June 23, 2024

Time Shares – Another Shattered Dream

Vacation Turns Into Financial Nightmare

Anyone who has vacationed to a tropical resort cannot be blamed for thinking how great it would be to own a piece of paradise.  Those who succumbed to the charms of the omnipresent time share salesmen may now be having deep second thoughts.  Consider the plight of the time share industry:

Major time-share developers, led by Wyndham Worldwide Inc., Marriott International Inc., Starwood Hotels & Resorts Inc. and others, are scaling back their time-share business as investors in time-share loans demand higher interest rates, buyers become more scarce and resales of time shares put downward pressure on prices and demand for new units.

The pullback will reshape some large time-share players. Wyndham, which owns 150 resorts globally and counts 830,000 time-share owners, intends to whittle its time-share business by 40% this year to an annual sales rate of $1.2 billion. That is a big reduction for Wyndham as a whole; its time-share division provided 53% of Wyndham’s revenue last year and 42% of earnings before interest, taxes, depreciation and amortization.

Meanwhile, sales of new time shares have been depressed by a rise in the pool of time shares listed for resale as the foundering economy forces some owners to try to unload their time-share debts and maintenance fees. Carrie Stinchcomb, a sales associate at A Time-share Broker in Orlando, said her office’s listings have increased 30% from last year. However, sales have fallen roughly by half because there are fewer buyers, she said.

Delinquencies on securities backed by time-share loans topped 5% in the first quarter, up from 3% a year earlier, according to Fitch. Starwood, which operates 26 time-share resorts, reported an estimated average default rate of 7.9% at the end of last year on time-share loans it originated.

The hurt that time share developers are feeling may be nothing compared to the plight of those who actually “invested” in time shares.   As an “investment class”, the only apparent rationale for purchasing a time share seemed to be easy financing and the belief that resale prices would increase relentlessly.   Now that values are plunging investors are reflecting on the negative side of time share ownership –  huge upfront sales commissions,  increased yearly maintenance fees, cost of traveling to the timeshare and the cost and complexity of unloading a timeshare in the secondary market.

The default rates on time shares may rise much higher as owners come to grips with the massive price declines that have occurred in time share values.   Many owners may not yet realize the extent to which the value of their investment has declined.  Time shares can often be found on EBay for literally a couple of dollars – eager sellers simply want to dump a unit that carries high yearly maintenance fees.

Here’s a Maui bargain at the Westin in Kaanapali:

STAROPTIONS Westin Kaanapali MAUI Hawaii TIME…

Current Bid: US $17,097.00
Units similar to the one above were being marketed in the 2005 era for $50,000.   Annual maintenance fees are $2,000.

If  you prefer Mexico, here’s another bargain at 92% off the original price.

Playa Del Sol, Los Cabos, Mexico – Buy It Now Price $997, Yearly Maintenance $424
Here is your chance to own a Membership Property (Does Not Expire) at a fraction of the developer price! Studio, One Bathroom (sleeps two),complimentary week! Maintenance fees are billed on odd years only. This club membership allows you to travel to any one of Playa Del Sol’s Resorts. Purchase this exact ownership NOW at a fraction of the original price ($13,500)!! This item is a NO Reserve auction and will be sold to the highest bidder!!

Buying At The Bottom?

Any one trying to sell their time share today is looking at big losses. Those who believe that the Federal Reserve can re-inflate the burst real estate bubble should be buying with both hands.
Disclosures: No positions

CALPERS Pleads Stupidity On Subprime Mortgage Losses

Calpers Blames Rating Agencies For Losses

Fallout from the financial world’s past love affair with subprime mortgages continues as the California Public Employees’ Retirement System (Calpers) announced it is suing the rating agencies.

NEW YORK (Reuters) – Calpers, the biggest U.S. public pension fund, has sued the three largest credit rating agencies for giving perfect grades to securities that later suffered huge subprime mortgage losses.

The California Public Employees’ Retirement System said in a lawsuit filed last week in California Superior Court in San Francisco that it might lose more than $1 billion from structured investment vehicles, or SIVs, that received top grades from Moody’s Investors Service Inc, Standard & Poor’s and Fitch Inc.

