Cogs and cracks in Merrill and Mac

Dear Mr. Berko:

My broker of 14 years is leaving Merrill Lynch with two other brokers from another firm to form their own management business, and they will use Charles Schwab to send statements and accept their orders. My broker has done fine by us, but I'm concerned about leaving the safety of Merrill Lynch and moving my account to their new business. Should I take my chances and stay at Merrill Lynch and use the new broker assigned to me, or should I move to be with my old broker? The new broker just recommended I buy 1,000 shares of Federal Agricultural Mortgage Agency, which he believes could double in two years. The stock looks interesting. Please comment on the stock, too.

GS in Ann Arbor, Mich.

Dear GS:

Merrill Lynch is a Big Box Broker, and if your "customer's man" is a creative, knowledgeable and talented professional with good ideas, he may find that working at Merrill Lynch is like wearing a hair shirt. Merrill Lynch does not endorse individuality, new ideas or innovation, and its brokers are expected to toe the Merrill Lynch line. And Merrill's stifling, time-consuming, frustrating dot-by-dot bureaucracy is legendary. The procedures, paper work and time required to change a client's mailing address, to make an interest rate adjustment on a margin balance or to change a beneficiary on an IRA could drive a teetotaler to drink.

Merrill's retail sales force (among the few who still wear ties to the office) is comprised of trained robots. Their branch managers require brokers: to make a specific number of cold calls, to open a specific number of new accounts each quarter, to generate a specific amount of commission dollars every quarter, to sell specific Merrill Lynch proprietary products every quarter, to recommend primarily Merrill Lynch research, etc. I don't know bupkis about your old broker, but if you have enjoyed a good and profitable relationship with him, then I suggest you follow.

Scores of Merrill Lynch brokers are leaving the firm to join smaller money-management brokerages where they believe they can be more effective in managing their client's money without the onerous, time-consuming layers of "hassle and rassle" to wire a client's funds to his bank account or get permission from New York to recommend an issue that is not on Merrill's approved list. Still, Merrill is a great company for lots of brokers and clients. Clients seldom get burned or churned by greedy brokers, Merrill has good statements, and the local branches hire good staff people.

Federal Agricultural Mortgage Corporation (AGM-$23), also known as Farmer Mac, is an unlikely and unattractive speculation. AGM is a consumer finance company that provides agricultural real estate and rural housing loans in the secondary market in the U.S. In fact, some folks mistakenly believe its name implies a relationship to several notorious and larger federal organizations. AGM buys agricultural mortgages from lenders and guarantees payment on securities that consist of pools of loans.

AGM has a huge cash position of $1.4 billion with 10 million shares outstanding. The stock is recommended by several brokerages that believe that declining credit costs along with lower loan-loss provisions and higher volume will generate strong earnings for 2012. And while they might be right, I think their enthusiasm may be offset by increasing regulatory costs, enormous competition in the loan business, the uncertainty surrounding Freddie Mac and Fannie Mae, and a persistently low interest rate environment. I think this enthusiasm is also mitigated by a very weak U.S. housing market recovery, which may be more susceptible to reversal than prior recoveries.

Finally, the low interest rate environment has not given a boost to the real estate market, suggesting that AGM's revenues may not provide high enough earnings in the next two years to push this issue much above the current price. I wouldn't buy it. Meanwhile, why don't you ask your old broker what he thinks of this issue? I'm sure he would welcome your call.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at Visit Creators Syndicate website at

© 2012 Creators Syndicate Inc.

Published: Fri, Apr 13, 2012


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