Many of us know we have an option to use a debit card but don't take advantage because we lack knowledge or interest or simply are in the habit of writing checks. While checks, ATM cards and credit cards are fairly self-explanatory, many people fail to see much difference between a credit card and a debit card.
So is there a significant difference? And is one better than the other?
The way a debit card works is basically the same in most respects. You make your purchase, plug in your number or swipe your card and the purchase goes through. The merchant, again, will get paid by the company who issued you the debit card. Here is where the difference is. With a debit card the money already has to be in your account. In other words, you've already paid in a certain amount of money to be available to your debit card. By using the card the money is simply transferred out of your account and your balance is reduced until it reaches zero, at which time you have to pay more money into the account or the card can't be used.
Maybe you still don't see much difference, besides where the money comes from and when you have to pay up. So which one is better to use? It depends upon how careful you are with your card and why you are using the card.
The features that make debit cards convenient - instant access to your money, lack of a required PIN number and not having to drag out your photo ID when you use it - make fraud that much easier. Unless reported quickly, theft of your debit card can quickly devastate your bank account. This is where you begin to see the difference.
Credit card companies are held to strict liability laws; the law limits consumer liability for credit card fraud to $50. For example, if you notice suspicious charges on your credit card statement such as double billing or an incorrect charge, the credit card company is obligated to investigate if you send in a written request within 60 days.
Credit card fraud vs. debit card fraud
The law limits consumer liability for credit card fraud to $50. For debit card fraud, your liability is $50 if you notify the bank with 2 days of learning of the fraud, and $500 or more after two days, up to the entire amount stolen under certain circumstances.
Your debit card is usually linked to your checking account. If the thief drains it, he has already made out with your money, and you have to fight with the bank to get your own money back. Meanwhile, your other checks could bounce and you could face bounced check fees, negative marks on your credit reports, cash flow problems and other hassles. With credit card fraud, you simply fight with the bank about getting disputed charges off your account, not getting your own money back.
Discover, Visa and Mastercard have implemented “zero liability” policies that protect you against debit card fraud provided that certain (reasonable) conditions are met. While many debit card issuers offer the same protection against fraud as that of credit cards, it still means closing the barn door after the horse is already out. It may take some time to restore the funds to the account, unlike a credit card where the cardholder can withhold payment on any fraudulent purchases.
Sunday, June 28, 2009
Tax saving with Municipal Bonds
Municipal bonds are debt obligations of states, cities, and other public subdivisions. Most, but not all, of them pay interest that is exempt from federal income taxes. This interest is also often exempt from state and local taxes. A small proportion pays taxable interest or interest that is subject to the alternative minimum tax (AMT). Municipal bonds can be purchased through nearly any brokerage company. Investment companies that hold portfolios of municipal funds can also enjoy the tax-exempt income that they provide.
In one sense, tax free munis are more complicated than tax free Federal obligations, since the Federal debt is free from all but Federal tax, while the munis are usually only free from local taxes if you live in that locality. That's why when you look at tax free muni funds, you'll see them listed by state, like "Massachusetts Tax Free" or "California Tax Free." If you don't live in that state, they will be Federal tax free, but you'll still have to pay state, and maybe even city tax. Municipal bonds aren't 100% safe, cities have been known to default from time to time, but there are rating agencies to tell you if the credit isn't top notch, and muni funds that spread the risk around in your state to the point where you shouldn't have to worry about it.
Example
David owns a $50,000 municipal bond that he bought at face value less than a year ago. The bond has a 3% coupon rate. Because of rising interest rates, the bond is currently selling at 95, or $47,500. If David sells the bond in 2006, he will recognize a $2,500 capital loss. He can then invest the $47,500 of proceeds in a new municipal bond paying interest at 4%. David’s effective tax rate is 33%. If David were to do this it would enable him to currently benefit from the $2,500 decline in the bond’s value. He has a short term capital loss, which is a tax savings of $825 ($2,500 X 33%) against his ordinary income. Although David would then have bonds that will pay $2,500 less at maturity, he may more than offset this with the increase in current municipal bond income ($1,800 per year with the new bond versus $1,500 per year with the old bond) and the current tax savings from the capital loss.
In one sense, tax free munis are more complicated than tax free Federal obligations, since the Federal debt is free from all but Federal tax, while the munis are usually only free from local taxes if you live in that locality. That's why when you look at tax free muni funds, you'll see them listed by state, like "Massachusetts Tax Free" or "California Tax Free." If you don't live in that state, they will be Federal tax free, but you'll still have to pay state, and maybe even city tax. Municipal bonds aren't 100% safe, cities have been known to default from time to time, but there are rating agencies to tell you if the credit isn't top notch, and muni funds that spread the risk around in your state to the point where you shouldn't have to worry about it.
