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Archive for Thursday, September 18, 2008

Market turmoil stirs potential for scams

September 18, 2008

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If your e-mail inbox is like mine, it's filling up with tips on how to handle the crisis on Wall Street.

Given the current turmoil, this is prime time for scams, bogus business opportunities and questionable advice.

I understand if you are rightfully worried about losses in your investment account. But stay calm. Don't be so eager to make money or preserve what you have that you make a costly mistake.

First, be leery of offers online or otherwise that guarantee you'll make money in a down market. I got one e-mail from someone pitching a deal where you set up a Web site for $250 and watch the money just click its way into your bank account. All you have to do is make deals with credit card companies for jewelry and clothing. You don't actually take possession of any inventory. You just act as what they call an "affiliate marketing middleman."

"No risk," you're told. "If you do it right, you can make a six-figure income."

Sure, there are folks who have found ways to make money online. But it is not as easy as just setting up a Web site and waiting for checks to arrive.

Some tips good

There are some helpful tips for investors or people trying to make do in this rough economy - but be mindful that much of this is coming from biased sources.

Biased advice isn't inherently bad. I certainly have no problem passing along tips from legitimate industry sources. I received an e-mail from the CMPS Institute, an organization that provides training, examination and certification for mortgage bankers and brokers. The subject line on the e-mail read: "Hurricane Wall Street: Four Steps Consumers Can Take To Protect Themselves."

"With Wall Street engulfed in the biggest financial crisis in a generation, there are a few things that consumers can do to protect themselves from this perilous storm," wrote Gibran Nicholas, the institute's chairman.

Of the four tips, I thought the first two were very helpful.

Tip No. 1: Make sure your investments are protected through the Securities Investor Protection Corp. If you have a brokerage account, you might want to read up on what protection you have in light of the Chapter 11 bankruptcy filing of Lehman Brothers.

The SIPC maintains a special reserve fund authorized by Congress to help investors at failed brokerage firms. If customer assets (cash and securities) are missing as a result of a closure or bankruptcy, SIPC steps in and, within certain limits, works to return customers' cash, stock and other securities.

SIPC coverage is limited to $500,000 per customer, including up to $100,000 for cash. For more information about SIPC coverage, read "The Investor's Guide to Brokerage Firm Liquidations," which you can find at www.sipc.org.

However, there's no point in calling SIPC if the value of your investment portfolio is down or you lost money as a result of the Lehman bankruptcy. SIPC does not provide insurance if the value of your investments tanks.

Tip No. 2 from the trade group urges that you make sure all your bank accounts are covered by the insurance offered by the Federal Deposit Insurance Corp. To find out what protection you may have, visit www.fdic.gov and click on the link for "Deposit Insurance." Likewise if you keep your money in a credit union, check your coverage with the National Credit Union Share Insurance Fund at www.ncua.gov.

Some tips dubious

I would be cautious about following the final two tips from the CMPS Institute.

The organization advises people to max out their home equity line of credit before lenders cut them off. Nicholas advised that consumers borrow the money and put it in an FDIC-insured account.

It is true that lenders have been reducing or terminating people's home equity lines of credit across the country. But if you're not having financial trouble or don't foresee any and you have ample capital reserves, don't tap these borrowed funds as a "just-in-case fund."

A loan isn't a good safety net. Instead of borrowing and paying interest on money you don't need, save more while you have the resources.

"Although it sounds counterintuitive, you should have as big a mortgage as possible - even if you don't need it," Nicholas said.

Why recommend people take out a mortgage if they don't need it?

The answer becomes clear when you consider that CMPS is also a membership group for mortgage professionals who have a financial interest in getting you to take out a mortgage.

When I pressed Nicholas about the reasoning behind the recommendation that people take out the largest mortgage possible, he said the organization is only trying to advise people to reserve cash in case of an emergency or in order to take advantage of bargain investment opportunities during this market downturn.

"I'm not saying people should be reckless and get a mortgage they can't afford," he said.

Haven't recent events proved we all - corporations and regular folks - should be saving more and borrowing only as absolutely necessary? The two strategies together put you in a better position to handle a financial crisis.

In this economy, you'll hear a lot of advice about what you should do to preserve or produce money. Just consider the source and motives of the people handing out this wisdom before you make any financial move.

Comments

Richard Heckler 5 years, 7 months ago

The GOP has been the big time SCAM of the past thirty years!. About $700 billion in investments vanished.CRIME: Who has history with financial institutions going south such as the savings and loan scandal? Republicans!Neil, George Jr., George Sr., and Jeb BushThe Savings and Loan industry had been experiencing major problems through the late 60s and 70s due to rising inflation and rising interest rates. Because of this there was a move in the 1970s to replace the role of S&L institutions with banks.In the early 1980s, under Reagan, regulatory changes took place that gave the S&L industry new powers and for the first time in history measures were taken to increase the profitability of S&Ls at the expense of promoting home ownership.A history of the S&L situation can be found here: http://www.fdic.gov/bank/historical/s&l/What is important to note about the S&L scandal is that it was the largest theft in the history of the world and US tax payers are who was robbed.The problems occurred in the Savings and Loan industry as they relate to theft because the industry was deregulated under the Reagan/Bush administration and restrictions were eased on the industry so much that abuse and misuse of funds became easy, rampant, and went unchecked. Additional facts on the Savings and Loan Scandal can be found here:http://www.inthe80s.com/sandl.shtmlThere are several ways in which the Bush family plays into the Savings and Loan scandal, which involves not only many members of the Bush family but also many other politicians that are still in office and still part of the Bush Jr. administration today. Jeb Bush, George Bush Sr., and his son Neil Bush have all been implicated in the Savings and Loan Scandal, which cost American tax payers over $1.4 TRILLION dollars (note that this is about one quarter of our national debt).Between 1981 and 1989, when George Bush finally announced that there was a Savings and Loan Crisis to the world, the Reagan/Bush administration worked to cover up the Savings and Loan problems This information was kept from the media until after Bush had won the 1988 elections.http://rationalrevolution0.tripod.com/war/bush_family_and_the_s.htmMcCain-the-most-reprehensible-of-the-keating-fivehttp://www.phoenixnewtimes.com/1989-11-29/news/mccain-the-most-reprehensible-of-the-keating-five/1

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