Storm Financial Group

[bunyip]

I recently had an interesting conversation with a Storm victim who felt a little sorry for the Storm advisers. The view expressed was that the advisors genuinely believed in the strategy, as evidenced by the fact that they implemented it themselves and recommended it to their families and close friends.

 

[bunyip]

Cassamatis probably believed in his strategy, but he failed to do his homework.
My understanding is that he factored a 45% market slump into his model, in the belief that this was the maximum the market could be expected to fall. He should have known that numerous past markets slumps have wiped more than 45% off the market.
Or maybe he was aware of this, but thought history wouldn’t repeat. I do a lot of reading, and in the bull market prior to 2008 I saw numerous well-respected analysts saying that this time it was different – the market would just keep going up.
Cassamatis possibly believed this as well, but when the opposite happened he was caught off guard and didn’t know how to handle it. Should he haul his clients out of the market, thereby losing all his business? Or should he advise them to hang in there, hoping the market would recover?
I can only imagine his dilemma as he pondered these questions.

Whatever, he has no excuses.
If I was a Storm victim I know what my feelings would be towards the bastard!

 

[Frank Ainslie]

Thanks Solly,

Good points.

Let us examine one.

Did Manny and Julie Cassimatis have risk mitigation strategies in place, to implement and execute a back out plan in a worst case scenario?

If they had was any attempt made to execute them?

Perhaps Frank and Harlequin and others may be able to comment on this one facet of Storm Financial.

gg

Hi GG,

If Storm had a contingency plan, it is not self-evident to me based on what we now know. Such a contingency plan may well have existed at one time (some two to three years before the Storm collapse) but I believe they got in so deep with the Banks during the years 2006 to 2008 over extending their clients beyond any reasonable degree of safety, that Storm had nowhere to go when the markets starting going bad.

Of course, Storm was cashing down some clients in October 2008 but this came too late. Further, he did not follow through for various reasons and many clients found themselves high and dry. Many also found themselves in negative equity well over 100% and sometimes up to 130% or more. That is unacceptable!

Think about it for a moment! If Storm had pulled the plug and cashed in their clients when this crisis loomed, Storm would have probably pulled the plug on itself also because its cash flow would have dried up.

I think that the directors of Storm backed themselves into a corner and therefore thought that there was no option but to hang on and hope! Storm’s whole philosophy was based on market recoveries. Everyone in Storm (the employees, that is) was so brainwashed into believing this that plan B went out the window. Certainly, everything they stated in their SOA’s with regard to safe-guards were completely ignored. Indeed, their agreements with the Banks circumvented these safeguards by extending the risks rather than reducing them.

I think Manny’s hubris eventually got in the way of his commonsense, and he actually believed that he could turn it all around if he only had more time. Unfortunately, he forgot that thousands of investors had placed their trust in him to protect their assets. It reminds me a little of Nero fiddling while Rome burned.

 

[Garpal Gumnut]

Hi GG,

If Storm had a contingency plan, it is not self-evident to me based on what we now know. Such a contingency plan may well have existed at one time (some two to three years before the Storm collapse) but I believe they got in so deep with the Banks during the years 2006 to 2008 over extending their clients beyond any reasonable degree of safety, that Storm had nowhere to go when the markets starting going bad.

Of course, Storm was cashing down some clients in October 2008 but this came too late. Further, he did not follow through for various reasons and many clients found themselves high and dry. Many also found themselves in negative equity well over 100% and sometimes up to 130% or more. That is unacceptable!

Think about it for a moment! If Storm had pulled the plug and cashed in their clients when this crisis loomed, Storm would have probably pulled the plug on itself also because its cash flow would have dried up.

I think that the directors of Storm backed themselves into a corner and therefore thought that there was no option but to hang on and hope! Storm’s whole philosophy was based on market recoveries. Everyone in Storm (the employees, that is) was so brainwashed into believing this that plan B went out the window. Certainly, everything they stated in their SOA’s with regard to safe-guards were completely ignored. Indeed, their agreements with the Banks circumvented these safeguards by extending the risks rather than reducing them.

I think Manny’s hubris eventually got in the way of his commonsense, and he actually believed that he could turn it all around if he only had more time. Unfortunately, he forgot that thousands of investors had placed their trust in him to protect their assets. It reminds me a little of Nero fiddling while Rome burned.

