bonds http://www.bizcovering.com/tags/bonds New posts about bonds It's Time to Start Buying http://www.bizcovering.com/Investing/Its-Time-to-Start-Buying.326705 Somebody has to come out and say this. With others, I've been cautious, hesitant and overcome with a myriad of new data. I've looked closely at that data, and kept my emotions, to the degree possible with a 35% correction, at bay.

It's time to start buying.

It's time to stop listening to the people who are screaming about whose fault it is, who predicted this a year ago, who are walking around with their sandwich signs predicting the end of the world. It's time to start buying.

As you have now heard approximately ten thousand times in the last few weeks (between the endless political commercials), no money that you need for the next five years should be in the stock market. I now pronounce that a truism for the rest of your life. If you are reincarnated, I expect you to take this dictate with you into your next life, too. Never, ever put short term (less than five year) money into the stock market.

Okay. If you were one of the people who sold in a panic, that is a signal that your portfolio allocation exceeded your risk tolerance. For those who prefer their explanations in English, you put too high a percentage of your money in stocks. It is now time for you to begin buying some stock again, but not as much as you had before. You just learned that you are a chicken.

If you did not sell in a panic, but woke up in the middle of the night thinking, "Oh (expletive), I'm going to run out of money," do NOT buy more stock, but when the market recovers, sell some of your stocks and buy bonds. You just learned that you are more of a chicken than you thought you were.

If you did not panic, but stared at your computer screen thinking, "Is this the time to start buying again?" over and over again for the last few months, this is the time. It is NOT the time to put every bit of the money you are investing in stock. It is time to buy about 1/3 of the amount you're going to buy.

Why? Be careful what you ask. You will get the answer.

First, there is the sentiment indicator. Sentiment is a negative corollary. Oh, you're one of the investors who prefers their explanation in English? Sentiment is the measurement how positive people feel about investing in the stock market. Because it has been historically shown that people buy when the market is high and sell when it's low, the lower the sentiment, the better the buy signal.

You've probably heard the advice, "Buy low, sell high." Sentiment is low. How low? Positive sentiment is at 24. A year ago, at the market high, it was at 69.4.

In early 2003 as the economy was emerging from recession and the S&P 500 was trading at 879.82, sentiment went as low as 27.75. Within a year, the market was up by 26%, and sentiment was up by 176%. See? Buy when everybody else is selling seems to work, over and over again.

Second, you may say we just entered a recession. We've had our first quarter of contracting GDP in the one that ended in September. There's surely more to come. Why buy now? Good question.

The stock market does not reflect the present; it reflects expectations of the future. It is a discounting mechanism. For those of you who persist in wanting their explanations in English, it looks to the future and prices accordingly. You are buying the present value of a FUTURE earnings stream, and that future is what the market "prices in." Generally, it "discounts" its current price to what it predicts about six months ahead.

You've probably heard that this last quarter of 2008 is widely predicted to be dismal, and the first quarter of 2009 does not show positive signs yet, either. Unemployment is up to 6.1% - and rising. People's homes are going down in value. Their 401(k) accounts are down BIG TIME. The stock market, as measured by the S&P 500 Index is down more that 35% over the last year, and it's behaving like the unmedicated bi-polar. It's up. It's down. Huge swings.

These are all signs of market bottoms. Will it go lower? Maybe. It's impossible to apply quantitative measurement to panic. But I do know this.

There are trillions (very big number) of dollars in money market accounts that belong to people who are scared to invest. They are staring at their computer screens with their stomachs churning, waiting for a sign. When that sign appears that money (very big number) will come into the market fast, and push prices up very quickly. Being a little early won't kill you. Being late increases your chance of missing a very significant turnaround.

I follow 21 economic indicators that reflect economic cycle momentum, monetary policy, sentiment and valuation. Your eyes would roll back in your head if I explained how the totality of these indicators has turned positive. But, they have. As a validation of my proprietary work, Value Line, an independent analyzer of securities and the market, has increased its recommended equity exposure from 70% - 80% to 75% to 85%. Value Line's highest recommended stocks, by the way, have outperformed the S&P 500 average by 15 to 1 since 1965. It is, to growth investors, what Warren Buffett is to value investors - a long term powerhouse.

Yes, we have very serious financial problems. Yes, people have every right to be nervous. These are the times when serious money is made. Buffett announced he was buying (something he very rarely does). So, it's time for you to take your first step in, too. You don't have to do a swan dive into the deep end.

