Our guest this week is a fascinating guest to me. Folks, he s joining us from Boston. Now, he has his PhD from Harvard University in economics. He also got his undergrad degree from University of Pennsylvania in economics. He is currently a professor of economics at Boston University. His name is Dr., and he s joining us to talk about a very interesting concept about the SIPC. Doc, welcome in. It s a pleasure being with you. Yeah, the issue is not really a concept. It s a huge problem for anybody with a brokerage account. What happened in the aftermath of the Madoff scandal the insurance company called SIPC, Security Investors Protection Corporation, which is a company that Congress forced Wall Street to set up to insure people against fraud in their brokerage accounts. Whenever we go into a brokerage office we see this sign that says, SIPC, and we think our brokerage accounts are insured. What SIPC did in the years running up to Madoff was collect insurance premiums from companies like Goldman Saks and JP Morgan of $150 total for all their brokerage accounts per year. When Madoff exploded, SIPC was facing claims of up to $500,000 from thousands of people. Of course, they didn t have the money, because they weren t collecting the premiums. They basically had been running an insurance scam all these years pretending they would never have to pay off. Instead of actually paying the victims what they did is they got the [inaudible 01:42] New York to make the law such that if they declare a fraud a Ponzi scheme and they have all the ability in the world to do that. Any brokerage account fraud can be declared as a Ponzi scheme. Then, what they ll do is any money that you ve taken out that exceeds what you ve put in so, if you put money in years ago or decades ago, you ve earned a return, and you take out that money and spend it well, if you have money in your brokerage account, all the money you have left in your brokerage account you won t be able to get any insurance protection on. You lose the $500,000 in protection that they ve been telling you that you ve had. In addition, they can sue you for up to every penny that you withdrew over the last six years. Consequently, none of the brokerage accounts are safe. I ve been writing columns saying, Close your brokerage account. I have friends, relative, and colleagues at Washington University who have been caught up in this Madoff scandal. In addition to the Madoff fraud, SIPC has been running its own Ponzi scheme in the way it s been conducting itself. They ve got the courts to do something that put everybody at risk if you ve got a brokerage account. If you had a brokerage account, you earn money, and you spend the money you can t sleep for the next six years, because you can be sued for the money you took out. The situation is different depending on each person, how much they took out, and how much the put in. Potentially, for every penny that you took out you can be sued. I can give you a very simple example if you d like to make it clearer. Suppose you ve got somebody who put $200,000 in 40 years ago when he was 30. Now, he s 70, and the money has accumulated up to $3,000,000. A couple years ago, he took out $1,000,000 to pay for kids college or someone had an emergency operation.
He s got $2,000,000 left in his account. There s a fraud declared on his brokerage firm and the brokerage account. He goes to SIPC and says, I was counting on the $2,000,000 to retire on. I ve got no money left. Give me the $500,000. They say, No. You took out more than you put in. You took out $1,000,000, but you put in $200,000. Now, are we not only going to cover $500,000 of your $2,000,000 loss, but we re going to sue you for $800,000, because you took out $1,000,000 and only put in $200,000. Therefore, you are a thief. You are a net winner. You have participated in a Ponzi scheme. You are not a victim. You are one of the perpetrators the victims are being called criminals. You took your money out over the last six years, and therefore you owe us $800,000. That s exactly what s happening right now to Madoff s victims. With the Stanford Ponzi scheme Allen Stanford ran a $7 billion Ponzi scheme. What they did is said, We don t owe any money on that either, because we are going to declare the money that was contributed by the Stanford victims was given in exchange for CDs. Of course, the CDs were never purchased. The money was just taken and Stanford used it personally, and to keep the rest of his scam going. Anyway, the fact that it was called CDs allowed SIPC to say, Guess what? You weren t investing with Allen Stanford, but you were actually making a loan to Allen Stanford. You are a business partner of Allen Stanford. You are actually not entitled to any insurance protection whatsoever, because you bought CDs, and you actually invested in Allen Stanford s brokerage firm. These are the lengths to which SIPC is going to avoid paying legitimate claims. Nobody is actually insured by SIPC in any real sense, because the two biggest cases of fraud in brokerage accounts have actually criminalized the victims. Beyond that, they ve set up things through the courts at this point where if you do have a brokerage account you are incredibly at risk for spending your money. You put money in. You think you re going to make a good return. You do get a good return. That s the American idea, right? That s the capitalism idea. You should do well on your investments. Then, you spend your money and are sued for it. Folks, we re talking to Boston University professor. He s also got his PhD in economics from Harvard. His name is Dr.. He s onto something here. You re on a good path here, because I ve seen a lot of people see SIPC see insurance in the name. In an article I read that you have been quoted in, you were asked if any brokerage accounts out there at all are safe. What s your answer on that? I believe none are. I had somebody check with Vanguard the other day. Vanguard, I would think would be the safest place around, and you find out that Vanguard I can t say for sure. This is what I ve found through a third party. Vanguard is custodian for itself just like Madoff was custodian for itself, or at least I believe that s the case. That s what I was told. They have this secondary backup insurance, but it s only insurance to cover SIPC. If SIPC can t cover what it said it was going to cover they can come in, but
