Sep 03 2012

In about Five Months…

“What we collectively decide about how to bail out our economy, how we pull our economy out of a ditch and what rules we put in place to make sure this problem does not happen again, will shape our country for the next 50 years.  This is it.” – Elizabeth Warren


After surviving the worst economic wipeout of the past seventy years or so, I remain hopeful that those in positions of great influence and power will never allow this to happen again.  And yet as the end of the year approaches, there are some troubling issues looming once again here in the US.


About a year ago, we had the great debt ceiling stand-off.  The entire world watched with great anticipation as members of Congress duked it out before finally punting the issue about twenty yards down the field.  So in a few months we will be dealing with significant budget cuts to defense and non-defense programs at the same time we will see an increase in taxes…unless the two parties can somehow come together and get something right before the clock strikes midnight.  This doesn’t even consider the presidential election or what is going on elsewhere on the planet.


In case you are not aware, Europe is in a deep recession, China’s economy is slowing, India has all forms of trouble brewing, Russia is trying to keep a social powder keg on ice, and Japan is probably a little worse off than the US.


Will the world as we know it come to an end if Congress can’t get it right and avert the automatic budget cuts and tax increases?  I don’t think so, but the thousands of people that will lose their jobs combined with reduced spending will most certainly impact the economic recovery – and I don’t see how it will be positive.  Surely our leaders will take the proper course of action and avert more economic turmoil…surely…

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Apr 10 2011

Interesting Times Indeed

“It was in the reign of George III that the aforesaid personages lived and quarreled; good or bad, handsome or ugly, rich or poor they are all equal now.” – William Makepeace Thackeray


For those who thought I gave up on the blog, I can understand why – but rest assured I have not.  It has been a terribly busy period in my life and something just had to give for a while.  Even now there are quite a few things that I need to get started on but I feel compelled to capture my thoughts before the moment slips by completely.


It would be an understatement to suggest that 2011 has brought great turmoil and change so far.  Going back a few months we saw regimes in Tunisia and Egypt fall in a matter of days or weeks.  Many other governments in the Middle East and North Africa are quite unstable and leaders are concerned they will encounter mass demonstrations or worse.  At this moment it seems the US, Britain and France are trying to help a ragtag group of rebels overthrow Muammar Gaddafi and his government – for what legitimate reason I have no idea.  I suppose it is remotely possible that prudent leadership will gain power in these countries and bring a better future for the people, but I am far too cynical to believe it is likely.  In this region of the world, I think all we can honestly hope for is a reasonable level of stability under strong and often militant leadership.  Western democracy just doesn’t work very well as there are too many radical groups that will challenge power at any cost.


As if this isn’t enough to deal with, the Earth has been delivering some deadly natural distasters of late.  Haiti, Chile, China, New Zealand and most recently Japan, have all been rocked by terrible earthquakes.  Japan’s 9.0 earthquake was the worst in over 100 years and the subsequent tsunami wiped many coastal towns off the map and started a nuclear disaster that is still unfolding.  It is as if Pandora’s atomic box has been opened and no matter how hard the humans try, we can’t contain the deadly, seeping force from within.  Tens of thousands died from the earthquake and tsunami and more will die from radiation sickness at some point in the future.  I have many friends and colleagues in Japan, so this has been very difficult for me.  Japan is an amazing country and I have the utmost respect and appreciation for the Japanese culture.  If there is any good news from this disaster, it is that it happened in Japan where people will work day and night to fix the problems and rebuild what has been destroyed.  I know this doesn’t erase the death and destruction but it is my best attempt to consider a brighter side (as dim as it might be).


Finally we have the quagmire that is the United States right now.  The once powerful nation that is so divided and buried in debt that we can’t seem to figure out what to do – except start wars in the Middle East and North Africa.  I only hope that God hasn’t given up on us yet because it seems he is the only one that can save us from ourselves.  Time will tell and so we will just wait and see.  In the meantime we would all be wise to pray for a brighter tomorrow.