But it's time to get in up to your knees.

]]> Sun, 02 Nov 2008 09:45:50 PST Three Guaranteed Ways to Win (and Lose) During This Market Correction http://www.bizcovering.com/Investing/Three-Guaranteed-Ways-to-Win-and-Lose-During-This-Market-Correction.325447 Even the most seasoned investor has been tested over the last few months. During market upturns, investing is a simple process. Portfolio values increase, and investors are a happy, if complacent bunch. But, the opportunities in the stock market are not without risk, the primary of which is a systemic market correction. There are common themes that are heard time and time again during these corrections, and I feel fortunate that I entered the banking business during the depths of the correction in the 1970's, and remember hearing similar things then as now.

It's different this time

This is unlike previous corrections because...blah, blah, blah. Every market correction is different, obviously, because no two occur with identical financial circumstance. There are, however, similarities which include panic selling, increased volatility (which is just a description of the depth and the height of price swings) and the decrease in company earnings that accompany a recession.

Go to cash

That is the perfect advice if, and only if, you possess two vital skills

  1. The ability to predict a market downturn before anyone else does, and
  2. The ability to predict a market upturn before anyone else does.

Those market pundits who tout their superior forecasting skills by showing that they predicted this downturn and sold all their stock last year must now "call the bottom" of this correction and reinvest their money before the upturn. There are trillions of dollars in money market funds being held "on the sidelines," consisting of people who sold in a panic as well as those who are hesitant to buy now. This extraordinary amount of cash will push the market up quickly when it is reinvested, and missing that upturn will likely result in foregoing the majority of the profit the market will enjoy in its turnaround. Who has successfully and consistently predicted market movements in both directions?

No one. So smart investors, who know that a market correction is a predictable event that happens about every 7 - 8 years, stay invested. After all, these investors invest only long term money in the stock market, and they know that long term means 5 - 10 years. They can wait it out.

Buy gold

Gold has always been a "hedge" against economic disaster. That means that when everything else goes down the drain, gold has tended to do well. Even Peter Lynch, in his book "Beating the Street," recommends holding about 5% of a portfolio in gold "just in case." When there is NOT an economic disaster, investing in gold is a pitiful investment that has underperformed virtually every other asset class.

The trouble is, when EVERYBODY is buying gold, the price is pushed up to ridiculous levels. The time to buy gold, if you want a hedge for your portfolio, is when nobody else wants it.
Now that you know what everybody says during a market correction that is WRONG, it may be interesting to hear what people say that DO know what they're talking about. Investment-wise, Warren Buffett comes to mind as a person who's done well over the years. Let's see what he has to say.

Cash combined with courage in a crisis is priceless

People with investment portfolios rarely have every cent invested in stocks. Rational people buy with some sort of discipline, be it "value," "growth," or modern portfolio theorists, who hold a percentage of their money in different asset classifications. With available cash during a market correction, a disciplined investor will buy opportunistically, in accordance with his or her investment guidelines, taking advantage of "sale" prices.

Don't invest in things you don't understand

If Google has a spin-off business that provides advertising business the use of research based target marketing using an algorithm consisting of historic web searches, and you don't know what the heck that means, but everybody's buying it and you see it on the cover of Time, Newsweek and the New Yorker, don't buy it.

Warren Buffett made a fortune buying companies like See's Candy, Wrigley's chewing gum and Gillette razor blades. He doesn't buy high tech companies because he doesn't understand them. If you do understand the business, by all means invest in it if it falls within your investment parameters. If not, buying something because everyone else is doing it is a very bad investment philosophy. Listen to Warren.

Don't try to catch a falling knife until you have a handle on the risk

It's all fine and good to take advantage of low prices. But as we've said (twice now), market corrections are marked by wildly volatile price swings. Note that the word "swings" is plural. You're likely to have more than one chance to buy at bargain prices, and the likelihood also exists that prices will go even lower as panic selling occurs. Don't be tempted to jump in too soon. Easy does it.

]]> Sun, 02 Nov 2008 02:25:36 PST Don't Be a Loser in a Market Panic http://www.bizcovering.com/Investing/Dont-Be-a-Loser-in-a-Market-Panic.294173 Yes, you have every right to feel upset about the current state of your investments. You can be very, very angry at the people who allowed a business model built on extreme amounts of debt to collapse without a word from those who were mandated to watch it. You are absolutely justified in all of those feelings.

