The Purple Headed Earls' Complaints Blog

The Hulk and I have now commenced operations on our new addition to the blogosphere - The Purple Headed Earls' Complaints Blog.

We aim to place our complaints up there for all to see.

At the moment, there's only one up there from me - and a response - but Hulk has some absolute ripsnorters of complaints letters ready to be uploaded. I can hardly wait to see those.

And like all blogs, you, the reader, get to whinge about each and every single complaint that we put up there for all to see. And they're all in the best possible taste.

So click here. And enjoy.

Edit 28/06/2007: Nice1bruva has joined us on the blog and has already got cracking on posting. It's all good.

Dikkii's Diatribe Archives is now retired

Apologies to all who are getting old stuff in my feed.

I've retired Dikkii's Diatribe Archives and I've moved everything here. This basically makes it easier for me to keep track of everything.

All the dates are still intact - you'll notice in my blog archive over on the right that I now have years 1997 - 1999 appearing. And for those posts that I've linked back to, I've stuck in pointers back to the new spots where I've moved them to.

If you had links to any of my old stuff, I advise you to change them. It's all good.

Speeding drivers and red lights

I was prompted to write this post by a post that my good buddy Paul wrote at his blog, Contempt.

In it, Paul bemoans the attitude of the newspapers and people in general who think that speeding fines are too high. And he's 100% spot on. This thing in the media is a bit of a blitz that comes around about once every 6 months, it appears.

Basically, the crux of the matter is that fines for speeding, running red-lights etc are seen by irresponsible media types as "revenue raising" and not the punishment that jerks who continually do this so richly deserve.

Well, I've had enough. It's about time that this cavalier disregard for human life was done away with, once and for all. In Paul's polite enough way, he makes the rather astute comment that pretty much nails this completely idiotic issue where it counts, and that is here:

"Melbourne's two newspapers waste an awful lot of newsprint complaining that speed cameras in Victoria are there for no other reason than to raise revenue. While I can't really see how this is a problem (don't want to pay? Don't speed), it intrigues me that a paper can then find issue with people losing their licences over such offences.

Sounds like the perfect solution to me, I'll be glad to see them off the road. I drive very rarely, but it still scares the heck out of me that whenever I do, someone in the oncoming traffic shoots through red lights as I'm trying to make a right-hand turn."

There's not really much I can add to Paul's comment here. Basically, there is a disconnect that our media just don't appear to want to acknowledge.

And why would they? Various hacks in the Melbourne print media have quite a reputation for being a bunch of Larry Leadfoots around town. Why print articles pointing the finger of blame where it is so sorely deserved at speeding drivers, when you can point it at the State Government and the Victoria Police for "revenue collection"? Especially when you inevitably end up losing your licence for a speeding offence and the other newspaper finds out about it. You certainly won't look like so much of a hypocrite.

Revenue collection.

This is a disgraceful red herring designed to distract attention away from the fact that speeding drivers get fined because they are engaging in life-threatening behaviour. It never ceases to amaze me how normal, ordinary, rational human beings can become fascist pigs whenever the ugly spectre of speed cameras is raised.

Speed cameras exist to protect human life. Speeding motorists should be fined back to the stone-age, and then some.

The very fact that the media complains about this issue is proof that no one takes speeding seriously enough. By trivialising this as being all about revenue raising, and not about protecting human lives, the media is basically saying that speeding drivers' hip pockets are more important than protecting the lives of pedestrians, passengers and other motorists.

And the attitude displayed by drivers who are caught speeding is nothing short of a DISGRACE!!!

Honestly, you'd think that they'd been wrongly accused of murder the way that some people carry on. Why can't people just accept that they've recklessly (sometimes willingly) engaged in life-threatening behaviour, pay their fine, accept their punishment and move on? Really, it's not hard.

But I've got an idea.

Next time the media complains, the State Government ought to raise both the fines and the demerit points. That'll learn 'em.

Rated PG

Yes folks.

My blog is rated PG. And here's why:

This rating was determined based on the presence of the following words:

• hell (5x)
• missionary (1x)

Thank you to Bob for this one. Love it.

Dikkii's financial tips #5: How the hell do cheques work?