As I watch Charl Swartzel slip on the Green Jacket at Augusta National, I can’t help but wonder what the World’s Greatest Golfer, Bobby Jones, would think about the 21st Century.  Like me, he probably wouldn’t know what to think.

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Dec 04 2010

Hubris, Ignorance, Goldman and the Fed – with some good advice in the end

“None of them would have survived without government help.”  – Timothy Geithner, Treasury Secretary


Last week the Federal Reserve released detailed information on the steps they took to stabilize the financial markets during the uber tense period from early 2008 through 2010.  Most of us were quite surprised to learn of the magnitude and frequency of intervention.  Although some will never completely agree, it was quite clear to me that we were truly on the edge of the abyss and without the Fed’s intervention there would have been a complete wipeout.


To add to the intrigue, my favorite system manipulator, Goldman Sachs – which once suggested it had plenty of cash to weather the storm – borrowed 84 times during the crisis window and more than $20 billion on at least one occasion.  I could add a few comments on this but I will take the high road at this time.  One thing you can say about Goldman, they know how to create their own destiny.


Shortly after this broke, the U.S. jobs report came out with dismal November job growth – so poor compared to other more encouraging indicators that many are questioning whether the report is accurate.  Regardless of what job growth actually is, while most of the key economies around the world have stabilized, there are still many potholes in the road to Shangri-La.  All you have to do is consider, Greece, Spain, Portugal and Ireland.


Since this blog is supposed to be about prudent personal finance and the global economy, my suggestion as we hopefully enjoy the 2010 holiday season, is to keep your job if you have one, find a job if you don’t and in both cases avoid excessive debt and save every dollar (or pound, yen, rupee, euro, etc.) you can.  There are and always will be investments worth pursuing but be very cautious unless you have adequate liquid to cover any possible losses.  Cheers and All the Best during this special time of the year!

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Feb 28 2010

Greece Is Back

“Tragedy is thus a representation of an action that is worth serious attention, complete in itself and of some amplitude E’ by means of pity and fear bringing about the purgation of such emotions.”  – Aristotle


…in the news that is – and it isn’t good.  It seems that Greece has a real financial crisis on her hands.  Greece’s budget deficit is twice what the Government reported as recently as mid-2009.  So once Moody’s downgraded the debt a few months ago, there seems to be serious concern that a sovereign European nation is at risk of default.


Greece, in the form of the Prime Minister George Papandreou, is asking for help from other EU countries and while the EU has indicated that it will assist to prevent default, details are sketchy for now.  We will soon find out if the EU will put the money where their mouth is come April and May when Greece has some 20 billion euros worth of bonds and T-bills maturing.


Let’s hope this gets sorted out or it could send other European countries like Spain and Portugal over the edge as well.  Interestingly, it has been reported that Goldman Sachs (our favorite investment bank at the center of the universe) helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that “legally” circumvented the EU rules.  Is there anything that Goldman Sachs isn’t involved in?

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Jan 31 2010

It all came down to a lucky guess?

“For if the trumpet give an uncertain sound, who shall prepare himself to the battle?”  – 1 Corinthians 14:8


There are still many that believe the U.S. Government should have allowed the big banks along with Fannie and Freddie and AIG to go under.  I recall one colleague explaining to me that the “invisible hand” would have corrected the situation.  He went on to suggest that any institution responsible for this disaster should have to pay for their foolishness anyway.  Being somewhat of a Keynesian, I never believed the government should look the other way and now I am more convinced than ever that we were on the brink of complete global financial wipeout that would have truly changed the course of human history.  The current environment is unpleasant but it could be far, far worse.


For those that think this was all some grand conspiracy to change the political landscape or that our leaders are really in control, a recent article by Laura Blumenfeld in the Washington Post about Neil Kashkari, former Interim Assistant Secretary of the Treasury for Financial Stability, and a book by Henry Paulson, Secretary of the Treasury during the darkest hours of the crisis, tell a different story.


