How many of you could totally screw up at your job and not feel any pain or punishment? If you aren’t a corporate CEO, you probably can’t. Here is an article profiling a few corporate execs who jumped the shark at their previous firms only to latch onto high paying exec jobs at other companies. You really have to wonder what the Board of Directors are thinking at these other companies. I think so many of these problems, including egregious corporate executive pay, would be reduced or eliminated if the shareholders started suing corporate board members. These board members are usually well connected individuals, often times without any real business skills (think politician), who get these positions for their connections. So they have no real incentive to run the company well. They want the very generous pay and the prestige of serving on the board…great resume fluffer.

With so many lawyers in this country, I can’t imagine why we don’t see more lawsuits on the behalf of shareholders. Could be the laws protect the politicians who eventually sit on these boards?

I finally got around to reading the latest piece from Matt Tiabbi where he goes on the offensive against Goldman Sachs. The Rolling Stone article “The People vs. Goldman Sachs” It is a long read, but well worth the time. While I believe there should be bankers heading to prison (over 1,000 were convicted during the S&L Crisis in the 80s – and it was minute compared to our current collapse), I fear the bankers hijacked DC, and we won’t see any prosecutions (or even investigations).

So we may not see any illegality, but there is no question Goldman lacks ethics. Why anyone would trust or work with Goldman is beyond me. Here is a great example taking from Taibbi’s work:

In the marketing materials for the Hudson deal, Goldman claimed that its interests were “aligned” with its clients because it bought a tiny, $6 million slice of the riskiest portion of the offering. But what it left out is that it had shorted the entire deal, to the tune of a $2 billion bet against its own clients. The bank, in fact, had specifically designed Hudson to reduce its exposure to the very types of mortgages it was selling — one of its creators, trading chief Michael Swenson, later bragged about the “extraordinary profits” he made shorting the housing market. All told, Goldman dumped $1.2 billion of its own crappy “cats and dogs” into the deal — and then told clients that the assets in Hudson had come not from its own inventory, but had been “sourced from the Street.”Hilariously, when Senate investigators asked Goldman to explain how it could claim it had bought the Hudson assets from “the Street” when in fact it had taken them from its own inventory, the bank’s head of CDO trading, David Lehman, claimed it was accurate to say the assets came from “the Street” because Goldman was part of the Street. “They were like, ‘We are the Street,’” laughs one investigator.

Hudson lost massive amounts of money almost immediately after the sale was completed. Goldman’s biggest client, Morgan Stanley, begged it to liquidate the investment and get out while they could still salvage some value. But Goldman refused, stalling for months as its clients roasted to death in a raging conflagration of losses. At one point, John Pearce, the Morgan Stanley rep dealing with Goldman, lost his temper at the bank’s refusal to sell, breaking his phone in frustration. “One day I hope I get the real reason why you are doing this to me,” he told a Goldman broker.

Goldman insists it was only required to liquidate the assets “in an orderly fashion.” But the bank had an incentive to drag its feet: Goldman’s huge bet against the deal meant that the worse Hudson performed, the more money Goldman made. After all, the entire point of the transaction was to screw its own clients so Goldman could “clean its books.” The crime was far from victimless: Morgan Stanley alone lost nearly $960 million on the Hudson deal, which admittedly doesn’t do much to tug the heartstrings. Except that quickly after Goldman dumped this near-billion-dollar loss on Morgan Stanley, Morgan Stanley turned around and dumped it on taxpayers, who within a year were spending $10 billion bailing out the sucker bank through the TARP program.

I hope that we eventually get political leadership that stands up to the banks. I would love to see Glass-Steagall reintroduced and the Federal Reserve routinely audited (if not outrighted outlawed).

