|
|
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama today. Anyone who follows my blog has heard me clamor for years about the need for these types of reforms. And, although this bill is far from perfect, it is very comprehensive and it addresses most of the critical areas where reform was necessary. To be honest, I didn’t think most of these provisions would make it past the banking lobby, but they have.
Credit Where Credit is Due
 Image by SEIU International Although I didn’t vote for President Obama and I don’t agree with most of his policies, I applaud his effort to provide these reforms, which I believe are critical to the financial security of our nation. This is the third major financial reform, following the CARD Act and Overdraft Protection. I don’t think President Obama gets nearly enough credit for pushing these reforms and the positive impact they will have for America.
It probably won’t surprise anyone that I’m not a big fan of Barney Frank. And, I’m happy Chris Dodd is not seeking another term. In my opinion, the Sub-prime Crisis happened on their watch and they bear responsibility for the sad financial condition our nation is in. Having said that, I appreciate the hard work they put forth in bringing this reform and I think it is fitting their names are on the bill.
What this Means for Americans
Consumer Financial Protection Bureau – There is now a single consumer protection agency that will ensure all financial transactions are fair to consumers. The emphasis of this new agency will be to simplify contracts, so they are clear and understandable. Hopefully, the fine print and dirty tricks will be eliminated or at least greatly reduced.
Banking Institution Reform- Key elements of the Glass-Steagall Act have been restored which require the separation of deposit and investment banks. This law also requires the divestiture of hedge funds, beyond a 3% stake. Most important, failed institutions will now be wound down with shareholders taking the hit, instead of being bailed out with taxpayer money.
Oversight of the Federal Reserve- The way the Fed has been operating in secrecy is a huge problem for America. What most Americans don’t realize is that the Fed is actually a banking institution and not a true government agency. Huge sums of treasury money have been flowing from the Treasury to banks through the Fed. How much is anyone’s guess, since they refuse to open their books. The reform bill allows the Government Accountability Office (GAO) to audit the Fed, but their powers are limited.
Mortgage Reforms- Everyone knows that sub-prime mortgages were a primary cause of the Financial Crisis. What most people don’t know is that millions of customers were steered into sub-prime mortgages, even though they qualified for regular funding. The reason this happened is because brokers were paid yield spread incentives to do so. From now on, lenders cannot be rewarded for steering borrowers into higher cost loans. And, consumers will have to prove they can repay their loans. No document loans are a thing of the past.
Derivatives Reform- Derivatives will now be traded on a central exchange, which will be monitored by the SEC and CFTC. Regulators are also given greater enforcement authority to punish parties who use complex derivatives to defraud others. Finally, a new code of conduct is established for dealers, especially when dealing with pension, endowment and governmental entities.
Continue reading The Benefits of Financial Reform
I just had an interesting comment debate with my buddy Matt over at the Online Investing AI Blog. Matt’s a big fan of derivatives and a laissez-faire kind of guy. He views government regulation with a heavy dose of skepticism. I am not a big fan of cumbersome regulation myself. But, I have become firmly convinced the banking industry is out of control and they need to be more effectively governed.
Our economy, industry, currency, investments and the very future of our nation depend on the stability of our markets and financial systems. In the past decade, we have allowed banks to gamble with our future to increase their profits and this turned into a disaster. Banks have shown no remorse for the financial crisis they created and they remain defiant in the face of reform. If left unchecked, the potential for disaster will only increase.
The Seeds of Failure
 Image by The Consumerist The Glass-Steagall Act was created after the Great Depression to protect depositors from risky bank speculation. And, it worked very well for over sixty years. However, it was quietly dismantled in 1999 in a bi-partisan effort signed by President Clinton and lobbied for by the banking industry. Many economists now agree this key piece of legislation could have prevented the Sub-prime Crisis of 2008.
The reason Glass-Steagall was so crucial and the reason it should be restored, is because it mandated the separation of deposit and investment banks. The repeal means a number of scary things. Most important, deposit banks can now trade in risky derivatives with your money and if they go under, the FDIC must pay the depositors. This places the total risk of speculation on everyone but the bank. Also, bank holding companies can now be formed with the rights of both deposit and investment banks. Many investment banks quickly reformed as holding companies to grab a share of the TARP money, even though deposits and lending wasn’t their primary business.
