaq: LEND), and H&R Block (nyse: HRB), which has a subprime lending subsidiary, have been crunched by rising defaults. It would also benefit companies like Thornburg Mortgage (nyse: TMA) that hold mortgages for investment. - Forbes

These are the very firms that thought it was perfectly fine to approve loans to people they knew could not afford them.

The basic fact is that many of the people in trouble now knew that their loans would reset in a couple years time. They just figured that they would sell their homes to some bigger fool. Unfortunately for them, everyone had the same idea. That would not have been a problem, except for the fact that none of these people realized that they were the bigger fools.

As we will all eventually learn, this problem is too big to bailout, partly because even with an interest rate of 0%, many homeowners now in trouble would still be unable to afford their homes, because they lied about their income.

Right now we’re seeing 30-40 calls a day. And 85 percent of these families we can’t help, simply because the gap of what they can afford and should have been able to afford is so huge,’ said Ester Cadavid, chief development officer of Los Angeles Neighborhood Housing Services. ‘They bought too much house. Even if we refinance them into a fixed-rate (mortgage), the payment is still too much. - Housing Bubble Blog

Had they been truthful from the start, they never would have been able to obtain the mortgages they are now complaining about. Lets not forget that many committed a crime when they lied to obtain a mortgage.

Another issue in all of this is that a good number of homeowners in trouble own more than one home. Of course they lied on multiple loan applications in order to pull off this feat. Many of these homes were purchased with no money down, so the homeowner loses almost nothing compared to the damage their foreclosure will do to the holder of the loan. (Oddly enough, homeowners in trouble who put down large down payments actually get hurt the most, since they actually have an investment in the property.) Paying only interest on your house loan is not much different that renting, other than a renter can call management when he has a problem with something, or better yet, move away. (Yes, their credit rating is ruined, but that is because it is merely recording the poor quality of their credit-worthiness.)

Lets say there is a bailout. Do you help those who lied? Do you help those who have multiple houses? What about those who used their homes as ATM machines (either through a home equity line of credit or refinanced in order to cash out) and spent whatever liquidity they might have had on vacations and expensive cars and other toys? What about those who used their house cash to pay off existing credit card debt only to max out their cards again? What about those who bid up the prices of houses that they could not afford in the first place? What about all of those properties that were purchased as investments? How about those who paid the lowest payment in a negative ARM loan from day done? What about those who NEVER made a mortgage payment?

What about those people who were just-plain-stupid?

The Orlando Sentinel reports from Florida. “The champagne-popping days are over for Natalie and David Luongo, who banked enough money flipping a South Florida condo three years ago to stage a $100,000 wedding. Should they walk away from the $117,000 deposit they plunked down on another investment condo in the ritzy Miami-Dade enclave of Bal Harbour? Or should they close on the one-bedroom unit, which is similar to others now on the market for less than the $585,000 they agreed to pay?”

“‘It’s painful and scary,’ Natalie Luongo said. ‘We saw the frenzy, and we bought in. Now we’re paying the consequences.’” - As highlighted on The Housing Bubble Blog

Sure mixed in all of this is a minority who is in trouble and probably deserve help. However, there is no saying that they will take advantage of any assistance made available wisely. Really, if you were responsible when purchasing a house, you would have done your best to obtain a fixed-rate loan (which were at historic lows) that way you would have known what your mortgage payment would be every month for the life of the loan and could plan accordingly. That would leave only loss of income or family emergencies to risk making those payments. People in trouble took the riskiest loans they could. That type of behavior does not warrant assistance.

There is another problem here. This housing market is headed down no matter how much money the Government attempts to throw at it. It has grown just too big to the point that most people cannot afford houses at the current asking prices. There is another simple fact in that many of the people in trouble own multiple properties. Renters like myself will be hard-pressed to purchase one house, let alone multiple properties. This is an issue of plain simple supply and demand. And the rest of us are not going to buy at today's inflated prices because we can all find places to rent that cost less than what would be the monthly interest due for buying these houses.