Welcome to Dikkii's financial tips.

This is a series where I attempt to provide some sort of guidance to financial matters without breaching the Corporations Act by actually providing advice.

Anyway, I have to return to banking just one teensy weensy last time, because I did promise regular commenter Plonka a round up of cheques.

Cheques, as I responded at the time, are amazingly complex instruments. The law as it relates to cheques is remarkably finicky, and horrible. There are so many different bits to them, that I could not begin to explain - but I'll have a go. It's worth knowing.

Back in the day, they were explained to me as a three way agreement between the person signing the cheque, the person that they're giving the cheque to and the bank that the cheque is drawn on.

I prefer to think of it as an IOU.

In any event, what normally happens is this. You write out a cheque, you hand it over, and money flows from your account to the other person's.

Let's look at all the bits - and there are many.

The drawer

(Pronounced: draw-rer)

Not someone's undies, this is the name of the account from which the cheque is drawn. It's usually indicated on the cheque somewhere between the amount in words bit and the space for the signature. Usually looks like "JM BLOGGS", "MP AND LF CITIZEN", "MEGA CORPORATION LTD" or even "J AND P DOE TA SMALL BUSINESS ITF THE DOE FAMILY TRUST".

Note the shorthand - I always thought this looked unprofessional, but it appears to be commonly accepted that AND indicates a joint account or partnership, TA indicates a registered business name ("Trading As") and ITF stands for "In Trust For".

The drawee bank

(Pronounced: draw-ree)

This will be normally shown up on the top left hand corner of a cheque. Underneath that will be the drawee branch. This is the bank and branch of the drawer's account.

The payee

This is the person, persons, company or other entity to whom the cheque should be paid. It will normally have the word "pay" at the start of the line and the words "or bearer" or "or order" at the end. Sometimes it will be made out to cash, in which case, the words "please pay cash," or just plain "cash" will be written.

"Or bearer"

This means that the cheque can be accepted by anyone holding it. Under current conversion laws a bank would be pretty stupid to rely on these words, however a bit of lenience is normally given (within reason). Normally a bank will not allow third party bearers to deposit a cheque made out to someone else - it's just too risky for the bank.

I am reliably informed the stolen third party cheque lawsuit involving a certain "Mr Cash" is an urban myth.

"Or order"

The opposite of "or bearer". This means that the cheque must go into an account name that matches that whom the cheque is made out to. Crossing out the words, "or bearer" means the same thing as "or order".

For example - a cheque is made out to "Tom and Sue Jones or order" - this must go into a joint account set up in the name of Tom and Sue Jones. No exceptions.

Usually, an "or order" cheque needs to be endorsed (signed on the back) by the payee, but the bank is normally deemed to be acting in good faith if it follows the rules in the above paragraphs.

Amount in words vs amount in figures

These need to match up. If one is different to the other, the lesser figure only may be accepted. This is always fun with Generation Y who, according to stereotypical "research", are illiterate, innumerate and belligerent.

Signature

The cheque must be signed in accordance with the operation method of the drawer's bank account. If the account requires two signatures, then the cheque must have two signatures.

I used to get a good laugh when young kids would come into the bank with one of their parent's cheques made out to cash, and only one dodgy signature where two were required. Cheeky little rascals!

The crossing

This is normally two parallel lines drawn vertically or diagonally across the cheque. Occasionally you'll see the words "not negotiable" as well. They mean the same thing - the cheque must go into a bank account and cannot be cashed.

Sometimes you might see the words "account payee only" written - this has the same effect, plus it also does the job of the words"or order" - the cheque must go into a bank account in the name of the payee specifically and it cannot be cashed.

Crossings may be pre-printed on a cheque which can cause great confusion - attempting to cash a cheque made out to "cash" with a crossing is nigh on impossible.

---

So what happens when a cheque is deposited, and why does it take so long?

Let's follow one along the trail.

1. Day one.

A cheque is deposited into a bank account. Normally, a cheque debit is processed off-site, usually overnight. The only thing that may (but not always) happen immediately is that an amount is credited to your bank account. If this deposit credit is processed off-site with the cheque, it will also be processed overnight.

