Q & A With Ray Martin On New Market Woes

CBS' Financial Consultant Gives Advice To Average Investors

(CBS)  Early Show money expert Ray Martin answers questions about the Wall Street shakeup involving Lehman Brothers, Merrill Lynch, AIG and other companies.

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What should the average investor do in regard to Monday's news about Lehman Bros, Merrill Lynch and the other financial firms?

The average investor is typically invested in the financial markets though their employers 401(k) type retirement plan and outside of that they typically invest in mutual funds. This means that the investments they own are broadly diversified and not likely to be directly affected by the events at Lehman Bros or Merrill Lynch. That said, due to the credit crisis’ affect on the financial services sector, the markets and the broader economy, the stock market, as measured by the S&P500 index, is off some 17% this year. Foreign stocks are off similar amounts and that has affected the investments owned by the average investor.

Investors with accounts owned at Lehman are advised to call their brokers and discuss how the investments in those accounts are covered under SIPC insurance, the federal program that protects investors from lost (not the loss on) securities owned at firms who fail. They should find out where their accounts will be transferred to and who will be taking over for any services and investment management and if any of the terms and costs of these services are going to change.

Investors with accounts at Merrill need to call their brokers and also ask questions as to what this will mean for their accounts. Will their account be transferred to Bank of America? Will the account features and fees be changed? When will changes, if any, occur? How will they be kept informed as the process of integrating Merrill Lynch into B of A gets underway?

Investors need to be patient as these events just took place today and there will be a lot of unanswered questions at this time.
There is a wider concern for investors who bought what they thought were “safe” investments - Certificates of Deposits from banks that were purchased in their brokerage accounts. Although such CDs, when purchased in amounts that are limited to insurance limits, can be covered by FDIC insurance, what actually happens to such CDs when the issuing bank fails is very different than what happens to a CD purchased in an account directly at that bank via a local branch. Since banks do not have a record of your account information on their ledgers (because the CD was purchased in street name at the broker dealer firm), then your claim may not be asserted for FDIC protection until the broker dealer provides the records by account holder to the FDIC. Only then can the FDIC make its determination as to the coverage of such CDs. This process can take 6 to 12 weeks longer before depositors who purchased brokered CDs receive confirmation of FDIC coverage.
Also, since banks pay higher rates on CDs they sell through another brokerage firm (to avoid having to compete with higher rates in their local markets), the FDIC may not credit the interest on such CDs after the bank fails. So, you could end up with a few CDs issued by failed banks and wait 12 weeks of more to get your money -- and get no interest. It is reported that there are now over 90 banks on the FDIC's watch list and industry watchers expect to see more than 150 banks fail over the next 12 to 18 months.

Is the stock market still the best investing vehicle for the average investor, or should investors choose safer ways to invest?

Investing in stocks will continue to be an important component of a well diversified portfolio for individual investors and should be complemented with safer asset categories including cash and bonds. Investing in diversified investment companies - mutual funds and exchange traded funds - continues to be the best investment vehicle for the average individual investor as these provide significant diversification and professional management.

How much longer will the effects of the mortgage crisis be weighing down the stock market?

Most experts say the answer ultimately depends on the recovery of the housing market. That’s because some firming of housing prices is needed so that financial companies can better determine the underlying value of the collateral of their loans and people can start buying houses, which can help lead to some stability in these areas. Estimates by some experts indicate that this is not likely to occur until late next year and until then there will continue to be more losses declared by the financial industry. A few other big banks or financial companies will likely face a fate similar to that of Lehman Bros. or Merrill Lynch.

On the positive side, the Fed's takeover of Fannie and Freddie has already contributed to a significant drop in mortgage interest rates and the Fed has essentially guaranteed a supply of money to lend for mortgages. This, coupled with the recent drop in energy prices, should give some relief to U.S. consumers. The question is how much help will this really be in the face of considerable headwinds of a crisis in the financial sector, a slowing economy and rising job losses.

[brianbwb-2009]

"Q, Is the stock market still the best investing vehicle for the average investor, or should investors choose safer ways to invest?"

Money "expert" Ray Martin, "Investing in stocks will continue to be an important component of a well diversified portfolio for individual investors..."

Translation, "continue to be a sucker, and sink your money into crooked corporations, so that snake-oil salesmen like myself can continue to make money".