There currently exists ways to end troubled home-ownership. Home owners can either let the house be foreclosed on, they can file for bankruptcy or attempt to negotiate with their lender, or whoever they are sending their payments to, some sort of reduced payment plan. With the value of these mortgages being slashed drastically on the resale market, the newest holders of the loans have leeway to reduce the payback amount to prevent the home 'owner' from defaulting. Then, there is the possibility of attempting a short-sale.

For a whole blog's-worth of examples of why homeowners in trouble should not be bailed out, go read the Bubble Markets Inventory Tracking blog.

For many examples of abusive lending practices, go read Housing Bubble Casualty.com, who comments as follows about a housing market bailout:

Creative financing, no risk assessment, and loose credit created this monster…risk assessment, tighter credit, and traditional financing (fixed rate loans paying principal) will rein it back in. If the mortgage industry and the secondary market didn’t discard risk assessment the past 5-6 years to get these ‘high risk’ people loans, they would NOT be defaulting today. - Housing Bubble Casualty.com

So, What to do to help the Economy?

If the Government is so interested in pouring money into the market to help the economy, then they should give the money to me and the millions of other American who acted responsibly over the last couple of years, while others raced headfirst into this mess.

We have our accounts in order, or are working in the right direction. We are the one's spending within our means. So how about increasing our means? We will make the best use of the money and unlike if the Government were to give it to the idiots, we won't be needing more money in a couple of years (or months). For me, I can go out and finally buy a new car (Mine has 190,000 miles on it.) Hell, I could even consider getting a second one for the wife. We can go out and buy a nice large flat screen TV and a house full of furniture to go around it. Give me enough money, and I'll even consider buying one of these houses that is currently held by a distressed buyer. One thing is for sure, we'll limit ourselves to a house we can afford. If the Government wants to help, then that is how they should go about doing it.

I think that as the housing market melts down nationwide, the calls will become louder not for a bailout, but for placing those responsible in jail. The appraisers, the predatory lenders and the flippers should not be allowed to get away with any criminal activity they might have done. There has not been much enforcement in the past, but I expect that will change as news gets out over the losses these poor-quality loans will generate.

This is surely just the beginning of the story.

P.S. -There should be no change in the Taxation of Forgiven (Short Sale) Income:

This is a bad idea:

Quick example: you buy 450k home. You have trouble making payments. You refi or negotiate with lender and the property is now worth 350k. That 100k that the lender ‘forgave’ is currently taxable as income. But under the proposed change, that would be a free ‘100k’. I know that taxes are a pain (see FairTax.org) but why should somebody get a ‘free’ 100k or whatever the amount is, and not have to pay ANYTHING on it. Again, it is another ‘reward’ for making bad financial decisions. - Housing Bubble Casualty

And a little clarification by a commenter on the site:

Another pointed out, “The vast majority FBs will never have to pay any extra taxes even without changing the rules (therefore, this rule change will be worthless). ‘There’s a very important exception to the debt-relief-equals-taxable-income rule. Although lenders must send 1099-C forms reporting taxable income whenever cancelled debt is $600 or more, the tax bill itself is forgiven if the homeowner is bankrupt or insolvent.’ Link here.” - Housing Bubble Blog

There needs to be a price to pay for irresponsible behavior. Take gambling at Las Vegas. Sometimes you win, sometimes you lose. Most people will walk away as losers. While the Government gives you a little leeway on your losses, they are not going to give you your money back. It should be no different for housing. (The Government already does not tax interest paid on a mortgage.)

"the biggest global margin call in history"

I had written a while back about the dangers of having a margin account. Looking at the last week's activity in the stock market, I know that people were getting burned simply by trading on margin and not being able to survive the market swings. Had I had my investments in a margin account, I would have been forced to sell or my broker surely would have sold due to margin call issues. That would have been unfortunate, since at the opening of the market on Friday, my account had not only gained back the losses, but also triggered a sell order as the stock opened much higher than the day before, closing a successful investment. An investment that was down thousands of dollars only two days earlier. (And the stock is now down $2.50+ from that sell point, simply due to moving with the market .)

NEW YORK - They are dreaded words on Wall Street, and they're becoming more common: margin call.

More money invested in the stock market is borrowed from brokers than ever before, and some investment houses are asking for theirs back through what are known as margin calls. It's one of the reasons why Wall Street has sold off so sharply in recent days.