That is very interesting Frank.

A few posters have mentioned that some Storm clients "got out early", during the GFC but before Storm ran in to liquidation.

Were these clients just fortunate, or did they have large accounts or were they otherwise advantaged in closing out their accounts.

The three to six months before Storm went in to receivership may hold some answers for many Storm Investors, some of whom it has been said in this forum were still being advised to invest in Storm products in the dying days of the enterprise.

And the involvement of the banks and ASIC in those months before liquidation needs to be discussed.

Actual Storm client or Storm adviser comment on a factual basis would be preferable to theories in this regard.

gg

 

[Harleyquin]

Frank I have just read your recent posts and agree with your comments. You've been able to explain far better than I can. I have limited computer access at present.

Have been in touch with a stormie over the past couple of weeks who is really doing it tough. Suicides and potential suicides caused by this disaster are becoming all too common, as are family breakups, and feelings of worthlessness. I think that we all find it hard at Christmastime when everyone else is able to celebrate.

I'm not a counsellor but so many are really hurting. Wish I could put some of the stormies recent stories on this forum however I'm not in a position to do that. Let me just say, nobody expects to be so badly burnt when seeking financial advice.

To all stormies out there hold on tight and keep supporting each other through this nightmare and let's pray that 2012 brings some closure to those of you who are feeling desperate.

 

[Solly]

Frank I have just read your recent posts and agree with your comments. You've been able to explain far better than I can. I have limited computer access at present.

Have been in touch with a stormie over the past couple of weeks who is really doing it tough. Suicides and potential suicides caused by this disaster are becoming all too common, as are family breakups, and feelings of worthlessness. I think that we all find it hard at Christmastime when everyone else is able to celebrate.

I'm not a counsellor but so many are really hurting. Wish I could put some of the stormies recent stories on this forum however I'm not in a position to do that. Let me just say, nobody expects to be so badly burnt when seeking financial advice.

To all stormies out there hold on tight and keep supporting each other through this nightmare and let's pray that 2012 brings some closure to those of you who are feeling desperate.

Harleyquin

This time of year does tend to exacerbate losses, difficult times, etc. I do know exactly what you have highlighted and what some victims of this debacle are facing. Those feelings of helplessness, inactivity, inertia and frustration are so real to those experiencing them. I do hope those still experiencing these do actively seek out strategies for dealing with these dark clouds that hover over them. I have seen beneficial coping techniques employed, which are evidence based through the facets of cognitive behavioral therapy (CBT) to be helpful to those undergoing these extreme stresses in their lives.

From a practical perspective, what I have done when I have been involved in major aspects of my life that have not gone to plan is to gain the perspective and single mindfulness of purpose to believe that nothing is going to stand in my way to recover from the dilemma.

I will keep myself active and focused on the issue and continually seek avenues to extract myself from the position that is detrimental to me. I have no excuses for not acting and staying focused. Age, health issues, the rehashing of the circumstances that lead to the issue, past events that should have been changed, all are of absolutely no consequence. The only things that matter are that the current actions and that the continuing momentum are maintained to extricate me from a negative situation. Nothing will stand in my way, what others may think and what the naysayers believe, all become irrelevant. The strategies in life can really be likened to the moves in a great game of chess. My goal is always, checkmate.

This forum has an excellent example of somebody who is not sitting back, restrained by inertia, gives up their stated position, who deflects detractors and who absolutely and completely is determined to do whatever it takes to improve their position. Little did I realise that the person who was sitting obediently in the front row of the gallery at the Worrells Inquiry would turn out to be the powerhouse in this fight who we all know as, Frank !

I always believe that it's all up to you. If you feel beaten and downtrodden or whether you get up, fight and kick a few heads, the CHOICE and the POWER remains with YOU.

I can't wait to see what resolutions 2012 will bring in this Storm saga.

S

 

[Frank Ainslie]

Frank I have just read your recent posts and agree with your comments. You've been able to explain far better than I can. I have limited computer access at present.

