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  • We Prefer A More Secure Financial Institution

    We Prefer A More Secure Financial Institution

    By Paul Lamont

    July 29, 2008


    ***We caution that this is not legal advice, so please consult your own legal representative and your own account agreement.***

    As we referenced last April, it is very important in a deleveraging environment to hold your U.S. Treasury Bills at a secure financial institution. Calling brokers and reps up and asking them if your funds are safe at their institution is like asking the fox if the chickens he is guarding are safe. What do you expect them to say? Since we are independent and only work for our clients, we have been diligently researching the different types of asset custodians. Here is what we found:
    • Trust Company - According to the American Bankers Association: “Assets held in custodial accounts in the trust department of a bank do not become assets of the bank and are segregated from the bank’s assets.” More importantly, “Account ownership in the assets remains vested in the individuals or entities for whose benefit the bank is acting as custodian and the assets are not subject to the claims of creditors.” The FDIC has confirmed this. Since this is the strongest claim of ownership, retirement and high net worth accounts are held in custody accounts at a Trust Company when you open a LTA U.S. Treasury Bill Account.

    • Brokerage FirmA conservative brokerage firm is the next step down in ownership claim. Only two brokerages in the country have made it through our selection process (the third we had to pull accounts from due to a merger). Why is this even a concern? Securities held at a brokerage firm are in ‘street name.’ This means they are registered under the name of the brokerage at the DTC, the system-wide clearing company. Brokerages then record on their books that they hold securities for the ‘benefit of the owner’ held at the DTC. What an individual client of a brokerage firm really owns is a percentage of the securities held in the client pool. This is not full ownership. If an investor has a margin account, the brokerage company may lend out those securities. (Even if you do not, but the brokerage firm promotes margin accounts, securities lending could diminish the client pool in a systemic crisis.) Also highly leveraged client bets may create losses that affect the entire client pool, as happened in the failure of MJK Clearing. So in our view, accounts held at Wall Street investment banks and brokerage firms that deal with leveraged players are not secure. When presented with the evidence, most folks would prefer to deal with only highly rated financially stable brokerage firms.

    • BankFrankly, we do not want to be depositors or creditors at any bank. Banks are even wary of lending to other banks. Instead, cash can be held at more secure institutions. Debit card and check writing capabilities can also be obtained at institutions less likely to be ‘bailed’ out by the government. As John Bovenzi, the FDIC's chief operating officer, recently stated: IndyMac bank “is as safe and as sound as any bank in the country right now.” (Cough.) As we discussed two months ago, comparing bank stock prices is the best determinant of financial health if you have to have a bank account. While stock prices can change, perceptions do create reality.

    Worst Case Scenarios

    We will continue to search for higher ground during this seventy year flood. If you have read our past reports, you know that we try to stay out ahead of the herd. But we also have to admit, that while we are doing everything we can, something may happen that we cannot stay ahead of. This credit crisis is one for the history books. Funds may be unavailable for extended periods of time. So with that, we give you the worst case scenarios:
    • Trust Company
    “Since assets held in trust, fiduciary and custodial accounts do not become assets of the bank (title is held by the account’s owner(s)), it follows that none of this property is subject to the claims of the bank’s creditors. As a result, a failure of a bank will have no adverse effect. In the event that a bank with trust, fiduciary or custodial powers fails, the FDIC will seek to transfer responsibility for administration of the accounts to a successor trust institution as quickly as possible. Provided this effort is successful, the account beneficiaries would need to either accept this new arrangement or make provisions with the successor bank for alternative arrangements. Therefore, the safety of trust, fiduciary and custodial assets is not dependent upon whether the bank has assets greater than its liabilities. Property held in these accounts belongs to the owner(s) of the accounts and would be unaffected by a bank failure.” - American Bankers Association
    • Brokerage Firm
    “When a brokerage firm is closed due to bankruptcy or other financial difficulties and customer assets are missing, SIPC steps in as quickly as possible and, within certain limits, works to return customers' cash, stock and other securities. Without SIPC, investors at financially troubled brokerage firms might lose their securities or money forever or wait for years while their assets are tied up in court. SIPC either acts as trustee or works with an independent court-appointed trustee in a brokerage insolvency case to recover funds. The statute that created SIPC provides that customers of a failed brokerage firm receive all non-negotiable securities - such as stocks or bonds -- that are already registered in their names or in the process of being registered. At the same time, funds from the SIPC reserve are available to satisfy the remaining claims of each customer up to a maximum of $500,000. This figure includes a maximum of $100,000 on claims for cash.” - SIPC
    • Bank
    “Since deposit account assets become assets of the bank, it follows that the depositor would become a creditor in the event a bank failed. However, the FDIC insures depositors for up to $100,000 per individual per bank.” - American Bankers Association
    Over-the-limit depositors are at the mercy of the FDIC.
    What’s Next