“Seven hundred billion was a number out of the air,” Kashkari recalls.  “It was a political calculus.  I said, ‘We don’t know how much is enough.  We need as much as we can get [from Congress].  What about a trillion?’ ‘No way,’ Hank shook his head.  I said, ‘Okay, what about 700 billion?’  We didn’t know if it would work.  We had to project confidence, hold up the world.  We couldn’t admit how scared we were, or how uncertain.”


And according to Paulson, after he and Timothy Geithner failed to find a buyer for Lehman Brothers, “My stomach tightened up and it was one of those times during the crisis where I was momentarily overcome by fear.”  He then called home to his wife Wendy: “And I said, ‘Everybody’s going to be looking to me for answers, and I don’t have any.  Please help me, pray for me.’  But boy, that was, that was a dark, dark hour.”


We will never know what would have happened with a different group of leaders – but I for one am grateful it didn’t turn out worse.  The question is: did we learn from our dreadful mistakes?

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Dec 31 2009

2009 – The Economic/Financial Year in Review

“After the pact, the Royal Navy was required to scrap the Grand Fleet’s backbone.  The Admiralty pledged itself never to build a naval base in Hong Kong.  England’s absolute command of the seas, so vital to the Empire, was over.  Britannia no longer ruled the waves, not because world opinion objected, but because, having spent 5,000,000 pounds sterling during the war, it simply couldn’t afford to.” – William Manchester, The Last Lion


It might not be apparent why I included this passage which describes how dramatically Britain’s course was altered following World War I.  I would like to believe this isn’t indicative of where the U.S. is heading following the second Gulf War, but there are certainly parallels that should be considered.  While I don’t believe a diminished future is sealed for the United States of America quite yet, it should be clear that our current course could easily lead us to become a second-rate world power.  It is not possible for a single country, no matter how big and powerful, to please and/or protect all the humans on the planet.  Enough said.


I think most will agree that 2009 is ending with a slightly positive momentum compared to where we were a year ago.  Just for fun, here is my annual recap…and here’s to a better 2010 – because we all know there is plenty of room for further improvement.


January 2009 – 1.  The U.S. Congressional Budget Office estimates the federal government will run a $1.2 trillion budget deficit in fiscal year 2009 and that the enactment of the economic-stimulus plan would increase that deficit; 2.  The Bank of England cuts interest rates to 1.5%, its lowest level in its 315-year history; 3.  Icelandic prime minister Geir Haarde announces the collapse of his coalition government in the wake of the country’s financial crisis.

February 2009 – 1.  California’s government goes broke and issues IOUs on all expenditures not required by law; 2.  Bankruptcies in the United Kingdom rose during 2008 by 50% to an all-time high; 3.  The Dow Jones Industrial Average and S&P fall to their lowest levels since 1997.

March 2009 – 1.  The UK’s government increases its ownership stake in Lloyd’s Banking Group from 43% to approximately 60%; 2.  Japan’s economy posts a record deficit of 172.8 billion yen; 3.  Premier Wen Jiabao says China may introduce a new stimulus package if the current financial crisis intensifies and he also expresses concern over U.S. Treasury securities.

April 2009 – 1.  The Group of 20 announces a US$1 trillion agreement to combat the current financial crisis; 2.  China imposes pay limits for executive officers of state-owned financial institutions; 3.  China’s economy grows by 6.1% in the first quarter 2009, the lowest increase since 1999.

May 2009 – 1.  The Eurozone’s 16 national economies contract by 2.5% throughout the first fiscal quarter of 2009.

June 2009 – 1.  General Motors, once the largest and most powerful corporation in the world, files for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code; 2.  Iceland’s rate of unemployment reaches 11.8%.

July 2009 – 1.  General Motors emerges from bankruptcy protection after 40 days under court supervision; 2.  China’s foreign exchange reserves reached a record US$ 2.13 trillion; 3.  The Dow Jones Industrial Average closes above 9,000 for the first time since January.