By giving these securities their highest ratings, the agencies “made negligent misrepresentations” to the pension fund, Calpers said. Such ratings, which typically accompany investments with almost no risk of loss, “proved to be wildly inaccurate and unreasonably high.

Calpers results for the fiscal year to date as of April 30, 2009 show a loss of 26% and assets of $176 billion.  Calpers assets have declined by a massive $77 billion from $253 billion at 12/31/07.

Calpers return for the 10 year period ended 4/30/2009 was 2.4%, actually a respectable showing compared to the passively managed Vanguard S&P 500 index fund (VFINX) which has declined 2.3% over the past 10 years.

Despite huge losses for the past several years, Calpers has paid out large bonuses.

Calpers, Calstrs award big bonuses despite losses: California’s two biggest public employee pension funds handed out millions of dollars in bonuses last year to their top executives and investment managers, despite losing billions of dollars.

Ailman’s counterpart at the California Public Employees’ Retirement System, Russell Read, received a $208,677 bonus to his $555,360 base pay in August, more than a month after he had resigned from the fund’s top investment job.

Despite continued losses in the market, both funds expect to cut more bonus checks, which they call “incentive awards,” this summer.

Calper’s does not mention that their 10 year investment results could have been higher had Calpers simply invested in bank CDs.  Going forward, Joe Dear, head of Calpers,  is predicting robust future investment returns.  In a recent interview with Barrons, Mr. Dear stated that  “So as a long-term investor, we think the markets are going to produce good returns that will enable us to make our assumed rate of return of 7.75%”.

Apparently Mr. Dear is very confident that the highly paid investment managers at Calpers can achieve investment returns going forward that will be over 3 times better than the past decade.   To achieve returns of almost 8% per year will be remarkable indeed for an economy that many view as being on the verge of a depression.

Fooled by Rating Agencies?

For Calpers to blame the rating agencies for losses suffered on subprime loans seems disingenuous.  The Calpers lawsuit implies that Calpers management did not understand what they were investing in or did not complete the due diligence required of them as stewards of public pension funds.

Calpers money managers have been amply rewarded for outperforming investment benchmarks.   Considering the expertise and experience of Calpers investment managers, none of them came to the conclusion that subprime mortgages were risky?  No one thought that mortgages made to subprime zombies with 550 credit scores and “stated” income would default?   Calpers really thought that subprime mortgages were safe triple A investments just because the rating agencies said so?

Instead of pursuing dubious claims, Calpers management would be better off spending their time figuring out how  to increase investment returns from 2.4% to the lofty 7.75% that is needed to meet future pension obligations.

Disclosures: Position in VFINX

The Perfect Health Care Plan For The Legendary 46 Million

Another Government Solution At Zero Cost

Congress has been working hard lately as one trillion dollar legislative decree after another has “solved” the banking crisis, the global warming crisis and the foreclosure crisis.  In between all of this, an almost trillion dollar stimulus plan was passed to solve the economic crisis of declining GDP growth and job losses.    (See Cost of Easy Money – $14 Trillion and Counting).

Now, as we enter the month of July, Congress is eager to pass  another multi trillion dollar piece of legislative fiat, this time to solve the health care crisis.   We are also told that solving the health care crisis will be achieved at zero cost due to offsetting “savings”.

The goal of providing unrationed, free and universal health care may be more difficult and complex than anticipated.   Health care spending comprises almost 20% of our GDP and involves millions of jobs and hundreds of thousands of varied health care providers all intertwined in a complex network.  Simplistic solutions put together during the frenzied atmosphere of  “let’s get it done this month” are likely to produce many unintended adverse consequences.  Public opinion polls reveal the confusion regarding what should be done to improve the US health care system.

Confused US Has Lots To Say About Health Care

Americans are passionate and confused about it — and their opinions are all over the lot.

