Before we get into today’s Money Morning, a brief announcement…
Your editor is taking a long weekend. However, we’ve lined up a couple of guest essays to give you something to read while you’re tucking into your Easter eggs.
Tomorrow, BullionVault’s Adrian Ash will give you more info on China’s gold buying spree. And on Monday, Diggers & Drillers editor Alex Cowie will give you the lowdown on Australia’s second largest export commodity – coal.
In between, assistant editor Shae Smith will have the usual weekly round-up of events for you in Money Weekend on Saturday morning.
But until then, this…
If you want to get a good picture about how much money you can make as an investment banker, look no further than the latest press release from the Federal Reserve Bank of New York.
The press release states:
“The Federal Reserve Bank of New York today announced that it has expanded the information that it makes available to the public related to the Maiden Lane portfolios.”
So what? Well, the Maiden Lane portfolios are the quaint and innocuous sounding names given to the government owned holding of former Wall Street heavyweights Bear Stearns and American International Group (AIG).
For your pleasure, Maiden Lane holds USD$74.9 billion, Maiden Lane II USD$34.8 billion and Maiden Lane III USD$56 billion.
But funnily enough, that’s not even the full picture. Because as the Fed points out:
“The new information includes nearly all of the holdings of Maiden Lane LLC (ML)-with the exception of residential whole loans as that would violate individual borrowers’ privacy…”
In other words, it doesn’t contain all the crappy subprime mortgage loans that are rotting away on the balance sheet.
But it’s not the dollar number that amazes us so much – we expected that – rather it’s the number of ‘assets’ in the portfolios.
Each asset represents a deal that has been lovingly crafted and nurtured by a caring and responsible parent – or, investment banker.
Take this one from the Maiden Lane portfolio:
IVYL_06-1A A1 144A (cusip: 46601QAC2) – USD$102,286,000
Or this valuable asset from the Maiden Lane III portfolio:
ALTS_05-1A ALTB 144A (cusip: 02149RAC2) – USD$1,102,582,000
Beautiful aren’t they!
Unfortunately your editor doesn’t have access to the wildly expensive Bloomberg Professional service which would reveal exactly what these investment gems are. So we’re somewhat in the dark.
[Ed note: If you do use the Bloomberg Professional service, feel free to send a screen grab of the description page of these assets to moneymorning@moneymorning.com.au, we'd greatly appreciate it].
The first one we’ve got no idea what it could be. The second we’ll take a wild guess. It could be a coincidence, but we do recall the bank examiner to the Lehman Brothers collapse referring to ‘Alt-B’ residential mortgage backed securities.
Without going through the 2,000+ page report again, our addled brain tells us Alt-B mortgages were almost as risky as Alt-A loans, which themselves were only slightly less risky than Subprime loans.
But, as we say, it could be a coincidence. Whatever they are, USD$1.1 billion is a heck of a lot of money. And remember, that’s just one deal. And it’s also just the amount held by Maiden Lane III. Consider how much of this stuff is being held by the banks and funds that haven’t gone bust.
We haven’t counted all the individual ‘assets’ in these portfolios, but looking at the number of pages they run to, you’re looking at thousands of them. And as we say, these are just the ones revealed by these bust companies.
And each asset represents part of a deal crafted by the bankers to rip money from investors. Investors who for the most part have absolutely no idea they’ve bought any of this stuff.
It helps to give you an insight into how investment banks like Macquarie Group became known as the ‘millionaires factory.’
Quite frankly, it all backs up our ages-long skepticism towards any investment that’s ‘packaged’ for retail customers. It doesn’t matter whether it’s a packaged property investment, a packaged share investment or a packaged bond investment, I just don’t like them.
The trouble is, part of the reason these types of investment are so popular is due to compulsory retirement savings schemes both here and overseas.
When individuals don’t have direct personal control over their savings, it ends up in the hands of investment managers or advisers who prefer to take the easy route. And what could be easier than chucking millions of dollars at an investment banker who tells you that investment ‘ALTS_05-1A ALTB 144A’ is the best thing since Google went public.
Compulsory savings schemes are just like any other compulsory scheme. Because you’ve got no choice but to do it, you see it as an impost or a burden, and therefore you take less care and less interest in it.
If there was no compulsory savings then investment managers would have to try and attract your savings. And chances are you’d want to know exactly where that money was going.
If your monthly retirement contribution came out of your pocket rather than being paid for before it gets to your pocket, don’t you think you’d want to know where it’s going?
Can you imagine any investment manager saying this to you:
“Oh, I thought we’d buy you $10,000 worth of ALTS_05-1A ALTB 144A. It’s a lovely little investment. It’s got an exposure to over-leveraged, marginal home owners in Michigan, Alabama and Wisconsin. The clever thing is, we’ve managed to engineer the investment so that all these crappy borrowers with low credit scores are classified as a triple-A credit rating. It’s clever because it means I get to make the sale and earn a million bucks by making you think it’s low risk, but you still lose all your money when investors figure out how rubbish it is. Everyone’s a winner – except you! Sign here…”
Would you buy? Thought not.