As the celebrations continue in Egypt after President/dictator Hosni Mubarak fled the nation, we need to examine the real lessons behind the revolution. The mainstream media portrays this strictly as fight for freedom. The press isn’t reporting on the real reason for the uprising: economics. Egypt has been under Mubarak’s rule since he claimed power under martial law after President Sadat was assassinated. If this was an uprising motivated solely by freedom, the Egyptian people would have demanded years ago that Mubarak remove the martial law and hold elections. It was economic reasons that prompted this call for freedom.

Egypt has a typical state controlled economy. Close to 30% of the employed citizens work for the government. This is usually a sure sign of a defunct economic system. Beyond this, the unemployment rate hovers between 20% and 30%. This level of unemployment is not due to the skill or education level of the Egyptian people. They are a highly educated workforce. These dynamics have been in place for several years though. So these facts alone haven’t prompted the revolt. The coup de grace was inflationary pressures. If you are unemployed or under-employed and prices for staples rise dramatically, it really hurts. Again, the press is making this out to be a revolution based solely on a need for freedom. Make no mistake if inflation was subdued, Egypt would not have revolted. Certainly, freedom is something the Egyptians have probably desired for a long time. It just never prompted a revolt until the economic situation became dire.

What lessons can Americans draw from this? One, the inflation issue is going to have large repercussions, and it is due to the Federal Reserve, and other central banks. The price of commodities has skyrocketed between 50% and 75% in the past year. Commodity prices ordinarily respond to demand/supply dynamics. If demand increases and supply remains constant, prices will rise. Certainly, the world’s demand for commodities has increased with the addition of China, India, and other emerging countries. However, demand hasn’t increased 50% over the past year. The commodities market, along with other assets such as stocks, are subject to speculation. Over the long term, demand/supply dynamics will control the price of commodities, but speculation can retard the price over the short term. This is precisely what the Fed’s money printing and low interest rate policy is creating.

As the Fed funnels money into the economy, these dollars are going to find a place to sit. It isn’t going to be traditional interest bearing vehicles since these instruments pay so little. The money is heading into the stock and commodity markets. It is pushing up prices above the natural demand/supply levels. The low interest rate environment created by the Fed is also forcing investors into these riskier assets to find a higher yield or return. So the average retiree is leaving money markets and CDs in search of a livable dividend. The big lesson here is we need to end the Federal Reserve. Since its inception in 1913, the US dollar has lost 95% of its value relative to goods and services. You would not experience this deterioration of purchasing power if we had a currency backed by gold and/or silver. If we continue to let the Fed run the show, we will really start to feel the inflation.

Egypt is a canary in the coal mine. Even before Murbarak fell, Tunisia and Yemen faced uprisings. Lebanon had protests as well. This will spread to other countries, and it will cause disruptions to the economy either through lower worldwide GDP growth or oil production. Further, we could find that these power vacuums are filled by less friendly regimes to the US.

Fed Chairman Ben Bernanke argued that the inflation hasn’t affected America as measured by the government’s Consumer Price Index (CPI), and that foreign countries have the tools to mitigate inflation through central banking policies. This is naive. Let’s ignore the fact that the true inflation most Americans experience is substantially higher than the stated CPI rate (the calculation of CPI is a post for another day). Eventually, the inflation experienced by other countries will come home to roost here in the US. If China, India, or any other country experiences substantive inflation, the wages of their citizens will eventually rise. As these employees build our electronics, clothing, and other items, the companies will have to increase their prices to pay for the higher employee costs, and, of course, the loftier commodity prices.  We will experience the foreigners inflation eventually.

The second lesson deals with our government budget. We have been providing Egypt with approximately $1.7 Billion in aid every year for Mubarak’s reign. Mubarak’s regime received over $60 Billion of yours and my tax dollars. He now has bank accounts containing billions of dollars. Obviously, our gifted tax dollars didn’t go to the Egyptian people. Egypt isn’t the only country raking in our hard earned dollars, which probably only enrich the controlling parties. Here is a chart of our foreign aid by country. Iraq and Afghanistan receive large gifts from us each year, but you will probably be astounded at how many countries are on our dole. Even Russia receives $1.2 Billion per year from the US. Isn’t this the country that was our mortal enemy a couple decades ago? Isn’t this the country building massive wealth with its oil fields? Their debt to GDP burden is substantially lower than ours, yet we give them billions every year.

