Investors trading 3 stocks that may be doomed

August 27, 2009

Investors still trading Fannie, Freddie, AIG shares, even though prices are likely to hit zero

Daniel Wagner, AP Business Writer
Thursday August 27, 2009, 5:36 pm EDT

WASHINGTON (AP) — Investors are still trading common shares of Fannie Mae (FNM), Freddie Mac (FRE) and American International Group Inc. (AIG) by the billions, even though analysts say their prices are almost certain to go to zero.

All three are majority-owned by the government and are losing huge sums of money. The Securities and Exchange Commission and other regulators lack authority to end trading of stocks in such “zombie” companies that technically are alive — until the government takes them off life support.

Shares of the two mortgage giants and the insurer have been swept up in a summer rally in financial stocks. Investors have been trading their shares at abnormally high volumes, despite analysts’ warnings that they’re destined to lose their money.

“People have done well by trading them (in the short term), but when it gets to the end of the road, these stocks are going to be worth zero,” said Bose George, an analyst with the investment bank Keefe, Bruyette & Woods Inc.

Some of the activity involves day traders aiming to profit from short-term price swings, George said. But he said inexperienced investors might have the mis-impression that the companies may recover or be rescued.

“That would be kind of unfortunate,” he said. “There could be a lot of improvement in the economy, and these companies would still be worth zero.”

The government continues to support the companies with billions in taxpayer money, saying they still play a crucial role in the financial system.

Fannie and Freddie buy loans from banks and sell them to investors — a role critical to the mortgage market. They have tapped about $96 billion out of a potential $400 billion in aid from the Treasury Department.

Officials have said AIG’s failure would be disastrous for the financial markets. Treasury and the Federal Reserve have spent about $175 billion on AIG and AIG-related securities. The company also has access to $28 billion from the $700 billion financial industry bailout.

But analysts say the wind-down strategies for the companies are almost sure to wipe out any common equity, making their shares worthless.

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How About a Stimulus for Financial Advice?

February 26, 2009

By ROBERT J. SHILLER
Published: January 17, 2009

In evaluating the causes of the financial crisis, don’t forget the countless fundamental mistakes made by millions of people who were caught up in the excitement of the real estate bubble, taking on debt they could ill afford.

Many errors in personal finance can be prevented. But first, people need to understand what they ought to do. The government’s various bailout plans need to take this into account — by starting a major program to subsidize personal financial advice for everyone.

A number of government agencies already have begun small-scale financial literacy programs. For example, the Treasury announced the creation of an Office of Financial Education in 2002, and President Bush started an Advisory Council on Financial Literacy a year ago. These initiatives are involved in outreach to schools with suggested curriculums, and online financial tips. But a much more ambitious effort is needed.

The government programs that are already under way are akin to distributing computer manuals. But when something goes wrong with a computer, most people need to talk to a real person who can zero in on the problem. They need an expert to guide them through the repair process, in a way that conveys patience and confidence that the problem can be solved. The same is certainly true for issues of personal finance.

The significance of this was clear at the annual meeting of the American Economic Association this month in San Francisco, where several new research papers showed the seriousness of consumer financial errors and the exploitation of them by sophisticated financial service providers.

A paper by Kris Gerardi of the Federal Reserve Bank of Atlanta, Lorenz Goette of the University of Geneva and Stephan Meier of Columbia University asked a battery of simple financial literacy questions of recent homebuyers. Many of the respondents could not correctly answer even simple questions, like this one: What will a $300 item cost after it goes on a “50 percent off” sale? (The answer is $150.) They found that people who scored poorly on the financial literacy test also tended to make serious investment mistakes, like borrowing too much, and failing to collect information and shop for a mortgage.

A paper by Liran Einav and Jonathan Levin, both of Stanford, reporting on work with William Adams of Citigroup, shows how sophisticated automobile lenders can be in their loan technology. They use complicated statistical models not only to approve people for credit, but also to fine-tune the down payment and even to suggest what kind of car individuals can buy. This suggests to me that many borrowers can’t match the expertise of lenders.