My purpose is to ensure that your feelings do not result in making decisions that you will regret later. As you watch the "cascading" stock market drift lower and lower, bond yields fall to negative levels (on an inflation adjusted basis), banks you thought were fine being snatched up by bigger rivals at fire sale prices, you may feel that there is no safe place for your money. You may be tempted to cash everything out now. Don't do that.
It's the worst possible action you can take with your long term investments, and will very likely cost you dearly if you do. Here's why.

Inflation will deteriorate your returns

Historic returns on investment

  • Shares of stock in small US companies - 12.7%
  • Shares of stock in large US companies - 10.4%
  • Long term government bonds - 5.4%
  • US treasury bills - 3.7%
  • Inflation - 3%

Even if you do as many have done recently and run to treasury bills for safety, you will be losing money. None of these returns are adjusted for the tax that must be paid on the gain on investment when they are sold. On an after-tax basis, adjusted for inflation, you will LOSE spending power in this investment. Guaranteed.

Market timing doesn't work

The reason long term returns are higher in stocks is because you are paid to take risk for higher reward. One type of risk you are assuming for this investment is called "systemic risk." That is the risk that the entire market will go down, taking, of course, your investments with it. That is a real, predictable risk that you take for being in the stock market. There was one in 2001, where the "Internet bubble" burst, in the early 1990's, 1987 and in the mid-1970's. Some are of a short duration; others last for years.
No one has successfully predicted market corrections. Even if it were possible to get out of the market prior to a correction, it would also be necessary to get back in at precisely the time it moved up. You'd have to be right twice, or forego much of the "rebound" that took place when the market recovered.

Let me repeat. NO ONE has successfully predicted market corrections.

Long term investing means just what it says

Jim Cramer, host of "Mad Money" on CNBC, recently advised his listeners to cash out any money they would need in the next five years. What?

The stock market is an appropriate place for long term investing, based on its historic long term returns. "Long term" is definitely over five years. Long term should actually be considered more like ten, fifteen or twenty years. Anyone who invests in the stock market for the short term is a gambler. "Trading" is gambling. It is NOT investing.
Market corrections are predictable in the course of stock market investing. They happen about every decade, as mentioned before. And, every time one happens, you would think the current correction was the first one in history, judging from the behavior of investors. If you're not prepared to withstand a correction, you have no business in the stock market because if you sell during a correction you are guaranteed to lose money.

This is the time when serious investors make serious money
When was the last time you knew that Warren Buffett was buying? When was the last time you knew what he was buying?

Many investors follow the changes in Berkshire Hathaway, Warren Buffett's company, for the slightest indication of what the Oracle of Omaha is buying. Usually the disclosures are made public long after his actual purchases are made. Now, we know he's investing in Goldman Sachs and General Electric. Think about this.

Value investors, Buffett being the most successful of our time, wait for prices of well run companies with predictable earnings and competent management to fall to bargain prices. Buffett began amassing his fortune in the stock market correction in the mid 1970's. During times like these, value investors make the investments that result in extraordinary returns.

The one important question you must answer

It's not necessary to "pick the bottom" of this correction. All you need is the ability to know what is undervalued, and buy it. It takes courage. How do you know whether you are making the right decision?

The one question you must answer in the affirmative is this. Do you think that the US remains the premier financial powerhouse in the world?

If so, this may be the buying opportunity of a lifetime. Don't be one of the people who passes this up, or worse, one who sells.

No one ever made a penny by panicking.

]]> Sun, 12 Oct 2008 05:36:03 PST Is Wal-mart the Cause of the Financial Crisis? http://www.bizcovering.com/Business-and-Society/Is-Wal-mart-the-Cause-of-the-Financial-Crisis.293787      In the last few weeks America has seen its financial markets go through massive turmoil and its stocks dive into the mud.  There have been more than enough fingers to point at any number of causes and more then a few people to blame.  However, when one looks at the history of the last half century one must wonder if this current problem is not from something more subtle then a housing bubble.

  1. In the last fifty years America has moved from rural to urban areas.  This may seem like a mute point, but is it?  One of the strengths of rural areas is the strength of the local community.  An individual in a small community is deeply affected by the social norms of that community.  Norms such as ethics, morals and standards of treating others.  In urban areas these norms quickly disappear in the autonomy of some many people. So in urban areas people are more likely to cheat, steal, and lie and more importantly not feel guilty about it.