Have been in touch with a stormie over the past couple of weeks who is really doing it tough. Suicides and potential suicides caused by this disaster are becoming all too common, as are family breakups, and feelings of worthlessness. I think that we all find it hard at Christmastime when everyone else is able to celebrate.

I'm not a counsellor but so many are really hurting. Wish I could put some of the stormies recent stories on this forum however I'm not in a position to do that. Let me just say, nobody expects to be so badly burnt when seeking financial advice.

To all stormies out there hold on tight and keep supporting each other through this nightmare and let's pray that 2012 brings some closure to those of you who are feeling desperate.

Hi HQ,

A happy New Year to you and all on this forum!

Like you I am fully aware of the pain out there! None of us is immune to the suffering that the Storm disaster has wrought on those that placed their trust in Storm. I feel particularly sorry for those that have sought to keep their losses hidden from their family and friends because they mistakenly believe that they were partly to blame in this fiasco. I know one or two that have gone down this road.

The truth is that we all need support in times like these. My mother always said, “You only know your true friends when something like this happens!” In the last three years, her words have been prophetic. Fortunately, Helen and I have a wonderful support group so this has been a great help.

It is difficult to convey the human misery that an event like this produces. To many we are just a bunch of numbers. Another blip along the way and our passing raises little comment except on forums such as this. Yet we, the ones that are experiencing this first hand , know all too well the havoc it has produced in Stormies’ lives. Not only has it wrecked our lives financially, but it has also destroyed our trust in people, particularly those in Government that should have protected us from all this.

However, as Solly says quite rightly, we cannot afford to give in. Life is full of travails and we must deal with them in a positive manner. As surely as one door closes, another one will open if we keep focussed. None of us in this life, no matter how smug we may presently feel with our lot, is immune to tragedy. We can either be crushed by such or rise above current circumstances and fight back. The former offers no hope, the latter everything.

To all those out there that believe they have lost everything, you haven't! The most precious thing we have is our life and the love of those around us. All the money in the world cannot buy that! So focus on what you have rather than what you lost. Take every day as it comes and enjoy it. And remember, we will come through this and be the better for it.

 

[Harleyquin]

Thanks Solly and Frank, I can relate to everything you've both said. I've sought help with some wonderful professionals and found CBT to be extremely worthwhile in order to cope. Personally I feel strong, determined and focussed so have no problems and have learnt to face each day in a positive way rather than over planning, as was the case pre-Storm.

I feel tremendous compassion for those still wallowing in hopelessness and those who are still feeling, because of their age, that they have nothing worthwhile to live for anymore, and will die before any resolution is ever reached.

If you're in this position please reach out to anyone who can help.

Read Solly's reply and gain strenghth from it.

We need you all there to celebrate coming through this ordeal.

 

[Garpal Gumnut]

That is very interesting Frank.

A few posters have mentioned that some Storm clients "got out early", during the GFC but before Storm ran in to liquidation.

Were these clients just fortunate, or did they have large accounts or were they otherwise advantaged in closing out their accounts.

The three to six months before Storm went in to receivership may hold some answers for many Storm Investors, some of whom it has been said in this forum were still being advised to invest in Storm products in the dying days of the enterprise.

And the involvement of the banks and ASIC in those months before liquidation needs to be discussed.

Actual Storm client or Storm adviser comment on a factual basis would be preferable to theories in this regard.

gg

I find a peculiar reticence on the part of Storm investors to discuss the aspects mentioned above.

Perhaps their legal advisers have advised them not speculate on what happened in the three to six months before Storm Financial went down the tube.

ASF is a Stock and Investment forum and posters need to flesh out these issues so that some poor bastard in the future is not taken to the cleaners by a Financial Adviser and/or a Bank as the Storm clients were.

gg

 

[Solly]

Here is an article of interest that has not been previously linked in the forum.

It is from, The Edmund Rice Business Ethics Initiative Newsletter of Sunday, February 8th, 2009.

