Unless you've been hiding under a rock for the past year, you know that the global economy is being hard hit by the meltdown in the US real estate market (and spreading to other real estate markets around the world), resulting in a huge writedowns for large and small financial institutions around the globe and a credit crunch for borrowers across the spectrum. The result is a quadruple-whammy, especially for American consumers who have an insatiable appetite for consumer goods and debt. Not only is the tap of easy access to credit being slowly turned off, but the equity in their homes which were being used as virtual ATMs is being steadily eroded. Add to that declining values in their stock portfolios, and sky-high gasoline prices, it's a wonder that there is any optimism emanating out of the US right now.
But the one positive development arising out of this financial mess, is that financial institutions are finally being held accountable for their reckless marketing and sale of the ABCP (Asset-backed Commercial Paper) and auction-rate securities (long-term bonds whose interest rates are reset every few weeks through an auction process), those seemingly 'safe as cash' investments that bundled all different types of loans together, thereby making the high-risk mortgages within this bundle almost unquantifiable and invisible to the retail investor. Because of this, these securities are difficult, if not impossible, to sell, and many investors are being left holding investments with no market in which to liquidate their greatly diminished investments. People, and especially retirees, are being financially ruined by having their yield-bearing investments obliterated, as the $330 billion market has collapsed.
Now large financial institutions including Merrill Lynch, Wachovia, JP Morgan, UBS and Citigroup are being forced to (and rightly so) buy back billions of dollars of such auction-rate securities from individuals, charities and small businesses.
Usually in such cases, small investors are left holding the bag. Before the meltdown, the originators of these securities (and the executives at the big brokerage firms) had made their big salaries and bonuses, the salesmen and brokers had been paid their commissions, but when things implode, the only ones who had not benefited is usually the little guy with absolutely no power or financial resources to challenge the status quo. But finally, the US Securities and Exchange Commission is holding those institutions accountable. And hopefully in the future, investments will be properly and ethically marketed by brokers and financial planners, and easier for small retail investors to understand. How many people can honestly say they have read a mutual fund prospectus prior too purchase?
While the odds are still slanted in favour of the financial institutions, this is a positive step forward in investor rights. Maybe all of us small investors should take a leaf out of legendary mutual fund manager Peter Lynch's rules for investing, i.e. don't buy any investment you don't understand, and know what investments you own and why you own it. And if a broker or financial planner tells you an investment is risk free, ask them to give you a written undertaking to that effect from their institution. Oh, and read the prospectus (or have your broker earn their money by reading it and explaining it to you).
No comments:
Post a Comment