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Sunday, September 28, 2008
European Governments Step In to Save Finance Firms
Ken Sweet
FOXBusiness
Two European financial institutions -- Dutch-Belgian bank Fortis and U.K. mortgage lender Bradford & Bingley -- had to be at least partially nationalized over the weekend, as the global credit crunch continued to take it toll.
Belgian Prime Minister Yves Leterme announced that Fortis will be partially nationalized to prevent it from falling victim to the credit crisis. That development, reached late Sunday, has the governments of Belgium, the Netherlands and Luxembourg putting EUR11.2 billion (US$16.3 billion) into the bank. It also forces Fortis to sell its stake in Dutch bank ABN Amro.
Like many financial firms in the past few weeks, Fortis has suffered from a crisis of confidence among investors. Shares fell 28% in the past week. The bank replaced its chief executive on Friday and has tried to reassure investors that it isn’t suffering from liquidity issues.
A spokesperson for Fortis was not immediately available for comment.
Meanwhile, mortgage lender Bradford & Bingley is going to be fully nationalized by the U.K. government, according to various media reports Sunday. Reuters said the U.K. is discussing the sale of B&B's book of business, citing a person familiar with the matter.
British Treasury Minister Yvette Cooper told the BBC that deposits at B&B would be guaranteed by the U.K. government, but stopped short of saying the bank would be nationalized.
The BBC reported that the savings business would be transferred to Spanish banking giant Santander (STD).
B&B, which provides loans to landlords to build rental properties, saw its stock price fall 28% in the past week alone.
This is the second time in the past year that British authorities have had to intervene directly in the U.K.’s financial sector. In February, the U.K. government nationalized Northern Rock after the mortgage lender could not find a buyer for the bulk of its assets.
A spokeswoman for B&B said the firm would not comment until the Treasury announces its plan for action.
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Some mutual funds want you to pay for the privilege of them (or your investment adviser) taking your money to invest. It's called a load, and it works like a cover charge to get into a nightclub. Luckily, there are such things as no-load funds. As the name implies, shares of these funds are sold without a fee paid to a broker or investment advisor.
The entire amount you invest in no-load funds goes to work for your returns. On the other hand, with load funds, right off the bat you're charged commission (not to mention other fees incurred over the life of the investment). Let's say, for example, you invest $25,000 into a load fund that charges a 5% commission. This costs you $1,250 off the top, bringing your actual investment down to only $23,750.
The often-cited horse race analogy argues against investing in load funds. Here's the logic behind it: Would you place a bet on a horse that had to start a race 200 yards behind the others? Well, maybe you would if you got a tip from a sketchy, trench coat-clad man in a dark alley. However, under most circumstances, it's not smart to put your money on that handicapped horse.
But some argue that at times that man in the trench coat (aka your broker) knows more about the horses than you do, and has a better shot at picking a winner. Also, sometimes these fees are unavoidable because some funds are available only through investment advisers.
Cost-benefit analysis can help determine when a load fund is worth it (in other words, when it will score you a load) and when it is better to "do it yourself" and avoid the fees. Load-fund fees range depending on share class and can cover a variety of costs, such as paper work and fund management.