Continue reading Why Banks are out of Control
Every couple of years, I am approached by someone who has recently become employed in the financial services industry. This is usually a friend or former coworker, who is working through their warm market, looking for candidates to sell financial products. This year, the approach seems to have evolved, because I was contacted via Facebook. I immediately suspected this wasn’t just a friendly greeting. But I hadn’t talked to this person for almost two years and I really wanted to call and say hello.
The Pitch
 Image by Alaskan Dude The pitch was relatively straightforward and predictable. He wanted to review my finances with me to make sure I have all of my bases covered. The company he works for offers products that may be useful to me and my family. This isn’t something he could do over the phone, so we would have to meet either at my house or at his office. To spare my wife the monotony of the sales presentation, I elected for the office visit.
But first, I went into great detail about the investments and insurance I currently have in place. And, I took a fair amount of time to explain to my friend how they were less expensive and better yielding than the products he could offer me from his company. After managing my portfolio for 25 years, I have no interest in buying whole life insurance or mutual funds with loads, redemption fees or 12b-1 expenses.
None of this discouraged him from his mission of setting an appointment. I figured he was having a hard time finding clients. Obviously, he was under a lot of pressure to bring people into the office. Not to mention, he probably wasn’t making very much money. So, I promised to stop by and he sounded relieved. But, I warned him up-front that I wasn’t likely to buy anything.
Continue reading My Visit with a Financial Advisor
This is my favorite time of the year. Not only has summer arrived, but it’s graduation season. It’s my chance to impart some nuggets of wisdom onto impressionable graduates. To those who seem genuinely interested, I usually provide a brief run-down of the five most important things to avoid.
1. Divorce
 Image by Found Photos LJ According to DivorceRate.org, it is estimated that around 50% of marriages will end in divorce. On average, first marriages that ended in divorce lasted about eight years. The divorce rate is highest for men and women who marry between the ages of 20 and 24 years. Waiting just a few years can almost double your chances of a successful marriage.
Divorce is called a destroyer of wealth and that’s an accurate description. When a divorce occurs, each person loses much more than 50% of their combined wealth. Between the lawyers, the court costs and the losses from costs of liquidating property, there isn’t much left over from years of work.
I have witnessed a number of divorces which led to foreclosure and bankruptcy. In almost all of these cases, the individuals had to basically start over from scratch. When you are in your thirties, forties or even fifties, moving back into a dingy apartment or moving back in with your parents can be pretty depressing.
Continue reading Five Huge Money Pitfalls
Happy Father’s Day to all of you Dads out there.
I was blessed to have two Dads. And they each impacted my life in different ways. Both of my Dads were Engineers and they were both very wise with their finances. They were good fathers and they were deeply committed to their children. But, their goals, thoughts and personalities couldn’t have been any more different. These differences gave me two valuable perspectives.
George Frohlich III
 George Frohlich My Dad George is gone now, but he left quite a legacy. He raised 11 kids from two different families and his proudest accomplishment was that all of his children turned out well. He didn’t measure himself by his job titles, assets or net worth. He measured his value by what he could pass onto others. When he left this world, he didn’t have to worry about any of his children. He had shown us how to take care of ourselves and our own families.
My Dad encouraged me to invest in my early ’20s. He invested in mutual funds and he talked me into buying newsletters and reading books. He taught me how to read a prospectus and how to evaluate the performance and expenses. He could sit around for hours talking about the markets and he loved to watch the financial news on TV. Since he lived in a foreign country, there weren’t many people he could talk with about investments and finances. So, when he came to visit, he was literally bursting at the seams with strategies and information. He was very proud of the way I invested, especially since I had very little money left over from my meager income.
One of my Dad’s goals was to retire at 45 and sail around the world. He always hated the “Rat Race” and he dreamed of a peaceful life with less stress and more time for thought and reflection. Because of his many children, a divorce and the financial support he provided for his folks, he had to put his dream on hold. He did retire at 55 and he lived out his remaining years on a beautiful island surrounded by people he loved.
I remember as a young man thinking he was nuts to want to retire so young. I was excited about my career and I couldn’t understand why Dad wanted to leave the workplace. But, now that I have reached that age, I understand exactly what his dream was about. He simply wanted regain control over his life. He wanted the freedom to decide whether to read the newspaper or drive into town. He wanted to spend all day cooking a special meal for his kids and to watch them walk home from school. He wanted to be the master of his time and he accomplished this goal.
Continue reading What I Learned from my Two Dads
|
|
Most Popular Posts