Страница 35 из 50
Like insurance, CDS contracts were custom-written for the situation; they were not set up as standardized, market-tradable securities. And like insurance, most CDSs were developed and marketed by insurance companies. But unlike insurance, CDSs do not require the buyer to have an insurable interest—that is, a stake in the matter being insured. You can’t buy life insurance on your next-door neighbor, but you can buy a few million in CDSs on company XYZ without owning any bonds or stock in that company whatsoever.
Because buyers of CDSs did not have to have an insurable interest, CDSs were used as a tool to speculate on the demise of companies. At the same time, in a ma
Making matters worse was the fact that many CDSs were written not just to protect against default, but against the change in a credit rating or any other change in a company’s financial condition. These triggers, to the surprise of most involved, were hit far more often during the financial crisis than anyone anticipated. CDSs were the primary factor in the $180 billion federal bailout of AIG.
JPMorgan Chase created CDSs in 1997; the face value of assets insured grew to some $45 trillion by 2007. Their spreads became a de facto indicator of a company’s financial strength—or weakness; it was the rise in CDS spreads for Bear Stearns in early 2008 that spooked the credit markets, starved the company of credit, and led to its forced sale to—ironically—JPMorgan Chase. Today, financial regulators recognize the need for CDSs to provide the insurance intended, but are examining ways to regulate the market, including standardization of contracts and trading on an open and more visible exchange.
Why You Should Care
Like CDOs and most other asset-backed securities, you probably won’t receive any offers to buy CDSs in your mailbox. But it’s important to know where our financial system troubles came from, and to know that even the best and brightest of our insurance companies got caught with their hands in the proverbial cookie jar. Most likely the lessons have been learned, but if you hear of heavy CDS activity from an insurance or financial services company you’re dealing with, look out.
70. MUTUAL FUND
You may have money to invest and you want to participate in the American economy, or perhaps other economies beyond American shores. But you don’t have millions; more importantly, you don’t have the expertise, the time, or the interest in becoming your own investment adviser. You just want to throw that job over the wall to someone else, and you’re happy to pay a small fee for the privilege.
That’s where mutual funds come into play for the typical consumer-investor today. Mutual funds are a popular vehicle for the investment of individual wealth, and have become a standard for investing retirement wealth, particularly the assets of 401(k)plans and other employer-sponsored retirement plans. Whether you intended to or not, you probably own a mutual fund somewhere, somehow.
What You Should Know
Mutual funds are the predominant form of what’s known as an investment company. Investment companies are investment pools designed to achieve certain investing objectives, usually to capitalize on growth, income, or some combination of the two. They were chartered under and are governed by the Investment Company Act of 1940. The act is very specific about how investors are treated, how the fund discloses results, and how investors are paid by these funds. Compliance is strong, because the act is actively enforced by the SEC (see #44). There are about 14,000 mutual funds in existence today, and they have become a mainstay of Main Street, especially for retirement plan investing (see #51 Retirement Plans).
If you’re a typical retail investor, you’ll probably have to settle for the fairly ordinary returns these funds generate. They’re largely safe, but tend not to outperform the market. They diversify your holdings, they’re convenient, and they save you a lot of time. They work well when you have modest amounts, say $50,000 or less, to invest. And they’re clearly better than not knowing what you’re doing and getting stuck with the wrong individual stock investments—like Enron, AIG, or Washington Mutual, for instance.
With mutual funds, you do indeed pay for their services. Management and marketing fees can be typically 0.5 percent to 1.5 percent of your investment balance—whether or not your investment does well. If you lose 20 percent along with the markets, you still pay the fee, albeit on a smaller balance. Mutual funds also may create tax surprises if held in taxable (that is, nonretirement) investment accounts. Each year they buy and sell stocks, and if there are gains, you pay taxes on those gains. Since the fund share price is based on the “net asset value” of all securities in the portfolio, if you buy shares late in the year after a good market run, you will pay a higher price for the shares—and pay taxes on the capital gains that the previous owner realized when selling you the shares! Thus, it’s better to buy mutual funds in the begi
Why You Should Care
Mutual funds are a good way for an individual investor to gain exposure to stocks, and to invest in challenging sectors of the market, like international stocks. Mutual funds make it much easier for the typical consumer to invest, and, along with the growth of individually directed and employer retirement plans, have indeed raised the share ownership among U.S. households from 10 percent or so in the 1960s to some 65 percent in 2007, but it has fallen off a bit to 54 percent in the wake of the Great Recession. Still, the high percentage of stock ownership is a good thing in terms of making capital available for businesses, and for allowing the ordinary individual to participate in prosperity. So far as mutual funds are concerned, like any product you buy, you should know what you gain and what you give up by investing in a given fund.
71. EXCHANGE-TRADED FUND (ETF)
Exchange-traded funds are an increasingly important and relatively new investment “product” designed, like mutual funds, to give you an easy, “prepackaged” way to participate in the world economy or certain segments thereof. Exchange-traded funds are closely related to mutual funds, but there are important differences. The first widely available ETF, the SPDR S&P 500 ETF Trust, commonly known as the “SPDR,” released in January 1993. Since then, about 1,400 new funds have entered the fray, with some $1.6 trillion in assets—a large sum, but still only about a tenth of what’s invested in the traditional mutual fund universe.
What You Should Know
Exchange-traded funds are pretty much what the name implies. Like mutual funds, they are groups or “pools” of investments that you can buy a share of for yourself. Unlike traditional mutual funds, their shares trade on exchanges, like the NYSE Arca electronic exchange. As such, the prices fluctuate throughout the day, and you can buy and sell them like any individual stock. So if you decide that agriculture is your thing but don’t begin to know which company to invest in, you can simply buy shares of the Market Vectors Agribusiness ETF (ticker symbol “MOO”) and let your investment harvest a few bushels of cash for you.