We need to stop all aid to countries…all countries. One, we can’t afford to help out as we are broke. Two, the money is stolen by the ruling elite. It never gets to the intended parties. Even the humanitarian aid we provide many countries finds its way into the wrong hands, just as it did in Egypt.

While we celebrate the voice of the people being heard in Egypt, let’s not ignore the lessons from Mubarak’s downfall.

I know this is a finance blog, but I was saddened to hear of Jack LaLanne’s death recently. He was an amazing man, and he motivates me to push myself physically even though I am past 40 years of age. I saw this article on Esquire with some quotes. Here are my favorites

If man makes it, don’t eat it.

Of course I have fears. But what good is thinking or talking about them? Billy Graham is about the hereafter. I’m for the here and now.

The only way you can hurt your body is if you don’t use it.

If you want to change somebody, don’t preach to him. Set an example and shut up.

Scales lie! You lose thirty pounds of muscle and you gain thirty pounds of fat and you weigh the same, right? Take that tape measure out. That won’t lie. Your waistline is your lifeline. It should be the same as it was when you were a young person.

Would you get your dog up every day, give him a cup of coffee, a doughnut, and a cigarette? Hell, no. You’d kill the damn dog.

Go on, have a glass of wine with dinner. What is wine, anyway? Pure grapes. A glass of wine is much better for you than a Coke.

I saw an interesting article in Yahoo Finance about the Five Quickest Ways to Bankruptcy. The five were:

1. Doing the Plastic Shuffle
2. Assuming Insurance will cover medical bills
3. Taking out advances on your paycheck
4. Keeping up with the Joneses
5. Overestimating the Value of an Expensive Degree

All of these are very valid. I might add buying too much house, but that could also fall in the keeping up with the Joneses.The plastic shuffle is something I see folks doing quite a bit. This slowed drastically during the 2008 downturn as the zero percent transfer balances disappeared, but this silly behavior is making a comeback since the banks have taxpayer backup for dumb ideas like this. The article specifically addresses how people assume they will get pay raises or other income to eventually pay back the debt. Until then, these people just transfer balances to keep their minimum payments low. This is a recipe for disaster. Shuffling debt around does not solve the issue of over-indebtedness. It temporarily masks it.

The point about medical bills is wrong or misleading. In this section, the authors quote a Harvard study showing that 62% of bankruptcies are caused by medical bills. This is flat-out wrong. The findings show that 62% of those in bankruptcy have medical bills, but it does not show that this is the reason for the bankruptcy. This fallacy was used quite a bit to justify the health care bill, but it is patently wrong. Certainly, cases exist where someone gets ill and has no insurance. That is essentially the fast track to bankruptcy. However, the vast majority of bankruptcies are caused by fiscal mis-management, not health care.

The third point is a no-brainer. You should not take any kind of cash advance either on a paycheck or a tax refund. The interest rate charged on these is egregious. This is where you should use credit cards if you need emergency cash. Or, as the article states, cut your living expenses drastically by eating beans and rice. That is the better option.

Keeping up with the Joneses is futile. If you base any of your self-esteem on material items, you need to reprogram your mind immediately. This isn’t to say you shouldn’t have a dream for a convertible, boat, or round the world trip, but these items should be dreams of yours, not an effort to out due your neighbors. I drive cars and use appliances till they die; I still wear clothes from the 1980s (they will come back some day I tell you); and I have used furniture in my house (I call them antiques). I am sure some folks think I am either poor or cheap (my wife thinks the latter), but I don’t care what they think. I spend money on items I see as important to me based on my values and goals. Case in point – I know so many parents that are the same age as me that haven’t saved a dime for college. They have nicer cars and homes than I do, but I have money set aside for college. I choose to align my assets around my goals, which are my children, rather than a 60 inch LCD screen.