    We have had quite a move down in the major stock indices over the last two months. We wouldn’t be surprised if we corrected upwards for a few weeks. This would set up the major down wave for the fall. We hope you are able to secure your funds. If you would like assistance, please contact us. Expect Friday afternoons to get more exciting, as that is when the FDIC historically announces bank failures. The fire sale forecast last October continues.

    We are conducting a quick survey to better understand our current online readership. This will allow us to improve The Investment Analysis Report. We appreciate any feedback.

    ***No graph, chart, formula or other device offered can in and of itself be used to make trading decisions. This newsletter should not be construed as personal investment advice. It is for informational purposes only.

    Copyright ©2008 Lamont Trading Advisors, Inc. Paul J. Lamont is President of Lamont Trading Advisors, Inc., a registered investment advisor in the State of Alabama. Persons in states outside of Alabama should be aware that we are relying on de minimis contact rules within their respective home state. For more information about our firm visit www.LTAdvisors.net, or to receive a copy of our disclosure form ADV, please email us at advrequest@ltadvisors.net, or call (256) 850-4161.

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    Ed.

  • #2
    Re: We Prefer A More Secure Financial Institution

    We all heard about e trades hilarious attempt to profit from the subprime crisis, and their close brush with bankruptcy. I have my account with Scottrade and as of late have been trying to get into their financial disclosure sheet only to be block for seemingly bogus reasons. I am curious as to how Scottrade has managed it's money.
    Anyone do any research on Scottrade?

    Comment


    • #3
      Re: We Prefer A More Secure Financial Institution

      Any thoughts on Fidelity? I'm a little unclear on how to start researching a brokerage firm.

      Comment


      • #4
        Re: We Prefer A More Secure Financial Institution

        So.. Ditto about TD Ameritrade.

        Comment


        • #5
          Re: We Prefer A More Secure Financial Institution

          Wonder why he didn't report the most secure as direct treasury?

          I would also like to know if a Treasury only MMF is as secure as actual bills?

          Comment


          • #6
            Re: We Prefer A More Secure Financial Institution

            Ironically, these dangers are exactly what Jim Sinclair has been warning and pounding the table on for the last 6-9 months, if not longer.

            Dear CIGAs,
            The financial system is broken and all that can be done by the US Federal Reserve and the US Treasury is monetize all major financial entities.
            The reason that all this has happened is the $1.114 QUADRILLION dollar mountain of crap paper made of unfunded, unlisted, unregulated and non-transparent financial specific performance contracts called OTC derivatives.
            Those that create and peddle OTC derivatives are guilty of financial murder one.
            I cannot imagine you reading the information above and failing to protect yourself, but knowing mankind, I doubt many did.
            1. You should hold no dollars except what is required to pay bills for six months. You know now that FDIC is grossly under-financed compared to potential claims. Get all your money out of financial entities now before you have to stand in line to get it. Screw interest rates. Keep six months of cash in your safety deposit box, invest the balance in short term treasuries of other currencies.
            2. You should put a minimum 1/3 of your LIQUID net worth in gold and gold equivalents.
            3. You surely know by now that SIPC is grossly under-financed when it comes to covering potential claims. The secondary insurance held by brokers is written to them for you, but not for you.