Example
David owns a $50,000 municipal bond that he bought at face value less than a year ago. The bond has a 3% coupon rate. Because of rising interest rates, the bond is currently selling at 95, or $47,500. If David sells the bond in 2006, he will recognize a $2,500 capital loss. He can then invest the $47,500 of proceeds in a new municipal bond paying interest at 4%. David’s effective tax rate is 33%. If David were to do this it would enable him to currently benefit from the $2,500 decline in the bond’s value. He has a short term capital loss, which is a tax savings of $825 ($2,500 X 33%) against his ordinary income. Although David would then have bonds that will pay $2,500 less at maturity, he may more than offset this with the increase in current municipal bond income ($1,800 per year with the new bond versus $1,500 per year with the old bond) and the current tax savings from the capital loss.
Unit Investment Trusts (UITs)
A unit investment trust, also known as a defined portfolio, is an SEC-registered investment company that is composed of an unmanaged portfolio in which the investor has an undivided
ownership in the underlying securities. The portfolio is professionally selected by the trust sponsor and remains fixed until the termination of the trust, usually ranging from 13
months to five years. Some UITs composed of fixed income securities may have longer maturities. Although the securities within the trust remain fixed and are not managed, the
sponsor may remove a security from the trust under limited circumstances.
The portfolio is designed to follow an investment objective over a specified time period, although there is no guarantee that the objective will be met. UITs are created by a trust
sponsor who enters into agreement with a trustee. When the trust is created, several investment terms are set forth, such as the trust objective, what securities are placed in the
trust, when the trust will end, what fees and expenses will be charged, etc. A full accounting of the terms of the trust will be listed in the prospectus.
UITs generally buy and hold a fixed portfolio of stock, bonds, or other securities, often concentrated in a particular industry or sector. This is in marked contrast to mutual funds, which are required to adhere to certain rules of diversification and must hold a minimum number of different securities. UITs are not subject to those requirements, and so can own shares of stock in just a few companies.Mutual funds can sell and buy shares frequently as long as those transactions meet the funds objectives stated in its prospectus. UITs cannot
Another difference between a trust and a mutual fund is that a trust doesn't generally generate capital gains to distribute to shareholders. Because the number of shares available in a UIT is fixed when the trust is created, investors who purchase shares in a UIT after its initial offering buy them from other investors, and not from the sponsor, similar to a stock or closed-end fund.
Because of the fixed number of shares of any particular UIT available in the market, buying and selling shares among investors does not carry tax consequences for other shareholders.purchase or sell securities except in limited circumstances.
Fees and Expenses:
UITs are affordable—investors can purchase a trust’s portfolio of several stocks or bonds with one transaction and at one purchase price. Generally, there is a $1,000 minimum investment for UITs, although the amount can usually be lowered if purchased for Individual Retirement Accounts (IRAs).
UIT investors generally pay a sales charge, or load, at the time of initial purchase, and often pay deferred sales charges. The offering price, which is the price paid to purchase units, ref lects the current NAV plus the initial sales charge. Sales charge discounts may be available for large purchases.
UITs pay an annual fee to cover operating expenses and often to reimburse the trust sponsor for its supervisory activities, organization costs, and a creation and development fee. Since
UITs offer a fixed portfolio, there are no investment management fees and, because the buying and selling of portfolio securities is limited, transaction costs are minimal. Further, there are no
ongoing marketing fees charged to the trust, as most UITs do not continually market their units to the public.
Taxes:
Generally, unitholders must pay income taxes on the interest, dividends, and/or capital gains distributed to them, although in retirement accounts such as IRAs taxes are deferred until
distributions are taken from the account. UITs provide IRS Form 1099 to their unitholders annually to summarize the trust’s distributions. Also, when an investor sells units, he or she will
realize either a taxable gain or a loss that should be reported on income tax returns. Certain UITs provide income that is free from federal and/or state taxation.
ownership in the underlying securities. The portfolio is professionally selected by the trust sponsor and remains fixed until the termination of the trust, usually ranging from 13
months to five years. Some UITs composed of fixed income securities may have longer maturities. Although the securities within the trust remain fixed and are not managed, the
sponsor may remove a security from the trust under limited circumstances.
The portfolio is designed to follow an investment objective over a specified time period, although there is no guarantee that the objective will be met. UITs are created by a trust
sponsor who enters into agreement with a trustee. When the trust is created, several investment terms are set forth, such as the trust objective, what securities are placed in the
trust, when the trust will end, what fees and expenses will be charged, etc. A full accounting of the terms of the trust will be listed in the prospectus.
UITs generally buy and hold a fixed portfolio of stock, bonds, or other securities, often concentrated in a particular industry or sector. This is in marked contrast to mutual funds, which are required to adhere to certain rules of diversification and must hold a minimum number of different securities. UITs are not subject to those requirements, and so can own shares of stock in just a few companies.Mutual funds can sell and buy shares frequently as long as those transactions meet the funds objectives stated in its prospectus. UITs cannot
Another difference between a trust and a mutual fund is that a trust doesn't generally generate capital gains to distribute to shareholders. Because the number of shares available in a UIT is fixed when the trust is created, investors who purchase shares in a UIT after its initial offering buy them from other investors, and not from the sponsor, similar to a stock or closed-end fund.