it s a very small amount of money. It s extremely minor relative to the size of their brokerage accounts. If SIPC says they don t owe you anything that insurance doesn t kick in. It s another scam on top of this SIPC scam. This secondary level of insurance if you read for Fidelity, Vanguard, or any of these companies about their backup insurance it is again another scam. I don t know who Wall Street thinks they re kidding here, but in the end if the word gets out through your radio show, other radio shows, TV shows, and media that the brokerage accounts are extremely dangerous Madoff and Allen Stanford may seem like twice in a century kind of things in terms of Ponzi schemes, but actually the New York Times reported there is a Ponzi scheme being discovered every four days in this country. Wow. These things are a dime a dozen. SIPC, at any moment can decide your fraud in your bigger brokerage account is a Ponzi scheme, because there s no clear definition of a Ponzi scheme in economics. You know, when you talk about these scams that are built upon other scams I call those, Scam skyscrapers. When they fall, they call pretty bad, don t they? Yeah, so I m telling everybody the truth which is, Close your brokerage account. There is a bill in front of Congress. Congressman Hensarling is deciding whether or not to push it through his finance committee there in the House. If your listeners go to my website, which is just kotlikoff.net and you look at the columns I ve written about SIPC there s a column that I invited the former controller of currency, James Smith to write I m not making this stuff up, and it s really bad. It s really dangerous, and I would not touch a brokerage account with a mile-long pole. Let s talk about this now. What is your opinion of this is scary. I ve never really liked this. What is your opinion of banks housing major brokerages in their buildings or in their whole realm of doing business these days? I think the whole thing is very dicey. The fact is, when you buy securities they re in street name. For example, with Vanguard and I think any of these major companies you can buy GM stock, and it s held in street names, or bonds, or whatever. What that means is they can go and borrow those securities, and then they could your security is in
somebody else s hands. They don t have your name on it. They can borrow, and invest in something highly risky that has lots of open exposure. You ve got a $700 trillion or so size derivative market. The magnitude of this stuff is just amazing. You ve got some road trader in one of these brokerage accounts bring down the entire darn thing. Your security is not your security. It s in street it doesn t have your name on it. It s been lent out, so somebody else has a claim before your claim on your own money, on your own security. Then, SIPC will turn around and say, Well, that was a Ponzi scheme. Guess what? You re not insured, and you actually owe us money. It s like people buying gold and have somebody keep the gold in their safe instead of your safe. We ve got time for one more question here. This is a good one, I think. You have students you talk to all the time. What do you tell your students right now about when they get out into the real world the money world, and they start making money? What should they do with their money? Should they do the 401K like everybody does, or what do you tell your students to do? Yeah, I think they should diversify. When you re young, you should certainly be in equities. I think long-term bonds now nominal bonds, whether they re government bonds or corporate bonds are very risky, because the Federal Reserve has been printing so much money in the last seven years it s just amazing. It s like nothing we ve ever seen, so there s always this potential out there that money could get loose into the economy and start leading to huge inflation. I would tell people to stay away from longterm nominal bonds. Inflation index bonds are safer. Buy bonds from countries that are actually running responsible fiscal policies, which our country is not. It s actually in worse shape when you look at all the liabilities, almost all of which are off the books. Social Security benefits, Medicare benefits, Medicaid benefits I m not opposed to these programs. I think they re vital, but the way they re funded is far worse than what s going on in Detroit. On top of all that, how you hold all your money I would say that a mutual fund that has a third party custodian is a safer way to invest these days with a brokerage account. I know people personally that are being sued. They lost their entire retirement. They didn t get the $500,000 insurance. Now, they re being sued by these people running SIPC to get money back to hand over to other victims. They re engaged in a redistribution among victims. Over half those Madoff victims got nothing back from Madoff. Then, they got nothing back from SIPC, and they re being sued. Many of those are being sued by SIPC. Wow. Would it be fair to say that folks out there when talking about trying to save for retirement they really need to check and make sure they have a custodial account, their advisor is using a custodial account that they re not related to, and the advisor has no
behold in the relationship of the places he s putting the money for them. Is that right? Yeah, and that the custodian is also not a brokerage account, and those securities are in the person s name, and not a street name. It may just be safer to buy bonds directly from a company or stocks from a company, and put them under your mattress. I think that s actually safer today than using a SIPC insured brokerage account. I would say in a sure run you know, these guys have all kinds of lines. You could talk to your broker and they can say all kinds of things that aren t true, just like I heard secondhand from people speaking for Vanguard. They said, Oh, Vanguard s perfectly safe, because it s owned by the investors. Well, that has nothing to do with this issue. I think the safest thing for right now, if you re going to hold individual stocks and bonds, get those securities and get them in your safe deposit box or maybe at the post office if you can have such a box there. I think you can. That might be the safest place or put them under your mattress, or in a safe in your house. These brokerage accounts are not safe right now until this bill that Congressman Hensarling has to push through Congress, which I encourage everybody to contact him who s got a brokerage account. Contact his office and ask him, What s the delay? Why have you been sitting on this bill? It s time to get it going. Dr., Professor of economics at Boston University. Thanks for your time today. It s my pleasure. Thanks.
