Caveat Emptor

The cons are pros.

The more volatile the market gets, it seems, the more the rip-offs, con games and pyramid schemes proliferate. Con men know that investors are desperate to beat the meager returns they’re seeing from their conventional investments. And they know that desperate investors are easy marks.

There are sadly too many examples to recount. Bernie Madoff’s take ran to the tens of billions. Bayou Hedge Fund out of New Orleans created its own “independent” accounting firm (going so far as to forge office stationery) to hide a $450 million Ponzi scheme. And here in Akron, three now-convicted fraudsters plundered the venerable Fair Finance Company to finance their own lavish lifestyles.

The common denominator in all these cases is that innocent investors got ripped off. And no matter how many con men go to jail, there’ll be plenty more to take their place.

So how do you protect yourself? Start with this age-old defense: If it sounds too good to be true, it is. Any investment opportunity boasting of double-digit returns should be treated with great caution. Any that “guarantee” returns should be avoided like the plague (and probably reported to the Feds).

Next, do your own research. Learn everything you can before you invest. Talk to the firm’s employees and other investors. Check the Better Business Bureau and Attorney General’s office for outstanding complaints. And if the firm or fund references outside auditors, research the history and track record of those companies to be sure they’re legit.

Perhaps most importantly, think of all of your investments as risky propositions at best. Even Federally insured instruments, and securities listed on the major stock indices carry their own risk levels. Alternative investments might bring greater potential returns but their risks are commensurately compounded.

So invest with the same attitude with which you might go to Vegas: don’t gamble with money you can’t afford to lose.

The C4:

1. As conventional investment markets get more and more shaky, more unconventional investment opportunities present themselves. All too many of these are cons, because con men know that investors are looking for alternatives.
2. Caveat Emptor — let the buyer beware. Protect yourself before you invest. Be skeptical of all claims, no matter who's making them. Even friends and family, with the best of intentions, can rope you into a pyramid scheme. If it sounds too good to be true, it is. The greater return that’s promised, or even hinted at, the more skeptical you should be.
3. Do your own research. Independently verify, through multiple sources, every claim. Check out the histories of all principals and associated companies. Talk to employees and other investors. Check the Better Business Bureau and Attorney General’s office for outstanding complaints.
4. Finally, remember that investing always means risk. Don’t invest money you can’t afford to live without.

Beware of Greeks Bearing Debt

A symptom of a flawed attempt to unify.

Casual investors, beware: your world has been turned upside-down.

Stocks have become the relatively safe parts of your portfolio. Bonds, which used to be your hedges of first resort, have changed entirely.

Top-rated bonds are all but useless for growth, and will pay practically zero interest for the foreseeable future. Sovereign-debt bonds, a sterling investment just a few years ago, are now almost too risky to contemplate.

What’s changed? It’s easy to oversimplify, but we’ll forge ahead: Greece. Greece has changed everything.

We’re not blaming that incubator of modern democracy, only pointing to it as a symptom. Greece is demonstrating all the perils of the Eurozone, an unprecedented experiment in a multinational currency. Greece is showing how difficult it is for 17 nations to share monetary policy while maintaining economic independence.

There are no easy choices for the Greeks. If they stay in the Eurozone, they embrace another generation of fiscal austerity — strangling any chance of economic growth. If they revert to the drachma they’ll almost certainly default on their national debt.

You say you own no Greek debt? Hold tight anyway. A Greek default, managed in the best possible fashion, will only encourage other teetering European economies to follow suit. Spain, Portugal, Italy, maybe even France, are all at high risk. This scenario, which is unfortunately one of the better possible ones and probably the most likely, means the bottom is going to fall out of the sovereign-bond market.

Forewarned is fore-armed. Think seriously about adjusting your portfolio accordingly. And spare the kindest possible thoughts for our friends and allies across the pond, who are guilty of nothing except a flawed attempt to unite their continent.

The C4:

1. The Greek debt crisis is demonstrating the vulnerabilities of the Eurozone, and pointing to a grim future of cascading defaults.
2. That likely result, coupled with already historically low interest rates on “safe” bonds, means we can no longer rely on the bond market as our hedge against other investment losses.
3. Casual investors (all investors, in fact) need to rethink their strategy. This is a slow-motion crisis that’s giving us time to adjust. Use it or wallow in regret.
4. But don’t blame the Greeks, nor the rest of the Eurozone. They tried. Economic unification is simply an idea ahead of its time.

Dimon In The Rough

$2 billion loss wakes people up early in the Morgan.

Over at J.P. Morgan, it feels like 2008 all over again.

Three weeks after CEO Jamie Dimon said “tempest in a teapot” when asked about the company’s renewed interest in credit derivative swaps, J.P. Morgan revealed that such trades resulted in over $2 billion in losses. The market immediately punished J.P. Morgan, by wiping out nearly 10% of its stock value in a single day.

Two facts make this loss all the more stark. First is that J.P. Morgan isn’t just an investment house. In the latter twentieth century J.P. Morgan benefited from deregulation, which allowed almost unlimited horizontal integration within the financial industry. As a result, J.P. Morgan is now the largest bank in the U.S.

“Too big to fail” almost doesn’t do it justice.

Secondly, we now know the lengths to which Dimon and company went in order to weaken the so-called “Volcker Rule,” which is designed to limit the amount of its own capital a bank can risk. It’s clear now that loopholes in the Volcker Rule, which J.P. Morgan lobbied heavily for, permitted precisely the sort of trading that just cost the company $2 billion.

There’s one hopeful glimmer, though. Perhaps heeding the Golden Rule of Public Relations (i.e., own up to your mistakes, immediately), Jamie Dimon is loudly and publicly admitting the company’s error.

“We were dead wrong,” he said on Meet the Press. “We made a terrible, egregious mistake. There’s almost no excuse for it.”

What comes next? Probably a lot less lobbying to weaken financial regulation. J.P. Morgan and others in the industry recognize this incident does far more to damage their credibility than it could ever do to their bottom line. So they probably won’t want to be seen jockeying for more loopholes, at least not in the short term.

And maybe that’ll lead to the ideal outcome: a financial industry governed by rules that quash recklessness while still encouraging growth. That is, after all, exactly what financial regulations are supposed to do.

The C4:

1. J.P. Morgan announced last week that credit-derivative trading has cost the company more than $2 billion over the course of about six weeks.
2. The day after the announcement, shares in JP Morgan lost nearly 10% of their value.
3. CEO Jamie Dimon quickly admitted culpability and promised a thorough investigation.
4. Only a robust system of financial checks and balances, that encourages growth through responsible business practices, can prevent those “too big to fail” from dragging us back into the nightmare of 2008.