Yesterday, the House Oversight and Government Reform Committee hauled in a gaggle of hedge fund managers to grill them about, among other things, why they should receive such favorable tax treatment.

If I were a congressman, the question I'd have liked to have asked this crowd is, “Why is it so often the case that when hedge funds fail, they don’t merely fail, they implode, like dying stars?” This failure mode seems especially inappropriate for an investment class that's often touted as a way to make money in both good times and bad. Read the full article

I've written several posts on the asset protection limits available to consumers who have invested in a variety of financial assets. With all the changes and adjustments that have taken place in the last few months in the financial landscape, I thought it might be helpful to provide a single article summarizing the insurance /protections currently available to investors. Read the full article

Last week, financial journalist and author Jane Bryant Quinn polled several members of the National Association of Personal Financial Advisors (NAPFA) for our opinions on whether it's still a good idea to have stocks in a retirement portfolio. The consensus? In a word, "yes." Read the full article

Last month I wrote that the federal government, in its takeover of Fannie Mae and Freddie Mac, had begun effectively guaranteeing the debt of the two agencies.

But it became clear this week that the government is still hedging about the extent of its backing of the agencies' debts. Read the full article

The parties involved in the Lehman credit default swap (CDS) auction are settling up today, and everyone is hoping that none of the participants got too badly burned (even if they're hedge funds). Read the full article

The Federal Reserve announced this morning that it is creating a Money Market Investor Funding Facility to ease tensions in the short-term credit markets. Read the full article

Until now, it hasn’t been entirely clear how much damage will result from the Lehman bankruptcy. An auction taking place today will be an important step in assessing which financial institutions stand to take a hit.

Today’s auction involves a type of security that many people know little about or have only heard of recently: credit default swaps. Read the full article

As recently as the end of September, many European commentators were describing the current subprime-ignited financial crisis as evidence of American arrogance. Now, however, the other shoe has dropped, and credit-related sickness is evident in the European banking system too. Read the full article

Dimensional Financial Advisors is a passive-investment-oriented investment firm closely associated with Eugene Fama, 2003 Economics Nobel Laureate and father of the efficient market hypothesis. Today they sent me a link to a very nice presentation by their vice president, Weston Wellington.

The presentation, “Is It Different This Time?” runs about 18 minutes long and puts the present stock market gyrations into a historical perspective by reviewing some of the “bear markets” of the last 50 years. It’s not overly jargon-filled and should be pretty accessible.

The present market downturn reflects concerns about the non-availability of credit, the extent and duration of the housing market downturn, and the fact that we are probably in a recession. But in the end, if you’re investing for the long term, the question you must to ask is whether you think the economy is going to completely collapse. If not, you should hang on, assuming you’re holding a diversified portfolio that fits your tolerance for risk.

The presentation is marked for general use, so I don’t think I’m breaking any rules by sharing it. Read the full article

Congress voted down the Troubled Assets Relief Program (“TARP”) legislation, much to the chagrin of the financial markets. At the moment, the markets continue to be in distress, despite a “dead cat bounce” in stocks today. What should you be doing in terms of your household finances? Read the full article

Unless you live in Lake Wobegon, it hasn't been a quiet month:

• Fannie Mae and Freddie Mac are in federal conservatorship
• Merrill Lynch is now part of Bank of America
• Lehman Brothers Holdings filed for Chapter 11; its assets have been purchased by Barclay's PLC
• The two investment banking giants left standing, Goldman Sachs and Morgan Stanley, have been converted to bank holding companies
• AIG has received an infusion $85 billion from the Federal Reserve in return for a 79.9% ownership position
• Washington Mutual became the 13th bank failure of the year (and the largest bank failure in U.S. history); the bank's assets have been sold to J.P. Morgan Chase

I don’t write many blog-centric posts, but I’ve noticed something interesting in the past week. Last Monday, as the wizards of Wall Street blinked and the markets went crazy, traffic to the FFS Blog jumped by 4 or 5x. I assumed it was a one-day event, but as you can see from the attached Quantcast graph, traffic on the site has remained higher than normal.



A number of people got here by Googling phrases like, “are mutual funds insured,” “are brokerage firms insured,” and the like. The traffic hasn’t dropped back to where it was, suggesting that there are still a lot of folks anxious about the safety of the financial markets. I hope the information here is helpful to you.

If any of my readers have questions that you’d like me to tackle in the blog, please drop a note to FFSBlog “at” FFSCambridge.com (I’ve avoided using the “at” sign to thwart spammers, but you know to substitute an @ for that). I can’t promise to post on every idea I get – this isn’t my day job, after all – but I’ll seriously consider anything that comes in. Be patient, though.

