Chingo De Dinero

I always wondered why my credit card company was located in South Dakota. I mean, I have no reason to think it is a bad place, but where my credit card would come?

So, the quick and easy reason is these two states have abolished usury laws. What exactly is usury, you might ask, think of it as the laws to protect people from USING other people. In particular, here, it is the interest rate you can charge. So, they can charge basically any interest rate they want. This is really great if you ask me, freer the better, we still have competition to protect us.

Next, I started thinking and why does it matter if they are where they are, I am in North Carolina, so NC laws should apply. Nope, wrong thinking…per “Marquette Nat. Bank v. First of Omaha Corp.”, the laws of where the bank is chartered is what matters. There you have it, since they are located where they are, they can charge you whatever they want.

On a side note, this is how some payday lenders get around interest rate caps (usury laws). The physical locations are just agents of the banks, which are in different states. Some states have closed this option, such as North Carolina :-(.

Also, Delaware seems like such a great place, at least by how free their state laws are…if it were only warmer, it would be heaven to me.

It is always interesting, to me, why external auditors must be used by all publicly traded companies. It all began back in the early 1930s. If you are at all familiar with American history, for the time, this is during the great depression. If you are not familiar, basically the late 1920s were high times, then everything came crashing down, the stock market, banking system, basically the economy in general. I do not want to get too much into the cause of this, but will discuss the government’s reaction.

One of the first things the government did was set up the FDIC, to insure bank deposit, thus improve trust in the banking system. Also, the wonderful Social Security program came along, to ensure our elderly are financially secure. Many other actions were taken, but to stay on track, laws were passed in 1933 and 1934 to regulate public companies (created SEC). The laws in 1933 apply to become public, what papers to file, how it must be advertised, what information must be communicated to purchasers, having the financial statements audited, etc. The laws in 1934 apply to ongoing reporting, 10k, 10q, etc. Getting back to my purpose here, the laws in the early 1930s required companies to have audited financial statements to become public, and to have their annual financial statements audited. Thus, guaranteeing business for external auditors.

This is where it began, but now the government has created Sarbanes-Oxley which requires external auditors to give their opinion on a company’s internal controls. So, basically, the external auditors require the company to prepare a ton of paper, and sign off if it is correct or not (not totally true).

The two services I described above are called attests services, which means the external auditors give their opinion, e.g.Financial Statements are correct, Internal Controls are sufficient. There are many other services, tax advise, financial system consulting, management consulting, etc. But, if the attest services, which are required by law, go away, all of the other services which the majority of money if made from is disappear quickly, or at least will be disbursed to different companies (my opinion).

So, if you couldn’t tell, I am not to fond of external auditors (even though I am an Accountant myself). The main reason is because it is government controlled. The only economic argument for them is that the borrowing cost for an audited company will be less, because they will be viewed as less risky. Maybe this is true, but the only way to see is to remove the government requirement, and let the market do its thing.

To recap, external auditors service the purpose of giving their opinion on the accuracy of a company’s financial statements.

Recently I found an investment that I could not turn down First Cash Financial Services (FCFS) at 16.15. Not only did I sell all of my other investments, I also borrowed money to buy more. This brings me to the subject of buying on margins, which is the term for borrowing money from your broker to buy stock. You use your current stocks as collateral for the purchases, allowing you to buy more stock than you would have thought before.

For example, if you put $1,000 into an account and have initial margins of 50%, you can purchase $2,000 in stocks. You then will have another limit for margin, maintenance margin, typically 25%, meaning at all time, you must have 25% equity. So, continuing with the example, original purchase of stock drops from $2,000 to $1,335 (equity 335/ total value 1335).

To ensure that you maintain the “maintenance margin” your broker will conduct a margin call, when you start getting close (I have never gotten one and hope to never). A margin call actually involves a call, where your broker will ask you if you are going to deposit more funds into the account, to increase your equity, or if they need to sell some of you stocks, to reduce the debt levels. If they can not get a hold of you, and it drops to the maintenance margin limit, your broker will sell. There is no way around it, it is a NYSE and NASDAQ requirement.

Another bit of info that is needed to understand margins is that you must pay interest, while you borrow the money. Currently, I am paying around 10%, too high if you ask me. Since the cost is so high I rarely use margins, only at times like this, when I think there will be a drastic change in stock price in a short period of time.

I have talked a lot about the negatives of margins, mainly because they can be very dangerous, but there are some good positives as well. For example, if a stock moves from $10 to $20 and you have $1,000. Plan A, you purchase 100 shares, making $1,000. If you use margins, you can purchase 200 shares, making $2,000 (less interest), almost doubling your profit.

Has anyone seen the latest news on E*Trade? Well apparently Citi sent out a report talking about the write down of some of the loans they have made, and how it would force them int bankruptcy. On no!!!! This is the last thing I want, most of my money tied up with a broker that is bankrupt. They could sell my stocks and use that money to help support their business. Of course, I do not think they would do such a thing, but it does not take too much of an imagination to think of this. So I know banks are FDIC insured up to $100,000, but this does not cover my stocks, who does this?

The answer is SIPC, the is a non-profit organization that insures brokerage accounts from the broker taking your money when they go bankrupt. It was created in 1970 by congress, and per their website have refunded 505 mUSD to investors since then. I could not find the amount they insure, but from what I remember it is $500,000 (if anyone knows for sure, please leave it in a commit). For a little more on them, it is member run, no government interaction. It is important to know that this group does not combat fraud, only bankruptcy.

So there is my answer, if E*Trade were to go bankrupt, I could file a claim with the SIPC and get my stocks back in 1 to 3 months.