Please scroll down to,

"Prudence in fair weather will prepare you for the stormy"

It contains a view of the ethics of the Storm situation.

http://www.erc.org.au/goodbusiness/page.php?pg=0902inscope0#3

 

[Frank Ainslie]

"I will keep myself active and focused on the issue and continually seek avenues to extract myself from the position that is detrimental to me. I have no excuses for not acting and staying focused. Age, health issues, the rehashing of the circumstances that lead to the issue, past events that should have been changed, all are of absolutely no consequence. The only things that matter are that the current actions and that the continuing momentum are maintained to extricate me from a negative situation. Nothing will stand in my way, what others may think and what the naysayers believe, all become irrelevant. The strategies in life can really be likened to the moves in a great game of chess. My goal is always, checkmate."

Hi Solly,

I couldn’t agree with you more! Well said! “The only difference between stumbling blocks and stepping stones is how we use them.”

However, I also appreciate that we Stormies are all coming from a different place. In some ways I am more fortunate than many because Helen and I have not been left completely destitute and my background and training has enabled me to respond positively. Many, however, are living in the most dire of circumstances and every day presents new challenges for them. They are the real heroes in all this.

Speaking for myself, I appreciate your kind words and understanding. It’s easy to be judgemental in life, and we have all been guilty of that along the way. It is therefore refreshing to hear the views of those that seek after truth and feel empathy for those that have suffered in life. In the end, in any fair society, truth should out and justice should be done.

When we had money, someone once said to me, “What’s it like to be a millionaire?” Strange as it may seem, it’s not everything that it is cracked up to be. I have never been materialistic (despite what some have assumed on this forum) so having money has never been a driving force in my life. Therefore, when people accuse me of being greedy, they couldn’t be further off the mark.

Don’t get me wrong! It was wonderful not to have the worry of wondering where the next buck was coming from but it wasn’t my be-all in life and it never will be. I found myself thinking constantly whilst I was wealthy that there must be something else in life besides money. Surely there must be one more chapter to write because my story seemed to lack a meaningful ending? As it turned out, there is a final chapter to be written.

In life nothing is written until we write it! The CHOICE and the POWER certainly does remain with each of us.

You have mentioned chess. I use to be a chess player myself, having studied the game for some years. Nowadays, I play competition poker instead – for fun, that is, because I haven’t got the money to do otherwise. I find that it is the ultimate distraction from the problems that have beset us. Helen and her mother also do the same so it’s a family thing. Bunyip will be pleased to hear this because he can now say, “I told you they were gambling orientated!” I prefer to say that we are challenge driven!

In terms of chess, our battle with the Banks is entering the ‘endgame’ phase. Unlike poker, there is no element of luck in chess but rather it all boils down to individual skill. Poker requires courage, skill and luck whilst chess requires a superior knowledge of tactics and what moves to make. It will be interesting to see how the players in this drama eventually perform, and who finally declares “checkmate!” if and when this hits the Courts.

I have placed your encouraging words on my desktop alongside those of others who have written meaningful things to me. When I feel any dark thoughts creeping in, I refer to these writings to get me back on course.

Many of us Stormies have offered wondered who you are. No matter! I sense a good man that has our welfare at heart. We cannot ask for more than that! You cannot ask any more of yourself.

 

[Frank Ainslie]

Here is an article of interest that has not been previously linked in the forum.

It is from, The Edmund Rice Business Ethics Initiative Newsletter of Sunday, February 8th, 2009.

Please scroll down to,

"Prudence in fair weather will prepare you for the stormy"

It contains a view of the ethics of the Storm situation.

http://www.erc.org.au/goodbusiness/page.php?pg=0902inscope0#3

Hi Solly,

There have been many excellent articles written about Storm and the Banks since Storm’s collapse. This is just one of them. However, it was written early on and we know a lot more now than we did then about what really happened.

“They took this risk to chase after a carrot of fabulous proportions that was dangled in front of them. This is a serious reason to doubt whether they were fully cognisant of the risks they were taking.”

The writer is suggesting here that Stormies were well aware of the risks involved! Quite frankly, this is an illogical assumption. People that have worked hard all their lives to put away money for their retirement do not suddenly have a sea change and decide to gamble with their futures as this writer seems to suggest. The fact that Stormies became involved with people that had a gambling habit, namely Storm and the Banks involved with that advisory firm, is unfortunate to say the least. It certainly wasn’t by any design on our part.

“However, news of the mortgage crisis in the US had arrived many months before the final collapse of Storm. Were the clients informed by their financial advisor of the types of market conditions that would indicate the realisation of their risks?”