A CNN-Opinion Research poll found that 51 percent of Americans favor Obama’s health-care plan, but a Wall Street Journal-NBC poll found that only 33 percent think it is a “good idea.” A New York Times-CBS News poll found that nearly six in 10 would be willing to pay higher taxes so that all could be insured, but a Kaiser poll found that 54 percent would not be willing to pay more to increase the number.

A Quinnipiac University poll found that a majority — 54 percent — believe that reducing health-care costs is more important than covering those who lack coverage, while the Times-CBS poll found that 65 percent thought that insuring the uninsured was a more serious issue. A Washington Post poll found that 57 percent of Americans are dissatisfied with the health-care system — but 83 percent are satisfied with the quality of their own care.

In short, when it comes to health care, the state of the union is confused. The confusion won’t be cleared up by the complexity of the debate, with all the jargon about community ratings and insurance exchanges and risk adjustments and guaranteed issues.

Reading some of the latest commentary on health care reform, our national leaders have tried to dumb down the issue and provide simplified answers for confused Americans.

Here are the promises:

Obama vows that health care reform will not add one dime to the federal budget deficit.  The plan to provide government insurance to those who cannot obtain private health insurance will be paid for by collecting premiums from the newly insured.

Drastic cuts in Medicare and Medicaid reimbursements to specialists and other health care providers can be used to pay for the cost of providing medical services to the uninsured.

The legendary 46 million uninsured people in America will have the unlimited health care they are entitled to.

In order to achieve universal and affordable health care, time is of the essence and Congress needs to quickly approve legislation by the end of July.

Here are the realities:

The Congressional Budget Office estimates the cost of health care reform at $1.6 trillion over the next ten years.   Based on the routine cost overruns of every government program, expect this number to be at least twice the estimate.

“Savings” obtained by cutting reimbursements translates into reduced jobs and incomes for the companies employing health care workers.

If there are really 46 million people being denied health care in this country, we would literally be tripping over the dead and dying every time we ventured out.  Where are the headlines citing real people who have perished from unavailable health care?  This hyped and unverified figure exaggerates the “health care crisis” for political purposes.

If 46 million people actually have no insurance, the logical question is why?  If  many of the uninsured do not have health insurance because they cannot afford the cost, exactly how is the government going to cover the cost of providing health care to the uninsured by “collecting premiums”?

Health care, essential to all of us,  is an issue for many Americans.   Those who believe that Washington can provide universal health care without “adding a dime to the federal deficit” are in fantasy land.

And this from a major hospital in Connecticut in a letter to their employees:

Tough times continue for “X”  Hospital and for health care overall.  At this time last year, our financials were making a comeback – not so far this year.  As unemployment rises in the local area, we’re seeing more patients with government insurance.  We already know that we will be reimbursed even less for these patients next year.  In our immediate region, Bridgeport, Greenwich, New Milford and Waterbury hospitals have laid off workers to make up for financial losses.

The initial results of government “cost savings” generated by lower reimbursements are resulting in health care job losses and weakening the financial condition of many hospitals and other health care providers.  Given the size of future promised government “savings” from reduced payments to health care providers,  who will be left employed in the health care industry to provide health care?

Stanford Financial Ponzi Scheme – New Fraud, Old Lessons

Stanford Free – Does Crime Pay?

On February 17, 2009 Stanford Financial was accused by the SEC of defrauding investors and engaging in a “massive, ongoing fraud”.  The fraud was perpetrated by seducing investors with “improbable if not impossible” returns on their investments, according to the SEC.  The amount swindled from investors is estimated at $7 billion.

The head of Stanford Financial, Allen Stanford, was finally arrested on June 18th and has been in federal custody since that time.  During a court hearing today in Houston, Mr Stanford entered the standard “not guilty” plea and his attorneys argued for his release on bail.

During the course of the court proceedings it was revealed that:

Texas financier R. Allen Stanford controlled a secret Swiss bank account from which he withdrew roughly $100 million last year, and also tapped the account to pay bribes to the firm auditing his Antigua-based bank, federal prosecutors alleged Thursday during a hearing in federal court.

