Retirement Fund Insurance

by John M. Curtis
(310) 204-8700

Copyright October 29, 2008
All Rights Reserved.                    

             Slashing the federal funds rate 50 basis-points, Federal Reserve Board Chairman Ben S. Bernanke tossed ice water on a most fragile Wall Street rally, propelling the Dow Jones Industrial Average over 900 points Oct. 28.  President George W. Bush begged the public for patience, urging banks to end the credit logjam, preventing businesses and consumers from getting credit.  Wall Street likes rate cuts except this time around, signaling the economy is already into a deep recession.  While only time will tell, slashing the federal funds rate to one percent tells investors that there’s more pain ahead.  Instead of expecting a booming economy, the Fed’s rate cut signals serious economic upheaval.  If the Fed’s Open Market Committee saw any possibility of inflation, Bernanke would have left rates alone, possibly raised them.  Bernanke reads recession in the tealeaves.

            Bernanke began slashing rates in 2007, seeing the housing meltdown dragging the economy to screeching halt.  No one, including former Fed Chairman Alan Greenspan, saw the impending disaster, causing bankruptcies, acquisitions or government bailouts of some of the nation’s most respected financial institutions.  Countrywide Credit, the nation’s biggest Mortgage lender, was sold to Bank of American Jan. 11, 2008 for the fire-sale price of $4.1 billion.  Countrywide’s CEO Angelo Mazillo cashed in his company stock and stock options before share prices crashed.  Like other devious CEOs, Mazillo is currently under FBI scrutiny for securities fraud.  Countrywide’s failure was the first major instituiton to succumb to the subprime mortgage scandal, plaguing U.S. and global credit markets.  Bernanke sees more bad news ahead, slashing the federal funds rate.

            Wall Street has been looking to rally, after watching the Dow drop 6,000 points or 40% since Nov. 2007.  More than $5 trillion in investors’ wealth has been lost since the market peaked July 11, 2007 at 14,000.  Many investors have bailed out of mutual funds, fearing further erosion in capital positions.  “It was a panic sell in the last two minutes,” said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams in New York, accounting for the sudden drop after learning General Electric faced a dismal earnings’ picture.  Contrary to Rovelli’s view, Wall Street doesn’t panic, it methodically takes profits when the market has been sufficiently inflated.  Given the market’s 900-plus-poont rise yesterday, it made sense for institutional investors to unload positions.  There’s no “panic” involved when fund managers place simultaneous programmed trades.

            Bernanke and Treasury Secretary Hank Paluson, former CEO of investment bank Goldman Sachs, know that Wall Street must lead the economy out of recession.  Wall Street can’t perform its magic of financing American business unless small investors have trust in mutual funds that they won’t gobble up investments and retirement savings.  Wall Street’s premier investment houses counsel long-term investing, when fund managers routinely place sell orders, when seeking quick profits.  When the market rocketed up 900 points, a premeditated programmed buy caused the one-day rally.  Funds make cake quick-cash on the spread between buying and selling, causing today’s wild gyrations.  It’s difficult for Wall Street to restore credibility when it encourages long-term investing but does the exact opposite.  Fund managers must follow their own advice and practice what they preach.

            Buill markets start and continue when Funds keep buying, methodically driving the shares upward, or, at least, that’s way it used to work.  Hedge funds, or market-neutral investment strategies, routinely short the market, or bet on stocks going down.  It’s difficult to sustain a bull market when hedge funds continue to drive the market up or down on a daily basis.  Bernanke and Paluson talked recently about restricting short-selling of financial stocks to stabilize markets.  Bernanke should work with Paulson and Securities Exchange Commission chairman Christopher Cox to regulate hedge funds and other mutual funds from short selling.  To restore credibility for institutions and small investors and to protect the wealth of the nation’s pension plans, they must create insurance for qualified investment funds, the same way they protect money markets and certificates of deposit.

            Yesterday’s rally too often becomes today’s sell-off, sacrificing the wealth of institutions and small investors.  If mutual and hedge funds are in a fiduciary capacity to protect investors’ capital, then the U.S. government should find some way to insure investments.  If the government really believes mutual or hedge fund investment is too risky for institutions or small investors, then government should ban risky investing for retirement accounts.  Government insurance should be available for qualified funds that have a proven track-record of sound investing, much the same way that rating agencies rate government and corporate bonds.  No investor should be duped into retirement investing too risky to qualify for federal insurance.  Since American business and the economy depend on the stock market, the government should pony up and offer insurance for qualified funds.

  John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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