  2. Big businesses like Wal-Mart have driven small local businesses out.  That is a well recorded fact.  That is how capitalism works.  The strong replace the weak.  Yet it seems that we are now feeling the effects of that not because small business is better for the economy in a financial sense but because big business has no conscience.
  3. An owner of a small store in a small town is held accountable. He must answer to his customers because the loss of a customer to that store owner is a serious thing.  Wal-Mart and companies like it care little for a single customer simply due to the volume they deal with and because no one making company policy is actually dealing with the customers.
  4. The CEOs of these major companies do not care either about their companies or their customers.  Many do not seem interested in creating profit or growing their company but seem only interested in turning their company into a money machine for themselves.  There is such a thing as pride of ownership.  A small business owner is more then the manager or investor in their company.  They are its parents.  The company is their child and they want to see it succeed for success's sake. 

The reason we are now in the trouble is because we now longer are a country run by people wanting to gain the American dream but by corporate thugs that are looking to make a dollar even at the cost of their own company.  Bad business is bad for business and ironically greed is very bad business.  The solution to the problem now is the same thing that was the solution when Adam Smith wrote his book in 1776.  Competition, Accountability, and Fair Business Practices.  Small business owners understand these things because they would not continue in business for long without them.  So why don't our leaders?     

]]> Sun, 12 Oct 2008 03:59:07 PST Mutual Funds Investing : What Makes It Tick? http://www.bizcovering.com/Investing/Mutual-Funds-Investing--What-Makes-It-Tick.283483 Mutual funds are "companies that pool the money of many different individuals and invest their cash into stocks, bonds, and other securities under the guidance of a professional securities." That's essentially the basic idea of mutual funds investing. An investment company pools the money from different individuals, based on the objective of the fund, and invest it into dozens, or even hundreds, of stocks and bonds of different companies.

It is similar to buying stock in that you are actually buying mutual fund "shares" that makes one a shareholder in that fund.  But, unlike stocks, which in buying shares of stock signify direct ownership in a company, mutual fund shares represent ownership of a fund which in turn is invested in different companies. Example, if a particular mutual fund has purchased stock in Disney, Coca-Cola, Microsoft and other companies, a shareholder in that fund is essentially an indirect stockholder in all of those companies, but without the rights usually afforded to corporate shareholders.

Here's some advantages mutual funds have over other kinds of investments (Pollack and Heighberger : The Real Life Investing Guide, 1998) :

Diversification

Diversified investment allows new investors, even those with just a few dollars, to spend their money over a wide range of stocks and bonds. Diversification means that the investor's money is divided between many different types of stocks and bonds, allowing investors to cushion losses from a single investment.

Professional Management

Allows the inexperienced investors to hire the expertise of a fund manager whose full time job is to eat, drink, and sleep mutual funds.

Cost - Controls

Mutual funds can be started without charges. Unlike stocks, which require brokers and their commission charges to get started.

]]> Sat, 04 Oct 2008 02:16:27 PST Did the Stock Market Bear Eat Your Lunch? http://www.bizcovering.com/Investing/Did-the-Stock-Market-Bear-Eat-Your-Lunch.281261 Your darn right it did. The Bear is always hungry and always gets its pound of flesh. If you play the game by Wall Street's Rules you are just meat on the table. Envision that Thanksgiving Day Turkey if you will. A Golden brown bird glistening with succulent juices garnished with all the trimmings just begging to be cut in to. Hum, yum! Now recall the platter at the end of the meal after all the good parts have been thoroughly picked over. So much for your portfolio!

So where do you get your investment information? Could it be from the Wall Street Pundits who ply the financial pages and spew their long and short-term advice to Main Street on a daily basis? Maybe you have a professional Financial Planner? Or better yet, maybe you've read all the “beat the market books”? How's that advice working out for you sweetheart?

Of course, there is a little bit of truth in everything. But remember your Sunday school lessons; Satan always includes at least one little lie in the truths he reveals to you. And that little lie will lead you far astray! I'll bet you have heard a lot about diversification and modern portfolio theory. How about Cost Averaging, Buy and Hold, or Indexing? There are a dozen more out there and there is truth in all of them “except” when the Bear hears the dinner bell!

