Republican Fed bill would restrict bond investments (Reuters)

Amazon Cell Phone Center

3 investments for an era of low interest rates (AP)

By MARK JEWELL, AP Personal Finance Writer Mark Jewell, Ap Personal Finance Writer – Thu Feb 2, 5:50 pm ET

BOSTON – The Federal Reserve is making it increasingly hard for investors to earn anything, unless they're willing to accept plenty of risk. Ben Bernanke and his Fed are playing the role of adviser, encouraging Americans to get a little more adventurous by shifting savings out of low-yielding bonds and putting it to work in stocks.

The latest nudge came last week when the Fed said it doesn't expect to raise its benchmark rate until late 2014, at the earliest, because the economic recovery remains fragile. Rates have been near zero since December 2008. The latest extension means borrowers can expect another three years of low-cost loans and mortgages.

However, it's more bad news for savers and retirees depending on investment income, particularly when there's 3 percent inflation. Investors who value earning stable returns from Treasury bonds end up with little more than satisfaction that they're faring better than people keeping money in traditional savings accounts.

Consider that investors committing to lock up their money for a full decade were only being paid 1.8 percent for buying U.S. Treasurys this week. And yields have turned negative for investors trading 10-year Treasury Inflation-Protected Securities, or TIPS. On Wednesday, the yield was negative 0.28 percent. In essence, investors are willing to pay Uncle Sam to borrow their dollars for 10 years, because the opportunity to minimize losses is attractive compared with other options.

That may be patriotic if the government puts that borrowed cash to work to stimulate the economy. But it's no way to invest for your future.

"I don't know why people would pay the U.S. government to borrow their money, unless they're very, very pessimistic," says Robert Horrocks, chief investment officer and a portfolio manager with the Matthews Asia mutual funds.

Returns are even smaller for money-market funds, safe harbors where investors can park their cash until they're ready to put it back into the market. Money fund returns are closely tied to interest rates, and their returns have been barely above zero for three years. They're now averaging 0.02 percent — call it nothing. Don't expect improvement until the Fed pushes rates back up.

Here's a look at three relatively low-risk alternatives to generate some income in a low interest rate environment:

1. Dividend stocks

Dick Bristol, a 74-year-old retired Air Force major from Biloxi, Miss., counts on dividend-paying stocks for his retirement security. His investment portfolio is nearly 100 percent in stocks that make regular payouts, and he and his wife count on a few hundred dollars of dividends coming in each month.

Of course, dividend-paying stocks are not immune from market drops. And companies often cut dividends when the economy skids. But Bristol is convinced the potential returns are worth the risks. In August, he invested in Dynex Capital, a real estate investment trust. The stock has since risen 8 percent and has a high dividend yield of 12 percent. That's the amount of the dividend paid divided by the share price.

"Keep in mind that if you invest in something that's earning 1 to 2 percent, you're losing out to the 3 inflation we've got now," Bristol says. "Over the long run, nothing pays like dividend stocks."

2. High-yield bonds

These bonds are issued by companies with credit problems. High-yield investors expect higher returns because there's a greater risk of default than with companies possessing investment-grade ratings. And they've gotten them recently. Mutual funds specializing in high-yield bonds have produced an average annualized return of 19 percent over the last 3-years.

Anne Lester, lead manager of JPMorgan Income Builder (JNBAX), has recently been adding to the fund's holdings in high-yield bonds. They now make up 44 percent of a portfolio that also is invested in stocks. Corporate default rates remain low and high-yields are attractively priced compared with Treasurys and other bonds, Lester says.

The market is pricing high-yield bonds "as if we were in a recession, and we're clearly not in one," she says.

But high-yield bond investors face plenty of risks. Chief among them is the possibility that Europe's debt problems spin out of control. That could put the domestic economic recovery at risk, potentially leading to a spike in corporate defaults and losses for high-yield investors.

