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Steer clear of toxic CMS curve securities

Dear Mr. Berko: I’ll be brief.

I have $435,000 in cash and need more income. I want to be conservative but can handle moderate risks.

I have two choices.

A Morgan Stanley representative has aggressively suggested a complex but high-paying CMS curve and a CMS noninvasion note. He says these can pay as much as l8 percent and are safe. But I don’t understand them even though they sound good.

My other choice is to put all this money into treasuries: 50 percent in 10-year and 50 percent in 30-year. Or maybe I can go 50 percent in the Morgan Stanley curves and 50 percent in treasuries.

Please help me make a decision. — W.C., Kankakee, Ill.

Dear W.C.: On most days during the year, you’re going to be the pigeon. But today, Morgan Stanley wants you to be the statue.

A CMS curve security is one of the most toxic, evil concepts ever poured from the colostomy bags at Morgan Stanley and other Wall Street banks. They’re designed by psychopaths, deviates, pedophiles and lawyers to make money for the issuers, not mooks like you who buy them.

Morgan Stanley’s CMS curve security has a fixed 10 percent rate for two years. But get this, and I quote from the prospectus: “(T)he yield for the next l3 years is five times the difference between the long and short-term swap rates, not to exceed l8 percent annually, earned when the Standard & Poor’s 500 stock index doesn’t dip below 875.”

Got it? Good.

But Morgan Stanley’s constant maturity swaps curve noninversion notes take the cupcake. And I quote: “Coupon payments are based on the number of days during the interest payment period when the CMS curve is upward sloping. Investors would receive a coupon above current prevailing market rates if these trends continue and the yield curve remains upsloping. CMS curve noninversion notes are created through the reverse inquiry process … to meet demand for nonstandard debt securities.”

I’ve been in this business since l958 and have never seen such unadulterated sewage. These products have no redeeming value except to create profits for their issuer. It’s little wonder that the consumer holds Wall Street and politicians in almost identical esteem. Wall Street has a trust problem, and if that broker solicits you again, call 911.

I realize that you need more income, and I hope you realize that this CMS junk is only suitable for union officials, congressmen and lobbyists. I have no questions about the safety of U.S. Treasury bonds, but don’t invest your $435,000 in a combination of 10-year (2.3 percent) and 30-year (3.7 percent) treasuries.

As certain as I am that chickens don’t quack, I’m as certain that within the coming few years interest rates and inflation will dam your buying power and corrupt the principle value of those bonds.

Consider investing l5 percent of your money in several floating rate income funds that were recommended months ago and earn about 4 percent. Then, invest l5 percent in some of the MLPS and BDCs that were recommended in earlier columns and earn 7 percent or more. Invest about 10 percent in some deep-discount high-yield bonds, which yield about 10 percent, and put 10 percent in some broken convertible bonds, which should yield between 8 percent and 10 percent.

Keep the remainder in the Marshall & Ilsley Bank money market fund, which yields 1.75 percent, and wait. And you might want to purchase a few shares of Marshall & Ilsley (MI, 52-week high of $10.66 as of April 21). MI will lose money in 2010, but with $2.3 billion in revenues it should be profitable in 2011. MI has a $10 book value, $3.70 a share in cash, $55 billion in assets and 351 branches. And a growing number of observers believe that MI has significant recovery potential. But an even better reason to buy MI is that a bank analyst, with whom I share a collegial affection, sold his personally owned shares 10 days ago.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com.

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