Wire Fraud & Your Advisor

As an investment advisor, we rely on the trust relationship developed with our clients for a range of activities.  The basic relationship is that of a fiduciary allowing us to buy & sell investments on your behalf, but our clients trust us with a host of other matters, as well: financial planning, phone calls for one-off advice on an opportunity, or help with the transfer of funds.  We enjoy the chance to serve you on all fronts.

For that reason, we are posting today to alert you to recent industry conversations surrounding wire fraud.  The challenge of fraud has been around as long as money has, but today the sophistication of would-be fraudsters is as great as ever.  And as your trusted partner we are taking steps to help you combat the hoards that would do you harm.

The financial industry has evolved its practices for the movement of money around the use of forms & documents to create a paper trail, and reliance upon original signatures was deemed the gold standard for hundreds of years.  Today, signed paperwork is still important, but in this digital age the creation of original-looking documents (called forgery) is an all-too-simple process.  And with the proliferation of email use, the ability to impersonate and/or dupe someone has never been easier.  At NWIC we work with our clients and their custodians to help combat fraud, and that has required the continual evolution of our processes.

When we are asked by clients to have their custodian move money to their own verified checking account, the chance for fraud is fairly low: after all, the owner of the accounts is the same person, and typically the process of establishing the true owner of the checking account is done at the time the account is set-up.  However, when a client requests that we have the custodian send their funds to a new, unknown party the burden to establish the authenticity of the request is considerably greater.

There is nothing particularly sinister about what’s called a third-party wire – we help clients wire their funds to third parties to buy houses, pay college tuition, or pay medical bills all the time.  Yet, knowing the request is genuine and that the recipient is an authorized one must be completed at each request, and that’s where you will start to notice some changes.  The new standard process in authentication is now to add voice to written request.  Thus, if you send us an email asking us to send funds to a third party (that is, anyone other than yourself), we will not only ask for you to complete and sign a wire authorization form, but we will also need to speak with you.

Typically, we will simply call you at home or on your cell phone to verify the details and ask you a few questions.  This is not only a chance to correct any typos we discover, but it’s also the best way to engage you in conversation and satisfy ourselves that your request is a valid one, and not that of an imposter.  And be aware: the typical fraud attempt relies on a sense of urgency and drama to cause people to act before thinking.  Thus, if you need funds sent from your account, try to provide us with as much advance warning as possible, and keep us updated on the best phone contact for you.  We look forward to speaking with you!

Fannie & Freddie – reports of their death are greatly exaggerated…

The news stories are again surfacing about Congress considering a new federal housing agency to replace the  troubled agencies now supporting the functioning of our mortgage market. As you may recall, the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) were placed under federal receivership during the 2008 crisis, and they have remained there to this day. 

Fannie & Freddie would be perfectly happy to go about their business of facilitating a functioning residential mortgage market under the protection of its federal receivership (think trustee) were it not for a particularly bothersome fact: they are making money again – and lots of it.  In fact, the two agencies just paid $15 billion back to the US Treasury in just the past 90 days as part of the terms of its 2008 rescue, and this has pushed the US Congress & President Obama to each raise the idea that it is time for Fannie & Freddie to draw to a close.

But, wait, you say: don’t we own a whole mess of  Fannie & Freddie bonds?  If these two agencies go away, what will become of those bonds?  The first answer is easy: yes, we own quite a fair amount of agency debt.  As two of the largest debt issuers in the world, just about any bond portfolio will have exposure to these entities, and NWIC is no different.  The second question is the one with which we are more concerned.

The simple truth is that there are roughly $3 trillion (yes, with a T) in direct obligations that need to find a home, and simply ignoring them is not an option (note, we are not talking about “mortgage bonds” that are backed by residential mortgages – these are indirect obligations of the agencies through their guarantees).  The default by a US government agency on this size obligation would make for a global financial catastrophe that would put 2008 to shame. There really is no choice but to repay these bonds as they come due, so that’s exactly what we expect to see happen.  Unfortunately, the news media and government talking heads gloss over this fact, leaving these details to the imagination.

Fortunately for our clients, these details are not something we like to leave to the imagination, so we have taken the time to see exactly what the latest proposal says about these existing bonds.  Sen. Corker from Tennessee has proposed legislation that you can see here, and it’s not until page 132 that we see any mention of the existing obligations of Fannie & Freddie.  Page 134 finally has the important information we’ve been looking for:

Guaranty

There’s not much to look at, but those are the magic words in the current proposal that should give you comfort.  In fact, we’d argue that the terms of support for Fannie & Freddie bonds are even stronger under this proposal.  Originally, the guaranty of these agencies’ debt was implicit – an assumption on the part of investors that is anything ever happened to the ability of the agencies to pay their obligations that the US Treasury would ride to the rescue.  Indeed, that’s exactly what happened in 2008, but the language above in Senator Corker’s bill would make that guaranty an explicit one and remove any further speculation as to the fate of Fannie & Freddie bonds.

To be sure, there is much work to be done before any new federal mortgage entity is created.  Some suggest that it could easily be another 3-4 years before the sausage making of Congress is compete on this, but in the meanwhile we think Fannie & Freddie bonds will (and will continue to) offer our clients a safe, liquid, and appropriate asset class to use in fixed income portfolio construction.

Economic Outlook–Conerly Charts

View the latest charts and comments on the U.S., Oregon, and Washington economies from Dr. Conerly of Conerly Consulting.

We are pleased to re-post Dr. Conerly’s August charts for our clients. Please see his site for more data and comments: www.conerlyconsulting.com. Click the images below for larger versions.

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