Bank of New York Mellon ranks as the safest U.S. bank, for the third consecutive year…August 25th, 2011

Smith Invest­ment Man­age­ment uses BNY Mellon’s Bank Trust Plat­form to hold client assets.

It is an insti­tu­tion that is liv­ing up to its rich heritage.

• In 1784, Alexan­der Hamil­ton founded the Bank of New York, now the old­est ongo­ing bank­ing orga­ni­za­tion in the United States.
• In 1792, The Bank becomes the first stock traded on the New York Stock Exchange.
• 2009 FORTUNE magazine’s rank­ings of The World’s Most Admired Com­pa­nies, Bank Of New York Mel­lon ranked num­ber one for the 2nd straight year in a row among Super­re­gional banks. It has been ranked num­ber one, five of the last six years. It is a global leader in asset ser­vic­ing and asset management.
• It is the world’s num­ber one asset ser­vicer, with over $20 tril­lion in assets under cus­tody.
• August 25th, 2011; Bank of New York Mellon ranks as the safest U.S. bank for the third con­sec­u­tive year, by Global Finance Magazine.

Are your Mutual Funds and ETFs disguised Hedge Funds?

A client asked me to look at some Van­guard Mutual Funds that he owns.

I was sur­prised at what I found in their “prospec­tuses” and “state­ment of addi­tional infor­ma­tion“.

• There is no assur­ance that any deriv­a­tives strat­egy used by a fund’s advi­sor will succeed.
• Cer­tain deriv­a­tives have the poten­tial for unlim­ited loss, regard­less of the size of the ini­tial investment.

Bot­tom line...

1. They are using deriv­a­tives. They may be doing it intel­li­gently or fool­ishly, I don’t know, but they have given them­selves the rights to be involved with FUTURES, OPTIONS ON FUTURES, COMMODITIES, CURRENCIES, CDS (Credit default swaps).
2. They give them­selves the right to use LEVERAGE (BORROWED MONEY)
3. They lend cus­tomer secu­ri­ties to other institutions.

TO ME…MANY MUTUAL FUNDS and ETFs ARE DISGUISED HEDGE FUNDS.

It was a wake up call to me to review all invest­ments and look for hid­den risks.

If you look into your own mutual funds and find some­thing inter­est­ing please let me know.

Is Social Security a Ponzi scheme?

A def­i­n­i­tion of Ponzi scheme is…a fraud­u­lent invest­ment oper­a­tion that pays returns to sep­a­rate investors, not from any actual profit earned by the orga­ni­za­tion, but from their own money or money paid by sub­se­quent investors.

Social Secu­rity fits that def­i­n­i­tion per­fectly other that it a gov­ern­ment pro­gram where leg­is­la­tion passed the House and Sen­ate and was signed into Law by FDR…so it is not a fraud­u­lent invest­ment oper­a­tion.  But…it cer­tainly matches the rest of the def­i­n­i­tion…pays returns to sep­a­rate investors, not from any actual profit earned by the orga­ni­za­tion, but from their own money or money paid by sub­se­quent investors.

Social Secu­rity has Unfunded Promises of 15.2 Tril­lion Dol­lars. That num­ber reflects the cost in today’s dol­lars of pro­vid­ing ben­e­fits, above and beyond what cur­rent taxes will cover.  In other words…the Gov­ern­ment needs to set aside 15.2 Tril­lion Dol­lars in an inter­est bear­ing account to pay promised Social Secu­rity ben­e­fits, in addi­tion to col­lect­ing the exist­ing Social Secu­rity Tax at its cur­rent rate.

The US Trea­sury (IRS)  took in just over 2 Tril­lion Dol­lars last year. So…if the Trea­sury had just one bill to pay for the next 7 years it might be able to make up this short­fall.  With the US Trea­sury bor­row­ing 40 cents out of every dol­lar it spends it will not be mak­ing any spe­cial con­tri­bu­tions very soon. I read one report that said if full retire­ment age is increased to 72 or 73 from the cur­rent full retire­ment age of 67 (for baby boomers). And if a cap is put on infla­tion adjusted ben­e­fits and some are means tested out of benefits…Social Secu­rity is sus­tain­able at cur­rent tax lev­els. That would be an explicit default on promises made to mil­lions of people.

Social Secu­rity will be paid “pen­nies on the dol­lar”, through explicit default…or with “dol­lars worth pen­nies” through implicit default – which is print­ing a bunch more money.  Gotta cover that 15.2 Tril­lion some­how. Unfor­tu­nately that is the good news…the bad news is that Medicare and Pre­scrip­tion Drug are in the hole 100.1 Tril­lion.

So…is Social Secu­rity a Ponzi Scheme? No. But we do need to make up a new term…the “GONZI SCHEME”. A GONZI SCHEME is a Gov­ern­ment Invest­ment Oper­a­tion that pays returns to sep­a­rate tax­pay­ers, not from any actual profit earned by the Gov­ern­ment Invest­ment, but from Gov­ern­ments freshly printed money or money paid by sub­se­quent tax pay­ers.  Ponzi schemes do not end well, nei­ther will our GONZI SCHEME. In due course the like­li­hood of a finan­cial con­vul­sion is high.

Bot­tom Line: So what does this mean to investors? We need to order our invest­ments to sur­vive and hope­fully thrive despite the dif­fi­cul­ties com­ing in due course. I think we have some real abil­ity to help many investors in this area. Call or email us to see if we can help you.