By: Matthew Arndt, CFA, CPA, CFP | February 5, 2010 | The Regulators, Wall Street Ethics

Just when you thought the ill stench wafting from Wall Street couldn’t get any worse. A recent U.S. report details how large American banks like Citigroup, Bank of America, and JP Morgan Chase facilitated the laundering of hundreds of millions of dollars on behalf of corrupt foreign officials who were subjects of criminal investigations into charges of money laundering, bribery and extortion, and who publicly associated with people like Libyan leader Col. Muammar el-Qaddafi. Supported by bank statements and internal e-mail messages, the Senate report details how the large banks ignored controls intended to prevent money laundering.

The report details how, between 2004 through 2008, high-risk clients from corrupt countries used American banks, real estate agents and lobbyists “to conceal, protect and utilize their ill-gotten gains” to purchase such items as: several C-130 Hercules military transport planes (with United States government permission), Hummer H2 armored vehicles, Ferraris, a $38.5 million Gulfstream G-5 jet, a $30 million home in Malibu, Calif., and invites to the 2007 “Kandy Halloween Bash” at the Playboy Mansion. It also describes how former President Omar Bongo of Gabon, carried a suitcase containing $1 million in shrink-wrapped bills into New York for his daughter to buy a Manhattan apartment.

Obviously, these banks used absolutely no discretion when deciding who they would do business with as long as the money kept rolling in. Could any of this money have supported state-sponsored terrorism? Where were the large banks planning on drawing the line? And our tax dollars are supporting these shenanigans?

By: Jack WaymirecloseAuthor: Jack Waymire Name: Jack Waymire
Email: jack@paladinregistry.com
Site: http://paladinregistry.com
About: Jack writes for the InvestorWatchdog website and Worth magazine. He worked in the financial services industry from 1976 to 2004. For twenty of those years he was the president of a Registered Investment Advisory firm and a Broker/Dealer. Jack is the author of Who's Watching Your Money? The 17 Paladin Principles for Selecting a Financial Advisor and is a co-founder of PaladinRegistry.com.See Authors Posts (87) | February 3, 2010 | Deceptive Sales Practices, Sales Representatives

The Financial Times reported BofA Merrill Lynch plans to hire 2,000 brokers over the next 12 months. They will hire inexperienced brokers rather than pay big upfront fees for established professionals. These brokers will market investment products to BofA’s 17 million mass-affluent customers who need wealth management services.

Alois Pirker, research director at Alte Group LLC thought this was a smart strategy, “If you don’t leverage the opportunity, you might as well split (BofA and Merrill) up again.”

I have a different take. BofA has developed a relationship with its customers delivering traditional bank services and not investment services. Now it wants to generate more revenue from these relationships – Mr. Pirker called it “leverage the opportunity.”

Leveraging relationships is good for BofA and bad for its customers when it adds 2,000 newly minted brokers to sell bank, investment, and insurance products. In my opinion, these brokers should come with the following warning label: “I am a brand new broker. I don’t know how to help you achieve your financial goals. But, I have been trained to sell you bank products.” This is not wealth management; this is product sales disguised as wealth management.

This is a common bank strategy. Build trust with traditional bank services and then use the trust to sell investment and insurance products. BofA customers beware. Make sure you ask brokers for documentation that describes their experience and other sources of investment expertise before you buy what they are selling.

By: Matthew Arndt, CFA, CPA, CFP | February 1, 2010 | The Politicians, The Regulators

It’s conceptually simple: take away any government protection for stockholders, management and creditors of large financial institutions to help shrink their appetite for risk-taking. For instance, in the case of the Bear Stearns debacle stockholders should have been wiped out; management should have been fired; and the bondholders should have suffered significant losses. Instead, stockholders received a renegotiated price of $10 per share; incompetent management was retained; and as it stands, the debt-holders of Bear Stearns stand to receive all interest payments and 100 percent of principal. This latter approach does not instill market discipline or uphold capitalistic ideals.

By not having consequences for taking risk, our current approach to protecting banks facing insolvency will only create moral hazard which implies that financial institutions deemed “too big to fail” can continue to count on public support at critical times. This perceived public “safety net” will only encourage excessive speculation at large commercial banks and will undermine the stability of our financial system unless sensible reform is implemented. There needs to be a mechanism by which any failing institution allowed to receive public aid would be subjected to an orderly dismantling where taxpayers would not be exposed to excessive losses in the event there is a bankruptcy. Creating considerable negative consequences for those involved in risk-taking at banks will go a long way to stabilizing our financial system.