The billionaire and the executives are accused of orchestrating a massive fraud by misusing most of the $7 billion they advised clients to invest in certificates of deposit from the Stanford International Bank, based on the Caribbean island of Antigua.

Also indicted is Leroy King, the former chief executive officer of Antigua’s Financial Services Regulatory Commission. He was taken into custody by island authorities and will now face extradition proceedings, according to a government official who spoke on condition of anonymity because she was not authorized to discuss the case. King is accused of accepting more than $100,000 in bribes to turn a blind eye to irregularities.

Investigators say even as Stanford claimed healthy returns for those investors, he was secretly diverting more than $1.6 billion in personal loans to himself.

The indictment also says Stanford and the other executives misrepresented the Antigua island bank’s financial condition, its investment strategy and how it was regulated.

Prosecutors argued that Mr Stanford should not be granted bail.

At Stanford’s bond hearing, prosecutors argued he should be held without bond because he might have access to billions of dollars in secret funds.

In court documents filed Thursday, prosecutors also said Stanford faces a potential life sentence, has access to a private jet and has an international network of wealthy acquaintances who would help him, including one who recently agreed to give him $36,000 to pay his lease on a Houston apartment for a year.

Each of the most serious counts that Stanford faces carry prison terms of up to 20 years. But prosecutors say sentencing guidelines could increase his total sentence to life in prison.

Despite the huge financial suffering caused by Stanford Financial to 30,000 investors, as well as the flight of risk, the court set bond at a small $500,000 and gave prosecutors until Friday to appeal the decision. How likely is it that anyone with a secret $100 million bank account and facing a life sentence would be concerned about forfeiting a half million bond by fleeing the US to escape justice?  This is no doubt a question that defrauded investors are asking.

Is This Man Smiling?

Is This Man Smiling?

Courtesy: Reuters

Other remarkable aspects of the Stanford Financial fraud are:

  • How long will it take for investors to be suspicious of firms offering guaranteed rates of return far in excess of what is available elsewhere?  No Ponzi scheme would work without the suspension of prudent judgment by investors blinded by ridiculous claims.  Has no one ever heard of “the higher the return the higher the risk”?
  • This is another case that should have caught the attention of the SEC long before Stanford could defraud thousands of people.  Just as with the Madoff fraud, Stanford blatantly and publicly advertised untenable returns, a classic sign of a Ponzi scheme.  The SEC blithely ignored or was oblivious to the obvious warning signs.
  • It took 4 months to arrest Mr Stanford and he is now on bail, free to enjoy his life.  At this rate of justice, Mr Stanford may get to spend the rest of his life immune from punishment and living a lavish life style courtesy of his secret bank accounts.   Defrauded investors, dolefully seeking for perspective on this matter may consider the remarks of William Gladstone who stated that “justice delayed is justice denied”.

FHA’s New Mortgage Program – Free Home Plus Trip To Vegas

100% Plus Financing Available

The American Recovery and Reinvestment Act of 2009, passed early this year, provides up to an $8,000 tax credit for first time home buyers.   The tax credit refund would be given to the home buyer after filing the 2008 or 2009 tax return.

It was only a matter of time before someone would realize that this tax credit was not helping the prospective FHA home buyers who had difficulty raising the required down payment of 3.5% for an FHA purchase.  The solution seemed obvious – let the home buyer receive the tax credit money upfront to be used for the down payment.

Last week, use of the tax credit for a down payment was officially endorsed by Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development (HUD).  Mr. Donovan stated that “We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans so that the cash can be used as a down payment”.   Mr. Donovan noted that this is one of the ways that the government is working to “stabilize” the housing market.

Mr. Donovan’s plan may actually do more than just stabilize housing – it may set off a buying stampede, multiple offers and bidding wars at the lower end of the housing market.  Consider the following example  of a home purchase using FHA guidelines and the $8,000 home buyer tax credit.