Any amounts credited to the payee's bank account during the day on day 1 will be subject to clearance - that is, they will actually be in their bank account that day, however, a hold is placed on those funds so that you can't touch them. Normally for three working days.

And even though some bank branches are open on weekends, now, this does not include those days.

2. Day two

Transactions processed off-site go through some batch reconciliation process which means that you won't notice the deposit in your bank account until the next day.

What will also be noticed the next day, is that the drawer's bank account will also have been debited.

But if you check both accounts, you'll see that they're showing transaction dates of day 1.

So why does clearance still apply?

Well, imagine that the drawer has overdrawn his account. Debits have to fund a credit, and the credit (the deposit) must be processed. Therefore, so too does the debit (the cheque).

The overdrawing will show up on a report which the drawee branch manager gets the next day (day 2) first thing. The manager has two options - allow the overdrawing, or dishonour the cheque.

If the manager dishonours the cheque, she will create a credit dishonouring the cheque and crediting the funds back to the drawer's account. The debit that funds this credit must be made to the payee's bank account. Both sides of this transaction will be processed off-site and will go through the same overnight batch reconciliation process I alluded to above.

Needless to say, the dishonour will not show up in the depositor's account until day 3.

3. Day three

Both sides of the dishonour will have the same date as day 2, but they normally will process overnight.

This means that when the payee checks their account that morning (day 3), the funds that were subject to clearance will have gone from their account.

If the cheque is not dishonoured, the funds will still be subject to clearance that day, though, because it won't be until this time that the cheque will have had a chance to physically make it back to the drawee bank for perusal.

Not all cheques get looked at by the drawee bank, but some do. Any irregularities such as funny signatures, third party cheques etc will have one more window for dishonour. This will happen overnight. So will the lifting of the hold on any uncleared funds that haven't been dishonoured.

4. Day four

Normally, this will be when the payee is finally able to access their funds, assuming that the cheque has been honoured.

With Credit Unions and Building Societies, a couple of extra days may be allowed. Their paper trail is somewhat more convoluted than banks.

---

So, if you've read this far, you're probably about to ask, "What about pay cheques? My bank let's me draw against them straight away."

Firstly, banks are under no obligation to do this - this may be done as a favour. Nothing more. No magical solution gets around the paper trail that must be followed above.

Secondly, history shows that employers who aren't organised enough to do their payroll properly are most likely to be ones who dishonour cheques. Resign immediately and get a job with a more organised employer.

Thirdly, fraudsters are all over badgering bank staff to let them draw against uncleared cheques by calling them "pay cheques".

And finally, if your liquidity situation is such that you need to access those funds immediately, then you have a different set of problems.

But what about bank cheques? Aren't they as good as cash?

In a nutshell, no. Bank cheques can be forged or stolen. Thus they're subject to the same rules as every other cheque.

Try to get anyone paying you money to credit your account directly. It's far less messy than cheques. Cheques are, as I mentioned before, a form of IOU, and as with all IOUs, it's the payee who bears the risk.

--
Dikkii's financial tips index

Standard but necessary disclaimer: This is not advice. Only a complete idiot would think that any of this constituted advice. It's not even vaguely reasonable to consider this to be advice. If you are in any doubt as to the content of this, see a good, independent financial adviser immediately. They do exist.

Doggerel #100

Over at the Bronze Blog (formerly Rockstar's Ramblings), Bronze Dog has churned out his 100th post in this excellent series.

This is a sensational achievement, and an excellent post to boot - he's looked at "Truth" for this one.

Not being one to rest on his laurels, he's immediately followed this up with Doggerel #101, which is about the phrase, "We can believe whatever we want!"

I say congratulations, BD. Well done.

Great debacles of our time: The great mezzanine financing collapse (part 2)

This is part 2.

Part 1 is here.

We were starting to really get stuck into the the sheer carnage caused by the collapse of Westpoint, Fincorp and ACR.

In part 1, we looked at a couple of burning issues created by these debacles:

1. The role that adviser commissions played in the collapse of these businesses and the loss of investor savings;
2. Mezzanine finance and portfolio theory - how is it that advisers can spot a wildebeest when it walks and quacks like a duck? and;
3. Financial literacy and retirees. Is it wrong to target a vulnerable sector of the community when pushing risky products?

