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Saturday, July 4, 2009

A case study in greed ?

Once upon a time there was a retired couple in their late 60s, with past professional occupations, living in their completely debt-free and paid-off comfortable home worth an estimated $420,000, and with a $340,000 superannuation to fund their retirement.

Then, in May 2004, they joined Storm Financial and borrowed against their house and their superannuation to leverage themselves into more and more investments, and releveraged again as those investments grew in value.

Twelve loans later, at the end of October 2007 (which also, in hindsight, was the end of the bullmarket run), their investments had grown to $2.9 million and their loans to $1.8 million. They now say they began to feel a bit uneasy at that time but did that stop them from continuing with their financial highwire act? Oh no! They borrowed again, $252,000 in February 2008 and $75,000 in April 2008. No doubt, they would have borrowed more except that by this time they had over-extended themselves in an already declining market.

In early 2009, the market was half the value it had been in October 2007. All their loans had been called in; they'd lost their house, all their investments, and have since been relying on a Government support pension to survive.

What was this elderly, retired couple doing with a highly leveraged investment portfolio? Having worked and saved all their lives and accumulated a comfortable financial nest-egg, what possessed these people to want to become multi-millionaires so late in life? Can they now see the stupidity of it all? It doesn't look like it!

"In mid-December of 2008, through no fault of our own, we were suddenly thrown into a dire financial situation" and, playing the old-fogey card, "How come [the Bank] approved a $252,000 loan with a 30 year term against the family home to a retiree who was 71 years old?", they bleat in their submission to the Parliamentary Joint Committee, which is receiving hundreds of similar letters in response to its inquiry into the excesses of the recent bull market and its aftermath. My response? "Do you take cheese with your whine?"

People travel overseas and stuff up. Then they cry, "The Government must help us!" Please note: we are the government and we will not pay for your follies. People get caught out without adequate insurance. Then they cry, "The Government must help us!" Please note: we are the government and we will not pay for your stupidity. People engage in harmful acivities (smoking, drinking, drug-taking, ec.) Then they cry, "The Government must help us!" Please note: we are the government and we will not live your lives for you. People make high-risk investments. Then they cry ..... need I go on?

If you want to listen to more pathetic cries of "The Government must help us!", enter their forum but abandon all hope to hear many logical arguments or even one mea culpa from those pitiful 'victims', aka 'would-be multi-millionaires whose timing went wrong.'

Here's an article that comes a couple of years too late, especially the warning, "4. Tread warily with debt and avoid it if at all possible.When it comes to stocks, debt is an accelerant. It turbocharges those gains when the market is running hot. But during the inevitable crash, it will destroy you. The most you can lose with your own money is 100 per cent. With debt, you can lose a hell of a lot more. Just ask anyone who invested with Storm Financial or who was enticed by banks offering margin loans for shares. When the property market falls, banks rarely call in a loan or ask you to top up the security. With shares, they don't hesitate."

There will be endless inquiries and long, drawn-out court cases over the Storm Financial saga. In the meantime, the only way those would-be multi-millionaires can vent their frustrations will be by attacking one of these "Smash Me Manny!" dolls. Click on the image for more details.