Loan Scenario

On the purchase of a home priced at $80,000 the buyer needs the FHA required down payment of 3.5% ($2,800).  In addition to the down payment, the home buyer needs money for closing costs and prepaid items, which could easily amount to 6% of the property’s purchase price ($4,800).  The FHA also charges an upfront mortgage insurance premium of 1.75%  ($1,400).  The total amount theoretically needed by the purchaser totals $9,000.

In the real world here’s how this deal will be structured:

  • Down payment of $2,800 covered by tax credit – cost to purchaser – ZERO
  • Closing costs and prepaid items of $4,800 can and usually are worked into the purchase price since the FHA allows up to a 6% seller concession – cost to purchaser – ZERO
  • Mortgage Insurance Premium of $1,400 is added to the purchaser’s loan amount and financed by the FHA – cost to purchaser – ZERO
  • Total cash out of pocket by purchaser – ZERO
  • Cash due to purchaser for unused portion of tax credit – $5,200 – enough to easily cover a couple of weeks vacation in Vegas.
  • Based on the FHA’s default rate, approximately 15% of the new home buyers will default shortly after closing. Considering foreclosure freezes and  loan modification attempts, many purchasers can look forward to enjoying payment free housing for 2 to 3 years.

Program Benefits/Limitations

Benefits for FHA home purchaser:   Zero cash outlay to own a home,  FHA financing provided at an all time low interest rate, $5,200 cash bonus to purchaser,  plus a free long term call on the price of housing.  With these types of buyer incentives,  expect to see an increase in home purchases by the first time home buyer.

Higher incomes groups excluded:   For single taxpayers with an adjusted gross income over $75,000 and for married couples with income over $150,000, the tax credit is reduced or eliminated.

Stanford Financial Investigated

Investors Flunk “Too Good To Be True” Test Again

“You only find out who is swimming naked when the tide goes out” – Warren Buffet

The tide has been going out for several years now and we are discovering that many of the biggest players never owned bathing attire.   Tight credit and massive erosion in asset values have exposed the mismanaged or fraudulently run operations that previously papered over their flaws with more credit.    Investors in Stanford Financial, who apparently ignored the common sense rule of “if it’s too good to be true it’s probably not” are likely to be in for a massive shock of reality this week.

According to BusinessWeek, The Stanford Group may hold as much as $50 billion in assets.

Is Stanford’s Financial Offer To Good To Be True?

Financier R. Allen Stanford makes investors an enticing offer: He sells supposedly super-safe certificates of deposit with interest rates more than twice the market average. His firm says it generates the impressive returns by investing the CD money largely in corporate stocks, real estate, hedge funds, and precious metals.

But skeptical federal and state regulators are now taking a hard look at Stanford’s operation—especially those CDs, whose underlying investments seem questionable. Over the past 12 months, the stock market and hedge funds have lost huge amounts of value even as Houston-based Stanford Financial Group continued to pay out above-average returns and claimed to have boosted the assets it oversees by 30%, to more than $50 billion.

BusinessWeek has learned that the Securities & Exchange Commission, the Florida Office of Financial Regulation, and the Financial Industry Regulatory Authority, a major private-sector oversight body, are all investigating Stanford Financial. The probes focus on the high-yield CDs and the investment strategy behind them. According to people close to the investigations, the three agencies are also looking at how Stanford Financial could afford to give employees large bonuses, luxury cars, and expensive vacations. Selling CDs typically is a low-margin business.


In the wake of Bernard Madoff’s alleged $50 billion Ponzi scheme, regulators and investors around the world are increasingly jittery about money-management firms that promise consistently higher-than-normal returns.

Stanford’s CDs, which require a minimum investment of $50,000, offer tantalizing interest rates. The current rate on a one-year CD is roughly 4.5%, according to the bank’s Web site. The average at U.S. banks is about 2%, notes research firm Bankrate.com (RATE). A year ago, the offshore bank sold five-year CDs that yielded 7.03%; the industry average hovered around 3.9%.

The firm suggests in marketing material that it can offer substantially higher rates because the bank benefits from Antigua’s low taxes and modest overhead costs, among other factors. The bank invests in a “well-diversified portfolio of highly marketable securities issued by stable governments, strong multinational companies, and major international banks,” the marketing literature says.

