It’s earnings season, and this time the focus is on reserve releases at banks. Reserves, as the name implies, are funds set aside to absorb expected losses. Reserve releases occur when banks feel that storm clouds have cleared and that there is no longer a need to maintain such a large buffer of reserves. In “releasing” reserves bank managers are able to redirect freed-up dollars to earnings. According to a Wall Street Journal analysis, “The four biggest U.S. banks have released $18.2 billion of reserves over the past four quarters reported, or 23% of their pretax income.” Among these are Bank of America Corp. (BAC) and Citigroup Inc. (C).

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Baltimore Sun's Eileen Ambrose features Yuval Bar-Or's new book, Crazy Little Risk Called Love, in her weekly column.

The Thiel Foundation is currently processing hundreds of applications for its second class of Thiel Fellowships. Each of twenty winners will receive a $100,000 grant to pursue an entrepreneurial venture and must in turn agree to skip college for at least two years. Some in the media suggest Peter Thiel is using his Fellowships to brazenly challenge and undermine mainstream college education. But they are wrong.

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"For Better Rating Agencies Go Back To Campus" (November 18, 2011), Forbes, Yuval Bar-Or

"Sovereign Credit Ratings: Relics Of A Bygone Era" (October 28, 2011), Forbes, Yuval Bar-Or

Several months ago I profiled Kroll Bond Rating Agency (KBRA), the new kid on the rating agency block. At the time I concluded that KBRA’s success and its impact on the rating industry remained to be seen and I documented several questions that would likely determine whether KBRA could revolutionize the ratings industry.

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"Kroll Gets Into Bond Gumshoe Biz, Faces Sticky Issues" by Yuval Bar-Or on Forbes.com

"Launch Sequence For Human Genome Stocks" by Yuval Bar-Or on Forbes.com.

I was recently informed by one of my former students that some advisors don't like to acquire gold for their clients. The stated reason is that they may not be compensated for bullion transactions and are therefore more likely to try to convince clients not to make such purchases. While a decision not to purchase gold for a client may be correct for a variety of reasons (liquidity and diversification come to mind), the decision should not be motivated by the advisor's compensation mechanism. This is yet another case of potential conflict of interest for advisors.

"LinkedIn’s 1999-Style IPO Rekindles Questions About Leaving Money On The Table," by Yuval Bar-Or on Forbes.com

The prevailing wisdom is that investors, whose ability and inclination to face risk declines over time,  should rebalance their portfolio as they age. More specifically, it is assumed that investors should invest more heavily in stocks when they are young, and then gradually shift from stocks to bonds over time. Near their retirement date, it is accepted that they should be primarily invested in high quality bonds whose volatility is much lower than that of stocks.

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On March 29, 2011 an article appeared on InvestmentNews.com under the title “Advisers not charging enough: Study”.

The article goes on to highlight results of a study by PriceMetrix Inc., a Toronto, Canada based firm that “helps retail wealth management firms and their advisors optimize selling efforts, manage clients, identify growth opportunities, and enhance practice management” (from pricemetrix.com).

A main message in the study is that “… many financial advisors are foregoing an average of $20,000 in fees because they are under pricing their fee-based business…”

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Crafting a carefully considered investing plan is an important step in the financial planning process. Doing so with the assistance of a properly qualified financial planner is advisable.

Having the plan does not, however, guarantee success. This is because many of the errors investors make are not in the creation of the plan but in the execution of the plan. More precisely, as markets gyrate, investors tend to become swayed by emotional considerations. These feelings convince investors to deviate from the plan. Thus, many investors (and households) get in trouble due to lack of discipline - they have a decent plan but don't stick with it. Examples of deviating from the plan include buying a house with an unaffordable mortgage or switching to less diversified (more risky) investments during bull markets (herding behavior).

Working with a client I was recently reminded of an important principle for decision makers. When we enter our workplace we tend to put on a metaphorical suit of armor. The armor is designed to protect us from difficult clients, inept colleagues, nagging bosses, and other threats or distractions – real or imagined.

Because our armor is so much a part of us, we don’t realize it’s there, but we do experience the tension and anxiety from carrying its weight, often as soon as we drive up to our factory or office parking lot. In many cases, the armor is necessary to help us function and keep our sanity. But carrying that armor around the workplace adds a constant element of tension to our working day and this affects our decision making. I often find that the most practical advice for managers is to urge them to leave the office or factory environment and instead spend some time in a more neutral and relaxed one. From this new perspective it’s easier to avoid overly defensive thinking. It’s also much easier to regain a higher level perspective that focuses on the big picture rather than being mired in details which are often meaningless in the grand scheme of organizational strategy and priorities. Better perspective and a more relaxed state of mind naturally allow us to make better decisions—ones that are much harder to arrive at from within our tense office setting.

The recent anti-government protests in Egypt (and earlier in Tunisia) are likely precursors of many more similar events globally in coming years. Frustrated by many decades of autocratic rule, Egypt’s people are in the streets demanding change, including greater democracy. The nation’s security forces have been mobilized and video footage shows violence is escalating as thousands ignore a curfew.

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The SEC’s much anticipated recommendation is out: Brokers should be held to the fiduciary standard.

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Thomas L. Friedman’s Hot, Flat and Crowded 2.0 is not a fun read. It’s an important read.

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The recent financial market decline devastated investors and provided a harsh reminder of the importance of basic investing literacy.

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Jeffrey Wasserstrom's book "China in the 21st Century: What Everyone Needs to Know" is an easy and important read.

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"Rating Agencies Should Get A Death Sentence" (September 24, 2010) Forbes, Yuval Bar-Or

When disasters occur, the full repercussions sometimes take years to manifest.

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For some time I’ve been championing the idea that the best way to address the inadequacy of our credit rating industry is by abolishing the NRSRO designation. My argument is that this will end once and for all the artificial dominance of credit rating agencies (CRAs), forcing them to compete for clients, and allowing investors to benefit from credit risk measures generated by organizations that are looking out for investor interests first (that is, no issuer-pays conflicts).

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Several months ago I sounded the alarm when it seemed a fiduciary standard for brokers had been taken off the table (See March 4, 2010 blog article). It is now time to revisit progress on this front.

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It appears proposed legislation to enforce fiduciary duty on brokers (force them to provide advice that’s in clients’ best interests) has been taken off the table. Senator Dodd’s financial services reform bill is to be introduced to the Senate Banking Committee this week, and will not contain a fiduciary requirement for brokers. According to Clark at Large, "it looks like the advocates of a comprehensive fiduciary duty are on the ropes."

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LINK: Lost Generation Video

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LINK: Sir Ken Robinson on creativity and education

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