The media has been completely enjoying this horrific financial pile-up. And why wouldn't they? There are thousands of angles to explore this from - advisers, investors, the companies involved, the executives, the trustees, the liquidators administrators, the federal government, regulators etc.

And why not? They all had a role to play in this. Whether good or bad, savoury or otherwise.

I'll do my best to cover some of the angles, but I'll re-iterate the important lesson to be learnt from this:

"If it looks too good to be true, that's normally because it is."

Let's look at some interesting stats from this. According to an article in the Fin of Saturday 2 June, 2007 by Robert Harley, the following numbers come up. There were:

• 20,000 investors burnt; and
• AUD $800 million lost.

No matter which way you crunch the numbers, this adds up to serious money and serious lost dreams.

The financial regulator, ASIC, is looking very battered and bruised after some fire from both sides of Parliament. But was ASIC being made a scapegoat?

This blogger thinks that they were. And these are the reasons why:

4. Mezzanine finance is a risky proposition.

Even though the issue of debentures and unsecured notes are done through a trustee, there is very little recourse available through a trust deed for investors. The trust deed itself is normally written by a the company who is issuing the paper.

Trustees are usually appointed through a tendering process whereby the one that offers their services most cheaply will win out. Not only that, but during the tendering process, preference will be given to trustees who promise no questions asked.

Trust Company, the trustee appointed to look after ACR's investors maintains that ACR did all that was required from Trust, and met all their obligations under the trust deed right up until the bitter end.

Is this a conflict for trustees?

I don't really think so - provided that there is proper disclosure given up front. If this is done, then the job of the trustee is mostly done. The trustee just needs to look after the rest, but they still have a duty to act on behalf of the investors.

How about ASIC?

ASIC polices the issue of these investments, but really only up to the point where disclosure is concerned. If the issuer of this paper is meeting their disclosure requirements, then ASIC's job is done.

How the company that has issued the debt then operates in servicing their debt obligations is between the trustee, the company and their investors.

This is a bit different to a bank or a superannuation fund.

Banks and super funds have their day to day activities policed by a number of bodies, all of whom ensure that their prudential and regulatory duties are being upheld.

For banks, the regulatory side of things is monitored closely by the Reserve Bank, and APRA monitors their prudential undertakings to ensure that all is good.

Super funds also have APRA keeping tabs on their prudential requirements, except for DIY super funds which are looked after by the ATO. The ATO also looks after super funds' regulatory arrangements.

In the case of debentures, unsecured notes and other debt instruments, there is no body that looks after the prudential goings on of the company that issues them - it really is caveat emptor.

This adds a whole new level of risks that banks and super funds don't have.

Where disclosure is inadequate, this is pretty much the only area where ASIC can step in and so something about it. And in fact, ASIC did so - the article in the Fin reports that ASIC stopped ACR from issuing capital raisings three times until they fixed stuff up. Which ACR did.

ASIC also issued 11 warnings about Fincorp's goings on both before and after their CEO, Eric Krecichwost resigned as CEO (and as a director) in 2005.

This would appear to point the finger of blame in an entirely new direction, and in a direction that investors will not like, at least for investors who didn't use financial advisers:

5. Investors really only have themselves to blame

This really only applies to investors who just saw the advertisements and went berzerk. It doesn't really apply to investors who sought financial advice.

ASIC appeared to be doing everything short of double-checking the disclosure given by these companies for mistakes and errors.

But the whole deal looked too good to be true for retail investors.

What happens in the institutional world?

Harley's article mentions that where professional lenders, like the ubiquitous Macquarie Bank are concerned, rates of 20% or higher are the norm.

(By the way, just once I'd like to do a post where I don't mention Mac Bank. How in the name of Crikey do these guys end up in everything that I write?)

Anyway, you can bet that where professional lenders are involved, all sorts of caveats are written into the contract to ensure that the lender has some recourse.

Retail offers simply don't have this kind of bargaining power. These investors were pretty much sitting ducks for the walloping that they got, and I hate to say it, but they really only have themselves to blame.

6. How do we protect investors from this sort of thing happening again?

Well this is an age old question.

