Dear Mr. Berko: Please explain why the government is suing Standard & Poor's and its parent, McGraw-Hill. I bought 235 shares of McGraw-Hill at $21 in March 2009. I bought them because I had this bee in my bonnet telling me to. The stock went up to $58 this January, and I had the same bee in my bonnet for weeks, telling me to sell it. I'm kicking myself for not having the courage of my convictions; it's now down 10 points. I don't know what to do. Should I sell my 235 shares, or should I buy more at $48? Now I'm thinking about buying a Treasury inflation-protected securities fund my broker is recommending. I have a $7,500 certificate of deposit coming due, but at age 66, would it be better for me to buy 200 shares of AT&T, which pays 5.3 percent?
BR, Springfield, Ill.
Dear BR: Wow, you're good! I wouldn't have bought McGraw-Hill in March 2009 at $21. The next time that bee is in your bonnet, send me an email with the bee's name and address.
The suit against Standard & Poor's and its parent, McGraw-Hill (MHP-$48), accuses S&P of fraud by intentionally misleading investors about the financial quality and ratings of trillions of dollars' worth of subprime mortgage securities. The suit alleges that S&P management instructed employees to give the highest-quality (Triple-A) ratings to toxic subprime mortgage-backed securities that should have been rated triple-C or lower. Investors, pension funds, mutual funds, insurance companies and state retirement plans relied on S&P's highest rating and purchased what turned out to be the lowest-rated junk securities.
The subsequent losses were biblical in scope, and our economy nearly imploded. The government is suing for $5 billion, a pittance compared with the hundreds of billions lost because investors believed in the integrity and probity of S&P.
Most observers believe that S&P is guiltier than sin.
However, blame also must be ascribed to the investment bankers who purposefully structured these risky mortgages for sale to the public. Goldman Sachs, JPMorgan Chase, Bank of America, etc., certainly knew that these securities were trash but represented them to the public as Triple-A quality. Like knowingly using billions of counterfeit dollars, Wall Street's prestigious brokerages misused the public's trust and peddled them as the real thing. These are the same broksters your employers hired to manage their corporate, state and municipal retirement plans. Now you know why so many pension accounts, during the past few years of a hugely rising market, are still dangerously underwater and can't meet their obligations.
I'm amazed that the consensus suggests that MHP has a high target price of $64 and a low target of $51 this year. However, you may have heard this expression: If you see a cockroach skitter across a kitchen floor, it won't be long till there are many more.
The government's suit could be followed with a thousand more by the numerous municipalities, corporations and states whose pensions have been raped. Sell MHP, and buy AT&T.
I've lost my enthusiasm for Treasury inflation-protected securities because I believe that the government's inflation numbers reflect Washington's politics rather than shoe leather reality.
There are more than 200 categories, with more than 80,000 different goods and services, factored in to make the consumer price index. I understand the selection of those 80,000 items, but I don't understand the dizzy computer-generated mathematical constructs. Nor do I trust the bureaucrats who are paid to calculate that inflation for 2012 was 1.8 percent. Call it a bee in my bonnet or a gut feeling, but if you've recently purchased tires, made tuition payments, rented an apartment, bought an airline ticket, bought homeowners, health or auto insurance, bought a movie theater ticket, taken a cab, renewed an occupational license, purchased groceries, taken your pet to a vet, etc., you know darn well that it's a fictitious number. It's laughable because it's so blatantly wrong! And the government knows it, but you're expected to believe it. Knock knock. Who's there? Big Brother!
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at firstname.lastname@example.org.