The answer to that is, "No! We were not!" In fact we were constantly being reassurred that all was well and Storm had everything in hand!

The writer’s words, “many months” is somewhat misleading in this respect. The rot started in the USA (that would have a flow-on affect) in 2007.

"The credit market's problems really started when housing prices started to fall in 2007. This led to the lenders being owed more than the homes were worth. Mortgage defaults started to rise, the national economy started to falter, and fear crept into the credit markets. Despite the efforts of the Federal Reserve, the destabilization of the credit market quickly spread to the national financial system. Lenders began to fear borrowers could no longer repay their loans.

Bear Stearns in the States was the first investment bank to fall victim to this fear. Investors, as well as other financial institutions, began to worry that money borrowed by Bear Stearns would not be repaid and began pulling money back.

On March 13, 2008, Bear Stearns advised the Federal Reserve that its liquidity position had deteriorated and that it would file for bankruptcy unless alternative sources of funds were made available. Two days later, Bear Stearns agreed to merge with JP Morgan Chase in a deal that wiped out 90% of Bear Stearns' market value.

By the year 2008, the Federal National Mortgage Association (FNMA or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) either owned or guaranteed nearly $6 trillion in mortgage loans. With a mortgage crisis brewing in the United States, these two corporations quickly began showing signs of financial distress.

On September 7, 2008, the governing authority over these two agencies - the Federal Housing Finance Agency, or FHFA, placed both Fannie Mae and Freddie Mac under their wing. In addition, the U.S. Treasury department began supplying funds to help stabilize these companies, raising the national debt ceiling by $800 billion in the process. Financial instability in the USA economy was beginning to grow.

On September 14, 2008, the Bank of America agreed to acquire Merrill Lynch for $50 billion as a second wave of volatility began in the financial community. And on September 15, 2008, concerns over the ability of financial institutions to cover their exposure in both the sub-prime loan market as well as credit default swaps led to further market instability. That same day, Lehman Brothers filed for bankruptcy.

On September 16, 2008, American International Group fell victim to a liquidity crisis as AIG's shares lost 95% of their value and the company reported a $13.2 billion loss in just the first six months of the year. By September 22, 2008, AIG was removed from the DJIA.

Although the share market arguably started to crash on October 1, 2008, the Black Week began on October 6th and lasted five trading sessions. During that week, the Dow Jones Industrial Average would fall 1,874 points or 18.1%. In that same week, the S&P 500 would fall more than 20%."

Bearing this in mind, the question must be asked, “Why did the Banks involved with Storm continue to support the Storm strategy in 2008 by continuing to lend money to Storm’s clients through housing loans and margin loans when the market indicators all pointed to a market collapse?” Can anyone on this forum answer this question for me bearing in mind that there was a credit squeeze in place by other banks at the time?

 

[Jifromoz]

The number of margin calls over 2008 averaged 5 per 1,000 clients.

I would be interested to know what the Storm average number of margin calls for their customers was. It would be substantially higher than this IMHO.

 

[doobsy]

New Year Darkside thoughts

Hey all. Hope the break was fun.

To catch up a little - Frank - any decent adviser would take probably 1 hour to read the SOA as it was full of appendices and cashflow projections but the first 40-50 pages were generally full of generic information.

They would probably re-read the advice section a couple of times but within a couple of hours would easily be able to identify the strategy and the fact what was behind it. As such they could easily identify how risky it was.

Julia - most retirement planning is based around cashflow. I will use a dummy example.

Client (couple) walks in with say $300K in super, house, some basic other non financial assets and bank accounts. Both Age Pension age for our example. Total assets of say $350K

Pretty quickly we can assess they would receive about $1,000 per fortnight ($26K pa) from Age Pension. If we are happy to draw down a little on the super we might take as high as 7-8% from it per annum (21-24K) and they have a happy income level of $47-50K pa without putting too much pressure on the investments. No tax payable after offsets etc as allocated pension income is tax free.

That same client walks into Storm.

Say the house is worth $500K also. Draw down $400K from it. Withdraw super. Gear everything at 50%.