Investing, much like supply, demand, democracy, revolution and innovation only works because of two base human emotions - fear and greed.

I would also add laziness to this, but I'll detail why on another day.

Investors who got burnt were basically shovelling everything that they had into these investments. In a nutshell, they got greedy.

Of course, where advisers were involved, this complicates things a little, and the blame shouldn't be sheeted home to investors entirely.

Portfolio theory says that putting large slabs of your cash into the one asset is a very silly thing to do, and history has borne this out. Diversification, while it won't protect people from market nosedives, will protect people from problems with particular parts of a portfolio.

But if you throw everything into one asset that goes belly up, you are in deep trouble.

Tony D'Aloisio, the new chairman of ASIC, says that all products like these coming on to the market should all be professionally rated.

This is possibly a constructive solution, but D'Aloisio knows only too well that investors will bear the cost of such risk ratings.

D'Aloisio's other solution is better, though:

7. Can we educate investors about risk?

I think that risk is so important that I honestly believe it should be taught at school as the fourth 'R'.

I'll do a Financial Tip on risk a little down the track, hell possibly even three, but risk is so important, and it's through misunderstanding of risk that people go on to get burnt in the way that they have.

I believe that we can educate investors about risk, but this should start in secondary school.

Trying to educate mature Australians about risk is shutting the gate after the horse has bolted type stuff. It really is.

Australians' financial literacy is shocking. But risk would be an excellent place to start fixing this discrepancy up. And I for one will support any initiatives that ASIC puts in place to improve this particular piece of general financial knowledge.

It's the most important piece there is.

Edit 13/06/2007: I lay the blame for quite a lot of this squarely at the feet of investors, which oversimplifies things a little bit. In the case of Westpoint investors (and some others), however, quite a lot of them sought financial advice, and the advisers in question recommended the debt in question. I've done a couple of edits to rectify this, but I may explore Westpoint's situation in a future post - it warrants some additional comment space.

Disclosure: This blogger owns shares in Macquarie Bank Limited.

Standard but necessary disclaimer: This is not advice. Only a complete idiot would think that any of this constituted advice. It's not even vaguely reasonable to consider this to be advice. If you are in any doubt as to the content of this, see a good, independent financial adviser immediately. They do exist.

Tea drinkers. What do they know?

I moved to Melbourne in 1991.

When I arrived, I was proudly informed that Melbourne was (and, I'm told, still is) the coffee capital of Australia.

Not really being a coffee drinker at the time, I bought this. I thought, "OK."

Now this sentence is a wonderfully predictable thing, because 80% of the time, the person who says it is then going to follow this non-falsifiable Popperian's nightmare up with the delightful and improbable statement, "You can't get a decent cup of coffee in Sydney."

This statement tells you a number of things about the person saying it:

A. They believe everything that they're told.
B. They believe that everyone from Tasmania without exception has 3 eyes and a hump; and
C. They haven't set foot north of the Murray.

Anyone who knows me knows that this sort of idiotic statement holds no truck with me, because in my case the following holds:

1. Having travelled between Melbourne and Sydney more than anyone else reading this blog (I really think I am not exaggerating here) I am in a wonderful position to judge relative coffee quality.
2. I have had both good and bad coffees in Melbourne and Sydney, and in roughly similar ratios.
3. The best cup of coffee that I ever had was in Melbourne, and it was at Pellegrini's in Bourke Street in the CBD.
4. The worst cup of coffee that I ever had, though, was also in Melbourne, and it was at the cafe next door to the cinemas at Chadstone Shopping Centre.

At about this point, anyone that I'm talking to about this really pointless yet annoying topic will turn to me and say, "well that's different. Chadstone's in the suburbs," which will confirm one additional thing about the person saying it:

D: They are a stuck-up inner city dwelling snob who isn't fit to have their car keyed by Shane and Hayley from Blackburn South.

Narre Warren and Endeavour Hills are as much a part of Melbourne as Fitzroy and Richmond are, no matter what Bruce and his partner Trevor from Windsor like to think.

Never mind that this is both a 'no true Scotsman fallacy' and a case for special pleading.