"It's being referred to as the biggest global margin call in history," said Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors. A flood of margin calls is typical in a market correction, he said, and "it can turn small declines into large declines. That's why leverage is dangerous." - TBO

For some reason 'investors' only see the benefits of trading on margin, the possibility of increased profits. However, the possibilities also extend to increased losses, up to wiping out your entire investment.

To reinforce my belief that you should not be trading on margin, comes the news that even professionally-managed hedge funds are getting margins calls.

Why is a hedge fund like Global Alpha affected by events in markets far removed from its bread-and-butter exposure? The root of the problem is high leverage. For example, when this debacle hit, one of Goldman's funds was leveraged 6 to 1, so every dollar of investor capital claimed six dollars of positions. This is the dry kindling for a market firestorm. When things go bad for a highly leveraged hedge fund, it gets a margin call and has to sell assets to reduce its exposure. Naturally, as it sells, prices drop. The falling prices mean a further decline in the fund's collateral, forcing yet more selling. And so goes the downward cycle.

Hedge funds that hold the toxic CDOs (collateralized debt obligations) can easily undermine those that don't. It can be difficult to sell the stuff that's causing the problem; those markets are beyond redemption. So if you can't sell what you want to sell, you sell what you can sell. The fund looks at its other holdings, focusing on the more liquid positions and reduces its exposure there. This causes pressure on these markets, markets that have nothing to do with the original problem, other than the fact that they happened to be held by the fund that got in trouble. Now that these markets are feeling the heat, other highly leveraged funds with similar exposure will have to sell. This leads to another cycle of selling, but in what was up to that point a healthy market unrelated to the initial turmoil. - Time

There is an important difference between you and them getting a margin call. They can go and borrow money to pay their margin call. Part of the recent Fed action was loans made for this purpose. You unfortunately, will have to pony up the money yourself, if you have it. Chances are, given the severe declines recently, your broker did not give you time to meet your margin call and sold some/all of your holdings before you could even react.

Margin accounts make you an investing partner with your brokerage. Unfortunately, their goals are not always the same as yours, and that can really cost you.

Feel free to add in the comments your own experience as there is not much information available on what is happening to small investors.

P.S.

One issue that apparently has increased the volatility of the market has been a change in the rule for shorting stocks. Before, to short, you could only do so on an up-tic, meaning that the stock just traded up. That rule is now gone. This now allows brokers to short a stock while it nosedives, adding their shares to the pile of those already looking to sell. As supply increases....

Previous posts:
You should not be trading on Margin - 9 Jan 2006 (READ)

Congress Should Investigate Short Selling Records - 9 June 2006
Are Brokers 'Screwing' Stockholders through Short Selling? - 6 April 2006
Criminal Charges for Hedge Fund Over Naked Shorting - 9 Dec 2006
Morgan Stanley fined $2.9 Million for Rogue Trading - 26 Oct 2006
Do You Know If You Have A Margin Account? - 2 May 2007

Do You Know If You Have A Margin Account?

This does not surprise me at all:

Investors often don't even know they have a margin account, even though many brokerage firms automatically put investors into margin accounts when they sign up. The incentives are plenty: Not only do brokerages reap interest charges and transaction fees, they also profit by lending shares held in margin accounts to other traders. To avoid getting sucked dry, investors must ask to be put into cash accounts. - Forbes

There is no law against being stupid, but beware since there is no law against taking advantage of your stupidity either. The same is true for being careless with your money as you will quickly find it in the hands of others.

Somewhere in the brokerage account opening package is a clause that approves the opening of a margin account instead of a cash account. (A cash account is one where you pay the full price of the stock at the time you purchase it.) You are expected to read the application. Even if you did not, once the account is open you would see margin data in your portfolio, and eventually being charged for taking advantage of margin the first time you purchased more stock than you had deposited money for. If you don't know if you have a margin account, then you should seriously consider not investing.

So how do different firms present the option of opening a margin account? I went to TD Ameritrade, which I currently use, and checked out the open a new account option. As you can see from the screen shots, TD Ameritrade requires you to request the ability to trade on margin. No trickery here.

