Money & Investing - Banks.com

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One of the cornerstones of executive compensation is the ability to enjoy stock options. Indeed, many of the top paid CEOs of 2008 reaped the benefits of stock holdings. The value of stock holdings can be quite lucrative, since as the stock market improves, so too does the executive compensation. And that is certainly the case right now. Many CEOs and other executives are enjoying a pay coup that has to do with the large amounts of stock awarded earlier this year. MarketWatch reports on how many executives — especially in the bailed out financial sector — are enjoying the advantages bestowed upon them by stock options:

“Executive pay at top U.S. financial firms stands poised for spectacularly rapid recovery,” said the Institute for Policy Studies in its annual compensation survey. “One reason: These firms lavished new stock awards on their executives earlier this year, as share prices hit bottom, and these awards — thanks to the bailout — have inflated in value.”…

For them, big market declines like those suffered in 2008 “quickly translate into opportunities, mainly because corporate boards so often react to such declines by handing executives new batches of stock options, all exercisable down the road at the current low share price,” the IPS said. “To make future windfalls even more certain, boards of directors also routinely increase the number of shares their executives can option whenever hard times hit,” it added. “With more shares in play, even a tiny rebound in share price can translate into a handsome reward.”

These executives are taking advantage of the classic stock investing rule: Buy low, sell high. Of course it works even better when you are just handed massive amounts of stock at rock-bottom prices. As the recovery moves forward, these executives are likely to reap the benefits. First, some of them made poor decisions that led to the financial crisis, then they were bailed out, and now, thanks to executive compensation perks, they stand the chance to be rewarded handsomely.

One of the biggest problems with mortgage backed securities prior to the financial market meltdown was the fact that many of the “pools” of mortgage backed securities were murky. A certain percentage of high risk mortgages were mixed in with good quality home mortgage loans, but the ratings did not reflect these risks. Many investors thought they were investing only in high grade home mortgage loans, when, in fact, they also held a certain amount of risk that they were not aware of. Naturally, when the subprime mortgage crash began, and many of these mortgage backed securities turned out to be exposed to risk, there was a massive attempted exodus from these investments.

However, mortage backed securities are an important part of the mortgage industry. They represent a needed secondary market that helps provide continued capital for the housing industry. So efforts have been underway since the middle of last year to overhaul mortgage backed securities. Julie Messina reports in the Examiner on the thrust of new mortgage backed securities regulations:

Senior industry policy makers and ASF professional staff are developing transparency, disclosure, and due diligence standards for new Residential Mortgage Backed Securities (RMBS).  On July 15, 2009 the ASF issued the Final Release of the ASF RMBS Disclosure and Reporting Packages.   If you look at the loan level data fields that begin on page 37 of this document you will have a better appreciation for how the industry is holding industry participants accountable for the accuracy and integrity of the mortgages that make up a pool of loans. There is no room for error. Those looking for a loophole to profit financially at the expense of others will not be able to do so.

For now, disclosure is a major part of the new regulations. Indeed, many of the new investing rules are centered around disclosure. It is important for investors to be able to make informed decisions about their investments, so that they understand the risks involved.

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Apparently a Ponzi scheme that ruined the life of many is worth about 150 years in prison. While some may get some satisfaction from the fact that this judge completely threw the book at Madoff, the fact of the matter is that satisfaction is about all that is available. (Although this probably isn’t over. Next up: The appeals process.) Most of Madoff’s victims will have to work hard to overcome the ruination that has affected their lives. And many others will, in turn, be wary about investing with “masters” and “insiders”.

And that’s not such a bad thing. Instead of relying on someone else to make all of your investment decisions, it is a good idea to do your own research and make some of your own decisions. After all, it’s your future. Most money managers are more concerned about their futures than they are about yours. While most investment professionals and brokers are probably not crooked, and they are probably doing an adequate job, the fact remains that they have their own interests to look after. And their interests may not necessarily coincide with your best interests. You might be better off with other products and services.

Stock market gains

The news about Madoff hasn’t dampened investment today; in fact, the Dow is moving higher. Bulls are trying to sustain a rally that began with a positive open this morning. Other news that is supporting a stock market rally includes:

• UBS may settle with the U.S. government over concerns that the Swiss bank helped U.S. citizens avoid paying taxes.
• Watson Wyatt and Towers, Perrin & Crosby are merging in a $3.5 billion deal.

While Madoff will likely remain in the news for most of the day (it’ll probably be the biggest story of the week), there are other positive signs for stock investors. Who knows? Perhaps this week will be one of gains for the stock market.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.