            There are three ways you can protect your securities:
            1. Have your shares delivered to you as paper shares registered in your name.
            2. Have your shares put in direct registration as a book entry at the transfer agent of the company you are invested in.
            3. After consulting a tax counsel and receiving their blessing, order your retirement 401K, Roth and other like investments transferred into the name of your Trust Company, for the benefit of you.
            Failing to do this because your broker disagrees or makes a fuss is you becoming complacent.
            The basic thesis is please distance yourself and your assets from financial agents.

            Monty Guild wrote the following excerpt in early April of this year:
            "REMINDER--HAVE YOU CHECKED THE SAFETY OF YOUR CUSTODIAN? HAVE YOU CAREFULLY READ THE LANGUAGE OF YOUR CUSTODIAN'S AGREEMENT WHICH GOVERNS THE DISPOSITION OF YOUR ASSETS IN THE CASE OF SERIOUS FINANCIAL PROBLEMS IN THE WORLD ECONOMY, OR WITH THE CUSTODIAN ITSELF?
            In our opinion, all investors and all recipients of pension plans or holders of IRAs should check the financial stability of the custodians of the assets that they own. Equally important, is the legal wording of your relationship with your custodian. Have your attorney look over the wording and make sure that the custodian is segregating your assets and will audit your assets annually to make sure that they are segregated from other clients and from the assets of the firm itself.
            We have spent money on attorneys who review the legal language in our custodial agreements as we believe that it is essential knowledge. We are money managers, not attorneys. Please have an attorney look over the legal language of your relationship with your custodian...what you find may surprise you."

            That which remains in any bank or trustee financial agency should be in true custodial form. Assuming you have your tax counsel bless the above actions with regards to your 401K, Roth, and other similar investments, the end result will be the trustee acting as a true custodial-ship.
            You must own gold and gold equivalents. Gold is headed to a minimum of $1650, a number that now looks quite low.
            Gold is a currency. Do not forget that.
            The US Budget Deficit is going ballistic. The US dollar will trade at .5200. The Euro will trade at $2. The collapse of banks is far from over. Default derivatives will fail to function when called upon to function in any significant amount. Many major companies will fade away due to hidden OTC derivatives.
            Pakistan will take crude up $100 from the point it is trading at now when the event occurs.
            Monetization of all primary dealers of US Treasuries and all major manufacturers of OTC derivatives will be bailed out.
            If you delay or do not act by doing the above simple and easy steps you will be financial finished. Mark my words. Those of you out there who freeze up make yourself targets.

            Comment


            • #7
              Re: We Prefer A More Secure Financial Institution

              Originally posted by dbarberic View Post
              Ironically, these dangers are exactly what Jim Sinclair has been warning and pounding the table on for the last 6-9 months, if not longer.
              I like JS, I really do! However, when he speaks of currency, he talks beyond his pay-grade, frankly.

              Comment


              • #8
                Re: We Prefer A More Secure Financial Institution

                Originally posted by phirang View Post
                I like JS, I really do! However, when he speaks of currency, he talks beyond his pay-grade, frankly.
                What are you referencing? His target for the dollar to go to .52?

                Comment


                • #9
                  Re: We Prefer A More Secure Financial Institution

                  "Only two brokerages in the country have made it through our selection process."

                  Which 2?

                  Comment


                  • #10
                    Re: We Prefer A More Secure Financial Institution

                    Originally posted by dbarberic View Post
                    invest the balance in short term treasuries of other currencies
                    How does one invest in short term treasuries of other countries???
                    raja
                    Boycott Big Banks • Vote Out Incumbents

                    Comment


                    • #11
                      Re: We Prefer A More Secure Financial Institution

                      We too have been warning of this for quite a while.
                      http://www.ltadvisors.net/Info/DJIAForecast.htm

                      We take issue with JS on the dollar. The U.S. dollar has been weak for almost a century. No news there. However it has risen significantly in purchasing power during one unique period: 1929-1933.

                      http://www.ltadvisors.net/Info/InflationtoDeflation.htm

                      Why must our financial institutions travel to the other side of the globe to find cash?

