David McPherson Answers Your Questions About the Credit Crisis

March 18, 2008— -- Toni from New York, New York, asked: "I have been unhappy for some time with the performance of my Smith Barney retirement fund and I'd like to move the funds to First Manhattan in the hopes of a better return. Is now a bad time?"

McPherson answered: It's never a bad time to review where you keep your retirement funds, but I would do it in a deliberative way and not act rashly because of recent events. There may be good reason you're unhappy with the performance of your current retirement fund. Just be aware that no matter where your funds were held, if they were invested in stocks, they very likely would have experienced losses since the beginning of the year.Legitimate reasons why you may want to consider moving your retirement account include investment expenses, your relationship with your current advisor and convenience.

Depending upon how much money is involved, you may want to consider seeking the assistance of a fee-only financial planner to help guide you through the process, who is not compensated for recommending a particular investment product. Two groups you can check out to find a fee-only planner are the National Association of Personal Financial Advisors and the Garrett Planning Network. (Disclosure: I belong to both of these groups, so keep that in mind, as well.)

Russ from Mishawaka, Indiana, asked: "I have $20,000 in Bear Stearns taxable bonds, market value currently about $15,700. Do I need to worry that JPMorgan won't meet their obligation on this? Thanks for your answer."

McPherson answered: Russ,You are probably in better shape than Bear Stearns stockholders. One reason JPMorgan Chase was able to pay just $2 a share for Bear was that it will be assuming all of the company's debts, including the bonds you own. The shareholders got pennies on the dollar because JPMorgan Chase agreed to assume the risk associated with Bear's substantial debt load. That means if the sale goes through, there's a good chance JPMorgan Chase will make good on your bonds.

Keep in mind that with any corporate bond there's a chance the company will hit tough times and not be able to pay back bondholders. It appears, however, JPMorgan Chase may be one of the strongest Wall Street players in the current environment.

You could be at greater risk if the deal falls apart and Bear Stearns is forced into bankruptcy. Then you might get nothing. According to news reports, Bear Stearns was preparing a bankruptcy filing at the same time it was negotiating the sale to JPMorgan Chase. I'd be more worried about that possibility than whether JPMorgan Chase makes good on your bonds.

June from Johnston City, Illinois, asked: "I have about $100k invested with A.G. Edwards/Wachovia. In the newscast, I heard that if you are insured with FDIC, you are safe. I do not believe this company is FDIC. The account is insured, but not with FDIC. I would take a loss, but do you recommend selling all and moving elsewhere? What companies are FDIC insured? Thank you."

McPherson answered: June, your accounts most likely are insured by the Securities Investor Protection Corporation (SIPC). It is a nonprofit corporation established by Congress in 1970 to insure securities and cash in accounts with member brokerage firms like Wachovia Securities, which now owns A.G. Edwards. It provides insurance up to a maximum of $500,000 per account with a $100,000 limit on cash or cash equivalents.

Keep in mind the SIPC does not insure you against losses from normal fluctuations in securities prices. It only protects you if the brokerage firm fails and your cash or securities are not returned to you.

As it says on the SIPC Web site, the agency "does not bail out investors when the value of their stocks, bonds and other investments falls for any reason. Instead, SIPC replaces missing stocks and other securities where it is possible to do so ... even when the investments have increased in value."

One other point: Be sure you understand the difference between Wachovia Securities, a brokerage firm that sells securities and belongs to the SIPC, and Wachovia Bank, the banking side of the company where deposits are insured by the FDIC. Same parent company, but two different types of accounts and insurance.

Nancy from Dublin, Ohio, asked: "I am 68 and retired with the bulk of my money in an annuity. Like many retirees, given the declining economy, I worry that I will run out of money before I run out of life. Can you answer the simple question of how safe are annuities today? And, is there a safer investment?"

McPherson answered: Nancy, the key question is what kind of annuity you own. Annuities come in multiple varieties and can be quite complex. If you own a variable annuity, then its value is tied to the underlying investments contained within them. Known as subaccounts, these investments often are tied to the stock market and behave like a mutual fund. If you own a variable annuity, you are right to be concerned and may want to explore further. Variable annuities do have their place, but, in general, I'm not a big fan of them.

If you owned a fixed annuity that provides you with a fixed regular payment, usually on a monthly basis, then I would be less concerned. A fixed annuity provides a guaranteed stream of income for a certain period or for a lifetime. This guaranteed stream can be quite beneficial to retirees who do not receive a traditional pension. You want to be sure the company that issued the annuity is financially strong, but I wouldn't lose sleep worrying about that unless you know there is reason for concern.

As far as your question about safer investments, certainly FDIC-insured bank deposits and U.S. Treasuries are safer, but they also feature quite low yields that are not particularly attractive to retirees seeking income.

Kim Evans from Lawton, Pennsylvania, asked: "I have an excellent credit rating, but my variable rate mortgage is sending me into bankruptcy faster than I can get another job. I have "stated income" and no bank will touch me this year, but it was no problem when I bought my house 2 years ago. I bought my property with every intention of refinancing after 2 years to build a dog-boarding kennel after selling my business to my son 2 1/2 years ago. Now I am stuck with a 10.5 interest rate on my first mort., a 9.25 on my second and a third mortgage from SBA for my geo-thermal furnace I installed after the flood in 2006. I could afford a 1000.00 mortgage, but now cannot do 1500.00 without the business income I had planned on having by now. The interest rate decrease doesn't help us if the banks still won't lend money. The purse strings have tightened for the middle income, yet the government continues to bail out the banks instead....When will this actually help us?????"

McPherson answered: There's no question that people like you are feeling the brunt of the current crisis in the credit markets. The simple fact is banks are much more careful about lending money than they were two years ago. Many people, me included, would say one reason we're having the current problems is that lenders had grown too lax about giving out loans.

It's tough to say when the federal government's actions will trickle down to you, but there's a good chance loans would have been even harder to come by had the government not acted and, instead, allowed Bear Stearns to collapse.

In your case, I would do two things. First, scrutinize your loan documents to see what index your variable rate loans are tied to. Given Tuesday's Fed action cutting the federal funds rate by three quarters of a percentage point, you might be in for a rate decrease. Second, in the short term, I would find a way to generate an extra $500 a month in income. Easier said than done, I know, but for now it may be your only option. Good luck.