3. Municipal bonds

Investments in the bonds of state and local governments typically won't make you rich, because returns are generally low. But muni bond interest payments are exempt from federal taxes. That protection may extend to state taxes if the munis are issued by the state in which the investor lives. Investors can pocket attractive returns even after taxes, because the tax hit can be sizeable for those in higher income brackets.

Muni bond funds have been on a terrific run, with average returns of nearly 15 percent over the last 12 months. But don't expect double-digit returns this year. Muni bond prices have rebounded from a market scare in late 2010, when the poor financial condition of many states and cities left investors nervous about a surge of defaults. Although many governments remain troubled, there has been no default surge and municipal bankruptcies declined last year, says Jim Colby, a muni bond analyst with Van Eck Associates.

A setback for the economic recovery could put more pressure on government budgets. But Colby says munis remain an attractive alternative to Treasurys. He's expecting muni returns to average 4 to 5 percent over the next few years.

"Munis give an investor opportunity," he says, "at a time when so many are saying, `Boy, I'm having a hard time stomaching these low Treasury yields.'"

___

Questions? E-mail investorinsight(at)ap.org

Amazon Cell Phone Center

Feds sue big banks over sales of risky investments (AP)

By PALLAVI GOGOI and EILEEN AJ CONNELLY, AP Business Writers Pallavi Gogoi And Eileen Aj Connelly, Ap Business Writers – Fri Sep 2, 8:00 pm ET

NEW YORK – The government on Friday sued 17 financial firms, including the largest U.S. banks, for selling Fannie Mae and Freddie Mac billions of dollars worth of mortgage-backed securities that turned toxic when the housing market collapsed.

Among those targeted by the lawsuits were Bank of America Corp., Citigroup Inc., JP Morgan Chase & Co., and Goldman Sachs Group Inc. Large European banks including The Royal Bank of Scotland, Barclays Bank and Credit Suisse were also sued.

The lawsuits were filed by the Federal Housing Finance Agency. It oversees Fannie and Freddie, the two agencies that buy mortgages loans and mortgage securities issued by the lenders.

The total price tag for the mortgage-backed securities sold to Fannie and Freddie by the firms named in the lawsuits: $196 billion.

The government didn't say how much it is seeking in damages. It said it wants to have the securities sales canceled and wants to be compensated for lost principal, interest payments as well as for attorney fees.

The government action is a big blow to the banks, many of which have seen their stock prices fall to levels not seen since the financial crisis in 2008 and 2009. Until now, the stocks have been undermined mostly by unrelated worries about the U.S. and European economies.

It is particularly damaging to Bank of America, which bought Countrywide Financial Corp. in 2008 and Merrill Lynch in 2009. All three are being separately sued by the government for mortgage-backed security sales totaling $57.5 billion.

After Bank of America, JPMorgan Chase was listed in the lawsuits with the second-highest total at $33 billion. Royal Bank of Scotland followed at $30.4 billion.

Bank of America has already paid $12.7 billion this year to settle similar claims. Last month insurer American International Group Inc. sued the bank for more than $10 billion for allegedly selling it faulty mortgage investments.

In a statement Friday, Bank of America rejected the claims in the government's lawsuits.

Fannie and Freddie invested heavily in the mortgage-backed securities even after their regulator said they didn't have the needed risk-management capabilities, the bank said. "Despite this, (Fannie and Freddie) are now seeking to hold other market participants responsible for their losses," it said.

Bank stocks fell sharply on Friday as news of the government's lawsuits emerged. Bank of America tumbled 8.3 percent, JP Morgan Chase fell 4.6 percent, Citigroup lost 5.3 percent, Goldman shed off 4.5 percent and Morgan Stanley's ended down 5.7 percent.

Residential mortgage-backed securities bundled pools of mortgages into complex investments. They collapsed after the real-estate bust and helped fuel the financial crisis in late 2008.

The FHFA said the mortgage-backed securities were sold to Fannie and Freddie based on documents that "contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans, the creditworthiness of the borrowers, and the practices used to originate such loans."