A final note: readers who would like to get a once-a-week summary of my posts may do so using the new FeedBlitz widget on the upper left-hand side of the blog. Read the full article

The Subprime mortgage mess and its aftermath were partly the result of risks not being priced appropriately. Interest rates for risky mortgages and bonds should have been much higher given the level of risk involved. As financial markets still recover from the aftermath of risk being underestimated, there is a good chance that there are now areas where risk is being overestimated. This week’s issue of Barron’s has two interesting suggestions in this regard. Read the full article

The financial markets seem to be taking a breather after last week’s roller-coaster rides. We’re all digesting the latest news of short-selling restrictions and a $700 Billion stabilization plan for mortgage-related debt. But now is also a good time to step back and think more broadly. Read the full article

This Monday, something very unusual happened: a money market fund began trading its shares at 97 cents, instead of a dollar.

Reserve Primary Money Fund (RPFXX) was forced to write down three quarters of a billion dollars of Lehman Brothers debt as a consequence of the Lehman bankruptcy. Even though the debt may eventually be partially paid through the bankruptcy process, as a current obligation the debt has no value. Thus the fund’s share value had to drop, forcing the fund to “break the buck.” On Monday and Tuesday, investors in the fund pulled out $27 billion in response.

FT Alphaville reports that one of Putnam Investments’ institutional money market funds has decided to close and liquidate itself, not because it needs to “break the buck” now, but because of concern that a future run on the fund might force a fire sale of its assets.

Money market funds are normally thought of as stable places to put cash, but even money market funds are not guaranteed not to lose money. How can you judge how safe your money market funds are? Read the full article

Douglas Adams’ Hitchhiker’s Guide to the Galaxy described a fictional intergalactic travel manual of the same name. The guide had the words “DON’T PANIC” written “in large friendly letters” on its cover. Investors could use a copy of the Hitchhiker’s Guide right about now…. Read the full article

Finally, I've gotten around to establishing a blog roll for web logs related to things I write about here. I'm inaugurating it with three selections and I thought I’d let my readers know a bit about each one. Read the full article

Master Limited Partnerships are complicated investments in which you share in the profits from an income-generating business. Most often these partnerships make their money in energy-related businesses. They’re publicly traded and offer certain income tax benefits. They aren’t for everyone, however. Read the full article

Last week, state regulators closed down the Columbian Bank and Trust Co. of Topeka, Kansas. It was the ninth bank failure thus far this year, and probably not the last. I've written several posts recently on FDIC insurance of bank accounts and CDs, but many investors have far more money in their retirement and brokerage accounts than they do in banks. Since FDIC doesn’t cover these assets, should you be worried? Read the full article

Today’s post continuues Part 1 with a further explanation of this rapidly-growing alternative to the mutual fund. In my initial post I explained that ETFs

• are created by financial institutions in large blocks that can be freely converted into underlying securities
• are transparent, meaning that the underlying securities are publicly disclosed on a continuous basis
• trade continuously on financial exchanges at prices that generally move closely with the underlying securities
• are generally liquid, reflecting the liquidity of the underlying securities
• are usually (but not necessarily) linked to a securities index
• tend to have low management costs

Read the full article

Several MA cities, towns, and the Mass Turnpike Authority received some investment help from Attorney General Martha Coakley recently. Although it’s often assumed that institutional investors are sophisticated in their understanding of investments, the case initiated and settled by the Massachusetts AG shows that even “big” investors sometimes fail to follow one of the cardinal rules of investing: make sure you understand what you’re investing in. Read the full article

In the last four years or so, there has been explosion of newly created exchange traded funds (ETFs) in the financial marketplace. What are these investment products, and how are they different from the more familiar mutual funds? Read the full article

If you have a longer-term CD that is now coming to maturity, you've probably been disappointed to discover how much interest rates have dropped since you last locked in your CD rate. What are the best options for those with short-to-medium-term cash to invest these days? Read the full article

Wall Street is licking its wounds this weekend, no doubt, after being pretty badly clawed by what is almost certainly a bear market. In the coming days you’ll see all sorts of articles offering you free advice, e.g. identifying “Bear Market Stocks You Should Buy Now,” providing lists of the mutual funds into which you should put all your money, and so forth. What should you do? Read the full article

Legendary investor Warren Buffett has made an interesting wager with the management of a New York hedge fund. Buffett is betting that over the course of ten years, the hedge fund won’t be able to outperform a passive S&P 500 index fund after fees are considered. Read the full article

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