Because of the fixed number of shares of any particular UIT available in the market, buying and selling shares among investors does not carry tax consequences for other shareholders.purchase or sell securities except in limited circumstances.
Fees and Expenses:
UITs are affordable—investors can purchase a trust’s portfolio of several stocks or bonds with one transaction and at one purchase price. Generally, there is a $1,000 minimum investment for UITs, although the amount can usually be lowered if purchased for Individual Retirement Accounts (IRAs).
UIT investors generally pay a sales charge, or load, at the time of initial purchase, and often pay deferred sales charges. The offering price, which is the price paid to purchase units, ref lects the current NAV plus the initial sales charge. Sales charge discounts may be available for large purchases.
UITs pay an annual fee to cover operating expenses and often to reimburse the trust sponsor for its supervisory activities, organization costs, and a creation and development fee. Since
UITs offer a fixed portfolio, there are no investment management fees and, because the buying and selling of portfolio securities is limited, transaction costs are minimal. Further, there are no
ongoing marketing fees charged to the trust, as most UITs do not continually market their units to the public.
Taxes:
Generally, unitholders must pay income taxes on the interest, dividends, and/or capital gains distributed to them, although in retirement accounts such as IRAs taxes are deferred until
distributions are taken from the account. UITs provide IRS Form 1099 to their unitholders annually to summarize the trust’s distributions. Also, when an investor sells units, he or she will
realize either a taxable gain or a loss that should be reported on income tax returns. Certain UITs provide income that is free from federal and/or state taxation.
Monday, June 8, 2009
ELSS Ideal for Tax Saving
First, what is an ELSS? And even before that, what is 80C?
# 80C is the section under which tax payers can invest
upto Rs 1 lakh and save upto Rs 30,000 tax in a year
# If taxable income was Rs 5 lakh and you put away Rs 1 lakh, you will now pay tax on only Rs 4 lakh
# You can invest in more than10 products under 80C, like PF, PPF, life insurance, 5 year FDs and special mutual funds called ELSS.
So, what is this animal called ELSS?
# Equity Linked Saving Scheme
# Equity mutual fund
# Investments give 80C benefit
# 3 year lock in
# I like the ELSS product to use for tax saving since I can target a higher return through it.
# Some top funds have given more than 20 per cent return over a 5 year period
That understood, our clear advise is stick to ELSS which have a good track record. Why invest in a new ELSS scheme at all? And believe me you will be tempted with financial agents doing a hard sales pitch, but be smart and avoid.
Amongst existing schemes, we've got some clear winners for you to look at. Morningstar, one of the world's leading providers of independent investment research on mutual funds has benchmarked ELSS schemes with 5 year track record; the clear winner in the ELSS group emerges as Sundaram BNP Paribas Taxsaver. It is a 5 star rated fund from Morningstar. Look at its 1 year , 3 year and 5 year returns and these are per annum returns – 22 per cent per annum over 5 years! And what's extremely heartening about this fund is that it has outperformed the benchmark index both in a rising market and more importantly in a falling market. The losses have been well contained by the fund manager - when the benchmark index melted by 55 per cent, the fund is down only 46 per cent - this one we really like.
Scheme: Sundararam BP Taxsaver
# I year return: -46 per cent (When benchmark index fell by 55 per cent)
# 3 year return: 2 per cent (When benchmark index sheds 3 per cent)
# 5 year return: 22 per cent (When benchmark index returns 7 per cent)
Two conservative schemes
# Two schemes that do quite well in an upmarket and the downside is not so bad in tough times.
# Thing to watch: benchmark return and your fund performance in relation to that
# Your fund should give at least 5-5 pp over the benchmark
# Franklin India Taxshield and HDFC Tax Saver have given on a 5 year basis more than 5 percentage points over their benchmarks
Let’s look at -
# Over the past year, market is down 55 per cent but the scheme fell by less than 50 per cent
# Over a 3 year period, market lost 4 per cent, scheme lost less than that, 2 per cent
# Over a 5 year period, Franklin India gave 13 per cent while the market gave 7 per cent per year
# The scheme comes with a 5 star Morningstar rating
Scheme: Franklin India Taxshield
# I year return: -47 per cent (When benchmark index fell by 55 per cent)
# 3 year return: -2 per cent (When benchmark index sheds 4 per cent)
# 5 year return: 13 per cent (When benchmark index returns 7 per cent)
The 5 year returns are less attractive than Sundaram, but the scheme is good. It has a 5 star rating with Morningstar.
HDFC Tax Saver
It is a steady and conservative scheme, riding the downside but not giving supernormal returns when markets are rising.