The fifth reason is an often overlooked one. Education is expensive. While it is easy to make a case that a college educated person makes more than someone who only has a high school diploma, this doesn’t mean you shouldn’t reduce the costs for the bachelor’s or master’s degree. Education is an investment, and the smart person ensures a decent return on the investment. You don’t need a Harvard degree if you plan to be a teacher in the public school system. The education will not produce a higher income. For those who argue that you can’t put a price on education, don’t understand what an education is. It is not a degree, but the amount of knowledge we attain. I know folks with no high school degree that are extremely well educated because they have a thirst for knowledge and read their tails off. This also applies to high school. I live in the Baltimore area. There is a huge private school system in this area. One reason is the Baltimore public schools are atrocious. But, the private schools draw students from areas where the public schools are fantastic. That makes no sense to me.  Maybe if you want your child to get a religious curriculum along with the traditional secondary education, I could see it. Of course, you can buy a Bible, Koran, or Torah for a few bucks at a bookstore. Or, you could attend Wednesday services along with Sunday so I still don’t buy that too much. However, I know parents shelling out $20,000 a year for high school when the public schools are solid. Seems like a waste of capital to me.

The commonality among all of these reasons is financial education. If people had a better understanding of basic personal finance, these mistakes could be avoided. If I could waive a magic wand and effect one change in our pre-college education, it would be to add a personal finance class to the curriculum.

The Securities and Exchange Commission (SEC) is attempting to develop standards for both registered investment advisors and brokers. Currently, most consumers don’t know the difference between a broker at a big wirehouse and a financial planner. They both deal with financial issues so they are seen as the same. This ignorance is damning to the consumer.

Registered investment advisors are required to act as a fiduciary, meaning these advisors must put their client’s interest ahead of all others, including their own. Brokers, on the other hand, only have to get past the suitability standard for clients. This means the product being sold is suitable for someone in the client’s situation. The brokerage and insurance industry argues that this is equivalent to a fiduciary standard and often times is better, but the reality is this suitability clause allows brokers and insurance salesmen to hide conflicts of interest and sell higher commission products. The fact that the insurance and brokerage industry are fighting this proposal should tell you something.

Brokers who work for insurance companies have united against the proposal. They claim that a fiduciary duty is vaguely defined and won’t protect investors any better than brokers’ suitability requirement. The National Association of Insurance and Financial Advisers sent an email alert to its members urging them to rally against the proposal.

A fiduciary duty, depending on how the SEC defines it, could revolutionize the way brokers market products and services by requiring them to disclose conflicts of interests. For example, brokers could now be required to tell their customers that they receive bigger commissions for selling certain higher-fee mutual funds.

Brokers do not have tell clients if they receive higher commissions for certain products, nor do they have to tell a client that their brokerage may have an investment banking arrangement for a certain company whose stock or bond the broker is recommending. The brokerage world can hide conflicts of interest by inundating a client with facts and figures (or putting lipstick on a pig as it is called from inside the brokerage world). Insurance agents must be reeling from this potential change because they would no longer be justified sticking a client in a whole life or variable life insurance policy when a term policy would be in the client’s best interest. There goes a fat commission.

Registered investment advisors are worried too that the SEC will craft a fiduciary standard that favors the brokerage world at the expense of the client. Or, it may place additional administrative burdens on registered investment advisors who are typically smaller firms.

The bottom line for you is finding an advisor who puts your interests first. Do you really want to put your life’s savings in the hands of someone who doesn’t have a legal responsibility to do what is best for you? Numerous people who use brokers acknowledge the conflicts of interest but feel that “their guy” does what is best for them. I then ask them, “how do you know.” After the blank stare, I usually get “he told me so” or “we are friends so he does me right.” Just cause you play golf with someone doesn’t mean they are putting your interests first. In fact, they could be using your friendship and trust to make as much as possible from your account. There is a big difference between telling someone you will put their interests first and having a legal liability to do so.