So what can you do? You don't want to stuff your cash (if there is any left) under the mattress. You have to invest somehow don't you? Well yes, but like the movie line said “A mans got to know his limitations”. You can't compete with the institutions; they have insider information and move much to fast for your little PC. Your Financial Planner makes commissions and maintenance fees off you portfolio (fox in the hen house). The pundits are paid to provide Wall Street entertainment and to keep the cash inflow going. I guess you are just screwed, right? Well, maybe not.

Long-term investing is the key but not the way they tell you to do it. Depending on age they give you Stock and Bond percentages e.g., 60/40 stocks and bonds etc. Set it and forget it, right? Wrong! Do you know what “High-net Individuals” did with their money a year ago? They moved it to Real Return Investments like Treasuries. Why, because it was obvious to everyone that a storm was coming. Their objective was to preserve capital. Did they miss some up side? Oh yes, but their ship was in port when the storm hit. These people do not buy and hold and they do not set it and forget it.

So what can you do? Don't play the Wall Street Game. Remember that you are not as agile as the big boys and that a 30% loss can only be made up by a 60% gain. Avoid the big loss. Play the Treasuries and the insured triple A corporate and municipal bonds with the majority of your capital. Chose your stocks based on financial strength and steady dividends (there are funds that meet these requirements). When you see storm clouds forming sell the stocks and move the money to Real Returns. Don't worry about inflation eating your bond portfolio. Worry about the Wall Street Bear eating 30% of everything you put into it. If you are young you will have quite a nest egg at the back end and if you are old you will get to keep your nest egg or pass it on.

There is no free lunch on Wall Street unless, of course, you are the Bear.

]]> Thu, 02 Oct 2008 09:00:40 PST Highly Rated Corporate Bonds: Good Time to Buy http://www.bizcovering.com/Investing/Highly-Rated-Corporate-Bonds-Good-Time-to-Buy.279201 Its a difficult time to invest. Common stocks look weak even though they have fallen substantially in value. It is unlikely that corporate income overall will be high enough to justify a near-term rally in stock prices. There has been such a rush to quality that the return on Treasury Bills and Money Market Accounts/Funds are very low, lower than the rate of inflation. What can the conservative investor do?

One option which, in my opinion is not very risky, is to invest in a diversified portfolio of high rated, mostly A, AA, and AAA rated corporate bonds. The price of these bonds has dropped substantially, so the present yield is approximately 7%, far above the return of super-conservative investments, and well above the inflation rate. I believe that a conservative investor, concerned about income, should definitely consider investing a portion of his portfolio in a well-run, low cost, no-load mutual fund that specializes in this type of investment. Since the bond market will be volatile in the short run, dollar- cost- averaging is recommended.

It is understandable why investors are running to the ultra-safe investments. However, when you see such disparity between the return on investments like Treasury Bills and AAA corporate bonds, it is prudent to have at least a portion of your investment in corporate bonds. As economic conditions become more stable you will likely see an increase in the value of these bonds, so you will still have high income and capital gains, as well.

]]> Wed, 01 Oct 2008 05:05:54 PST High Income Corporate Funds http://www.bizcovering.com/Investing/High-Income-Corporate-Funds.269619 These are difficult times for investors who want both safety of principal and income from their portfolio. Frankly it is impossible to have both complete safety and also high income. Investors who have a diversified portfolio, and have a significant portion of their portfolio in very safe securities such as Treasury Bills, Certificates of Deposit, Money Market Funds/ Accounts have very low risk re: these securities, but they cannot expect very high rates of return. Investors who also need more income should consider investing some of their portfolio, perhaps 5-10% in a conservative high yield corporate bond fund such as Vanguard. Currently the yields an investor can earn with such a fund is approximately 9%. There is no question that there will be some volatility associated with this type of fund. History shows that although there will be volatility with respect to fluctuations in the net asset value (NAV), the income stream will be stable.

In order to protect yourself, you should not place all your investment in this type of fund  at one time. There is too much volatility in the market right now. However, if you utilize dollar cost averaging, you can take advantage of price fluctuations. For example, assume you plan on investing $ 20,000 in this type of fund. Initially if you purchase Vanguard's fund, the minimum intitially would be $ 3,000. ( Each fund has different minimum investment requirements) You could then invest  $ 100/ month until you reach your desired target. With this type of fund you would receive earnings monthly, and have the option to reinvest the proceeds back into the fund,  request a check or reinvest the proceeds in some other fund.