# Over the past year, HDFC Tax Saver lost half its value, while the market lost a bit more than that
# Over 3 years, the scheme lost 5 per cent, while the market lost 4 per cent, so that is not so good
# But over a 5 year period, it gave 18 per cent return while the market gave 7 per cent return
# 4 star rated by Morningstar
Scheme: HDFC Tax Saver
# I year return: -50 per cent (When benchmark index fell by 55 per cent)
# 3 year return: -5 per cent (When benchmark index sheds 4 per cent)
# 5 year return: 18 per cent (When benchmark index returns 7 per cent)
It is 4 star rated from Morningstar, a steady scheme from a fund house known for long term approach to investing.
And the final ELSS which made our cut for recommendation is SBI Mangum Tax Gain Scheme. It is a High risk, high return scheme; 24 per cent per annum over 5 years. It is hugely outperforming in a rising market, but in a sliding market its fall has been equally rapid. So choose it if your risk appetite is high - this one is a 5 star rated fund from Morningstar.
Scheme: SBI Mangum Tax Gain Scheme
# I year return: -53 per cent (When benchmark index fell by 54 per cent)
# 3 year return: -2 per cent (When benchmark index sheds 1 per cent)
# 5 year return: 24 per cent (When benchmark index returns 8 per cent)
And with this, we hope we've done our bit is raising your tax quotient.
As we promised last week, we will look at some key new products in the market, read the fine print carefully and weigh out their pros and cons, to help you decide whether you should invest in them or not.
# 80C is the section under which tax payers can invest
upto Rs 1 lakh and save upto Rs 30,000 tax in a year
# If taxable income was Rs 5 lakh and you put away Rs 1 lakh, you will now pay tax on only Rs 4 lakh
# You can invest in more than10 products under 80C, like PF, PPF, life insurance, 5 year FDs and special mutual funds called ELSS.
So, what is this animal called ELSS?
# Equity Linked Saving Scheme
# Equity mutual fund
# Investments give 80C benefit
# 3 year lock in
# I like the ELSS product to use for tax saving since I can target a higher return through it.
# Some top funds have given more than 20 per cent return over a 5 year period
That understood, our clear advise is stick to ELSS which have a good track record. Why invest in a new ELSS scheme at all? And believe me you will be tempted with financial agents doing a hard sales pitch, but be smart and avoid.
Amongst existing schemes, we've got some clear winners for you to look at. Morningstar, one of the world's leading providers of independent investment research on mutual funds has benchmarked ELSS schemes with 5 year track record; the clear winner in the ELSS group emerges as Sundaram BNP Paribas Taxsaver. It is a 5 star rated fund from Morningstar. Look at its 1 year , 3 year and 5 year returns and these are per annum returns – 22 per cent per annum over 5 years! And what's extremely heartening about this fund is that it has outperformed the benchmark index both in a rising market and more importantly in a falling market. The losses have been well contained by the fund manager - when the benchmark index melted by 55 per cent, the fund is down only 46 per cent - this one we really like.
Scheme: Sundararam BP Taxsaver
# I year return: -46 per cent (When benchmark index fell by 55 per cent)
# 3 year return: 2 per cent (When benchmark index sheds 3 per cent)
# 5 year return: 22 per cent (When benchmark index returns 7 per cent)
Two conservative schemes
# Two schemes that do quite well in an upmarket and the downside is not so bad in tough times.
# Thing to watch: benchmark return and your fund performance in relation to that
# Your fund should give at least 5-5 pp over the benchmark
# Franklin India Taxshield and HDFC Tax Saver have given on a 5 year basis more than 5 percentage points over their benchmarks
Let’s look at -
# Over the past year, market is down 55 per cent but the scheme fell by less than 50 per cent
# Over a 3 year period, market lost 4 per cent, scheme lost less than that, 2 per cent
# Over a 5 year period, Franklin India gave 13 per cent while the market gave 7 per cent per year
# The scheme comes with a 5 star Morningstar rating
Scheme: Franklin India Taxshield
# I year return: -47 per cent (When benchmark index fell by 55 per cent)
# 3 year return: -2 per cent (When benchmark index sheds 4 per cent)
# 5 year return: 13 per cent (When benchmark index returns 7 per cent)
The 5 year returns are less attractive than Sundaram, but the scheme is good. It has a 5 star rating with Morningstar.
HDFC Tax Saver
It is a steady and conservative scheme, riding the downside but not giving supernormal returns when markets are rising.
# Over the past year, HDFC Tax Saver lost half its value, while the market lost a bit more than that
# Over 3 years, the scheme lost 5 per cent, while the market lost 4 per cent, so that is not so good
# But over a 5 year period, it gave 18 per cent return while the market gave 7 per cent return
# 4 star rated by Morningstar
Scheme: HDFC Tax Saver
# I year return: -50 per cent (When benchmark index fell by 55 per cent)
# 3 year return: -5 per cent (When benchmark index sheds 4 per cent)
# 5 year return: 18 per cent (When benchmark index returns 7 per cent)
It is 4 star rated from Morningstar, a steady scheme from a fund house known for long term approach to investing.