August 2009 – 1.  Hong Kong posts 3.3% growth over its previous quarter, far exceeding predictions, signaling an end to its recession; 2.  The U.S. budget deficit will reach $1.6 trillion, the highest ever recorded; 3.  The Democratic Party of Japan wins 308 seats in the 480 seat House of Representatives, ending nearly 50 years of control by the Liberal Democratic Party.

September 2009 – 1.  The G-20 Finance Ministers outline plans for banking reform, including tougher regulation of financial institutions.

October 2009  – 1.  The International Monetary Fund states that the global economy is “recovering faster than expected”, raising its forcast for global growth to 3.1% for 2010, up from 2.5%; 2.  The Dow Jones closes above 10,000 points for the first time in more than a year.

November 2009 – 1.  Dubai World, the state-owned real estate and ports giant, asks for a moratorium on its US$59 billion in debt until at least May 30, 2010; 2.  The Central Bank of the United Arab Emirates announces it will provide liquidity to Dubai banks.

December 2009 – 1.  The FDIC, which insures deposits in U.S. commercial banks, runs a deficit of US$ 8.2 billion; 2.  Japan unveils a 7.2 trillion yen stimulus package to strengthen the country’s economy amid signs it is weakening; 3.  140 U.S. banks failed in 2009.


And so…raise your glass to a better 2010 for all.  Cheers!

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Sep 30 2009

The Way We Were

“Lehman’s fall over a nerve-racking weekend a year ago pushed the financial crisis, which had begun months earlier with the subprime mortgage meltdown and the rescue of Bear Stearns Cos., to a terrifying new level.  Lehman’s bankruptcy, the largest in U.S. history, shocked investors who had expected the federal government to step in with a Bear-like 11th-hour rescue.  Its fall unleashed fears of a depression triggered by a domino-like toppling of battered financial institutions.” – Walter Hamilton


Having been born when I was, I missed the Great Wars, the first Great Depression, and the Cuban Missile Crisis.  My memories actually begin during the war in Vietnam and except for a few bumps here and there, I have enjoyed a relatively stable and secure life.  I took much for granted in my progressively improving life until exactly September 11, 2001 – and suddenly it was all so interrupted and uncertain.  I wasn’t personally impacted.  I didn’t lose any family or friends, nor was my career in jeopardy – but no matter how hard I tried to convince myself everything would be fine again, I couldn’t get back to where I had been.  Gradually over the next five years or so, despite growing turmoil around the world, I started to feel more settled once again.  Then in the summer of 2008, it was apparent we were in for a rough ride.  Once again the month of September delivered a world-altering event.  This time it fortunately didn’t bring physical death and destruction but it did bring the end of several storied financial institutions along with hundreds of banks around the globe – and no one will ever know just how close we came to a complete financial collapse.


Here we are a year later and I would be very interested to learn how others feel.  I have been doing my best to focus on work and family without dwelling on all the troubling news.  On one hand I recognize that the economy has stabilized and the stock market is recovering quite steadily, but on the other hand it seems many of us are quite apprehensive and anything but confident or carefree.  There is no silver bullet to fix all our economic woes.  In fact, many organizations and individuals will be forced to deal with the de-leveraging process for years to come.  Our governments can only do so much and it scares me to think of the growing deficits around the globe.  At the same time, everything seems to move faster in the Internet age, so just maybe the recovery will quickly gain traction.  I predict that we are two years away from real recovery (significant job and economic growth) – but I would be happy to be wrong as long as it happens sooner.  What do you think?



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Jan 31 2009

Banker Assigns Responsibility for Meltdown

“I sincerely believe that banking establishments are more dangerous than standing armies, and that the principles of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” – Thomas Jefferson


A friend of mine, who happens to run a local BB&T bank, sent me an interview of the recently retired Chairman of BB&T Corp, John A. Allison that was in American Banker – The Financial Services Daily.  I have read that Mr. Allison is a somewhat highly regarded bank executive and this might be debatable, but one thing is for sure – he is confident that he knows what caused the financial mess we are now living through.  I didn’t find this article online when I searched, so I thought readers would find some of what he said quite interesting.