So it gives me great joy to finally have this to say about all you inner-city coffee drinking prats: You are all a disgraceful bunch of know-nothing hypocrites who wouldn't know your arabica from your robusta, if it reached up between your legs and latched you after having warned you in advance with postcards showing pictures of squirrels.

This has been building up for a long time.

The most pretentious strip of cafes in Melbourne is the one that occupies the business end of Acland Street in St Kilda. These cafes are so pretentious that legend has it that the following story actually took place:

"...so we went in and asked for a decaf soy cappucino with carob sprinkles and, after some deliberation between the waitress and the barista, we were asked to leave. The owner appeared as we were being shown the door and it looked for a moment as though he was going to request our presence in the back alleyway while he took to us with a plank with nails through the end of it. Fortunately the cafe next door was able to oblige..."

I know an experienced barista who works this strip, and she's told me that the regulars will return coffees that are burnt straight away.

Even if they're not actually burnt. Sometimes they just do it to show off. It's a bit like how if Russell Crowe doesn't like the waiting staff at the establishment, he allegedly will order the most expensive wine off the list, try it and claim that it's corked and refuse to drink it. He supposedly got halfway through a case of Chateau Mouton Rothschild once doing this, which I'd believe if not for the fact that Crowe allegedly only drinks Australian plonk.

But I digress.

It was a public holiday in Melbourne today. Normally, I'd reward myself by sleeping in on such a fine day, but I was feeling particularly masochistic so in a fit of self-flagellation, I woke up at 12.30 PM and went out to one of Melbourne's finest establishments for a late breakfast and a pot of tea.

"The full English and I'll have my eggs over hard, thanks and a pot of darjeeling, thanks," I casually requested from our waitress friend.

Her tone darkened as she asked, "Um sorry, we only do 'normal stuff' here."

"I'm sorry, 'normal stuff' isn't a term that I'm familiar with. Could you please elaborate?"

"Well, you can have your eggs fried, scrambled or poached. Also, I'm not sure we have the brand of tea that you've ordered."

"Over hard is fried, both sides, until the yolks have set. Darjeeling is not a brand of tea, it is a blend from the north-west of India, and it is one of Twining's biggest sellers."

"I'll see about your eggs, but I can't promise anything," she said. I was a bit shocked at this.

She continued, "and you can choose your tea from the following: English Breakfast, Earl Grey, Green tea, Peppermint, Chamomile and Apple & Cinnamon."

Now only one of these is a black tea. Earl Grey is a tisane. Peppermint, Chamomile and Apple & Cinnamon - FSM only knows what the hell is in those.

"OK." I gave in. "English Breakfast."

Now I may only have been having breakfast at 2.30 PM in the afternoon, but it was the afternoon. And English Breakfast is a breakfast blend, for crying out loud.

And this is where I get lost with the macho posturing about Melbourne's "coffee culcha." It's contrived and silly. It's more than just a little bit wrong. It smacks of hometown parochialism.

It's simply not good enough to not know, if you are offering fried eggs, the difference between sunny side up and over hard. It's not good enough to offer only one kind of black tea, and a breakfast blend, at that.

And, this appears to be considered blasphemy, but I doubt whether the majority of Melbourne's baristas would know the difference between a ristretto and a short black. I already know that of the baristas I know, if you asked them to detail the difference between a caffe latte and a flat white, most of them would tell you that it's only the vessel that it's served in.

And I know that on one street - supposedly Melbourne's coffee-drinking heart - if you were to ask for a Vienna, you will get the most strangest of looks, as though you've just sacrificed your first-born on the table.

This is rubbish.

All I want is a decent coffee. Not excellent, but decent. I admit that I get that, but I query the pretence and the ignorance that goes along with it.

And if I order breakfast I would like to have some real choice as to how I get my eggs. Fried does not mean either sunny side up or over easy.

Lastly, if I order tea, I do not want to hear the sheer ignorance of cafe owners who simply don't know their orange pekoe from their china black. Tea is not just English breakfast. Earl Grey is a tisane and peppermint and chamomile are abominations.

It's just not good enough.

What kind of atheist are you?

Over at Die Eigenheit, Einzige posted this, so I thought I'd give it a go too.