And the final ELSS which made our cut for recommendation is SBI Mangum Tax Gain Scheme. It is a High risk, high return scheme; 24 per cent per annum over 5 years. It is hugely outperforming in a rising market, but in a sliding market its fall has been equally rapid. So choose it if your risk appetite is high - this one is a 5 star rated fund from Morningstar.
Scheme: SBI Mangum Tax Gain Scheme
# I year return: -53 per cent (When benchmark index fell by 54 per cent)
# 3 year return: -2 per cent (When benchmark index sheds 1 per cent)
# 5 year return: 24 per cent (When benchmark index returns 8 per cent)
And with this, we hope we've done our bit is raising your tax quotient.
As we promised last week, we will look at some key new products in the market, read the fine print carefully and weigh out their pros and cons, to help you decide whether you should invest in them or not.
Friday, June 5, 2009
Tax Planning Tips India
Taxpayers can lower the incidence of income tax by means of legal transfer of their sources of income among family members, so that each unit of the family enjoys the basic personal income tax exemption limit, which the Finance Bill 2008 has revised for financial year 2008-09 to Rs 150,000 for male individuals and HUFs; Rs 180,000 for resident women tax payers and Rs 225,000 for resident senior citizens.
The first step in tax saving through family tax planning is to adopt the concept of divide and rule. The simple rule is that each family member must have his or her independent source of income so as to legally become an independent tax payer under the provisions of the income tax law.
In case the entire income of a family belongs to just one member, the tax liability is much higher than when the same income is spread among different members of the family.
Now, under the income tax law it is not possible to arbitrarily divide one's income amongst different members of the family - and then pay lower tax in the names of different family members. However, this goal can be achieved by intelligent use of the facility of gifts and settlements.
Thus, for example, even if a taxpayer's parents are not paying income tax today but if they receive some gift from friends or relatives or from anyone else in the world, the income so generated would belong to them.
In this manner, independent income tax files can be started for different family members by developing independent funds for each person through gifts thereby resulting in separate independent sources of income which would then be taxed separately to income tax.
Once the income is spread among more people, chances are some of them would attract lower rates of tax. Also, each one would then be entitled to independently claim exemptions, deductions, rebates, etc.
Generally, any gift you receive from various members of your family and specified relatives is not considered your income but a capital receipt. Thus, no income tax is payable on gifts received from relatives - and also gifts received from parties other than relatives upto a sum of Rs. 50,000 and at the time of marriage up to any amount.
Care should, however, be taken to ensure that any gift which is received should be a genuine one. The person making the gift, called the donor, should have proof of his or her having the source for making the gift.
The other important point to keep in mind in the case of gifts is that the provisions of Section 64 of Income Tax Act prohibit any direct or indirect transfer of funds between an assessee and his/her spouse.
Thus, a husband should not make any gift to his wife; likewise, the wife should not make a gift to her husband. If the gift is made between spouses, it would attract the provision of Section 64 and lead to clubbing of the incomes of the spouses.
To achieve the best results of gift, and to avoid clubbing of income, you may receive gift from any relative other than your spouse, and, in the case of a daughter-in-law from her father-in-law.
Thursday, June 4, 2009
The Rapid Rise and Blistering Fall Of Boaz Weinstein
The WSJ has a long piece on Boaz Weinstein's tenure at Deutsche Bank. Weinstein was DB's "star trader" for a few years—right up until he managed to lose $1.8 billion.
So how did Weinstein lose $1.8 billion? The same way every "star trader" loses a boatload of money: they make a lot of money exploiting arbitrage opportunities in good times, and then lose it all when their market goes berserk in a crisis. Repeat as necessary.
Specifically, Weinstein lost most of the money on basis trades when Lehman collapsed and the corporate bond market froze:
By early 2008, Mr. Weinstein was at the top of his game. He, along with a colleague in London, was overseeing global credit trading for all of Deutsche Bank. His own trading group, Saba, had grown greatly, to roughly $30 billion of positions and $10 billion in capital. And his control also extended to the bank's trading for customers.
Wall Street traders were optimistic in early 2008 that the mortgage crisis was contained, though there were some strains in short-term lending markets, causing corporate-bond prices to decline. On several businesses, such as Ford Motor Co., Lyondell Chemical Co. and General Electric Capital Corp., Mr. Weinstein bought corporate bonds or loans as well as credit-default swaps.
The swaps would pay off if the debt defaulted. And the cost of this protection was less than the income produced by the bonds. Mr. Weinstein believed the debt was cheap relative to the cost of protecting it with swaps.
Corporate bond prices soon rallied, leading to a tidy profit for Mr. Weinstein's group, after the Fed's brokering of a deal for reeling Bear Stearns Cos. stabilized the credit markets. Emboldened, Mr. Weinstein added to his positions in succeeding months. His group entered September in the black for the year, expecting to tack on more gains.
But the simmering financial crisis finally boiled over. The government said early in September that it would take over mortgage giants Freddie Mac and Fannie Mae. And Lehman Brothers Holdings Inc. was teetering. Traders worried about losses they might incur if Lehman failed.
