Financial Regulation Follow Up… Good News!

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

As a follow up to last week's contribution, Financial Regulation...What It Means to You and America, I want to add two follow up points. As you may have read, I was outraged that absolutely nothing was being done to address two of the main drivers of the financial crisis, Fannie Mae and Freddie Mac. It was irresponsible for Congress to totally take a pass on that gargantuan, systemic problem. Thankfully, others felt the same way!

Earlier this week, the Obama Administration announced that a special conference will be held on Aug. 17 at Treasury to specifically address Fannie Mae and Freddie Mac. I fully applaud this effort and hope there will be bipartisan participation to solve this catastrophic mess that could end up costing the U.S. taxpayer almost one trillion dollars!

Judging by what Barney Frank recently said, I expect the implicit government guarantees to be removed in either one fell swoop, or staggered over a period of a few years. From there, it’s likely that the two behemoths would be broken up in some fashion into smaller entities which could not jeopardize the housing market or financial system if they failed.

I also want to mention another piece of the bill that makes perfect sense to me and I wholeheartedly support. It’s placing the fiduciary standard on ALL financial advisors. Although aggressively fought with enormous lobbying dollars by the major wirehouses, like Merrill Lynch, UBS and Citi, the law of the land will now force brokers to act in the same capacity as registered investment advisors (RIAs) by placing their clients’ interests ahead of their own.

(For full disclosure and transparency, I am an independent, fee only registered investment advisor or RIA. The only way I get paid is by my clients. I do not sell financial or insurance products and do not collect commissions of any kind.)

I am sure many of you always assumed all financial advisors were the same, but that was far from true. The change in the law further protects you and increases the duty to which advisors must act. For decades, only RIAs were required by law to put their clients’ best interests ahead of their own. As long as the investment was considered “suitable”, a broker was free to sell it, regardless of size of commission earned, expense ratios or possibly performance.

Fiduciaries, on the other hand, are supposed to sit side by side with their clients without obvious conflicts of interest. Plainly put, fiduciaries are supposed to do right by their clients are have been held to a much higher standard than brokers. With the passage of this legislation, the rest of the industry, more than 90%, will be now held to the fiduciary standard, a huge win for individual investors!

Don’t get me wrong. There is nothing bad about doing business with a broker as long as all of the details are transparent and properly disclosed in plain English. As a client, you should know and understand exactly what you are buying, the fees, expenses, commissions and any penalties. There are plenty of brokers who do it the right way, but also a good number who look out for themselves first.

As I mentioned earlier this summer, I am working on an interview I did with Spencer Tillman, playfully titled, Superman is Alive and Well and Living in Sugarland Texas! I hope to have more details next month.

I am scheduled to be on CNBC’s Squawk on the Street this Tuesday, Aug. 3rd, around 9:35 am.

Feel free to email me with any questions or comments at Paul@investfortomorrow.com.

Until next time…

Paul Schatz
Heritage Capital LLC
http://www.investfortomorrow.com/
http://RetirementPlanningConnecticut.com/

Mortgage Industry Re-do

The Obama administration Wednesday beckoned the public's input on how it should reform the nation's housing finance system.

The Treasury department and the U.S. Department of Housing and Urban Development (HUD) took the lead in presenting 7 questions to a variety of audiences including housing market professionals, industry groups, academic experts and consumer and community organizations.

The mortgage industry was dealt a severe blow with the near-collapse in 2008 of quasi-public mortgage finance companies Fannie Mae and Freddie Mac. The government-backed entities got into trouble by buying mortgages originated by lenders and then packaging them into bonds that were sold in the bond market.

National investment banks took severe losses as well by bundling mortgages and selling them in a secondary market. In both scenarios many loans were toxic, meaning they were approved for borrowers who did not truthfully represent their ability to pay or were misled about the terms of mortgages they really could not afford. Some loans had interest rates that spiked up after a certain number of months, making the payments unaffordable for those borrowers.

The questions posed by the Obama administration seek public comment on the future of the
housing finance system, including Fannie Mae and Freddie Mac, and the overall role of the federal government in housing policy.

"A well-functioning housing finance system is critical to the long term stability of the housing market," Treasury Secretary Timothy Geithner said in a statement. "Hearing from a wide variety of perspectives as we embark on this process is an important part of establishing a more stable and sound housing finance system for the American people."

