Friday, October 3, 2008

tthe sakvithi scandal that is inevitable again and again

No matter what the Central Bank or government says, people always try to find a better return on investment for their money. In a country where the annual rate of inflation is hovering around 25%, only dodgy deposits offer returns higher than the rate of inflation, and accordingly rich and poor alike invest in such companies. One just has to cautious and follow a few rules.

Rule no 1 – too much of a good thing cannot last forever, and therefore be cautious how long you can expect high returns by just holding a 6month CD
Rule no 2 – never put all your eggs in one basket as every basket has a chance of a leak whether it is metal, wicker or plastic. Have many baskets.
Rule no 3 – if it too good to be true, it probably is not true, so stay away.
Rule no 4 – don’t risk your money if you are over 50 as the period you have left to earn any loss is less, and therefore your chance of recovery is slim.
Rule no 5 – seeing is believing and don’t count on a return until you actually receive the money as all pieces of paper showing CD amounts are just that.

These scandals are daily occurrences and will continue until you can eliminate greed. Be cautious and follow the rules above, and then the risk can be reduced, not totally avoided. The SL case is the same as the US debt security scandal, but in reverse, where the depositors have been swindled, and are holding worthless paper, where as in the US Institutions are holding worthless paper, as people, the Joe Blow’s of this world are unable to meet their obligations because unsafe lending practices were adopted by lending institutions. The common denominator is greed, and securities due to the rating of the debt carried high rates of interest, just because of the level of risk.

EAP a well-known lender’s certificates of deposit pay 24% as they purchase gold, which has been appreciating in value. Jewelry is made and sold. When pawned, a higher rate of interest is charged on the borrower, using the pawned asset as collateral, giving the depositor some sense of satisfaction that the deposit has some gilt edge! As it is registered under the Central Bank there is some additional tracking, but I am not sure exactly what they require as covenants for this registration. It is therefore not wholly without risk, as this institution could fail with depositors losing their funds, and hence follow the rules set out above and minimize your risk, the only way you can. Of course there are additional factors like the size of the institution one should take into account, but size is no guarantee of security.

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