$1.4 M invested.
$1.1 M debt. 6.5% on home loan, 9% on margin loan. Total interest is $89,000

But the kicker is lets borrow the first and second year interest as well so we can pre-pay. How does that work? Lets say 2011/12 financial year. We can pay the interest for that year and in June pre-pay for the 12/13 year. All is a deduction in the 11/12 year. So interest costs are $89K, lets borrow an additional $180K to prepay.

Total debt $1.28M. Total deductions - $180K

All loans are interest only. All interest is a tax deduction as it is "claytons" or for investment purposes. (Love that term)

Storm projections "assumed" 10% return (income + "growth").

$1.4M @ 10% generates $140,000 in investment earnings. These would be taxable. BUT we have a deduction of $180K in year 1. So no tax. In fact we get a tax return of $40K. Total "return" generated = $140K + $40K = $180K. Give the clients $70K and keep $110K aside to fund next pre-payment of interest.

Year 2 - pre pay again using $110K - $20K left over

$1.4M generates $140,000, $90K deductions - $50K assessable income. Split between the couple and no tax once we count offsets etc.

Give the client $70K and we have $90K ($70K + $20K) left over for next year.

Now we are 3 years in. The "assumption" was that either the shares or the property have gone up in value so this game can carry on. But can you see how they could "inflate" what "living allowance" people were told they could take.

Same client - $20,000 more per year to live on. Of course people wanted to believe.

To the rest of the forum - there has been much talk on how could people have believed, trusted etc. From my experience most of my clients barely skim the advice I provide and I would say less than 5% actually stop and check forms I put in front of them.

I make a point if it is making investment changes to walk through the form and the advice but have seen how if I say the form is something basic like to update something or get say a nomination of beneficiary put on their super account, they sign without looking what they are signing. Put a sign here sticker on something and people don't look.

I ask how many on the forum own a mobile phone on a plan and actually read the contract before siging it.

 

[doobsy]

Oh, as a PS, Storm worked a little differently.

They would have had the cash dam, been re-investing all dividends/distributions with the thoughts to sell down to top up the cash levels. Which added more risk than taking the distributions to the cash account.

On top of this they also regularly did not pay for the prepayments from the investment cashflow but instead "capitalised" the interest adding to the debt levels under the assumption that clients were better off having the distributions re-invested.

We all know how keen they were to have as much invested as possible for their fee calculations.

There was mention in earlier posts of EC and his hubris. I can say with certainty that storm head office and majority of their advisers were firm in their belief that markets would stop falling well before they did stop. Frank was right, they basically gambled with clients money after markets fell below their set "get out" points as to sell some or all down would have meant EC would have to admit he was wrong and the empire would have crumbled. He was all about protecting the business but as a result the clients lost plenty more than they should have.

I would think some of the monies sold down in the early part of the process would include those who had broken the rules and spent their cash dam and could not add the monies needed to keep LVR's under control so were triggering early margin calls and those who had capitalised interest and therefore had high starting lvrs compared to others. Both still wiped out, just earlier. But maybe they got to keep their homes with a small amount of equity pulled out.

I would say less than 2% were those strong enough to override headoffice and the advisers and DEMAND to be sold out. I also know for a fact that if clients went in wishy washy about it they were quickly convinced that even after only a 15% correction it was the WORST possible time to be selling. I bet there are a few who wish they stuck to their guns.

 

[doobsy]

And for those looking at my numbers and still confused how a client could look at it and have $1.4M invested but debts of $1.28M after borrowing the prepayments and not get worried, then (and I am happy to be corrected here) I am pretty sure the home loan debt was swept into the background and the only discussion became around the invested amount of $1.4M and the margin loan amount of $880K (63% LVR)

 

[Frank Ainslie]

And for those looking at my numbers and still confused how a client could look at it and have $1.4M invested but debts of $1.28M after borrowing the prepayments and not get worried, then (and I am happy to be corrected here) I am pretty sure the home loan debt was swept into the background and the only discussion became around the invested amount of $1.4M and the margin loan amount of $880K (63% LVR)

Hi Doobsy,

You are spot on with your comments.