Not surprisingly, this is how I turned out:

You scored as Agnostic, Agnostics consider the possibility that they may be wrong about God's existence, no matter which side of the fence they stand on. Always willing to objectively evaluate the most ridiculous proof, nevertheless, these guys are skeptics of the Nth degree. Agnostic 92% Scientific Atheist 92% Apathetic Atheist 67% Spiritual Atheist 58% Militant Atheist 50% Angry Atheist 25% Theist 8% What kind of atheist are you? created with QuizFarm.com

Feel vindicated a bit by the backhanded fence reference, although I'm not sure about the willingness to evaluate the most ridiculous proof bit.

You'll notice, however as I did that there is a dead heat for first (disregarding the fact that all these add up to 392%). There was a tiebreaker question for me, so I went back and changed the result of that. This is how I'd be if I was diagnosed with a case of scientific atheism:

You scored as Scientific Atheist, These guys rule. I'm not one of them myself, although I play one online. They know the rules of debate, the Laws of Thermodynamics, and can explain evolution in fifty words or less. More concerned with how things ARE than how they should be, these are the people who will bring us into the future. Agnostic 92% Scientific Atheist 92% Apathetic Atheist 67% Spiritual Atheist 58% Militant Atheist 50% Angry Atheist 25% Theist 8% What kind of atheist are you? created with QuizFarm.com

Happy with that, too. Although I will admit that my knowledge of the Laws of Thermodynamics are not as they should be. And I've broken more than my fair share of the rules of debate in my life.

Give it a go. And leave me a comment with your results.

On marketing to kiddies

I've said it before - marketing to kiddies is a DISGRACE!!!

In the past, I've singled out the music, tobacco and alcohol industries as the main offenders, but somehow, I've missed the elephant in the middle of the room.

Thanks to Plonka's Blog, (in this post here) I'm now in a position to rectify this. This is a vid fresh from YouTube, and I've gotta tell you - it is seriously worrying.

Warning: Scenes contained in this vid are likely to offend the bejesus out of you.



And now we can add fundamentalist Christianity to the list.

Edit 12/06/2007: Bob the Austin Atheist has added his take on this. It's worth a read, particularly as he "outs" the source of this highly questionable video.

Great debacles of our time: The great mezzanine financing collapse (part 1)

I haven't really blogged much about this, but the dominoes are really starting to roll within mezzanine finance in Australia. After Westpoint went down, we've now seen Fincorp and Australian Capital Reserve (ACR) hit the deck as well.

The fact that this is even major news speaks volumes about 2 things:

1. Where financial advisers stand to gain significant commissions from the sale of such products, can there be any more evidence that commission-based advice is completely wrong?

2. Where such risky products are offered, should this ring alarm bells on the general level of investor financial literacy if investors go into these with all guns blazing?

First of all, what do we mean by mezzanine financing?

Basically, in all these instances, the company that was the end user was building property developments. Sound OK, so far?

In order to undertake this level of development, money needs to be borrowed, usually from banks, to fund purchase and/or construction.

However, this will only go part way. You know how banks will generally lend up to 80% of a property's value? And possibly a bit more if the bank (which the borrower pays for, natch) buys Lender's Mortgage Insurance?

Well, more money will quite often be required for property development.

This is where mezzanine financing comes in.

Mezzanine finance is usually sourced from the issuance of certain financial instruments, usually debentures and unsecured notes. This promises the investor a fixed rate of interest for a fixed term, and at the end, the borrower pays back the principle, together with any interest that is owed.

Debentures are usually secured through a trust deed over the company. Unsecured notes are, as the name would suggest, not secured.

But the security provided for debentures is not normally worth the paper it's written on, unless the security provided are specific assets. If it is only security over the company itself, then debenture-holders will rank behind secured creditors if the borrower is wound up.

In the case of Westpoint, Fincorp and ACR, the "secured creditors" are the banks who have lent to these companies and have first mortgage claims over specific assets. So all is good for them, provided that employees are paid, the taxman gets his cut and the administrators/liquidators get paid, though not necessarily in that order.

Unsecured notes will then normally rank behind debentures. Shareholders will be last, in the unlikely event that there is anything left over after the banks have mopped up.

