Market Reflections

Thoughts, ideas and musings on current state and evolution of financial markets

Can you trust anyone with your money?

Guarantees of outrageous returns, fraud and illegal activities flourished last year in the financial services industry. While not a new phenomena, frequency and amounts usually increase when the real returns are tougher to get. Whether the perpetrators are government certified or not does not seem to make any difference. Likewise, makes no difference whether they operate under a name of a reputable, large financial services firm or are completely independent and have made themselves famous in the past.

Lacking sensation the small-scale wrongdoings are hardly noticed by mainstream financial media. Yet, these affect most people and mostly people who can ill afford it.

It is troubling to note that none of the cases described in this article involved complex financial strategies that could be hard to validate by anyone. No-one has been caught (yet) selling Structured Investment Vehicles (SIV), Credit Default Swaps (CDS), …, etc. to the public. How come these 98 Costa Rica real-estate investors did not Google “Costa Rica real-estate investment”? Read a little and you will find out how realistic a 100% return is. Sadly, it appears that year-by-year we are moving further from the legacy of our ancestors – independent and strong they did not expect a government to “wipe their nose”. Relying only on their neighbors they stood up for themselves to protect their property and financial interests. What’s wrong with us? After all it is no more complicated than it was then. The “neighbors” with same interests and always ready to help you for free have not disappeared either. In fact, via Internet you’ll have many more of them. Managing your investments yourself with free information and free services on Internet you will fare better than relying on a certified professional who’s real motivation is to get away with your money.

Big ticket financial services fraud targets wealthy individuals, funds, endowments, banks and even local governments. This category has gotten ample press recently as the numbers are sensational. Some of the losses have probably been exaggerated as most reporters are only interested in sensations, not in truth. It is peculiar to note that the “victims” did not exhibit any more vigor for thorough due diligence of Madoff’s Ponzi scheme before handing over billions to crooks even though they certainly had means to do so.

In hindsight, a loser can point fingers at credit rating agencies, SEC, family, friend or neighbor who recommended Madoff or someone from Ameriprise. At the end, it is everyone’s own responsibility to make sure the opportunity he/she invests in is sound, solid and the profit projections sold to you realistic under current economic conditions. Most importantly, same investor oversight and scrutiny must continue throughout the investment period. As we all learned 2008, economic conditions can and will change rapidly. Prudent opportunities of few months ago may turn into obvious losers fast. It is unrealistic to expect credit rating agencies revise their ratings daily although in some instances that would be the frequency required to keep the ratings current and meaningful.

An alternative to credit rating agencies is to open public exchange trading for all securities including asset backed securities, and credit default swaps. After all market is a “collective” rating agency (with proper regulation to avoid abuse by ethics challenged organizations and individuals) is working just fine for that purpose. Until that is in place, it is prudent not to invest in opportunities one is unwilling or unable to monitor. Lost opportunity is always much better than lost money.

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