TDAmeritrade:

Too bad they are not as upfront with you when it comes to their paper application. It is setup to for you to automatically open a margin account, unless you opt-out.

"All qualified accounts are opened as margin accounts, allowing you to borrow against the value of certain securities"

This is the source of the problem mentioned in the article. By wording it this way, it gives the impression that it is normal to open a margin account. So why would you not open a normal account, right? It seems pretty strange that they would require you to request margin approval when opening the account online, but require you to opt out of a margin account when filling out a paper application. Are they guiding older, less internet savvy, clients to margin accounts? I think TDAmeritrade has some explaining to do here. Not for anything, many people are going to miss the opt-out because they are busy filling out the other info requested in the section. So how about giving those using a paper application the same clear choice that they are given when applying online?

eTrade:
Pretty open and clear application process here. (I did not check their paper application as it is delivered by mail.)

Schwab:
Schwab seems to have the sneakiest application process that I can see, since they pre-select margin trading for your account type, even if you mark on the previous screen that you have low income and have no investment experience. Come on Chuck, how about listening to your new clients who tell you that they have no investment experience. Do you really think putting them in a margin account is the right thing to do? How about putting that in your next commercial?

Good luck finding that account agreement mentioned in the above screenshot as I did not see a clear link to one on their website. Here is one clause that I found interesting from their margin agreement:

We may transfer Securities and Other Property from any brokerage account in which you have an interest to any other brokerage account in which you have an interest, regardless of whether there are other Account Holders on either Account, if we determine that your obligations are not adequately secured or to satisfy a margin deficiency or other obligation. You agree to pay on demand any account deficiencies after liquidation, whether liquidation is complete or partial. - Schwab Margin Agreement extract (4/28/07)

So, if they decide that you are in trouble on your account, they have the right to raid any other account you might have, like your child's account that your a custodian on, or perhaps a parent's account, depending on what 'in which you have an interest' means. Taking money from joint accounts is pretty a pretty low thing to do, even for a brokerage.

Now why does this matter? Take this recent alert from the SEC:

NASD Warns Investors of the Risks Associated with Using Margin to Purchase Securities

Washington, DC — NASD today issued an updated Investor Alert warning investors about the risks associated with trading on margin. Since the release of a previous Alert on this topic in 2003, the amount of debt taken on by investors to buy securities has reached a record high of $321.2 billion in February 2007.

"We are concerned too many investors are unaware they could suffer substantial financial losses by using debt to purchase securities," said Mary L. Schapiro NASD Chairman and CEO. "By updating our Alert on this topic, we hope to remind investors not to underestimate the risks involved."

The Alert, Investing with Borrowed Funds: No "Margin" for Error, explains that investors who cannot satisfy margin calls can have large portions of their accounts liquidated under the market conditions at the time, favorable or unfavorable. That liquidation can result in substantial losses. Some of the risks associated with opening a margin account explained in the Alert are:

* Firms can force the sale of securities in accounts to meet a margin call.
* Firms can sell securities without contacting the account holder.
* Account holders are not entitled to choose which securities or other assets can be sold.

* Firms can increase margin requirements at any time and are not required to provide advance notice.

* Account holders are not entitled to an extension of time on a margin call.
* Account holders can lose more money than is deposited in a margin account.
* Account holders should ask whether they will automatically be placed into a margin account and, if so, what the rate of interest will be and what circumstances would trigger a margin loan.

Along with explaining the risks involved with margin, the Alert provides some basic facts about purchasing securities on margin and where to turn for help. Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge. In 2006, members of the public used this service to conduct more than 4.7 million searches for existing brokers or firms and requested more than 207,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasd.com/brokercheck. Investors can also access this service by calling (800) 289-9999.

Too many rookies trading on margin result in inflating the stock market like a bubble. The problem with bubbles is that they pop and the more margin accounts that are long in the market, the more dramatic the drops are when the market goes red. When the stock market has a bad day, margin accounts get margin calls. Since many will not have the money to meet a margin call, they will instead sell driving the price of stocks lower. This is combined with brokerages liquidating accounts of those who have not cleared their margin call. Anyway, the price of most stocks fluctuate, and many will fluctuate due to a generally down day, even though there is nothing wrong with the stock itself.