In my article “Witness for the Prosecution” posted on the SICAG forum in October 2009 I made mention of the “Loan to Value Ratio” deception. Here is an extract from an excellent submission made to the PJ-C in 2009 that explains this fully:

6 .The Loan to Value Ratio - The LVR Deception
“The main indicator of our debt/asset position was the gearing level or LVR which was available via Macquarie Margin Lending Summary- (MML)

During any advice session this was always a reference point. Whenever our advisor reviewed our position, the Macquarie Margin Lending LVR was always referred to and used as a key and current indicator of our true position and whether further investment should be undertaken. Sadly it is only now and in hindsight that we have come to understand more exactly the degree of obfuscation that clouded our understanding and judgement in relation the all important LVR (Loan to Value Ratio) which was used when planning our next steps - i.e. additional investments. The LVR was so critical in determining whether the step was judicious.

When advising us, our level of debt was always represented only by the LVR as per Macquarie Margin Lending’s Summary. There was no account taken of the $380,000.00 loan from the Bank of Queensland which was derived from the debt against the house. This was not visible as part of the debt/loan balance/LVR of our Margin Loan and was never referred to in discussions about our LVR.

Perhaps this was not Macquarie Bank’s responsibility to separately flag the $380,000 debt from the Bank of Queensland which was drawn against equity in our house. But perhaps it should have been. However we now realize that it certainly should have been STORM and our advisor’s duty to take account of this additional borrowing by incorporating this into the account alongside Macquarie Margin Loan LVR so that we had a true and accurate picture of our total debt level when considering the next investment step. This was never done.

This omission and failure to consider the WHOLE debt position obviously gave a false and misleading reading of our actual investment situation. So we are now of the view that every investment step we took was actually based on a false statement of our real debt position as only the Macquarie Margin Loan LVR was used as the debt indicator.

Consequently we were being put further and further into debt that we were not actually being made aware of, a debt that could not possibly be safely supported by the investments.

It now seems to us that from very outset we were advised to invest more and more based on the visible LVR alone, when in fact our real debt level ( i.e. the LVR as per our Macquarie Margin Lending Summaries + the $380,000.00 derived from home loan) should have signalled otherwise.

7. A real example of the misleading LVR
In the period from October to December 2007 our “Current Gearing Level was showing as 61.54% (Current Loan Balance $1,686,153.00: Market value $2,739,735.00) which, according to STORM and our advisor, would represent a very acceptable situation - a safe gearing level, a no worry situation and an ideal time to further invest.

In fact we took another step and invested a further $66,000.00 in December 2007.
BUT it seems to us that what really should have been not only visible, but also added to the loan balance to see the REAL LVR and true level of debt, was the additional $380,000.00 debt of borrowings against the house. This was after all borrowed along with the Macquarie Margin Loan with the sole purpose for investment into the Indexed Trusts.

Thus in the period from October to December 2007 the real LVR was in actual fact
75.06% i.e. Current Loan Balance: $1,686,153.00 + Home Loan of $380,000.00 =
$2,066,153.00 versus Market Value $2,739,735.00. It was not the touted acceptable 61.54% - Current Loan of $1,686,153.00 versus Market Value $2,739,735.00.

Why then were we advised to invest when the gearing level, taking into account the real level of debt, was in fact at a very dangerous and unacceptable level of 75.06% So, even when matters were under control and markets were still behaving in early 2007 and our visible yet deceptive LVR was showing on our MML Summary at a mere and supposedly safe and conservative 46.02%. the real and actual, but invisible and not taken account of LVR i.e. the one taking into account the home loan debt (invested into the market) should have read as 64.4% i.e. Loan value of $950,818.00 + Home Loan of $380,000.00 = 1,330,818.00 versus Market value $2,066,077.00 and not as 46.02% i.e.Loan Balance of $950,818.00 versus Market Value of $2,066,077.00

NOTE: - *Home Loan Borrowings of $480,000.00 were used as follows:
1. $380,000.00 was used to invest and the balance was then used as:
2. $60,406.00 to STORM as upfront fees
3. $36,224.00 to our cash dam

8 The Double Jeopardy Mortgage
The loan against the house was not ever described to us in terms of a double mortgage. Our advisor recommended we use the equity in our house and borrow $480,000.00 (60% of the Bank of Queensland’s valuation) for further investment into the Challenger Funds. The rationale for this was to boost our investment and its potential earnings and so have the ongoing capacity to generate our income of $85,000.00 p.a.