And another paper, by Paige Marta Skiba of Vanderbilt University and Jeremy Tobacman of the University of Pennsylvania, showed that payday loans — advanced to people who run out of cash before their next paycheck — exploit people’s overoptimism and typically succeed in charging annual rates of interest that may amount to more than 7,000 percent.

One wishes that all this financial cleverness could be focused a bit more on improving the customers’ welfare!

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Most Profitable Mutual Funds Ever

February 20, 2009

Friday February 20, 10:55 am ET
By Max Rottersman

HANOVER, NH (ETFguide.com) – The highest mutual fund advisory fee, of all time, was collected from the Fidelity Magellan Fund (FMAGX).  In 2001 it took in $792 million.  Magellan has earned the top three, all-time records, grossing $1.8 billion between 2000 and 2002.  Much of that is profit, from future retirees who don’t read their statements.   Most can’t believe such large sums go directly into one manager’s pocket.   After all, if they did, wouldn’t we read about it in the press?  No.  Mutual fund companies provide a steady stream of advertising dollars.  It isn’t a conspiracy.  It’s natural self-interest for all involved, from The New York Times to the Wall Street Journal.

Ironically, American mutual fund regulation is the finest in the world.  I’m not joking.  There’s no secret to the numbers I’m pointing out.  They’re sent to every shareholder once a year.   Sadly, few journalist read fund financial statements either.  And any Fidelity shareholder who doesn’t like the fees is free to leave.

Mutual funds are corporations run on the behalf of their shareholders, represented by a board of trustees.  It’s a legal structure that makes for some confusing language; for example, fund fees are often called expenses (which legally they are), rather than fees (which functionally, you pay).  For example, Fidelity never charges you, the shareholder, directly. Rather, the fund trust pays a fee, from the fund’s assets, to various Fidelity companies (which are separate from the fund corporation) for various services.  Your board of trustees enters into contracts, on the shareholder’s behalf, with the advisor (like Fidelity) and other service providers.  Ironically, mutual funds were born during a ‘socialistic’ time in American history.   Again, I kid you not.  Should shareholders revolt, trustees can easily fire the portfolio management companies which serve the funds.   Interestingly, that has seldom happened.

If you have any question about the profitability of the fund business, consider this.  Last year, these five funds alone earned over $2 billion in advisory fees. Fidelity Contrafund: $522 Million (FCNTX), PIMCO Total Return Fund: $506 Million (PTTAX), Growth Fund Of America: $450 Million (AGTHX), Europacific Growth Fund: $439 Million (AEPGX), Fidelity Diversified International Fund: $374 Million (FDIVX). Again, believe it or not, these are the fees the manager charges for a few people to pick stocks for the fund.  The operational costs are separate.

Flying under the radar, because they don’t offer shares directly to the public, the CREF Stock Account Fund paid $586 million in advisory and administrative fees, the largest amount of any fund in my database.  TIAA-CREF says it’s ‘at cost’.  We have to assume it’s true, that the teachers did their own homework and thought for themselves.

Every shareholder should understand that all mutual funds have two basic costs.  The first is the cost to manage the portfolio; that is, buy and sell stocks and bonds.  A single person with a brokerage account can do this.   In mutual funds, the fee for this ‘portfolio management’ work is called the advisory fee.  The second basic cost is operational.  This work is often done by hundreds of people: administrators, call center workers, accountants, IT professionals, custodians, printers and lawyers.  The operational work is what shareholders ‘see and touch’ when they deal with their mutual fund.  Shareholders seldom, if ever, have any contact with the portfolio manager (advisor).

In 2001 Fidelity charged shareholders $162 million for operational costs (on top of the $792 million).  Fidelity probably makes some money on these costs too, since Fidelity subsidiaries handle shareholder servicing, administration and other ‘touch’ services.  Yet most people don’t believe me when I say most of the advisory fee is profit.  They just can’t believe it’s legal for Fidelity to collect $792 million for a few people picking stocks (which they pay a handsome salary in the millions, but it’s a fraction of what they charge). Here’s a list of 58 Fund Managers Who Took in Over $100 Million in Advisory Fees Last Year.