Do you still want that margin account?

I want you to have one. It is those really bad days with lots of margin calls where I pick up some good stock being sold cheap.

Hopefully your not using any margin so you can request to have your account changed to a cash account.

Mad Money Is Piling Into Margin Accounts - Forbes

Other Related:
You should not be trading on Margin - FFI 9 January 2006
Congress Should Investigate Short Selling Records - FFI 9 June 2006

Update: McLean Housing Bubble - *** Failed Auction? ***

It appears that the auctions for this house was a failure as this week a For Sale sign once again appeared in front of the house. (Note: it is possible that there was an auction buyer who is now trying to flip the house himself.)

According to the website listed on the sign, the selling price is currently $815,000.

One reason I suspect that the house did not sell was the lofty expectation that the flippers had when they first started trying to sell this house. Here is a snapshot from the withdrawn listing:

Spectacular whole house renovation includes 4 bedrooms and 4 fabulous baths, plus a 2 car garage. Plus, a major price reduction from $1,250,000 to $825,000. Nice corner lot with plenty of expansion room. - Paton Real Estate

Over a million for this house. They must have been crazy. I suspect that they current owners are in a bind in that they cannot get any offers that match what they paid for the house, not to mention all the money that they spent renovating it.

Anyway, new owners or not, clearly there is a problem in McLean in that this house cannot find an owner interested in keeping it. Then there is the house next to it which is also on sale, and then the four others within a block that are also for sale. What a mess.

The house's auction website is located here.

"Acceptable to seller" is the key problem.

Previous post:
McLean Housing Bubble - Auction - 1 April 2007

Stockbrokers Caught Abusing Client's Money - Jan 2007

Here are some excerpts from the NASD January, 2007 Disciplinary Actions Report where stockbrokers were either taking liberties with their client's accounts without permission or borrowing/stealing their client's money.

The total amount of money misused/stolen from investors listed below is $1,178,307.25. (Some entries do not list the amount taken.)

Individuals Barred or Suspended

Mustapha Youssef Aljaroudi (CRD #3274506, Registered Representative, Miami, Florida) submitted an Offer of Settlement in which he was barred from association with any NASD member in any capacity. Without admitting or denying the allegations, Aljaroudi consented to the described sanction and to the entry of findings that he engaged in a pattern of misconduct that included falsification of essential public customer information on a new account opening form and a sale of stock in a customer’s account without the customer’s knowledge, authorization or consent. The findings stated that Aljaroudi converted customer funds, in that he received a customer’s check from a clearing firm, endorsed the check without the customer’s knowledge, authorization or consent, and deposited the check into his personal bank account without repaying the customer or accounting for the funds. (NASD Case #2005001185301)

Kathy Lynn Gallagher (CRD #2189903, Associated Person, Pocatello, Idaho) submitted an Offer of Settlement in which she was barred from association with any NASD member in any capacity. Without admitting or denying the allegations, Gallagher consented to the described sanction and to the entry of findings that she misused $218,558.00 of public customers’ funds intended to be invested on the customers’ behalf, and rather than depositing the funds into the customers’ accounts as instructed, Gallagher caused the funds to be deposited into a bank account she controlled without the customers’ knowledge, authorization or consent. The findings stated that Gallagher forged, or caused to be forged, a registered representative and public customers’ signatures on Investment Distribution Forms, causing funds to be wired from the customers’ accounts to accounts under her control without the customers’ knowledge or authorization to conceal her misuse of funds. The findings also stated that Gallagher falsified books and records, and forged documents and customers’ signatures in order to conceal her misuse. (NASD Case #2005000863701)

Elliott Matthew Glover (CRD #4476082, Registered Representative, New Castle, Delaware) submitted a Letter of Acceptance, Waiver and Consent in which he was barred from association with any NASD member in any capacity. Without admitting or denying the findings, Glover consented to the described sanction and to the entry of findings that he converted $119,000 of public customers’ funds by diverting proceeds from loans that customers had received from a bank. (NASD Case #2006004847801)