...
The next day it became clear Lehman would fail, and a struggling Merrill Lynch & Co. agreed to sell itself to Bank of America Corp. Within days, the government bailed out another big player in credit derivatives, American International Group Inc.
Brooding in his office overlooking Wall Street, Mr. Weinstein remained outwardly calm as markets went haywire, traders say. The value of his group's holdings of corporate bonds and loans began to slide as other investors, needing to raise money, sold such securities.
At the same time, trading in credit-default swaps was curtailed because market players were concerned about entering trades with banks that potentially could collapse. This left Mr. Weinstein's group increasingly unprotected against losses in corporate bonds and loans, because it used swaps to hedge those positions.
Mr. Weinstein wasn't alone. Similar positions held by banks and hedge funds across Wall Street fell apart amid the seismic dislocations after the Lehman collapse.
As prices of corporate bonds and loans slumped to new lows and stocks plunged too, Mr. Weinstein wanted to buy more swaps to protect his positions, traders say. He told traders that in such a trading environment, "the primary objective is to get as flat as possible to the market" -- not betting on either a rise or a fall -- according to a person familiar with the conversation.
But in contentious conference calls, risk managers at Deutsche Bank told Mr. Weinstein to scale back positions or sell them entirely, traders say. Mr. Weinstein's stock-trading desk was instructed to sell nearly every holding, effectively shutting it down.
I don't think the dislocation in the CDS market after the Lehman collapse was as simple as the WSJ article suggests. It wasn't just that "players were concerned about entering trades with banks that potentially could collapse." That was definitely part of the problem, especially for Merrill.
But as I noted earlier, a big problem was that protection buyers all wanted to lock in their profits when spreads exploded wider (or, alternatively, net protection sellers wanted to cap their losses). And since the dealer banks generally try to run matched books—note that Weinstein's biggest concern in the crisis was getting "as flat as possible to the market"—all the end-users demanding to unwind their CDS trades essentially forced dealers to unwind off-the-run contracts at off-market prices, which is expensive for the dealers and generally requires a sizable upfront payment. It probably didn't help that traders at the dealer banks, being traders, couldn't stop shooting at each other.
As the WSJ article notes, however, the losses on Weinstein's basis trades came predominantly from the corporate bond leg, not the CDS leg. That's what happens when the entire corporate bond market suddenly shuts down, I guess.
So how did Weinstein lose $1.8 billion? The same way every "star trader" loses a boatload of money: they make a lot of money exploiting arbitrage opportunities in good times, and then lose it all when their market goes berserk in a crisis. Repeat as necessary.
Specifically, Weinstein lost most of the money on basis trades when Lehman collapsed and the corporate bond market froze:
By early 2008, Mr. Weinstein was at the top of his game. He, along with a colleague in London, was overseeing global credit trading for all of Deutsche Bank. His own trading group, Saba, had grown greatly, to roughly $30 billion of positions and $10 billion in capital. And his control also extended to the bank's trading for customers.
Wall Street traders were optimistic in early 2008 that the mortgage crisis was contained, though there were some strains in short-term lending markets, causing corporate-bond prices to decline. On several businesses, such as Ford Motor Co., Lyondell Chemical Co. and General Electric Capital Corp., Mr. Weinstein bought corporate bonds or loans as well as credit-default swaps.
The swaps would pay off if the debt defaulted. And the cost of this protection was less than the income produced by the bonds. Mr. Weinstein believed the debt was cheap relative to the cost of protecting it with swaps.
Corporate bond prices soon rallied, leading to a tidy profit for Mr. Weinstein's group, after the Fed's brokering of a deal for reeling Bear Stearns Cos. stabilized the credit markets. Emboldened, Mr. Weinstein added to his positions in succeeding months. His group entered September in the black for the year, expecting to tack on more gains.
But the simmering financial crisis finally boiled over. The government said early in September that it would take over mortgage giants Freddie Mac and Fannie Mae. And Lehman Brothers Holdings Inc. was teetering. Traders worried about losses they might incur if Lehman failed.
...
The next day it became clear Lehman would fail, and a struggling Merrill Lynch & Co. agreed to sell itself to Bank of America Corp. Within days, the government bailed out another big player in credit derivatives, American International Group Inc.
Brooding in his office overlooking Wall Street, Mr. Weinstein remained outwardly calm as markets went haywire, traders say. The value of his group's holdings of corporate bonds and loans began to slide as other investors, needing to raise money, sold such securities.
At the same time, trading in credit-default swaps was curtailed because market players were concerned about entering trades with banks that potentially could collapse. This left Mr. Weinstein's group increasingly unprotected against losses in corporate bonds and loans, because it used swaps to hedge those positions.
Mr. Weinstein wasn't alone. Similar positions held by banks and hedge funds across Wall Street fell apart amid the seismic dislocations after the Lehman collapse.