Perhaps we missed something in our Financial Plan in relation to the risk of liquidating 60 % of our property’s equity via the bank borrowing from the Bank of Queensland but the only reference to this risk in this strategy is on p 44: ( Annexure D )
“Many gearing arrangements rely on you continuing to earn income to pay interest on theborrowed funds. If your income is not completely secure protect yourself by....making contingency plans such as holding sufficient reserves against such as event. Apply the same caution if you are thinking of using your home as security – borrow conservatively as default on the loan could mean loss of security for the loan. If you have used your home as security, this means you could lose your house”

But, according to STORM and our Advisor our income was going to be completely secure because STORM’s product and strategy was proven – or was it? We had no other source of reliable income apart from what our investments would generate.
We were advised that the house borrowings were a significant part of the total borrowings and this would help expand our capital base and assure our income stream at the level of $85K p.a. So if borrowing against our house was a risk why put this strategy on offer and encourage/ persuade us that this was a good and safe course of action and that in fact we would not have really enough to live on if we did not do this. Furthermore the assurances of our own advisor were totally contrary to the risk outlined.

We had reservations using the house equity and expressed to our advisor our fear of the risk of losing our house and home. If the house was at risk we did not want to use the equity to boost our investment. It is clear now that the real risks inherent in this particular strategy were not clearly and transparently explained to us.

In answer to our concerns about using the equity of our house, we were repeatedly and unequivocally assured by our advisor that we were not being put at risk of losing our house. This would NEVER happen because if required the sale of the trust units would cover this debt, not the sale of the house.

We now know this was clearly totally incorrect and misleading. We can only assume that either our advisor had failed to read our Financial Plan and/or had failed to understand the risks inherent in the STORM Product and our Financial Plan - that the borrowings against the house for investment purposes meant that in fact the house was double mortgaged or did understand this risk. but did not make this risk clear and unambiguous to us when discussing this option. But then this would have meant contradicting The Financial Plan being recommended!"

As I have stated previously, I cannot believe that a company such as Storm who had been in the business for some years would operate in such an inept manner unless there was an ulterior reason? Surely, we are talking here about basics, not rocket science! Was this merely a financial advisory firm acting in an irresponsible manner or was there something more sinister afoot? Were they villains or imbeciles? What's your view on this?

 

[Julia]

Julia - most retirement planning is based around cashflow. I will use a dummy example.

Thank you for going to the trouble of setting out the example.
To be honest, I'm incredulous that retirees could even consider participating in such a complex arrangement. It seems that few of them actually understood what they were engaging in and I'm not at all surprised.

But the kicker is lets borrow the first and second year interest as well so we can pre-pay. How does that work? Lets say 2011/12 financial year. We can pay the interest for that year and in June pre-pay for the 12/13 year. All is a deduction in the 11/12 year. So interest costs are $89K, lets borrow an additional $180K to prepay.

Sorry if I'm being obtuse about this, but what actually drove this prepaying, i.e. what was the purpose of it? Wasn't the arrangement already more than complicated enough?

 

[Julia]

When advising us, our level of debt was always represented only by the LVR as per Macquarie Margin Lending’s Summary. There was no account taken of the $380,000.00 loan from the Bank of Queensland which was derived from the debt against the house. This was not visible as part of the debt/loan balance/LVR of our Margin Loan and was never referred to in discussions about our LVR.

So what did you think had happened to the debt incurred via the lending against the house?

 

[doobsy]

Sorry if I'm being obtuse about this, but what actually drove this prepaying, i.e. what was the purpose of it? Wasn't the arrangement already more than complicated enough?

All about doubling the tax deduction in the first year to prop things up. This allowed them to have extra "free" cash courtesy of the tax dept to get things started.

We took over clients who were still invested (got in very late so no margin call) and without that ability to capitalise that interest in the year following when it all went to mud, the earnings (income only in this case as no gains obviously - so around 4%) became taxable income that had no offset.

Everything and I mean Everything in the strategy was designed to make it hard to exit. EC had this sown up so that all roads led to head office. Getting in was easy - getting out was a nightmare. Once again we seem to touch on a trait of a cult.