Laurence J. Kotlikoff Laurence J. Kotlikoff is a William Fairfield Warren Professor at Boston University, a Professor of Economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Fellow of the Econometric Society, a Research Associate of the National Bureau of Economic Research, President of Economic Security Planning, Inc., a company specializing in financial planning software, and the Director of the Fiscal Analysis Center. Professor Kotlikoff is a NY Times Best Selling author and an active columnist. His columns and blogs have appeared in The New York Times, The Wall Street Journal, The Financial Times, the Boston Globe, Bloomberg, Forbes, Vox, The Economist, Yahoo.com, Huffington Post and other major publications. In addition, he is a frequent guest on major television and radio stations. In 2014, he was named by The Economist as one of the world's 25 most influential economists. In 2015 he was name one of the 50 most influential people in Aging by Next Avenue. Professor Kotlikoff received his B.A. in Economics from the University of Pennsylvania in 1973 and his Ph.D. in Economics from Harvard University in 1977. From 1977 through 1983 he served on the faculties of economics of the University of California, Los Angeles and Yale University. In 1981-82 Professor Kotlikoff was a Senior Economist with the President's Council of Economic Advisers. Professor Kotlikoff is author or co-author of 19 books and hundreds of professional journal articles. His most recent book, Get What's Yours -- the Secrets of Maxing Out Your Social Security Benefits (co-authored with Philip Moeller and Paul Solman, Simon & Schuster) is a runaway New York Times Best Seller. His other recent books are The Clash of Generations (co-authored with Scott Burns, MIT Press), The Economic Consequences of the Vickers Commission (Civitas), Jimmy Stewart Is Dead (John Wiley & Sons), Spend Til the End, (co-authored with Scott Burns, Simon & Schuster), The Healthcare Fix (MIT Press), The Coming Generational Storm (coauthored with Scott Burns, MIT Press), and Generational Policy (MIT Press). Through his company, Professor Kotlikoff has designed the nation's top-ranked personal financial planning software and Social Security lifetime benefit maximization software.
Peter J. D Arruda Peter J. D'Arruda is President of the IARFC (International Association of Registered Financial Consultants), an Investment Advisor, and has been in the financial arena for nearly 25 years. He is the founder at a financial firm designed to help his clients "Cross the street of life." At Capital Financial Advisory Group, LLC he and his team strive to help their clients take the worry out of living in retirement. Known as "COACH PETE" to most of his clients, Pete has made it his lifetime goal to assist his clients in achieving the levels of success they desire. He has authored 6 books and co-authored 2. Two of his books have reached the bestsellers list on Amazon. The most noteworthy book, Successonomics, is one that Coach Pete co-authored with Steve Forbes. But, by far, his favorite book just happens to be his most recent, "7 Baby Steps to a ridiculously Reliable Retirement Income" Each week he hosts the wildly popular, nationally syndicated, Financial Safari radio show, heard by millions each year. You can listen to past shows on itunes and by visiting FinancialSafari.com He has just been named to the prestigious Forbes Leadership Council and will be submitting at least 6 articles a year to Forbes for their readers' print and web enjoyment. He graduated from The University of North Carolina in 1988. is WINNER OF: 2 EMMYS 2 Quillys (best-selling author award) 3 EXPYS He is a proud father of daughter, Caroline, age 11 with his wife, Kim.