Input will be sought both by written responses submitted online in the Federal Register at www.regulations.gov and through a series of public forums around the country.

"This open process will help shape the future of our housing finance system," HUD Secretary Shaun Donovan said. "The Obama administration is committed to engaging the public as we consider proposals for reforming the housing finance system in the context of our broader housing policy goals, and the best steps to get from where we are today to a stronger housing finance system."

Here are the 7 questions:

1. How should federal housing finance objectives be prioritized in the context of the broader objectives of housing policy?

2. What role should the federal government play in supporting a stable, well-functioning housing finance system and what risks, if any, should the federal government bear in meeting its housing finance objectives?

3. Should the government approach differ across different segments of the market, and if so, how?

4. How should the current organization of the housing finance system be improved?

5. How should the housing finance system support sound market practices?

6. What is the best way for the housing finance system to help ensure consumers are protected from unfair, abusive or deceptive practices?

7. Do housing finance systems in other countries offer insights that can help inform US reform choices?


Tell me what you think of this approach and whether you will participate?

The Geithner Countdown

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

It's been no secret that I am not fan of Treasury Secretary Tim Geithner. Long-time readers remember that I assigned a lot of blame for the collapse of Wall Street on Mr. Geithner when he headed the New York Fed. What I thought was unfathomable was how President Obama could possibly promote this man to a higher office when he basically let Wall Street explode with toxic assets and leverage, and then implode to the detriment of Main Street.

I said I would be shocked if he lasted four years and now it will be interesting to see if he even makes it two years. That was on my on list of 11 Shockers for 2010. Maybe Goldman Sachs hires him as a "thank you" for the tens of billions he helped them make as a result of the crisis? That would certainly be a shocker! And reverse the trend of former Goldman folks into powerful positions in the government.

I remember when the AIG bailout was being discussed and all of the moving parts involved. Bernanke, Paulson, Geithner, Blankfein, etc. Although I was in favor of saving AIG at the time, given the facts presented, I will clearly and definitely state that if I knew then, what I know now, AIG should have been left to fail.

The financial system and economy would have taken a tremendous blow, but one year later, we would have been on the road to a real and sustainable recovery, not this government sponsored, public rescue of the biggest institutions held together with duct tape and paper clips, much to the detriment of small business. With all good intentions, the Bush administration made a mistake in how AIG was saved. You can add that to the list of screw ups, like allowing five investment banks to leverage 40 times!

What reopened old wounds regarding Geithner was first, his comment on December 23 that "there would be no second wave of the crisis" and then one day later that the U.S. government would unconditionally support Fannie Mae and Freddie Mac. There's no way it was pure coincidence that he chose the quietest time of year when so many investors and media are tending to holiday matters to offer such important comments.

The fact that this man presided over the banks and investment banks and totally dropped the ball is the exact opposite of the meteorologists calling for 10-20 inches here and only getting light snow. Now, he says that another wave of the crisis can't happen? The skeptic in me has just raised the alert level!

Second, and even more infuriating, is something I mentioned during the nationalization of Fannie and Freddie in the summer of 2008. At the time, Paulson and the Bush administration said the cost of the rescue would be contained to $100B at first, with much less being initially deployed. But the more the press dug, the more the public realized that this could become a trillion dollar nightmare in the worst case scenario. I think I wrote about a potential $500B price tag when all was said and done.

Now Tim Geithner comes out and pledges unlimited support from the U.S. taxpayer for Fannie and Freddie? How can this be? Where does it end? Does it ever end? These government sponsored enterprises had admirable intentions when they were created, but they ended up poisoned by politics as they became the two largest hedge funds in the world that must eventually be unwound. For now, the government needs to find a way to slowly reduce the size of the entities and their role in the mortgage market.

Long before Tim Geithner steps downs, I fully expect trial balloons to be floated on his replacement. While former New Jersey Governor and Goldman Sachs CEO John Corzine may be the most qualified, it would be hard to believe that people would tolerate it, given the perceived favoritism Goldman has received over the past few years.

Please feel to email me with any questions or comments at Paul@investfortomorrow.com.

Until next time…

Paul Schatz