Archive for February, 2012 | Monthly archive page

The ABC’s of Double Gearing and its risk

Saturday, February 18th, 2012

Report : Ted Baxter

Content : Carey Ramm AEC Group, Double Gearing explained, Storm Financial advice

Friday 18th February 2012

The good thing about a myth is that it is just that, a myth. Myths can be easily  confirmed' or  busted' simply by looking at the truth. The Plain Truth has conducted an extensive analysis of the concept of  Double Gearing' and illustrated a (hopefully) simple explanation for our readers.

There are more myths circulating about Storm than there are truths. Most such myths The Plain Truth has been able to source back to the CBA and Carey Ramm's AEC Group. This myth in particular about double gearing emanated mainly from AEC Group of which Carey Ramm is a principal. The misinformed use of the term Double Gearing had been bandied around for many years by novices and has only recently risen to prominence as a convenient tool by the likes of ASIC, the liquidator, the Parliamentary Joint Committee, and CBA for the purpose of demonising Storm. The CBA in particular, as usual, will promote anything to make Storm look bad and at the same time cover its own position, even something that by their own definition the CBA themselves practice.

The incorrect interpretation of  Double Gearing' being put forward is popularly defined as  borrowing funds from a loan such as a home equity loan or line of credit, and using those funds to purchase investments. The investments are then used as security for further borrowing via a margin loan.' Without any further explanation by those who claim that Double Gearing is of itself intrinsically high risk, a huge leap is then made to a conclusion that because this  self defined' double gearing exists, it must automatically be a bad thing. Hence the perception that Storm Financial had some sort of model that promoted highly risky leveraging through so-called double gearing.

The popular double gearing myth assumes that  risk of leveraging' comes from the number of loans a person has. That is a person who has 2 loans is at higher risk than a person who has 1 loan. Similarly a person who has 4 loans is at higher risk than a person who has 2 loans. This is an absolutely absurd and embarrassing proposition. A person who owns $1million in assets and has 5 loans each of $100,000 is no more highly geared or at any more risk than a person who owns $1milllion in assets and has only 1 loan for $500,000.

The real measure of leverage can not even be derived from the total amount of debt a person has. For example, if Mr Norris has a debt of $1,000,000, this would not be considered as leveraged as an average householder with the same amount of debt of $1,000,000.

The true measure of leverage and hence one of the measures of the risk of that leverage is derived by measuring how much debt a person has compared to how many assets that same person has. This measure is expressed as a ratio called a LVR (loan to valuation ratio). For example if Mr Norris has assets worth $50,000,000 and a debt of $1,000,000 then his LVR is 2% which is very low. On the other hand if a young married couple purchased a home worth $1,250,000 with a deposit of $250,000 and a loan of $1,000,000 and the home is their only asset, then they have a LVR of 80%, which is considered high but as we know happens every day.

Accordingly a measure of risk as a consequence of leveraging is not how many loans exist, i.e. whether there is double, triple or quadruple loans etc but what is the relative proportion of liabilities to assets.

When analysing the Storm strategy there was often (but not always) more than one loan, however The Plain Truths understanding from viewing a number of statements of advice provided to us by various clients of Storm indicates that the correct emphasis by Storm was placed on measuring someone's overall LVR. The usual operating overall LVR range recommended by Storm was from a lower end of 40% to an upper end of 60%. The usual starting margin loan LVR range for retirees was 40% to 50% whilst the range for non-retirees was 50% to 60%. Combine these moderate LVRs with the fact that the investments were made into a highly conservative index fund strategy then the risks seem to be quite sober.

According to a report published on 1 May 2009 in Money Management “Many financial planning dealer groups place a cap on the LVRs clients can employ in margin lending strategies”. The report also stated, “Commonwealth Financial Planning and Financial Wisdom, both Commonwealth Bank of Australia (CBA) owned entities, have maximum LVRs in place of 70 per cent (including credit card and personal debt).”  Whilst this Money Management report was clearly written with the intention of vilifying Storm, the facts, even those quoted by Money Management, show the opposite.

Storm Financials Statement of Advice (SoA), an extract of which is shown below, clearly shows a more conservative LVR cap of 60% than what most other dealers who use margin lending recommend. This cap includes the effect that any so-called double gearing would have.

As further proof that Storm was more conservative than most other groups, a margin loan cap of 65% was imposed by Storm on CBA as Storm felt that CBA's and the industry standard of 70% was overly aggressive.

The extract above is from the CBA agreement with Storm dated 18th May 2007 and clearly indicates that a 65% margin loan LVR starting cap existed for Storm clients. Interestingly this clause also contemplates that markets might fall by reference to the words, “Should a client find themselves at LVR of 65% or above…”

The good thing about a myth is that it is just that, a myth. Myths can be easily  confirmed' or  busted' simply by looking at the truth. As you can see from the above explanation and comparisons, Storms approach to gearing was relatively conservative, the double gearing concept portrayed is a figment of the imagination and the number of loans can not be a measure of leverage risk.

Myth 1: Storm geared clients to 80%

Myth 2: Storm Double Geared is clients

P.S. Actual definition of double gearing according to…

Double Gearing is Used to describe situations where multiple companies are using shared capital to buffer against risk occurring in separate entities without the proper documentation of exposure.

