Bankers on Banking

Since the repeal of the Glass-Steagall Act in 1999 – and recall that it was enacted in 1933 to dampen securities speculation by the banks for their own accounts and that of their loan-assisted customers – the banks have dived (or jumped) into both ends of the (shark-infested) investment pool – the shallow end consisting of their millions of customers’ retirement and savings accounts, and the deep end – investment banking, IPOs and securities promotion or underwriting.

But can they swim? Can they prove that they know how to manage investment risk for their customers or even for themselves?

Readers of these Letters know, of course, that we think not (and provably so) and that the management of investment risk by the keepers of our money is no better now than it was in 1929 (see, for example, Banks 1 Congress 0, June 2012).

Where is the instrument that we should expect as consumers? Where can we buy

The Perpetual Bond®

“Alpha-smart with 100% Capital Safety and 100% Liquidity”

Guaranteed

or even more simply,

The Canada Pension Bond®

“3% plus inflation, every year, no matter what”

Guaranteed

with no fees and no loads.

In our view, that is the acid test of investment management – we, as professional investors, will run your money with no fees, no loads, and absolute guarantees of the capital (100% Capital Safety) – all well within the capability of today’s technology and finance.

For example, without a capital guarantee, their customers could lose not only their money but their homes or properties as surety for investment loans or margin accounts and, after all, what do we really know about leveraged investments in stocks, bonds, futures, options, foreign exchange, emerging markets, “funds of funds”, “hedge funds”, ETFs, and so forth, that we have not been told or sold by our investment advisers?

What other purchases do we make that have no guarantee, warrantee, “best before date” or demonstrated suitability for the customer?

Nor are we alone because the banks themselves are just treading water. For example, in 1999, the Five Largest Canadian Banks had Total Assets of $1,207 billion, Total Shareholders Equity of $61 billion, and “Inventories”, that is “securities for sale or trade” of $238 billion. Those numbers ballooned to $3,146 billion, $171 billion, and $526 billion in 2012.

That certainly shows a lot of confidence. When were we last offered the opportunity to invest three to four times our net worth in a portfolio of equities? How many of us can withstand a 10% to 20% decline in the market value of our equities and not lose our savings account or homes?

Moreover, in most businesses, the “inventories” are something that we own and that we produce, such as clothing, hand bags, automobiles, et cetera, and which we expect or hope to sell at a substantial “markup” to offset the marketing, distribution, and sales expenses. What markup do the banks expect from their inventories, or are the inventories perishable like ripe fruits and vegetables, and they need to be pedalled, right away, for all that they know? And their mutual funds are ready buyers, aren’t they.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”.

Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability.

We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now.

The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”,  “price of risk”, “risk price”, and the symbols “(B)” , “(N)” and N*.