Jo Anne Jean Goulet (CRD #4768440, Associated Person, Ludlow, Massachusetts) submitted a Letter of Acceptance, Waiver and Consent in which she was barred from association with any NASD member in any capacity. Without admitting or denying the findings, Goulet consented to the described sanction and to the entry of findings that she withdrew a total of $116,000 from a public customer’s fixed annuity by systematically withdrawing amounts under $10,000 without the customer’s knowledge, authorization or consent. The findings stated that Goulet deposited the funds into her personal bank account, thereby converting the funds for her own use and benefit. The findings also stated that, as a result of the unauthorized liquidations, the customer incurred $6,500 in surrender fees and suffered adverse tax consequences. (NASD Case #2006004750801)

Kyle Jay Keesling (CRD #1911150, Registered Principal, Simpsonville, South Carolina) submitted a Letter of Acceptance, Waiver and Consent in which he was barred from association with any NASD member in any capacity. Without admitting or denying the findings, Keesling consented to the described sanction and to the entry of findings that he obtained $112,629.88 from public customers for investment purposes and converted these funds to his own use and benefit. The findings stated that, in an attempt to conceal his conversion of funds, Keesling provided some of the customers with falsified statements showing that their funds had been invested when they had not. (NASD Case #2006004831801)

George Ellis Brown McMahon III (CRD #3055065, Registered Representative, Waldorf, Maryland) was barred from association with any NASD member in any capacity. The sanction was based on findings that McMahon instructed a public customer to sign checks totaling $3,600 and make them payable to him for investment purpose. The findings stated that contrary to McMahon’s representation, he did not invest the funds for the customer’s benefit, but cashed the checks and misused the customer’s funds. The findings also stated that McMahon failed to respond to NASD requests for information. (NASD Case #2005003051001)

Christopher Lincoln O’Connell (CRD #2153507, Registered Representative, Topsfield, Massachusetts) submitted a Letter of Acceptance, Waiver and Consent in which he was barred from association with any NASD member in any capacity. Without admitting or denying the findings, O’Connell consented to the described sanction and to the entry of findings that he received a $3,140.16 check from a public customer to purchase a disability insurance policy, deposited the check in his personal bank account and misappropriated the proceeds for his own use and benefit. (NASD Case #2006005048501)

Joseph Peter Orozco (CRD #1019164, Registered Representative, Burbank, California) submitted an Offer of Settlement in which he was barred from association with any NASD member in any capacity. Without admitting or denying the allegations, Orozco consented to the described sanction and to the entry of findings that he received a $471,280.09 check from public customers to be invested, but instead, he retained possession of the check and falsely represented to the customers that it had been deposited and the securities had been purchased. The findings stated that Orozco submitted written reports to his member firm that stated that he had not received any customer correspondence, even though he had received letters from his customers inquiring about the status of their accounts. The findings also stated that Orozco made false statements to public customers regarding the check and the securities. The findings also included that Orozco failed to complete an NASD on-the-record interview and provide requested testimony. (NASD Case #C0220040045/E0220030808)

Brian L. Pauley (CRD #4253361, Registered Representative, Olmsted Falls, Ohio) submitted a Letter of Acceptance, Waiver and Consent in which he was barred from association with any NASD member in any capacity. Without admitting or denying the findings, Pauley consented to the described sanction and to the entry of findings that he withdrew $95,000 from a deceased public customer’s checking and savings accounts, transferred the funds to newly created bank accounts and moved $65,000 from the new accounts to an investment account in his name, thereby improperly using the customer’s funds. (NASD Case #2006004940901)

Michael Brent Peterson (CRD #4611211, Registered Representative, Oxford, Wisconsin) submitted a Letter of Acceptance, Waiver and Consent in which he was barred from association with any NASD member in any capacity. Without admitting or denying the findings, Peterson consented to the described sanction and to the entry of findings that he misappropriated a public customer’s funds by signing her name on documentation directing distribution of her fixed annuities without her knowledge and consent. The findings stated that Peterson deposited the customer’s distribution checks into her checking account at the bank where he was employed, and wrongfully used his authority as an officer of the bank to withdraw funds from her account and deposit them into his personal bank account at another bank, thereby converting the funds to his own use. The findings also stated that Peterson failed to respond to NASD requests for information. (NASD Case #2005003168601)