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Obama sets aside $75 billion to slow foreclosures

February 18, 2009

Program would seek to bring mortgage payments down to 31% of income

By Ronald D. Orol, MarketWatch
Last update: 2:38 p.m. EST Feb. 18, 2009

WASHINGTON (MarketWatch) — The White House unveiled a plan Wednesday to help 9 million “at risk” homeowners modify their mortgages, committing $75 billion of taxpayer money to back the initiative.

The plan contains two separate programs. One program is aimed at 4 million to 5 million homeowners struggling with loans owned or guaranteed by Fannie Mae (FNM) or Freddie Mac (FRE) to help them refinance their mortgages through the two institutions.

The Obama mortgage plan

Below is a list of key elements of the plan outlined Wednesday by President Obama that aims to aid as many as 9 million households in fending off foreclosures:

* Allows 4 million–5 million homeowners to refinance via government-sponsored mortgage giants Fannie Mae and Freddie Mac.
* Establishes $75 billion fund to reduce homeowners’ monthly payments.
* Develops uniform rules for loan modifications across the mortgage industry.
* Bolsters Fannie and Freddie by buying more of their shares.
* Allows Fannie and Freddie to hold $900 billion in mortgage-backed securities — a $50 billion increase.

A separate program would potentially help 3 million to 4 million additional homeowners by allowing them to modify their mortgages to lower monthly interest rates through any participating lender. Under this plan, the lender would voluntarily lower the interest rate, and the government would provide subsidies to the lender.

“The plan I’m announcing focuses on rescuing families who have played by the rules and acted responsibly: by refinancing loans for millions of families in traditional mortgages who are underwater or close to it; by modifying loans for families stuck in subprime mortgages they can’t afford as a result of skyrocketing interest rates or personal misfortune; and by taking broader steps to keep mortgage rates low so that families can secure loans with affordable monthly payments,” President Barack Obama said.

Homeowners that have Fannie Mae or Freddie Mac loans, who are having a difficult time refinancing and owe more than 80% of the value of their homes, would be eligible to refinance with this program. Even if homeowners with Fannie or Freddie loans have negative equity on their mortgages, they can qualify for this refinancing program. The program would only help homeowners occupying the property, not individuals who own property as investors.

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U.S. budget deficit seen topping $1 trillion in 2009

January 6, 2009

Tue Jan 6, 2009 6:13pm EST

By Jeremy Pelofsky and David Lawder

WASHINGTON (Reuters) – Politicians want American consumers to resume spending to pull the economy out of its tailspin, and the U.S. government is leading by example with a potential $1 trillion deficit in 2009 — even before a massive stimulus plan.

The Congressional Budget Office is set to release its projections on Wednesday for the fiscal 2009 budget deficit and experts believe it will not just set a new record beyond the $455 billion set in 2008, but could hit $1 trillion as the economic recession saps federal revenues.

While that figure likely includes some of the impact of a $700 billion bailout package for the financial industry and U.S. automakers, it does not include any of economic stimulus measures Congress hopes to pass, which could cost another $775 billion over two years.

President-elect Barack Obama is contemplating large tax cuts to the tune of about $300 billion and potentially as much if not more in infrastructure projects and other spending to try to jolt the economy out of recession.

North Dakota Sen. Kent Conrad, chairman of the Senate Budget Committee, said that a $1 trillion deficit was not just a possibility for 2009, but that an average of $1 trillion could be added to the national debt annually over the next decade.

“We’re on an unsustainable course,” he said in an interview with Reuters, adding that he had not yet seen the CBO figures.

“It’s obvious we have to have a recovery package,” the North Dakota Democrat noted, but Congress must also address longer-term issues, such as the costs of the Medicare health care program and Social Security retirement system.