By: Jack WaymirecloseAuthor: Jack Waymire Name: Jack Waymire
Email: jack@paladinregistry.com
Site: http://paladinregistry.com
About: Jack writes for the InvestorWatchdog website and Worth magazine. He worked in the financial services industry from 1976 to 2004. For twenty of those years he was the president of a Registered Investment Advisory firm and a Broker/Dealer. Jack is the author of Who's Watching Your Money? The 17 Paladin Principles for Selecting a Financial Advisor and is a co-founder of PaladinRegistry.com.See Authors Posts (87) | January 29, 2010 | Deceptive Sales Practices, The Politicians

I was reminded the other night, watching President Obama’s State of the Union message, that politicians and low quality financial advisors use the same deceptive sales tactics.

First, Obama told people what they wanted to hear. They wanted to lower unemployment; he will lower unemployment. They wanted economic growth; he will create growth. Financial advisors use the same tactics when they tell investors they deliver high returns for low risk.

Second, Obama did not communicate any strategy for achieving many of his lofty “goals.” His strategic initiatives were deliberately vague so there is no measureable accountability. Less ethical financial advisors use the same tactic when they claim they can produce high investment returns, but provide no audited track records for past results. They hope you buy their claims so they can sell you their products.

Third, Obama added spin to make his agenda sound more realistic. He pays his public relations gurus a lot of money to produce spin that people will buy. The most important point about spin is that it is not true. An example of financial spin occurs when advisors show investors the track records of hot products. Then they tell investors they know how to identify hot funds before the performance occurs.

Fourth, Obama delivered his messages with as much conviction as possible. Conviction is a sales tactic that makes claims and spin more believable. Naive voters and investors tend to trust people who really “believe” what they are saying. TV evangelists are the epitome of conviction.

By: Matthew Arndt, CFA, CPA, CFP | January 28, 2010 | Investor Information, The Regulators

All those invested in Money Market Funds beware. In a nearly unanimous vote the SEC has made it legal for Money Market Funds to have the ability to suspend redemptions if they see fit. So as it stands if there were another financial meltdown, money market investors would NOT be able to withdraw their money if the Money Market Fund decides to exercise this right. Isn’t a Money Market Fund deposit suppose to be highly liquid investment comparable to a cash deposit? Wouldn’t this sort of rule impose significant hardship on investors who rely on their ability to redeem shares at a moment’s notice? Who in the hell are these guys at the SEC working to protect? Guys like Madoff? This is truly a head-scratcher!

By: Jack WaymirecloseAuthor: Jack Waymire Name: Jack Waymire
Email: jack@paladinregistry.com
Site: http://paladinregistry.com
About: Jack writes for the InvestorWatchdog website and Worth magazine. He worked in the financial services industry from 1976 to 2004. For twenty of those years he was the president of a Registered Investment Advisory firm and a Broker/Dealer. Jack is the author of Who's Watching Your Money? The 17 Paladin Principles for Selecting a Financial Advisor and is a co-founder of PaladinRegistry.com.See Authors Posts (87) | January 27, 2010 | Investor Information, The Politicians, Wall Street Ethics

There are aristocrats in the U.S., but membership in this exclusive club is not based on bloodlines, it is based on money and political power. The new aristocrats are key executives of major companies who control the money and Washington politicians who control the power. Politicians need money to gain and retain power. Executives need favorable regulations to maximize profits and bonuses. They work together. Their intermediaries are called lobbyists.

The executives’ companies are organized into “special interest groups” so they have even more power. They pool their resources because they have the same needs and interests. For example, they want weak regulations with numerous loopholes that allow companies to maximize profitability, not to mention the executives’ seven, eight, and nine figure incomes. This could not happen without the collaboration of the politicians. They sell votes on critical legislation for money. They get away with it year after year because they are powerful aristocrats. Unfortunately, voters and consumers are disorganized and weak.

You have seen the devastating impact of the aristocracy. Twice in the past decade (2000-2002, 2007-2008) Americans lost trillions while Wall Street made billions. These devastating events were engineered by Wall Street executives and their political allies. But, nobody goes to jail if you have enough money and the right connections.

There is a good chance you feel powerless to do anything about the new aristocracy. It has huge amounts of money and power. In addition, you have your own interests to protect. This creates the vacuum that is occupied by the new aristocrats.