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Casinos For Delinquents

Posted on: October 2nd, 2007

Do you fancy a sleepless night? First, work out how much you have lost on the Irish stock market recently. Nothing? You are wrong. Nearly all Irish workers are worse off this weekend because of their pension fund manager’s slavish devotion to Irish shares.

So you should be having some pretty hairy moments. Irish shares have been a disaster for your pension in 2007. Irish pension funds are still deep into Ireland. They have been slowly unloading, but not fast enough. Today they still have 11 per cent of all funds in domestic stocks. God help you and your pension.

This 11 per cent figure is monstrously high, considering the tiny size of the Irish market. Such stubbornness has been hurting them badly since the end of March. Irish shares have lost 17 per cent this year. US shares are up 11 per cent, the FTSE has climbed 4 per cent. Your overpaid fund manager has sunk your money deep into the worst-performing stock market in the world. And he is well-paid for this skill.

As a result, Irish pension funds are flat on the year. While most other markets are well ahead, our home-grown managers’ addiction to Irish shares has left them legless. They are the stale bulls of Allied Irish Banks, Bank of Ireland, CRH and other stock market disasters.

Your pension fund manager’s “expertise” led him onto this path. But was it his expertise — or his broker?

Irish stockbrokers love stuffing Irish punters into Irish companies. They often double as brokers to the same companies, so are deeply conflicted. They win brownie points from a company if they can find buyers for an awkward overhang of its shares. So they issue “buy” circulars galore to massage their publicly quoted corporate clients and stuff their more gullible retail customers.

High net-worth individuals are particularly useful to them. They always need advice. This month, it seems that they have run out of rope. There are very few buyers left to stuff. The world has lost confidence in the Irish stock market.

And now, so have the Irish. Many have been badly burned.

We have heard all the reasons for the slaughter on the ISEQ this year: we are too dependent on property and construction; interest rate hikes hit Ireland harder than other markets; the banks make up 40 per cent of the index; the Irish economy is in sudden retreat; oil prices; and any other old bull that brokers can peddle. They never mention the elephant in the market room. The elephant, a hero of the brokers, is trampling all over the poor investors.

The elephant in the room is the Irish casino. The currency is called CFDs.

CFDs are a stockbroker’s paradise. They are all the rage in Ireland. And they are part of the reason for the collapse in the Irish stock market. Your pension is locked into that casino.

CFDs have nothing to do with investment. They are gambling chips. Borrowed gambling chips at that.

Put very simply, you can borrow up to 90 per cent of the cost of a stock and then bet the lot on it. You put up only 10 per cent of the money. A so-called “provider” lends you 90 per cent. Now you possess 10 times the number of share that you can afford. Temporarily.

Brokers never call this gambling. They call it “leveraging”. That way it sounds much more professional, even scientific. They call the gambling chips CFDs or “Contracts for Difference”! More aptly, Casino For Delinquents.

Some estimates suggest that the elephants are doing as much as 20 per cent of the retail business on the Irish market.

In the good times, the casino was a magic place. You put down 10 per cent (maybe €10,000); the provider lent you 90 per cent (€90,000); you paid him interest; the shares rose 10 per cent (€10,000); you doubled your money. You sold and you had €20,000. What an easy trick.

Next, do it with €20,000. The market rises. Now, with €40,000. You are well on the way to becoming a millionaire. And look at all those mugs down there working for a living. “Leveraging” is the business. No golf club bore could miss out on “leveraging.”

The Irish stock market began to welcome “providers” of “leverage” with open arms. Basically, they were moneylenders from London. Their activities began to fan the flames of one of the best-performing stock markets in the world. The ISEQ became a casino. CFDs lifted it to the top of the league. Charlie McCreevy was savaged for calling it what it was.

Brokers encouraged the madness. They raked in the commission; they charged the punters brokerage – not just on their 10 per cent, but on the 90 per cent that they borrowed. Income soared. Boy brokers received six figure bonuses.

Everybody was nodding knowledgeably about “leveraging”. Some brokers’ salesmen smoothly tried to compare CFDs to mortgages on property. Do not the banks give 90 per cent mortgages, they protested?

Not quite. Mortgages are given on the fixed price of a house. CFDs are given on moving prices. CFD winners reap the benefit of the difference between the buying and selling price. They never pay for the product.

Brokers even plugged the line that there was no stamp duty on CFDs. As you never own the shares, you never pay the dreaded tax. Dealing was cheaper. No such generosity attached to commission, you paid the full whack. Money for nothing.

All the punters coined it in until global markets took a mild downturn. Suddenly there was blood on the streets of Ireland. Those caught with CFDs were slaughtered. The politely dubbed “providers” of “leverage” swiftly demanded more “margin” (money) to cover the losses. No margin, you lost the lot. Exit.

Irish shares were sold at heavy losses. There were a series of forced sales. Not only did Ireland become economically bad news, the Irish stock market lost a good reputation.

The foreigners, doubly disillusioned by the Irish property collapse and our economic setbacks, fled – some terrified that we were aping the Chinese in our addiction to gambling.

Today we are counting the cost. High net worth individuals, motivated by greed, have been financially gutted. Unable to meet margin calls, they have been left without cash and without shares.

Innocents have been allowed to punt out of their depth in a pool of professional sharks. Hard-headed sophisticated investors use CFDs to sell stocks short, to hedge, or cover their positions elsewhere. Amateur retail customers, led on by commission-hungry brokers, have entered territory which they do not understand.

Last week, the Financial Regulator sent out the message that it was scrutinising the operation of these pompously named “Contracts for Difference.” The result will be comical. It will find that no brokers are exposed by these activities! How could they be? They are running no risk.

Just benefiting from the misfortune of others.