WHEN DO THE BANK SCANDALS START?
by Mark Scheinbaum
American Reporter Correspondent
Boca Raton, Fla.
BOCA RATON, Fla., Dec. 23, 2004 -- The Comptroller of the Currency of the United States and the U.S. Treasury Department have my permission to give a big holiday gift to all Americans: a thorough investigation of the banks which have become stockbrokers and insurance agents.
Since mutual fund investigations, New York Stock Exchange floor trading rules and executive salaries, and corporate governance, have grabbed the 2003 business headlines, it's time for readers like you, to bombard regulators with your banking horror stories.
Many banks and bankers are fine, honest people. Too many are not, driven by corporate policies which seek loopholes through which greed greased money slides.
For more than 60 years the nation's financial institutions were the envy of the world with a stodgy old law called Glass-Steagall. As a reaction to the Crash of 1929, and the depths of the Great Depression in the early 1930s, a "Chinese Wall" separating commercial banking from investment banking, insurance, and stock brokerage business was erected.
Political pork, dot com greed, and well-placed lobbyists allowed Citibank to purchase Traveler's Insurance and Smith Barney, even before Congress changed the rules. If you think it is a coincidence that Citibank later hired former Goldman Sachs vice-chairman, and former Clinton Treasury Secretary Robert Rubin, let me tell you about Santa and his elves.
Here are a few of the scoundrels, scams, and scandals that have hit my clients in recent years:
Teller Bonuses: Clients go to the back to renew a $50,000 insured Certificate of Deposit and grouse about low interest rates. Teller refers customer to a (sometimes unlicensed) investment counselor to sell the customer investments they may not want or need. Teller receives a $50 cash bonus if the account is opened. Government 'Insured' Bond Funds: Picking off unsophisticated bank or savings & loan customers, discount brokers in their lobby push government bond mutual funds as an "insured" product. They mention that U.S. Treasury bonds in the fund are insured by the government. This, of course, has nothing to do with poor management of the fund. This does not guarantee against a loss of principal. Conservative customers are shocked to learn that when long-term mortgage rates rise one per cent, their bond fund has declined 12 per cent.
No Load Annuities: With a new-found windfall in insurance products, bank employees tout variable annuities with three, one, or no surrender periods. They emphasize that retirees over age 59 1/2 have no tax penalties when they withdraw. They fail to mention that most of the companies they represent are no longer--or never were - investment grade underwriters. They also fail to mention that many of the features which insurance agents and full service brokers offer in annuities with surrender charges are exactly the ones retirees might need. Features such as guaranteed death benefit; annual or maximum anniversary date death benefit "step ups," estate bonuses on death benefits; investment grade sub-account (fund) options, are exactly the features that in some cases make annuities attractive.
'Investment Grade' Corporate Bond Funds: Some banks have actually been forced to disgorge profits on this one. With yields low, and "total return" more important than "yield," banks market corporate bond funds. In the best of times bonds issued by AMR (American Air Lines), SBC Communications, or International Paper, are not as credit worthy as AAA-rated government bonds or derivatives. But here's the cute scam: when reading the prospectus you notice lots of "non-rated" or "C: or "B" rated bonds. In fact you might see 20, 30 or 40 percent of the portfolio you just purchased which is not suitable for a conservative retired person or long-term investor. Not investment grade means a judge could not use it for a child's college fund, or grandma's nursing home payments. The banks and their unscrupulous fund wholesalers, claimed that if just 51 per cent of the portfolio is B-plus rated or better it is honest to say it is investment grade.
Keep in mind that not just laymen, but investment professionals, use the term "investment grade portfolio" to mean bonds which are insured and/or all investment grade. No one but folks stalking bank lobbies to my knowledge has ever suggested that a fund with 30 per cent "junk", 20 per cent borderline and 50 per cent investment grade could be called an Investment Grade Corporate Bond Fund. In some of these funds less than 20 per cent of the bonds actually hold the top ratings from agencies such as S&P or Moody's.
Yield Shock: With inflation low and the yield curve flat, bank employees lure unsophisticated customers into long-term CD's of five or 10 years by offering 4 or 5 per cent instead of a one year rate of 2.5 or 3%. Obviously, when you lock in for 10 years, and in seven years anyone could walk into the same bank and buy a one-year CD paying, say, 8 per cent, your bank is very happy to keep paying you four and using the float for their new branches, Karistan carpets, and training sessions in the Bahamas.
For the first time since the S&L scandal of the 1980s it's time for regulators to go after the big time crooks.
Mark Scheinbaum is a former member of the Ethics Committee of the International Association for Financial Planning, South Florida Chapter, a licensed insurance and securities agent, and certified NASD arbitrator. He works with Kaplan & Co., BSE, NASD, SIPC www.kaplansecurities.com.