Ponzi schemes, pension plans and insurance policies: All are parts of a potpourri of issues that affect you as a contemporary real estate investor.

Specifically, the Ponzi scheme devised by Bernie Madoff and ripped billions and billions of dollars from people’s pension plans may be just the tip of the iceberg when compared to what may befall municipalities’ pension plans in the years ahead, say real estate expert Jason Hartman and colleague Patrick Donohoe.

The pair discussed the Bernie Madoff Ponzi scheme and pension issues during a recent episode of Hartman’s popular podcast show, titled “Creating Wealth.” Donohoe, who’s a member of Hartman’s Platinum Properties venture alliance and specializes in insurance investments, also offers more details in the podcast about how you can borrow money from your life insurance policy and invest those funds in real estate.

Donohoe’s unique, life-insurance borrowing twist was the subject of another recent “Creating Wealth” episode.

Here’s how Hartman’s and Donohoe’s alerts about Ponzis, pensions and insurance policies could cause trouble ahead for you as a fellow investor:

Beware: There May Be Ponzi Schemes, Worse Than Madoff’s

Donohoe in the podcast presents the exploits of Harry Markopolos, who began warning people about Bernie Madoff’s fraudulent business practices 10 years before Madoff’s downfall. However, Markopolos couldn’t get anyone to listen to him until after Madoff already had pilfered billions from pensioners in a Ponzi-like scheme.

A Ponzi scheme is eponymous to Charles Ponzi, an Italian swindler who, in the 1920s, promised U.S. and Canadian investors 50 percent returns on their investments in only 90 days.

Madoff, the more modern-day swindler, talked thousands of investors into handing over their savings to him, falsely promising steady profits in return. He was charged with 11 counts of fraud, money laundering, perjury and theft in December 2008, a day after his own sons turned him into authorities.

He’s currently serving a 150-year sentence for his convictions in a North Carolina prison.

To learn more about the Bernie Madoff Ponzi scheme, but better yet, Markopolos’ watchdog ways, Donohoe suggests in his recent podcast with Hartman that you, as an informed investor, watch a documentary, “Chasing Madoff.” In that 2010 documentary, Markopolos himself details his frustrating journey to expose Madoff.

Hartman, meanwhile, recommends that as an investor who’s even more fully informed, you also should watch, as he recently did, a more recent HBO film. That film is “Wizard of Lies,” which stars Robert De Niro as Madoff and Michelle Pfeiffer as Madoff’s wife, Ruth.

Donohoe explains that whistle blower Markopolos went to extreme lengths to notify regulatory bodies, investors, and financial publications about the Bernie Madoff Ponzi scheme when Markopolos, then a financial analyst himself, smelled something fishy about Madoff’s investments in the late 1990s. Yet, nobody listened to Markopolos until Madoff’s sons exposed his wicked ways a decade later.

Markopolos now is a freelancing bounty hunter of sorts who continues to dig up odors that he says still emanate from financial institutions and Wall Street.

Says Donohoe of Markopolos’ current work: “He goes out and really analyzes companies and financial institutions with the objective of doing the same thing he did with Bernie Madoff, which is figuring out which funds are legitimate, which companies are legitimate and so forth.”

More recently, Markopolos has “made some bold claims when it comes to a few banks, but he’s not able to give details because of settlement issues,” while he works with regulators from the Securities and Exchange Commission.

But even more recently, Donohoe says, “Markopolos is talking about pension systems, specifically the municipality pension issue that exists right now, as well as the U.S. government and the unfunded obligations they have coming to them in the future, and the improbability of being able to fulfill those promises.”

Markopolos told an investors seminar in June that the unfunded status of the pension fund of the Boston Transit Authority (MBTA) is $500 million worse than previously thought. The $500 million gap, he says, is because of bad investments, as well as fraudulent accounting and unrealistic actuarial assumptions, a la Madoff and his Ponzi days.

Markopolos claims that the MBTA’s funding status will be felt greatly on the municipal bond market, especially if it turns out that the other municipality pension plans are partaking in similar practices.

Why Is Markopolos’ Whistle-Blowing Important to You as Investor?

A chief point that Markopolos is making, Donohoe says, is that municipalities are administering pension funds incorrectly and that, even though there has been a “bear run” in stock markets and investments since 2009, the pensions are being underfunded.

And “not by 5 to 10 percent,” as the fund administrators claim, but “like 40 percent, 50 percent, in some cases worse,” Donohoe says.

“What that means is if it’s 50 percent underfunded, they only have half the obligations they owe to those who receive the pensions.” The plans will fail once there’s a “correction” in the market and stock prices start falling, and Markopolos predicts that a correction “is an inevitability,” Donohoe adds.

Hartman agrees that both a stock correction and pension failures are inevitable, and he predicts doom for 401K plans, too, which he has called “401k jail.”

What ‘s an investor today to do?

“You’ve got to be self-reliant,” Hartman tells podcast listeners, which means making wise investments that include such options as real estate.

“You’ve got to do your own thing, your own plan, so you don’t become a victim of this and you don’t have these huge expectations. You’ll get to the time when you can start benefiting from your pension in 10 to 20 years and then you’re left with way less than you thought—that’s the likelihood.