TOUGH CHOICES AHEAD

Obama said on Tuesday he expects to inherit a deficit approaching $1 trillion and his administration would have to make tough budget choices. But economists agree now is not the time for the country to tighten its belt.

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Got advice?

November 18, 2008

Commentary: This is a great time to take a hard look at your financial adviser

By Bob Clark
Last update: 6:28 p.m. EST Nov. 18, 2008

SANTA FE, N.M. (MarketWatch) — A silver lining of the recent Wall Street/economic meltdown is a chance to assess your relationship with your financial adviser. Sure, you could do this anytime, but the best indication of whether you’re getting what you need is when you need it most.

Chances are this is probably one of those times. This is so true, in fact, that the best financial advisers get the majority of their new clients during times like these — folks who have become dissatisfied with their old advisers. In most of these cases, the need to make a change is obvious. To paraphrase an old saying: If you have to ask, you probably need a new adviser.

What if you’re just not sure? Most people like their adviser — it’s usually one of the main reasons why he or she is your adviser. So you’re inclined to give them the benefit of the doubt, especially during tough times when their business is undoubtedly hurting as much or more than your portfolio.

But we are talking about your financial future here. You really can’t afford to stick with any professional who isn’t getting the job done. This is one of those rare times when it really is all about you.

The problem that most people have with evaluating their financial adviser is they don’t have much experience with other advisers. How do they know whether their service is good or bad? Compared to what? Sure, if you’re really unhappy, the decision is clear. But what if you’re just mildly annoyed?

One excellent independent adviser I know won’t even take new clients who haven’t had at least a couple of other advisers first — he doesn’t feel they can fully appreciate his level of service and expertise if they don’t have other experiences to compare.

Ultimately, only you can make the call whether it’s time to look for another financial adviser. But it can help to get some sense of what good advisers do. For some perspective, here are some important issues in an adviser/client relationship, together with how they best handle them:

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Storms on the Horizon by FOMCs Richard W. Fisher

May 29, 2008

Richard W. Fisher – Federal Open Market Committee (FOMC)

Excerpt from remarks before the Commonwealth Club of California
San Francisco, California
May 28, 2008

Storms on the Horizon

Tonight, I want to talk about a different matter. In keeping with Bill Martin’s advice, I have been scanning the horizon for danger signals even as we continue working to recover from the recent turmoil. In the distance, I see a frightful storm brewing in the form of untethered government debt. I choose the words-“frightful storm”-deliberately to avoid hyperbole. Unless we take steps to deal with it, the long-term fiscal situation of the federal government will be unimaginably more devastating to our economic prosperity than the subprime debacle and the recent debauching of credit markets that we are now working so hard to correct.

You might wonder why a central banker would be concerned with fiscal matters. Fiscal policy is, after all, the responsibility of the Congress, not the Federal Reserve. Congress, and Congress alone, has the power to tax and spend. From this monetary policymaker’s point of view, though, deficits matter for what we do at the Fed. There are many reasons why. Economists have found that structural deficits raise long-run interest rates, complicating the Fed’s dual mandate to develop a monetary policy that promotes sustainable, noninflationary growth. The even more disturbing dark and dirty secret about deficits-especially when they careen out of control-is that they create political pressure on central bankers to adopt looser monetary policy down the road. I will return to that shortly. First, let me give you the unvarnished facts of our nation’s fiscal predicament.

Eight years ago, our federal budget, crafted by a Democratic president and enacted by a Republican Congress, produced a fiscal surplus of $236 billion, the first surplus in almost 40 years and the highest nominal-dollar surplus in American history. While the Fed is scrupulously nonpartisan and nonpolitical, I mention this to emphasize that the deficit/debt issue knows no party and can be solved only by both parties working together. For a brief time, with surpluses projected into the future as far as the eye could see, economists and policymakers alike began to contemplate a bucolic future in which interest payments would form an ever-declining share of federal outlays, a future where Treasury bonds and debt-ceiling legislation would become dusty relics of a long-forgotten past. The Fed even had concerns about how open market operations would be conducted in a marketplace short of Treasury debt.

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