Investment

31 October 2008

Reader Writes:
What is your view on the losses made by many in the Icelandic banks and also those who offered the access to the banks via their websites as ‘experts’?

There are lots of so-called money saving experts out there who apparently know everything about everything. Few if any are regulated by the FSA – There is a message there.

Whilst they may know lots of little bits about how to save cash here and there, this catastrophe has shown clearly that you should always seek advice before acting on anything to do with your hard earned cash.

I am most disappointed in all those who are using the ‘credit crunch’, as they did with September 11th to dump and blame, as well as shouting that no-one could have foreseen what was happening.

What a complete load of nonsense. Only as recently as August this year in this column we pointed out there were problems in Icelandic banks.

Near three years ago the Icelandic government went absolutely mad as Norway, its neighbour clearly knew something all our local governments didn’t.

Norway’s sovereign wealth fund which has over $380 billion in it, decided it would ‘short’ the Icelandic banks seeing that the arctic boom was at an end. ‘Shorting’ is basically were you bet that a share will fall in value. If you are right and it falls, you win. If it rises, you lose.

Why were Norway’s managers of their funds so confident Icelandic banks would fall, that they could afford to bet on their share going down?

All this time later, local authorities invested and websites have promoted their all too over the top rates without looking at their potential risk.

Researching a bank is a complicated issue as many are quite opaque in their nature and it's difficult to see what they are invested into.

Many of those banks, who bought an ‘investment’ into collaterised debt obligations (CDOs), or subprime mortgages as they are called, have a lot to answer for. How can they really say they fully understood what they were investing into and what the risk was?

One thing that has come out of this is the requirement for greater transparency which would then make it easier to assess a bank and its strength, or lack of it.

In the meantime we all need to learn that there are no free lunches. Icelandic bank rates were much higher than normal and that should have been a clear signal to research the bank more closely.

Even a simple google search would have highlighted the Norwegian’s attacks on Icelandic banks and that would have alerted investors to the risk.

We should all remind ourselves that the cheapest is not the best, and investment without advice affords you no protection.

Scanning cheap websites for cheap information may provide you with advice of a similar value. Suppliers of this information (some of which receive commission when you take out credit cards, bank accounts and the like) need to take greater responsibility with what they publish – a lesson for us all.

Another word of warning: Those of you who are investing, or considering investing into my pet hate of structured or guaranteed contracts, will need to be careful what they are investing into.

Many of these structured or guaranteed products provide a guarantee via a third party counterparty. Whilst you might think you are investing into a guarantee, the truth may be rather different.
Some of these guarantees were provided by Lehmans via complicated investments which may now be worthless.

Subsequently because the holding company is classes as a ‘large’ company under the large company rule, the investor will have no comeback whatsoever via the FSCS.

So whilst you think you are buying a guarantee, you may actually be buying an almost guaranteed loss.
Many of these structured plans are sold and marketed through banks who sell only their own products and are not independent, so be sure with all investments to fully assess what you are buying by taking advice from an independent financial adviser who specialises in investments.

For advice on any guaranteed product call Peter on 0800 0112825, e-mail info@wwfp.net

Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.