NICK MASSEY
The Edmond Sun
EDMOND —
Some things just never change. A few years ago the major financial firms created a devastating financial crisis and meltdown that harmed the country and global economy. This wasn’t the first time, of course. Think about the S&L crisis in the early ’90s and many others before. Once again investigations were held but no one was punished, and once again regulations were promised that would prevent it from ever happening again. And once again those regulations were so watered down that nothing much has changed.
A couple of years ago I said that this would happen. The stock market has recovered and has investors excited and no longer focused on or caring about how the system operates. Life is good again. Even the watered-down regulations that did survive are being pushed aside so the major financial firms can carry on as before. And no one cares or protests.
For example, new regulations require that trading in contracts involving currency derivatives must be made on exchanges where regulators and others can see them, rather than in secret as previously was happening. Many feel this was a significant part of the problem in the recent financial system meltdown.
Treasury Secretary Timothy Geithner recently announced he had decided to exempt major banks and financial firms from the ruling and allow them to continue trading certain contracts “over the counter” (i.e. not on an open exchange) and out of sight as before. According to the Treasury Department, the contracts that Geithner carved out from the rules account for $30 trillion of the global market for such derivatives.
Why would they want to do that in private and not on an exchange? The fact that they can create all types of exotic products, put up far less collateral, charge much higher commissions and be subject to less regulation wouldn’t have anything to do with it, would it? I am aghast. Who would have thought that those greedy guys would put their own self-interests ahead of doing what’s right!
New financial regulations also were supposed to prevent abuse of investors in initial public offerings. Basically, investment banks have used their influence over IPOs to allocate IPO shares to the executives of their investment banking clients and others they wanted to do favors for, with only tiny portions available to the investing public. The investing public could then go after the shares in the open market after the offering, which often doubled and tripled the price in a matter of hours or days, allowing the favored few to sell their shares into the frenzy and thus make huge profits.
A few weeks ago, a section of the regulations requiring that investment bankers have no involvement or influence, directly or indirectly, in how the shares of IPOs are allocated was removed from the new regulations by the SEC. What a surprise! Coincidently, this is happening just as Wall Street firms are preparing an unusually high number of IPOs of Internet companies related to the hot new areas of social networking, online gaming and music downloading. Looks like we’re back to business as usual and the inmates still run the asylum. And they wonder why the public doesn’t trust them anymore.
On another note, have you noticed the ongoing evolution of investments in agricultural products, metals and foreign currencies? They enable an investor to invest in a variety of asset classes that the general public could not easily do before. The question is should the average person be investing there at all?
There are now ways to invest all types of agricultural commodities, as well as ways to invest in German, Italian and Japanese sovereign-bond futures. Many of these are even leveraged two or three times, which significantly increases the potential return or loss. Retail investors can now place their bets on volatile farm prices and the credit worthiness of assorted countries, and leverage themselves to the hilt in the process. It looks to me like a train wreck waiting to happen.
To each their own I guess. For the life of me, I cannot understand why a retail investor would want to dabble in these types of investments. You’re making a high-risk bet on the direction of a commodity, or currency or sovereign bond, on which you have no special insight or information. And you’re entering a market full of well-informed insiders who often do have special insights or information. This is not investing. It’s gambling.
As a retail investor, do you feel you have better information on, say, the corn market than the pit traders in Chicago, or than professional international currency traders? This is like one of us going one on one with an NBA player. It’s not even a contest.
I know a guy who makes his living as a professional Texas Hold ’Em poker player. He says the world of poker is a Darwinian fight for survival in which “sharks” (the professionals) feast on the “fish” (the amateurs).
I can think of no better analogy for this area of the investment world. The entry of legions of new, inexperienced fish into commodities, currencies and bond futures will keep the sharks in New York and Chicago well fed for years. My recommendation? Play a game you can win. Invest in companies and sectors you understand that are attractively priced and backed by durable macro trends. Over time, you’ll come out on top. Thanks for reading.
NICK MASSEY is a financial adviser and owner of Householder Group Financial Advisors in Edmond. Massey can be reached at www.nickmassey.com. Securities offered through Securities Service Network Inc., member FINRA/SIPC.