As prices of corporate bonds and loans slumped to new lows and stocks plunged too, Mr. Weinstein wanted to buy more swaps to protect his positions, traders say. He told traders that in such a trading environment, "the primary objective is to get as flat as possible to the market" -- not betting on either a rise or a fall -- according to a person familiar with the conversation.
But in contentious conference calls, risk managers at Deutsche Bank told Mr. Weinstein to scale back positions or sell them entirely, traders say. Mr. Weinstein's stock-trading desk was instructed to sell nearly every holding, effectively shutting it down.
I don't think the dislocation in the CDS market after the Lehman collapse was as simple as the WSJ article suggests. It wasn't just that "players were concerned about entering trades with banks that potentially could collapse." That was definitely part of the problem, especially for Merrill.
But as I noted earlier, a big problem was that protection buyers all wanted to lock in their profits when spreads exploded wider (or, alternatively, net protection sellers wanted to cap their losses). And since the dealer banks generally try to run matched books—note that Weinstein's biggest concern in the crisis was getting "as flat as possible to the market"—all the end-users demanding to unwind their CDS trades essentially forced dealers to unwind off-the-run contracts at off-market prices, which is expensive for the dealers and generally requires a sizable upfront payment. It probably didn't help that traders at the dealer banks, being traders, couldn't stop shooting at each other.
As the WSJ article notes, however, the losses on Weinstein's basis trades came predominantly from the corporate bond leg, not the CDS leg. That's what happens when the entire corporate bond market suddenly shuts down, I guess.
Buffett’s latest best idea
Investing legend Warren Buffett has stated that he would be happy if he and his partner, Charlie Munger, could come up with one good investment idea every year. That one good idea currently appears to be Burlington Northern Santa Fe Corp. (BNI-N75.37-1.67-2.17%), a Fort Worth, Texas-based railway company that hauls freight.
Of the investments disclosed in recent 13F filings with the U.S. Securities and Exchange Commission by Berkshire Hathaway Inc. (BRK.B-N2,924.00-74.00-2.47%), it’s by far the biggest purchase.* Accumulation began in April, 2007 and has been steady since. The latest buying, in January, increased Mr. Buffett’s stake to 75-million shares, or 21.75 per cent of the company. It’s now one of Berkshire Hathaway’s largest holdings.
The prices paid for Burlington Northern stock range mostly between $75 and $80 (U.S). With the price currently trading several dollars below that range, followers of Mr. Buffett can buy even cheaper than the master himself.In the past, Mr. Buffett has said the railroads were not his kind of investment. He described them as capital intensive, heavily unionized, extensively regulated, and operating at a comparative disadvantage against the trucking industry.
However, railways now appear to have a competitive edge in long-haul transportation thanks to years of upgrading infrastructure and equipment in response to deregulation in the 1980s. For example, locomotives today get 75 per cent more mileage from a gallon of diesel than they did in 1980, observes IHS Global Insight consultant Kenneth Kremar.
The upgrading continues. Of note, Burlington Northern is keen on technology that will allow it to run trains closer together, increasing productivity even more.
Energy and environmental trends have also conspired to bestow an edge. As Burlington Northern’s chief executive officer, Matthew Rose, recently told Business Week magazine:
- the further the price of crude oil rises above $25 (U.S.) a barrel, the more trains enjoy a cost advantage (they use just a quarter of the fuel trucks use).
- highways have problems with traffic congestion.
- trains are more environmentally friendly – a locomotive transporting 100 tons over 1,000 miles (1,600 kilometres) produces 45 per cent less pollution than long-haul trucks.
The U.S. industry is presently dominated by five rail companies. The division of the U.S. rail system into five railroads means more control over pricing. Railways might be capital intensive but with fatter margins, they can more easily cover capital costs.
Of the big five, the two largest are Burlington Northern and Union Pacific Corp. But Burlington Northern has “a record of more consistent management than Union Pacific does,” writes Money Magazine editor Michael Sivy.
Burlington Northern controls nearly 50,000 kilometres (over 30,000 miles) of track throughout the United States and Canada, including a line that runs through Mr. Buffett’s home town of Omaha, Nebraska. When it comes to railway networks, size matters. For one thing, a large network can provide seamless shipping to a greater number of destinations.
Burlington Northern’s network spans two-thirds of the continental United States and is concentrated in the Midwest and West. The terrain and dispersed populations of these regions play to the strength of rail in long-haul freight transportation. Rail companies operating in the more densely populated Eastern region face relatively greater competition from trucks due to shorter hauling distances between destinations.
The location of Burlington Northern’s geographic footprint also yields a natural advantage over other railway companies (except Union Pacific) when it comes to shipping imported Chinese goods across the U.S. due to easy access to terminals along the West Coast. Lastly, the company’s lines running north and south down the middle of the U.S. give it the lead position for shipping imports and exports generated by free-trade agreements with Canada and Mexico
Donald J. Trump's Top Success Tips
Donald Trump or "The Donald" as he is often called, is a famous New York real estate developer and businessman. He has developed and owns some of the most exclusive buildings in New York.
