Financial reforms in America

A key proposal of Obama's Administration is to set up a Consumer Protection Agency on financial products. It will encourage financial institutions to offer "plain manilla" products that meet their needs.

Critics said that it will stifle innovation. I disagree with these critics. My view is that consumers are best served by buying simple products. They do not need "innovative" products, which were created to make profit for the financial institutions, at the expense of the unwary consumers.

Another interesting proposal is for the products to be offered on an exchange. For example, the Administration is working on a health insurance product to be offered by the Government, which will be offered on an internet exchange together with private sector products. This will allow the consumers can make an informed choice on the available products. In my view, this is a major step forward.

I read that Paul Vocker, who is an adviser to the Obama Administration, is strongly in favour of all derivative products being transacted on an exchange, rather than over the counter. This will ensure transparency and fair pricing. I agree with this approach. If it had been adopted earlier, the world would have avoided the global financial crisis.

Free market and innovation have been misused by the proponents to act unethically and to take big risks, which has caused the downfall of the global economy.

We need new foundations to rebuild the global economy, namely:
a) plain manilla products
b) transacted through an exchange
c) consumers to be protected

My best wishes for the success of the financial reform that is being promoted by the Obama Administration. They have the courage to do the right thing.

Tan Kin Lian

Unable to take up rights issue

Dear Mr. Tan,
I have invested in REITS. Due to the recent right issues carried out by several REITS, I have been forced to buy more shares or suffer dilution. Can you advice on:

1. Could you please kindly advise if it is worthwhile to buy & hold REIT for many years (i.e. 10-20 years)?

2. Should I switch into high dividend yield blue chips, as they do not issue rights often?

REPLY
All shares are subject to rights issue, i.e. not just REITs but other shares as well.

If you are not able to take up the rights issue, you have the option to sell the rights. The amount that you get for the rights should be almost the same as the amount of dilution in your shares.

For example,
Price of shares before rights issue $5
Rights issue (1 for 1) at $3
Share price after rights issue, due to dilution: $4
Value of rights, if sold in the market, should be $1.

The value of the rights is usually the same as the loss due to dilution, but it may vary somewhat, due to market condition.

Whether you should invest in REITS or blue chips is a different matter. Usually, it is better to be well diversified, e.g. buy a ETF of shares and REITS (if available).