Scott Thomas Powers (CRD #2255877, Registered Representative, Danvers, Massachusetts) was barred from association with any NASD member in any capacity. The sanction was based on findings that Powers accepted $25,000 from a public customer for investment purposes and deposited the funds into a bank account, but failed to use the funds for the customer’s benefit. The findings also stated that Powers failed to respond to NASD requests for information. (NASD Case #2005002808001)

Peter Rhee (CRD #2964890, Registered Representative, Garfield, New Jersey) was barred from association with any NASD member in any capacity. The sanction was based on findings that Rhee effected transactions in public customers’ account without the customers’ authorization or consent. The findings also stated that Rhee failed to respond to NASD requests for information and documentation and failed to appear for an NASD on-the-record interview. (NASD Case #E9B2004049101)

Complaints Filed (NASD issued the following complaints. Issuance of a disciplinary complaint represents NASD’s initiation of a formal proceeding in which findings as to the allegations in the complaint have not been made, and does not represent a decision as to any of the allegations contained in the complaint. Because these complaints are unadjudicated, you may wish to contact the respondents before drawing any conclusions regarding the allegations in the complaint.)

Jose Hernandez (CRD #1976668, Registered Representative, Cary, Illinois) was named as a respondent in an NASD complaint alleging that he converted or misused $4,100 from a public customer that was intended for the purchase of securities, and used the funds for personal expenses and not for the customer’s benefit. The complaint alleges that Hernandez created false account statements that purportedly showed that the customer owned securities to conceal from the customer that the money was not used to purchase securities. The complaint also alleges that Hernandez failed to respond to NASD requests for information. (NASD Case #2005001945401)

Christopher David Solomon (CRD #4470012, Registered Representative, Treasure Island, Florida) was named as a respondent in an NASD complaint alleging that he engaged in an outside business activity and failed to provide written notice to his member firm. The complaint alleges that Solomon received $8,000 from a public customer for investment purposes, deposited the funds into a bank account he controlled but failed to transmit the funds from the bank account for the intended investment, thereby converting the customer’s funds. The complaint also alleges that Solomon provided the customer with a false account statement in order to convince him that the investment had been made when, in fact, there was no such investment. In addition, the complaint alleges that Solomon failed to respond to NASD requests for information. (NASD Case #2006005220901)

Richard Adam Thayer (CRD #4123272, Registered Representative, St. Clair Shores, Michigan) was named as a respondent in an NASD complaint alleging that he withdrew $2,000 from a public customer’s bank account without the customer’s knowledge or consent, and used the funds for his personal use or for some purpose other than the customer’s benefit. The complaint alleges that Thayer converted funds from other customers, without their knowledge or consent, to cover up his use of the first customer’s funds. The complaint further alleges that Thayer failed to respond to NASD requests for information. (NASD Case #2006005175401)

Now it is not just brokers who are helping themselves to your cash. The brokerage houses, while not 'stealing' your money, apparently are borrowing it without properly compensating their customers:

The phrase "cash sweep" may sound like a cleaning crew gathering loose change. But on Wall Street, the top brokerage firms are increasingly turning cash sweeps into gold.

The blue-chip securities firms are reaping bigger profits from a few simple changes to how investors' idle cash balances are treated. And most investors either don't notice or don't care that Wall Street's gains are coming at their expense as brokers turn around and reinvest the money for their own benefit at a higher rate.

• The Situation: Wall Street brokers are making more money from the cash sitting in customer accounts.

• The Context: Most customers barely notice they are receiving a low interest rate while the brokerage is making a profit reinvesting their money.

• Bottom Line: In the past year the trend has accelerated despite red flags from market regulators.

WSJ's Randall Smith discusses "cash sweeping," a growing trend despite red flags from market regulators.

Merrill Lynch & Co., which pioneered such tactics starting in 2000, is expected to report next week that its profits derived mainly from reinvesting customers' cash will top $2 billion for 2006, up from $1.3 billion two years ago.