                      Is this a global credit bust? (check out Eastern Europe’s recent credit growth) Are you dumping U.S. dollars for something even worse? Why has the dollar not gone down, meanwhile gold has lost $100 an ounce, since the Bear Stearns bailout? Is it because the banking system is unable to create inflationary credit?

                      Comment


                      • #12
                        Re: We Prefer A More Secure Financial Institution

                        Please contact me personally at pauljlamont at ltadvisors dot net, if you would like to discuss the institutions we deal with. Also please note that some of the institutions have account minimums.

                        Comment


                        • #13
                          Re: We Prefer A More Secure Financial Institution

                          Originally posted by pauljlamont View Post
                          We too have been warning of this for quite a while.
                          http://www.ltadvisors.net/Info/DJIAForecast.htm

                          We take issue with JS on the dollar. The U.S. dollar has been weak for almost a century. No news there. However it has risen significantly in purchasing power during one unique period: 1929-1933.

                          http://www.ltadvisors.net/Info/InflationtoDeflation.htm

                          Why must our financial institutions travel to the other side of the globe to find cash?

                          Is this a global credit bust? (check out Eastern Europe’s recent credit growth) Are you dumping U.S. dollars for something even worse? Why has the dollar not gone down, meanwhile gold has lost $100 an ounce, since the Bear Stearns bailout? Is it because the banking system is unable to create inflationary credit?
                          Our argument since 2001, when the dollar was at a 20 year high and gold a 20 year low, that competitive currency depreciation, starting with the dollar and followed by other major currencies, was a certainty. We have not changed our minds.

                          Yes, the numerator in the equation as measured as creation of units of credit is not growing as quickly as before, but gold took off a year ago from $650 where it had tread water for a year to over $800 immediately following the securitized debt crisis in June 2007. The denominator in the equation, the purchasing power of dollars, continues to decline even faster than the decline in credit units.

                          1929-1933 was a unique period. The dollar deflated against gold until 1933 when FDR took the US off the gold standard and re-priced gold, producing near instantaneous inflation despite a moribund banking system and little in the way of credit creation. All other similar periods of debt deflation since then have been inflationary. All of them. Every one. The US case now is only a matter of degree. How much new credit is being created today in Zimbabwe today with inflation running at over 1 million percent? Consider the process of debt deflation via inflation and currency depreciation as a continuum from mild to extreme.

                          Ed.

                          Comment


                          • #14
                            Re: We Prefer A More Secure Financial Institution

                            Originally posted by FRED View Post

                            Who says currency depreciation doesn't lead to wage inflation?!? Can't wait to get my bale of Hoovers!

                            Seriously, wouldn't a scenario like this work out somewhat ok for heavily indebted US consumers? Homeowners could pay off their mortgages & other debts and start living more frugal lives? Gold & silver would buy a lot of bales of cash.

                            IMO A big difference between the US and other past hyperinflationary examples is that we have millions of people with claims on real assets paired with loans in the depreciating currency. It's creditors who get screwed when they start handing out Franklin footballs. I know EJ did a piece on how a 100% inflation over 5 years could save the American consumer's ass.

                            Comment


                            • #15
                              Re: We Prefer A More Secure Financial Institution

                              Originally posted by jimmygu3 View Post
                              Who says currency depreciation doesn't lead to wage inflation?!? Can't wait to get my bale of Hoovers!

                              Seriously, wouldn't a scenario like this work out somewhat ok for heavily indebted US consumers? Homeowners could pay off their mortgages & other debts and start living more frugal lives? Gold & silver would buy a lot of bales of cash.

                              IMO A big difference between the US and other past hyperinflationary examples is that we have millions of people with claims on real assets paired with loans in the depreciating currency. It's creditors who get screwed when they start handing out Franklin footballs. I know EJ did a piece on how a 100% inflation over 5 years could save the American consumer's ass.
                              Inflation is Dead! Long Live Inflation! - Janszen
                              The Five Year, 100% Inflation Scenario
                              Ed.

                              Comment

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