Double Gearing : The act or practice of two or more companies pooling their risk in which each places capital in the other company. In one of the most common examples of double gearing, an insurance company buys shares in a bank, and, in exchange, the bank extends credit to the insurance company.

Double Gearing : A situation in which a number of companies will pool their overall risk by placing capital with each other.

The Plain Truth has been inundated from Storm clients with the question: What can we do to help? The following 2 actions each and every one of you should do.

1) Pass on the information on this website to as many people as possible.
– Family

– Friends
– Neighbours
– Your Professionals (e.g. dentist, doctor, accountant, financial planner, bank manager and bank staff)
– Politicians (local, state and federal)
– Anybody you can…

2) Contact Senator John Williams who is one of the good guys and direct him to the truth with the aim of reopening the Parliamentary Inquiry. John can be contacted via email at senator.williams@aph.gov.au or 02 6721 4500 or 0427 029 918

The Editor

The Plain Truth,
PO Box 2783
New Farm QLD 4005

Content : Carey Ramm AEC Group, Double Gearing explained, Storm financial advice

Colonial Geared Investments plays God

Monday, February 6th, 2012

Report : Tom Tucker

Content : CGI terms and conditions, Margin Lending LVR, Margin Call LVR

Monday 6th February 2012

Much has been made about the assertion that it was always the borrowers obligation to monitor their own margin loan. Whilst is contractually clear that the borrower did bear the responsibility to monitor their own margin loan, it is a myth that a borrower was able to do this by determining the value of their portfolio with reference to unit prices from the fund manager. This cunning myth that has been promoted again by the CBA does not hold up under scrutiny.

The good thing about a myth is that it is just that, a myth. Myths can be easily ‘confirmed’ or ‘busted’ simply by looking at the truth.

Clearly according to CGI's terms and condition the borrower is responsible for determining if they are in margin call.

Furthermore the terms and conditions explicitly state that the bank is not obliged to notify the borrower of a margin call.

This leaves the borrower in a position where they must determine when their loan s subject to margin calls. That is, the borrower must know at all times what their current loan to security ratio is (LSR). The current LSR as determined according to the following extract from CGI's terms and conditions.

The borrower then must make sure that their current LSR does not exceed as CGI defines as the base LSR + 10% if the borrower is to avoid margin call. According to CGI, the borrower must have the requisite mathematical skills to calculate the weighted average of the total amount the bank will lend against each security. This is calculation also requires the borrower to know the total market value of the security.

Now that the borrower knows how to calculate their own LSR and base / margin call LSR's, all they have to do know the  market value of the secured property' as defined in CGI's terms and conditions.

The glib assertions that CBA's victims have endured is the foolish proposition that  all they had to do is go to the fund manager to get the value of their portfolio which would then allow them to work out whether they were in margin call or not'.

IT IS NOT SUFFICIENT FOR THE BORROWER TO SIMPLY APPROACH THE FUND MANAGER, STOCK BROKER ETC AND REQUEST THE VALUE OF THEIR ASSETS BECAUSE THE MARKET VALUE IS DEFINED IN THE TERMS AND CONDITIONS AS WHATEVER CGI ASCRIBED IT TO BE AT THEIR OWN DISCRETION.

Accordingly as can be seen in the extract above from CGI's terms and conditions, CGI which puts itself in a position of GOD in all things, is the only source of information about the market value of the security that CGI will accept. No other source can provide this information.

Try and figure this one out if you can? As at 30/11/08:-

– CBA data on client statement indicates that client IS in margin call with an LVR of 106.22% and a margin call LVR of 100%.

– CBA data to Storm indicates that client IS NOT in margin call as with a same LVR of 106.2178% because margin call LVR is CBA's fed to storm is 106.298%.

On the one hand the CBA is telling the client, in their Nov 08 statement which the client would have received in Dec 08 after the event, that they were in margin call on the 30th Nov 2008. On the other hand the CA is telling Storm that the same client on the same day is not in margin call.

Above : CGI loan statement to client
Below : CGI data feed to Storm

So now dear reader you are left to unravel which is the untruth wrapped in an enigma inside of a deception. We acknowledge W Churchill.

– CGI, the fountain of all knowledge, forwarded statement client in Dec 08 showing that they were in margin call on the 30th Nov 08.

– The same fountain of all knowledge sent feed to Storm on the 30th Nov 08 indicating that client was not in margin call.

– The real position is that client first went into margin call on the 9th Oct 08.

– The 30th Nov 08 information from CGI was useless because this client had been completely sold out by CGI and without authority on the 24th Nov 08 showing that the information that Storm received in the feed and the subsequent statement that the client received was a complete waste of pixels, ink and paper.

Further evidence of CGI's errors and inability to recall that they have already performed unauthorised full redemptions can be found at http://www.commonwealthbankdeception.com/art05.htm

Myth : Borrowers could work out their own security values

The Plain Truth wishes to thank the former Storm client who provided us with their statement and helped alert us to the anomaly and a special thank you to the courageous person within the Commonwealth Bank receivers office who shall remain unnamed and to whom we are deeply grateful for providing us with the data. The Plain Truth asks its readers to send in any evidence about lies from any of the banks, particularly CBA. You can forward evidence to The Plain Truth through our  contact us' tab. Thank you.

More importantly please, please help spread the word.

The Editor
The Plain Truth,
PO Box 2783
New Farm QLD 4005

Content : CGI terms and conditions, Margin Lending LVR, Margin Call LVR