Last year Morgan Stanley ramped up the same strategy of "sweeping" client cash to insured bank deposits, which pay rates as low as 1.25% on the smallest accounts. And the Smith Barney unit of Citigroup Inc. in September also began paying rates as low as 1.51% for cash in smaller accounts.

Smith Barney had considered such moves earlier, but hesitated because its former chief executive, Sallie Krawcheck, who led the firm between 2002 and 2004, raised questions about whether such "tiering" tactics could hurt customers, according to people at Citigroup. This year the firm decided it couldn't afford to pass up the profits and risk being left at a competitive disadvantage, other people said.

In a statement, Smith Barney said it shifted "to a relationship-based offering" that included "clear and abundant client disclosure." The firm said it offers rates "among the most competitive in the industry," and clients have "ample" alternatives.

Regulators at the New York Stock Exchange warned firms and investors in 2005 that such programs risked being instituted "without fully appropriate levels of disclosure or customer consent."

Bank deposits are more profitable for Wall Street because they can be reinvested at profits of roughly three to four times the fees on money funds.

But the bank deposits where the money is swept all pay less than 2% annually for the smallest accounts, far below current money fund rates of 4.72%, where Wall Street firms could put clients' idle cash. - WSJ.com

Read the whole story.

NASD Monthly Disciplinary Actions 2007

How Wall Street Sweeps' the Cash - WSJ.com

Last Year's Only Resolution Accomplished

So far this year I have no New Year's Resolution. I did have one for last year that I managed to accomplish on 20 December. That was to pay off all credit card dept.

I am not sure exactly how it happened but around the time that I got married in 2002 I started to accumulate credit card debt. The interest rates were low and the interest-free for a year cards made it that much more attractive. Within a year I had accumulated close to $40,000 in credit card debt.

Now that sounds bad but in actuality I had over half of it in the stock market. The highest interest loan I had was a car loan and I was concentrating on paying that off first, as it was a previous year's resolution. At one point in 2004, I had over $65,000 in debt between car, student loan and credit cards. I managed to pay off the car a full year early. Next came paying off the credit card debt. (On second though upon reading this, it was bad, perhaps even insane.)

As I managed to sell stock I would transfer a part of the proceeds back out of the trading account to pay off part of the debt. That worked well but it seemed that there was always some big purchase, like plane tickets to Finland or a repair needed for the car that would push the goal ever farther away.

The first real push to pay off the debt came in 2005 when the initial free rate on one card ended and the interest rate moved up to 9%. Then Chase bank purchased the company where I had this card. I was sent two notices. One informing me of the change to Chase Bank and of the great things that would come by being a Chase customer. The second one was notification that my interest rate was going from 9% to 18%. I called asking for an explanation and was told that my level of debt made me a 'risky customer' so my interest rate was raised. (and no it could not be reduced.) I informed them that I would cancel the card where a polite laugh was heard from the other end as he checked my current balance due. Three days later I had paid off the card and closed it. Of course this is much easier if you have the funds to pay what you owe, and thankfully I did as I was planning to pay it off anyway as the free interest offer was over.

Paying off that card felt good, so I immediately started on getting my main card paid off. After a year of working to pay it down, I finally managed to get to a zero balance at the end of December. Currently, the only debt I have is a student loan. I am not concerned about that one as the interest is only 3.85%.

Now I would like to concentrate on increasing my return from the stock market. I have been doing well but I really need to do more research to better take advantage of some of these market swings especially when stocks drop due triggering yet more sale orders and margin calls. At least I will no longer have the additional cost of interest payments on the outstanding balance of the credit cards as a cost of investing.

I do plan on staying away from Real Estate. I think a train wreck is still coming down the tracks. Just take a look at this poor fool Casey Serin who managed to get over $2 million in debt in less than a year while attempting to flip houses. I am sure that there is money to be made in real estate but I am against trading on margin and house flipping does require a massive amount of borrowed capital that is even worse than a margin account. At least with a margin account your stock will be sold to pay back the loan leaving you with whatever is left over. Fail to sell a house and maintain the payments and you might end up with nothing after the lender forecloses on the property, other than more debt such as whatever you accumulated at Home Depot trying to fix up the house.