Of course, when investments are pooled, you’ve got no idea, and very little say in the matter. When the individual has control, then it’s a different story.
Don’t get me wrong, individuals make investing mistakes too when they’re left in charge of their own money. People who fell in with Opes Prime and Storm Financial are a classic example.
But the point is, when individuals have control over their investments they should have a better understanding over where that money is invested.
And even the Storm and Opes Prime examples – as we understand it – are more of a case of investors being told what to do rather than the whole process being explained to them properly.
But the way we see it, much of the cause of the excesses in financial markets is due to financial engineers having too much access to investor’s cash, too much access to bank-created credit, and too much of an incentive to get create new products and investments for the sake of earning a fee rather than because it’s a good investment for the punters.
Our fear is things will only get worse if trade unions and property spruikers have their way and convince politicians that retirement money should be compulsorily invested in pointless infrastructure projects, residential mortgage backed securities or government backed annuities.
What’s the solution? Well, that’s something Dan Denning and I are working on in Australian Wealth Gameplan. But I’ll also fill you in with some ideas in the next few weeks in Money Morning.
Cheers,
Kris.
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Talking of Bretton Woods, gold and the GFC, this is an excellent interview with the bloke who claims to be the original gold bug:
http://www.youtube.com/watch?v=lMIFEZdWFkk&feature=related
Thanks CB.
I was having a look at http://www.ainsliebullion.com.au in Brisbane …
I see they have a bit of a variety of coins and bars – varying quite a lot in price per ounce. i dont really understand why that is so…
Why would one coin cost 10 or 20% (or even more) higher than another of precisely the same weight? Are they not all 100% (well 99.9% usually) gold or silver?
I also note generally a fairly wide disparity between purchase and selling prices – usually at least 10% => spot price would need to climb by at least 10% before even breaking even, then with insurance/storage costs by it means price may need to rise about 20% to break even… ?
Sandra,
This clip goes through the various forms of bullion. It is by a US dealer, but the general priciples apply everywhere.
http://www.youtube.com/watch?v=F6Ba1pWqbqA&feature=related
Sandra – The Ainslie website did not come up for some reason, but basically, the smaller the weight, the more expensive it is per ounce.
Hence, while you might want a handful of small change in the form of coins, the bulk of your holdings should be in larger bars, so that you minimise the spread, or the dealer’s margin. The margin you are looking at is a necessary expense, unfortunately. When you buy and sell the real thing, the physical metal, you have these expenses, in the same way that you have similar expenses when you buy and sell other forms of real property, such as real estate. I think of it to be the price of eliminating counterparty risk, and the peace of mind you get from same.
CB:
Regarding the below – what do “fabrication” charges refer to?
I’m guessing it’s the charge to convert however many ounces of gold/silver you own in unallocated pool into a physical product – be it coin or bar.
“Ainslie Bullion Gold and Silver Pool Account Services
The Ainslie Bullion Company also offer Pool Accounts. These are also referred to as unallocated storage accounts in which a precious metal account is set up for a client but the client does not have title to specific (allocated) bars or coins. The client instead owns a defined unsegmented interest in a pool of precious metals held by Ainslie Bullion. However, the client can receive physical bullion in the form of any type bar or coin normally carried by Ainslie Bullion upon payment of quoted fabrication charges.”
Ah – just saw your link now – thanks – will check it out…
Sandra – Yes, that is correct, although, if you think about it a little, you can smell the fraud that so-called pool accounts and unallocated metal accounts really are. They are a form of paper gold, or rather a promise on a piece of paper, that you are owed the bullion. This is a paper promise, and no better than having shares in an etf, or shares in a mining company. The common denominator between all paper promises is that you are an unsecured creditor to a third party, which may and may not be good for promises made. The reason why various dealers and companies would prefer you to have unallocated metals is that in such an arrangement they have everything to gain from taking your money, while they give you noting in exchange by the making of a promise to pay. But promises, as they say, are cheap.
A safer form of holding would be to have an allocated metals account, where the company in question actually stores the bars for you, and holding them physically separated and reserved for you, with specific serial numbers. In such cases, you are not an unsecured creditor, but the actual owner of specific bars, which the company merely stores and holds in trust for you for a fee, and which you have the right to physically examine. However, even in such cases you are risking the company going bust and squandering and stealing your metal, and if you are not insured, you can lose the lot. Whether the fraudsters are caught or not, you still lose out.
Hence, the only form of ownership with no counterparty risk is that of taking actual delivery of the metals, and then storing them yourself in places and institutions that you know and have direct access to. Obviously there are degrees of security even within this category. For example, in more and more states in the US you have state authorities breaking into people’s safe deposit boxes in banks and selling off people’s precious possessions wihout even making an effort to check whether the owners are around or not. Once you read a few stories like that, it is hard to trust even such an arrangement. Yo also need to think about institutional restrictions on the access to your metal, such as opening hours, or outright bank closure.
CB – you’ve got mail
Sandra
Re. gold, website that might be of interest…
http://www.goldandsilverexchange.info/index.html
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