But Stanford Financial and its affiliated bank, both of which are owned by Allen Stanford, offer few details about the nature of those holdings. According to the bank’s 2007 annual report, stocks, precious metals, and alternative investments—such as hedge funds and real estate—account for 75% of the bank’s portfolio.

Stanford’s CDs lack the government insurance that backs certificates issued by U.S. banks.

The financials of the offshore bank are audited by a tiny accounting firm (14 employees) in Antigua called C.A.S. Hewlett & Co.

The offshore bank’s seven-member board of directors is dominated by Stanford insiders, family, and friends.

Stanford brokers who sold at least $2 million of CDs in a quarter kept 2% of the assets, says Hazlett. That’s much more than competitors generally pay their sales forces on such investments. “The primary thing they cared about were CDs,” says Hazlett. “That was all they talked about in meetings with brokers.” But the high yields “never made any sense to me,” he adds. “I never understood how they could generate the performance to justify those rates.”

Funding Commitments Pulled, CD Redemptions Delayed, Assets Invested In Illiquid Securities

An offshore bank at the center of two U.S. federal investigations recently curtailed financing commitments to two small American companies, regulatory filings show.

Some Stanford International representatives have been recently advising clients that they can’t redeem their CDs for two months, a person familiar with the matter said.

But SEC filings show that the Antigua bank also holds majority stakes in a handful of thinly traded American firms.

Stanford Financial Gets More Scrutiny – FBI and SEC Investigate

An investigation into wealthy financier R. Allen Stanford’s operations is intensifying, with the FBI looking into his financial group in the U.S. and regulators in Antigua scheduled to visit his bank there.

Another person familiar with the investigation said the SEC has been looking at the certificate-of-deposit business since at least 2007.

Those people say the agencies now are focusing on certificates of deposit, which are marketed by the financial group’s wealth-management arm and sold by Mr. Stanford’s Antiguan bank. The CDs offer unusually high returns; for example, as of Nov. 28, a one-year, $100,000 CD paid 4.5%.

“The first thing that grabs your eye is the business model,” says Alex Dalmady, an analyst who unveiled concerns about Stanford International Bank in the magazine VenEconomy Monthly but isn’t involved in the investigation. “Taking deposits and playing the stock market — this is way too risky. “

Stanford Blames “Disgruntled Workers”

Feb. 13 (Bloomberg) — R. Allen Stanford, the billionaire chairman of Houston-based investment firm Stanford Group Co., blamed “former disgruntled employees” for stoking regulatory probes into his firm.

Stanford Group pushed its financial advisers to steer clients’ money into the offshore CDs, paying a 1 percent bonus commission and offering prizes including trips and cash for the best producers, according to four former advisers who asked not to be identified.

Marketing material for Stanford Group CDs raised red flags, said Bob Parrish, a financial planner and accountant in Longboat Key, Florida.

The use of the term “CD” to describe the investment was misleading because most investors associate it with a safe, FDIC- insured instrument, Parrish said.

SIB describes the CDs in its disclosure statement as traditional bank deposits. The bank doesn’t lend proceeds and instead invests in a mix of equities, metals, currencies and derivatives, according to its Web site and CD disclosures.

Warning Signs Ignored By All

Yields offered at twice the market average, offshore accounts, huge commissions paid to brokers to draw in more cash, SEC investigation since 2007, extravagant corporate lifestyles, assets invested in hedge funds, real estate, stocks and alternative (illiquid) investments which have all fallen 40 – 50% in value, frantic efforts to raise additional funds, previous regulatory investigations and risky business model.  It is not hard to see the ending to this story.  Once again regulators and investors have shown extraordinary carelessness and disregard of information that was readily available for scrutiny.

This is probably not another Ponzi scheme similar to Bernard Madoff.  It seems more like a case of poor asset management leading to large losses which management then attempted to cover up with additional investor funding.   The end result, however, will be the same as for those who invested with Madoff – a significant loss on their investments.