The FHFA filed a similar lawsuit in July against Swiss bank UBS AG, seeking to recoup more than $900 million in losses from mortgage-backed securities.

Also sued Friday were are Ally Financial Inc., formerly known GMAC LLC, Deutsche Bank AG, First Horizon National Corp., General Electric Co., HSBC North America Holdings Inc., Morgan Stanley, Nomura Holding America Inc., and Societe Generale.

JPMorgan, Goldman, Citigroup and Morgan Stanley declined to comment on the lawsuits. Ally Financial said in a statement said the government's "claims are meritless, and the company intends to defend its position aggressively." A spokeswoman for First Horizon said the bank intends to "vigorously defend" itself.

Ken Thomas, a Miami-based banking consultant and economist, said he expects the banks to settle soon with the government.

"This will be nothing but a distraction to them and the quicker you settle something like this the better," he said.

___

Christina Rexrode contributed to this report.

Browse your computer here

Allstate sues Goldman Sachs over toxic investments (AP)

Allstate Corp. is suing Goldman Sachs Group Inc. claiming the broker fraudulently sold it more than $123 million in mortgage-backed securities in 2006 and 2007, before the housing market collapse sent the investments' value plunging.

The insurer claims in a lawsuit filed in New York that the documents Goldman provided at the time "contained untrue statements and omitted material facts" about the mortgages underlying the investments.

"Goldman knew these types of securities were, to use Goldman's own words, ... `junk,' `dogs,' `crap' and `lemons,'" according to the complaint.

Allstate's complaint, filed Monday in New York State Supreme Court by subsidiary Allstate Insurance Co., says Goldman's characterizations of the investments were "revealed to the public by the numerous governmental investigations into Goldman's role in the market's collapse."

The lawsuit alleges Goldman violated state laws against fraud and negligent misrepresentation, and it seeks unspecified damages from Goldman and certain affiliates.

Goldman Sachs spokesman Michael DuVally declined to comment.

The lawsuit is the ninth that Allstate has filed since December over mortgages that were bundled together and sold to investors. The first was a complaint against Countrywide Financial Corp. over $700 million in mortgage-backed securities that Allstate purchased beginning in 2005. That complaint also targets Bank of America Corp., which bought the mortgage giant in 2008.

Defendants in more recent lawsuits filed by Allstate include Morgan Stanley and JPMorgan Chase & Co., Bank of America's Merrill Lynch & Co. unit, and units of Citigroup Inc., Credit Suisse Group AG and Deutsche Bank AG.

The bursting of the housing bubble and the resulting shrinking of the value of mortgage-backed investments helped trigger the Great Recession that began in late 2007.

Allstate's complaint against Goldman alleges that the New York-based bank claimed the mortgages backing the securities it sold were low-risk and followed strict underwriting criteria.

"In fact, Goldman knew that lenders had systematically abandoned the stated underwriting guidelines, producing loans without regard to the likelihood of repayment," the complaint says.

Goldman paid $550 million last year to settle similar civil fraud charges brought by the Securities and Exchange Commission. That was the largest penalty against a Wall Street firm in SEC history. Goldman did not admit or deny wrongdoing.

The SEC accused Goldman of steering investors toward complex mortgage investments without acknowledging the securities had been crafted with input from a client that was betting they would fail.

In June, the Manhattan District Attorney's office asked the bank for information on its activities leading up to the financial crisis.

Goldman's role in selling mortgage-backed securities has been closely watched by lawmakers. A Senate report in April found that Goldman marketed four sets of complex mortgage securities to banks and other investors. The report concluded this was part of Goldman's effort to shift risk from its balance sheet to those of investors.

Shares of Goldman Sachs fell $2.26, or 1.9 percent, to close Tuesday at $116.87.

Shares of Allstate, based in Northbrook, Ill., fell 36 cents, or 1.4 percent, to $25.67.

Browse your computer here