Tip of the hat to Barry Ritholtz.

Kenneth Starr, not the blue dress, Monica Lewinsky one, was indicted on a $30 million fraud charge last week. Like Bernie Madoff, Starr was known as an advisor to the stars with clients such as Al Pacino, Sly Stallone, Martin Scorcese, Diane Sawyer, Henry Kissinger, and others. Also like Madoff, these clients violated the number one rule when working with a money manager or advisor: never let the advisor custody your assets.

What does that mean? You do not want the advisor to control or hold your money. You must require that the money be held at a third party, independent custodian like Schwab, Fidelity, TD Ameritrade or any other regulated brokerage with SIPC coverage. By doing so, you are putting a wall between your money and the advisor. You should only give an advisor a limited power of attorney to perform functions like placing trades in your account and possibly removing their fee from your account. They should not have the ability to move assets from one account to another or change personal information like your home address without having you sign a form. Most custodians will require your signature or permission to conduct these activities.

Another lesson is don’t get caught up in the advisor’s client list. If they manage money for professional athletes or movie stars, don’t get enthralled with the thought of having your money managed by them. Most frauds happen where the advisor is seen as a star or where the client base is a who’s who. Also, don’t just take a friend’s recommendation for the advisor. Do your homework on the advisor. Check the advisor’s background at the FINRA or SEC site. Ask tons of questions including the advisor’s compensation structure. Personally, I prefer a fee-only planner who receives no compensation from commissions, but I am biased.

It is hard enough making money in this investing environment. You certainly don’t need to lose money to fraud to jeopardize your financial future.

I have been following the debate in Congress about a fiduciary standard.  Here is another article from the Wall Street Journal discussing this very topic. The article begins describing the standard, which essentially means a legal requirement to put your client’s interest first, above all others, including your own.

At issue is whether a financial adviser—which nowadays means anybody from a stockbroker or insurance agent to a financial planner or “wealth manager”—should be held to higher standards of conduct.

Many brokers and insurance agents are obligated only to have reasonable grounds for believing that any investment they recommend is “suitable” for you. They need not inform you of conflicts of interest that might bias their judgment; you might never find out, say, that they sold you a particular fund primarily because it paid them a fatter commission than others would have.

Other financial pros, however, bear a “fiduciary duty,” meaning that they must put their clients’ interests ahead of their own and disclose potential conflicts. After the rolling calamities of the past decade, wouldn’t this be an improvement over business as usual?

A measure in the Senate’s earlier reform bill would have imposed a fiduciary duty on all financial advisers. It has been superseded by one that would merely study whether the current standards are adequate. An amendment introduced last week would exempt many insurance agents, and brokers selling their firms’ own products, from being fiduciaries.

What is interesting about this article is it continues to say that maybe Congress doesn’t have the right stuff to grasp this concept. Many in Congress seem to make numerous trades or works with broker who churn their accounts. One Senator discusses how he trades after watching Jim Cramer of  Mad Money fame.

Some members of Congress permit brokers to trade their accounts hundreds of times a year; others trade too much themselves. The accounts of 38 members of Congress or their spouses showed at least 100 trades apiece in 2008, according to public records; 15 had more than 300 trades each.

This isn’t surprising as most people don’t really understand that two worlds of financial planning exist: the broker or salesman and the fiduciary. There are only about 13,000 SEC registered fiduciaries in the U.S. out of 600,000 advisors so it is a small group. Once folks understand the difference, I find they never go back to the “dark side” of financial planning. Here are some videos where I describe how Wall Street really works:

An upsetting article in the Detroit News about folks turning down landscaping jobs so they can keep collecting unemployment. Even more discouraging is this is in Michigan. People should jump over backwards for a job there.

I hope these landscapers find some hard working teenagers to fill these jobs and tell these adults to hit the bricks. I know there are a lot of kids who can’t find summer jobs in Michigan. Maybe this will be there chance.