“Even if it’s Social Security, which is another form of a pension. It’s just not going to be there for you, and even if it is, it’s going to be inflated away and you’re going to get paid in deflation-based dollars.”

Donohoe says that if you look at the health of the pension system, “it’s in very poor health across all 50 states.”

“One bear market or correction could start to wipe out a lot of these,” he says. “I think what we’ll see is as one goes down, the others start going as well … a snowball effect. I would say that those who really have a pension, it is not a permission slip to not have responsibility to do something else.

“If you have a pension, great, but pay attention to it. Question their assets, go to meetings … a lot of this documentation is available publicly.”

Donohoe also suggests that investors follow Hartman’s first commandment in the 10 Commandments of Successful Investing, which is “thou shalt stay educated.”

“Understand how economies work, what the signals are, where you see opportunities, because Markopolos points out there’s going to be a correction,” Donohoe warns.

“Things right now just don’t make a lot of sense in a lot of different areas. You see signs. The pension industry is in the trillions, when you see how big it is. If there’s a massive correction there, then the ripple effect is going to be huge.”

For now, Markopolos is keeping his investment money “in cash” and not investing in anything else, according to Donohoe. Hartman thinks that’s a “risky” route on Markopolos’ part, but, Donohoe counters: “Could be, but depends on your objective. His objective with cash is, when there are amazing opportunities (with a market correction), you can capitalize on them.”

Some Common Mistakes You Could Make as an Investor

As for Markopolos sitting on cash and waiting for a correction to happen, Hartman tells Donohoe: “First of all, I want to say, ‘Good luck timing the market’ … I just don’t know anybody who can do that.”

Another mistake that too many investors can make, Hartman says, is sitting idly by with cash while waiting “to hit a home run.”Bernie Madoff Ponzi scheme

“Stop trying to hit home runs,” he says. “Just hit a double, get to second base. Or, maybe first base. Just get good returns, invest for yield. Let a little time go by and before you know it, you’re going to be rich.”

Of course, Hartman says the best yield lies in real estate investments, particularly single-family income properties in linear markets.

“Everybody wants to say, ‘Oh, I’m going to buy Bitcoin or Ethereum, or gold, or silver, or this stupid apartment complex that is completely a dumb investment, right? Or, a massively overpriced house in LA.

“The ‘greater fool theory’ says that ‘no matter what I pay, some greater fool is going to come along and pay more.’ You’re trying to hit a home run. You’ve got to stop doing that. That’s basically a symptom of greed.”

The Life Insurance Twist on Real Estate Investing

In another recent “Creating Wealth” podcast, Gary Pinkerton, another Platinum associate, detailed Donohoe’s development of a way that you, as an investor, can use life insurance to make a down payment on a house purchase or to make home repairs.

In this most recent podcast on Ponzis and Madoff, with Donohoe appearing as guest host, he details that life-insurance alternative a bit more and explains how insurance companies can make money out of the deal.

Pinkerton in the earlier podcast says that in 2011, when there was a “flash crash” in the stock market, he decided to take a couple hundred thousand dollars from his stock market and mutual fund investments and move the money into life-insurance policies—”and that became available collateral for investing in properties.”

“I put my money in the policy, it gets protected, and it’s growing tax-free,” Pinkerton says.

“But then I can turn to the insurance company and say, ‘Listen, I have $100,000 in my policy, I need to borrow 50,000 or 100,000 from you’ … they’ll loan me up to as much money as is sitting in my policy as cash collateral for them. They’ll loan me their dollars.”

Pinkerton calls the life-insurance strategy “an unstructured loan,” meaning there’s no loan terms.

“There’s no qualification for it. It’s a couple-minute phone call or a piece of paper. The money gets deposited into my account and then I use it as if it was my own cash, and I’m signing up to pay an interest rate that is floating on the Moody’s bond index.” His rate hasn’t changed in over 10 years and has stayed at 4.7 percent, he said.

In Hartman’s more recent Bernie Madoff Ponzi scheme podcast, he asks Donohoe, who is an insurance specialist, how insurance companies can make any money off such life-insurance loans for policy holders.

Donohoe explains that when you take on such a life-insurance policy loan, you’re not necessarily taking money out of your cash-value account; rather, you’re directly borrowing money from the insurance company.

“Your collateral,” he says, “is the actual cash value” of the life insurance policy.

“When you make an investment, you put money into a property, or make a down payment, and you’re receiving returns there. You are on the hook. You have an obligation to pay back that loan with interest, and that interest becomes part of the revenue stream and income to the insurance company. It’s a part of their profitability.”

Hartman calls the life-insurance borrowing option “interesting,” because the life insurance company is becoming a lender or bank—yet, it still has a lot of unused money in policies that it can use to invest or run its business or cover its administrative fees.

Donohoe goes on to explain the policies more and how companies make money nonetheless.

“These types of policies are a small share of their business,” he says.

“The lion’s share of their business is company pensions, it’s disability insurance, term and traditional life insurance, long-term care. These are other parts of the business that is revenue to their bottom line, not just these policies.”

As an informed investor, you would have to say that the life-insurance borrowing practice does make more sense than, say, municipality pension plans that smell of Madoff Ponzi-like schemes.

Comments are closed.