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‘Securitized’ doesn’t mean secure

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Dear Mr. Berko:

My broker has recommended that I buy this bond (description enclosed) that he says is “securitized,” which he says means the investment is secure. As you can see, it’s a $100,000 face value bond that I can buy for $63,000 and pays an extremely high rate of interest, which really makes this very attractive. Do you think this is a good investment? Also, this broker had my sister buy 10,000 shares of General Motors stock at 81 cents per share. He says it’s a good gamble, and after the company is liquidated, these new shares could be worth a lot of money if GM becomes profitable again. I’d like your opinion on this, too.

C.C., Moline, Ill.

Dear C.C.:

I think your broker is an excellent candidate for a glossectomy (removal of the tongue) without anesthetic.

“Securitization” has nothing to do with the safety or security of an investment, as this broker would have you believe. Rather it’s a process by which a brokerage firm like Merrill Lynch or Goldman Sachs helps lenders like Hardrock Mortgage, Ample Savings & Loan and Last Chance Credit create more dollars so they can increase their loan activities.

Here’s how it works. When Hardrock, Ample and Last Chance have used up their funds to make loans, Merrill and Goldman (or other large brokerages) will buy all their little loans, put them in a big box and sell small pieces of that box to thousands of investors in the form of bonds. Then the proceeds (less fees, vigorish and costs) go back to Hardrock et al. so they can lend more money to more people. And when that money is used up, they go back to Merrill and Goldman, who put all those little loans in another big box, sell small pieces again to investors and so on and so on. The bonds earn interest, which is paid into the box from thousands of loans made by Hardrock, Ample and Last Chance and then paid from of the box to investors who purchased this new “security.”

Hence, securitization is the process by which thousands of small loans are assembled into a big box and then sold off in little pieces to investors as bonds, which is a security, hence “securitization.” Depending upon the quality of the loans in the box, some of the boxes sold to investors represent good-quality securities and others might represent poor-quality securities.

Contrary to what this doofus is telling you, a lot of bad boxes were sold to lots of investors, and lots of investors have unwittingly lost lots of money purchasing pieces of the bad boxes.

Even though you sent me a description of that bond, I am unable to give you my imprimatur. The security your “broker” recommended is backed by more than 1,100 individual loans, and I lack the capability to evaluate them for their individual creditworthiness. Considering the “extremely attractive yield,” I suspect that quite a few of the loans in that box may be sour. However, a $100,000 face value purchase for $63,000 could represent an attractive speculation. So, if you are comfortable with a $63,000 investment risk, grab the Devil’s hand and jump in.

Now, I’m also certain that your broker is a superb candidate for excarnation (that’s the removal of the flesh and organs from the bones). There are three types of people who buy stock in General Motors, now called Motors Liquidation Co. (MTLQQ-66 cents): (1) sapheads like your sister who fantasize they’re getting shares of the new General Motors with all the factories and machinery on the cheap, (2) professional gamblers seeking short-term gains as thousands of sapheads continue to buy GM, the price of which fluctuates as much as 50 cents a day and (3) “nostalgia investors” who are purchasing a piece of history and believe GM stock will have a value for collectors 10 or 20 years hence. (Perhaps 100 years from now, but certainly not in 20.)

Yes, I know that the shares trade between 40 cents and $1.15 a share. Still, once the liquidation of the old GM has been completed, demand for those GM shares will disappear, and your sister’s 10,000 shares won’t be worth a centime. Resist being a fool and stay away from those shares.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, Fla. 33775 or e-mail him at mjberko@yahoo.com. © 2009 Creators.Com