For those dreaming of that same kind of wealth and business savvy, simply wanting it is not enough. But if you are serious about building wealth, then you must be open to learning, and not just by reading a book - but by actually doing the work. see what we can learn from his own success:
1. "As long as you're going to be thinking anyway, think big."
2. "Listen to your gut, no matter how good something sounds on paper."
3. "You're generally better off sticking with what you know."
4. "Sometimes your best investments are the ones you don't make."
5. "I don't make deals for the money. I've got enough, much more than I'll ever need. I do it to do it."
Passion. That's really what it all comes down to - a passion for your work, for the process of business, and even a passion for the creation of wealth. There is a big difference between loving money and loving the process of making money.
6. "I try to learn from the past, but I plan for the future by focusing exclusively on the present. That's were the fun is."
7. "I wasn't satisfied just to earn a good living. I was looking to make a statement."
8. "Money was never a big motivation for me, except as a way to keep score. The real excitement is playing the game."
9. "Show me someone without an ego, and I'll show you a loser."
10. "The final key to the way I promote is bravado. I play to people's fantasies. People may not always think big themselves, but they can still get very excited by those who do. That's why a little hyperbole never hurts."
For those dreaming of that same kind of wealth and business savvy, simply wanting it is not enough. But if you are serious about building wealth, then you must be open to learning, and not just by reading a book - but by actually doing the work. see what we can learn from his own success:
1. "As long as you're going to be thinking anyway, think big."
2. "Listen to your gut, no matter how good something sounds on paper."
3. "You're generally better off sticking with what you know."
4. "Sometimes your best investments are the ones you don't make."
5. "I don't make deals for the money. I've got enough, much more than I'll ever need. I do it to do it."
Passion. That's really what it all comes down to - a passion for your work, for the process of business, and even a passion for the creation of wealth. There is a big difference between loving money and loving the process of making money.
6. "I try to learn from the past, but I plan for the future by focusing exclusively on the present. That's were the fun is."
7. "I wasn't satisfied just to earn a good living. I was looking to make a statement."
8. "Money was never a big motivation for me, except as a way to keep score. The real excitement is playing the game."
9. "Show me someone without an ego, and I'll show you a loser."
10. "The final key to the way I promote is bravado. I play to people's fantasies. People may not always think big themselves, but they can still get very excited by those who do. That's why a little hyperbole never hurts."
Comparing Car Different Insurances
Insurance agents don’t like to hear this, but the best way to pay the lowest auto insurance rates is by shopping around and making car insurance comparisons.
But sometimes the buyers are ignorant about all the options that they can have and also the comparing process. This can lead to loss money in terms of more premiums they have to pay to a company as compare to some cheap policy which they can get after researching for it. The higher rates are not the criteria of the protection.
While going to buy a car insurance policy, your first step should be to be certain of all your requirements and needs, along with specified details of what all you expect from your insurance policy. It includes, time span of premium payment, amount of premium payment, mode of payment, monthly, annually payment, coverage needs, etc.
Get at least five quotes for a car insurance in order to be able to make a good comparison. Off course, the more quotes you get, the more you can compare and the more you can save on auto insurance.
When comparing insurance prices it is also advisable to think about credit ratings because these can seriously impact the premium. Companies that sell insurance for cars use the credit rating for determining the insurance rate of the driver.It’s very wise to check a credit report for errors because the smallest mistake can lower the credit score and thus higher the price of insurance. Make sure all comparison quotes use the same (and accurate) credit report because otherwise this will result in a big difference between car insurance rates and it will be difficult to compare.
The insurance policy with lowest price may not be the best available policy. Ask for discounts available at all specific conditions; be sure of the coverage of the scheme.
But sometimes the buyers are ignorant about all the options that they can have and also the comparing process. This can lead to loss money in terms of more premiums they have to pay to a company as compare to some cheap policy which they can get after researching for it. The higher rates are not the criteria of the protection.
While going to buy a car insurance policy, your first step should be to be certain of all your requirements and needs, along with specified details of what all you expect from your insurance policy. It includes, time span of premium payment, amount of premium payment, mode of payment, monthly, annually payment, coverage needs, etc.
Get at least five quotes for a car insurance in order to be able to make a good comparison. Off course, the more quotes you get, the more you can compare and the more you can save on auto insurance.
When comparing insurance prices it is also advisable to think about credit ratings because these can seriously impact the premium. Companies that sell insurance for cars use the credit rating for determining the insurance rate of the driver.It’s very wise to check a credit report for errors because the smallest mistake can lower the credit score and thus higher the price of insurance. Make sure all comparison quotes use the same (and accurate) credit report because otherwise this will result in a big difference between car insurance rates and it will be difficult to compare.
The insurance policy with lowest price may not be the best available policy. Ask for discounts available at all specific conditions; be sure of the coverage of the scheme.
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