You should recognize that each fund may have different requirements re: withdrawals. For example, Vanguard wants only long-term investors, so if an investor withdraws his initial investment in less than a year, there is a 1% fee assessed. There is no fee if you simply want earnings returned. I recommend this type of investment only for long-term investors. I have invested in conservative high yield funds for over 15 years, and the results have been excellent. Investors should only consider this type of investment if they are long-term investors, and they are not concerned about short -term fluctuations in net asset value.

]]> Wed, 24 Sep 2008 06:56:22 PST Where to Invest in Difficult Times? http://www.bizcovering.com/Investing/Where-to-Invest-in-Difficult-Times.263125  The times are extremely difficult. There’s bloodshed on the street and the stains can be seen on the portfolios of the small time investors. Investments have been rendered worthless in a month. Is time to keep that hard earned money in the vaults and forget about it? Following some simple investment principles should see you through the difficult times and at the same time reap you some rich dividends.

Divide your corpus so as to be protected against a downfall in any sector. No other investment instrument is as powerful as the stock market but with more money comes more risk. Let’s have a look at the ideal division of investments.

Have a balanced portfolio

Divide your stock market investments so as to accommodate the top 4 sectors. It is not possible to accommodate all the sectors. Have sectors that balance each other. An ideal example would be realty and Information technology. Do not include sectors that are interdependent like realty and cement.

Have some sectors that never go bust like FMCG and telecom. This way you will have a balanced and considerably risk free portfolio in the sense that even if a sector fails you will still continue to float.

Ideally approximately 35% of your total money should be in the stock markets.

Invest in mutual funds

Mutual funds are less risky since they are managed by professionals who constantly monitor the markets. Even if the markets plunge be assured that the fund will bail out sooner than the stocks you have invested in. Again do not put your money in sector based funds but go in for diversified equity funds which invest in a variety of sectors and the fund manager keeps juggling the stocks.

Investing in Index funds should see you much safer than investing in pure equity based funds. Another safe option for investing in mutual funds is balanced funds which are a combination of equity and debt.

Ideally about 30% of your corpus should be in mutual funds of which 10% should be in index funds, 10% in balanced funds and the rest in equity diversified funds.

Invest in government Bonds


Government bonds are very safe and yield better returns than bank deposits. The only deterrent is the time period. Bonds require a lock in period of 2 to 3 years and hence not many people tend to invest here.

Ideally 25% of your corpus should be in bonds and similar investments.

Invest in bank deposits


Fixed deposits are the safest forms of investment, that is, until the bank goes bust! Fixed deposits earn decent interest, more than the money kept in that bank accounts and they can be withdrawn without any hitch. It is always advisable to keep a decent amount of money in safe instruments.

Keep the last 10% of your money in fixed deposits.


Following the above structure for your money should get you through difficult times and at the same time earn you a more than decent sum. Learn to manipulate the amount invested in the different investments depending on which sector is doing better at what time. And most important, learn to resist greed and have infinite patience!

]]> Sun, 21 Sep 2008 07:11:48 PST The Credit Lyonnais Financial Scandal http://www.bizcovering.com/Business-Law/The-Credit-Lyonnais-Financial-Scandal.240129 The French firm broke numerous international laws of banking and finance and cost the French people nearly $17 billion. Credit Lyonnais was founded in 1863 and was nationalized in 1945 after World War II, but its problems did not begin until 1988, when the French government made an aggressive move to expand the bank into an international financing powerhouse. It is believed that the bank suffered from a crisis of identity, that it was unsure of whether to serve the needs and interests of the French government preferentially or treat it like any other client. In 1988, President Mitterand appointed Jean-Yves Haberer as CFO. He developed a plan to make Credit Lyonnais rival DeutscheBank and U.S. investment banks by growing existing businesses, opening new offices around the world, and making new investments in real estate. The French government officials liked the grandiose scale of Harberer's plan and gave little oversight to his investments. Unfortunately, with this freedom the bank amassed a great number of poor-quality investments and assets. During the economic boom in the late 1980s, Credit Lyonnais was making millions and the expansion seemed to be working, but this period was cut short by the economic downturn beginning with the Gulf War. It was then discovered that Credit Lyonnais had taken significant equity stakes in businesses and that, in contrast to other banks, these investments were not the result of long-term relationships. The bank often continued to support investments that were poorly managed or were losing money. In fact, by 1992 the French government began to realize that the bank was underreporting its losses, but two of the bank's subsidiaries caused the biggest losses, created scandal, and brought criminal and civil actions from the U.S. Attorney's Office.