The main problems, though, with these were in the points raised above. Let's look at them one by one:

1. Financial adviser commissions

I've heard, but I can't pin it down, that in the case of Westpoint, commissions paid to advisers were as high as 10%. This means that for a $10,000 investment, a financial adviser would be collecting a commission of up to $1,000 up front, not allowing for cuts that his dealer group may keep. Not only that, but the commission was paid for by Westpoint themselves, it wasn't recouped from the investor through an "entry fee" arrangement.

Now in all my years of providing advice, it was rare that any product would provide anything up front of more than 4%. And even then, this would normally be recouped via an entry fee, so that the investor essentially paid the fee.

Ostensibly, this means that Westpoint were paying a 10% commission to advisers on top of the interest rate applicable to the notes that they had written. That's some seriously expensive borrowings.

The interest rates were quite high, too. But I'll come to this later.

I can't find any evidence to suggest that Fincorp and ACR were being invested in via financial advisers, so I'll have to assume that his problem was specific to Westpoint.

2. Mezzanine finance and portfolio theory

From what I can tell, advisers appeared to be completely ignorant about the nature of these investments.

Debentures and unsecured notes are medium to long-term instruments that promise a rate of interest paid in regular instalments, together with a return of capital at the end.

This means that they are fixed interest investments, just like bonds and term deposits.

Because the funds were used for what was ostensibly property investments, advisers were not only recommending these to people as part of their fixed interest portfolio, but also as part of their property portfolios.

This is erroneous in the extreme.

Not only that, but it appears that advisers were, in some instances, recommending that investors stick all this part of their portfolio into the one instrument.

Portfolio theory tells us that this is a silly thing to do. For most investors - my guess 90-95% - portfolio theory tells us that diversification achieves a greater return for a given level of risk.

Usually, the risk that is managed through diversification is market risk, however there are other risks out there, two of them being credit risk and interest rate risk. Diversification provides an effective way of managing both of these risks, by "not putting all one's eggs in the one basket".

But if you're going to stick an entire segment of your portfolio in the one asset - your diversification is reduced. And because of this, your exposure to something going wrong is greatly increased.

It's fair to suggest, and studies back up this suggestion, that advisers were really only thinking about their commissions when recommending this sort of product.

Again, I can find no evidence to suggest that Fincorp and ACR's ones were being sold through financial advisers, so this problem appears to be Westpoint-specific.

However, my point about diversification applies to all investors who used this sort of product still stands, and I'll discuss this some more in due course.

3. Financial literacy and retirees

In the case of ACR, I remember seeing advertisements on TV last year where interest rates of up to 9.15% were being offered. I remember at the time breathing a snort of disbelief and thinking to myself, "Surely that can't be sustainable."

And obviously, it wasn't.

However, as I've mentioned before at various spots throughout my blog, the general level of financial literacy throughout the Australian public is not particularly good.

The first thing that anyone should learn before they invest a cent is this old maxim:

"If it looks too good to be true, that's normally because it is."

Anyway, the advertising that ACR was doing was calculated to ensnare retirees. I'm told that Fincorp and Westpoint were doing this too, at various times, but retirees are an interesting demographic.

Why?

A. They're usually cashed up. They've retired from the workforce, and they often have a significant chunk of money to play around with, either in the form of superannuation, or equity in their homes.

B. It would appear that retirees are not particularly financially savvy compared to later generations. This blogger would contend that later generations aren't all that better, but I'll leave that post for another day.

C. Retirees generally like investments that pay regular income.

So it would appear to be a no-brainer - when presented by advertisements showing excellent rates, why wouldn't retirees go in for this hell for leather?

In my book, aiming one's advertising at retirees is only slightly better than how the music industry, alcohol and tobacco companies target their advertising at kiddies.

This doesn't make it any less vile.

I'm going to call a halt here - there's plenty more that I'd like to write, but it needs a second part. Stay tuned.

Standard but necessary disclaimer: This is not advice. Only a complete idiot would think that any of this constituted advice. It's not even vaguely reasonable to consider this to be advice. If you are in any doubt as to the content of this, see a good, independent financial adviser immediately. They do exist.