Credit Lyonnais had been under the scrutiny of the U.S. Attorney's Office for two scandals. First, it was accused of funding the takeover of MGM Studios by an individual who was both corrupt and criminal while concealing its involvement from the U.S. government. Second, they were accused of playing a role in a scheme to defraud policyholders of the Executive Life Insurance Company and of making off with over a billion dollars from fraudulently acquired junk bonds.

In 1990, Italian businessman Giancarlo Paretti purchased the controlling interest of MGM Studios with $2 billion in loans from Credit Lyonnais and its subsidiary, Credit Lyonnais Nederlands, even though Paretti had a criminal record and a bad credit rating. Paretti was required to report the terms of the acquisition, but he lied in this report, and the U.S. Attorney's Office began to investigate the origin of his finances. In, 1991, Credit Lyonnais was forced to lend Paretti more money to save MGM from financial deterioration and to avoid an investigation from a bankruptcy commission. As security for this new loan, the bank seized control of the company's stock, thus becoming owner of MGM Studios. Such ownership was in direct violation of the Bank Holding Company Act, which prohibits any financial institution from owning a nonfinancial institution. In an attempt to make it seem as though the bank was an unwitting victim of Paretti's schemes, Credit Lyonnais sued Paretti for mismanagement. The U.S. Attorney's Office was not convinced of the bank's victimization and began to investigate how Paretti had been able to request and receive twenty-three loans totaling $50 million from Credit Lyonnais Nederlands without a background check, which would have shown that Paretti had a record of fraud, forgery, and assault. It had also been discovered that Paretti had rewarded Credit Lyonnais's loan officers with shares in his Italian film company and all-expenses-paid trips on yachts and private planes. While the bank was being investigated, Credit Lyonnais created sham transactions to make it appear as if Paretti were paying down the debt when no such payments were ever made. In 1998, the U.S. Attorney's Office began to prosecute Paretti and his business partner Fiorini, but decided against prosecuting Credit Lyonnais and its officers. A settlement was prepared in which the bank would pay the U.S. government a penalty of $4 million for failing to supervise its employees. The bank also agreed to acknowledge the errors of its officers and promised to commit no further crimes in the United States. However, even before the ink was dry on the settlement, the U.S. Attorney's Office began another investigation into the criminal activities of Credit Lyonnais and its involvement with Executive Life.

Credit Lyonnais had acquired Executive Life Insurance as part of a junk bond portfolio when it bought Altus Finance in 1990. Executive Life had nearly gone under when its junk bonds lost value in the late 1980s. Credit Lyonnais officers figured that a profit could be made when the bonds recovered, so they financially backed Apollo Group Finance, which bought the bonds. But, in order to purchase the bonds, they would also have had to buy Executive Life, which would again put them in violation of the Bank Holding Company Act. To get around this problem, Credit Lyonnais concealed its interest in both the Apollo Group and Executive Life. Then, in 1992, the bank sold part of its interest in the junk bonds to a company called Artemis, whose owner was good friends with the president and other government officials. Credit Lyonnais lent him the money to buy the bonds. The junk bonds did recover and netted about $1 billion in profit while violating U.S. federal law. The violations would have been kept secret, but in 1999 a disgruntled French businessman told the California Department of Insurance that Credit Lyonnais had an illegal relationship with Executive Life. This whistle-blower began an investigation into the deal that would mark the beginning of the end of Credit Lyonnais.

In 2003, the U.S. Attorney's Office presented its evidence to a grand jury, which returned with a fifty-five-count indictment against the bank and it subsidiaries. For the remainder of the year, the two countries fought and negotiated concerning the terms of a plea agreement. Finally, in early 2004, the bank agreed to pay $100,000 to the Federal Reserve (the largest fine ever paid to that institution) and was given three years probation. A package deal required that the parties involved pay nearly $775 million in fines. Although the name Credit Lyonnais is still in existence, the bank no longer exists as a separate entity. Another French bank, Credit Agricole, bought it for $20 billion in 2002, and it plans to merge Credit Lyonnais into Credit Agricole over the coming years.

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