Mr. Allison’s views on the root causes of the mess we’re now in:

“There are certainly individual financial institutions that have made some pretty serious errors.  But the root causes, however, are government policy, and I think there are four primary culprits in this regard: 1.  The Federal Reserve, which has, in my opinion, mismanaged the interest rates and monetary policy by driving rates down too low and raising them too high and that has distorted economic calculation.  2.  The existence of FDIC insurance, which has allowed people to raise money they couldn’t have in a true free market.  3. Housing in a broad context where the government tried to encourage above-market rate of homeownership under the theory that homeownership is always good.  Homeownership in general is good, but giving someone a home is not necessarily good, and particularly if they’re not able to pay for it…Fannie Mae and Freddie Mac are the No. 1 villians because of their magnitude…They were the ones who created the subprime crisis.  4.  Finally, the Securities and Exchange Commission is largely to blame.  Fair-value accounting has certainly accelerated the problems.  If we had had it in the early 1990’s, we would have had an economic collapse.  It is a very poor accounting concept.  Personally, I would just get rid of it tomorrow.”


Mr. Allison’s comments on which banks will survive:

“Through a very non-market-driven process, you have potentially created an oligopoly in the banking business, with four to nine institutions depending on how you look at it…Look at Citigroup.  It failed twice last year and even more times during my career.  That’s not good, and it creates a challenge.  While there are some economies of scale, you can say it’s not obvious that having more than a trillion dollars in assets is a good thing.  BB&T can compete very effectively against these big banks, but they have a…fundamental, long-term, potential competitive funding advantage if they are basically perceived as being subsidized or protected by the government.  It’s artificial, and you can argue that it is adverse selection.  Citibank shouldn’t be here…”


Mr. Allison’s thoughts on redeeming qualities to the Tarp:

“Only in one context.  Tarp wasn’t necessary except that the government created a panic and they probably had to do something about it.  But they didn’t need to create the panic to begin with.”


Mr. Allison’s views on when we will know we have hit bottom and how much longer until things get better:

“I think the biggest indicator will be the stabilization of real estate prices.  It is amazing to me how little focus has been put on fixing these real estate markets.  Until you bottom real estate, you’re not going to fix the economy.  I think the market will bottom in less than 18 months, but it will take at least 18 months before we see a meaningful recovery.  I think BB&T will be very advantaged on the other side.  We have an operating model and a culture that can compete more effectively over the long term.”


DBP Disclaimer: Although I generally agree with Mr. Allison’s comments, I am not suggesting they are correct, nor do I have any reason to believe that his timetable for recovery is valid in specific terms.

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Jul 31 2008

Mortgages, Subprime Mortgages, Mortgage Bailout

If you are like me, you have read and heard these words so many times recently you could scream!  That being said, there is clearly a good reason for this.  Most of us have a mortgage on the house we live in – unless we rent.  When I was in the process of buying my first house, the financial institution I dealt with required verification on nearly every detail I self-reported to determine if I was a worthwhile credit risk.  I didn’t necessarily appreciate being challenged in this manner at the time but I understood why it was necessary.  This was just the way it was and if it had been my money that I was considering loaning to someone else, I certainly would have done the same or possibly I would have been even tougher.


Between five and ten years ago, a whole bunch of brilliant people (that just happen to occupy positions of great influence) decided that it should be much easier for people with a less-than-satisfactory credit history to qualify for a mortgage.  This was apparently important because home values were shooting towards the stars in many markets and potential buyers needed bigger loans to buy these homes.  Fast forward to present day and guess what we have…you guessed it…all this easy money has resulted in an international mortgage meltdown – and desperate times call for desperate measures!


So President Bush and Congress just signed off on a mortgage bailout at the tax payers’ expense.  According to Congressman John Hall from New York, “The Centerpiece will help many homeowners refinance their mortgages into lower-cost government-insured mortgages that they can afford to repay, preventing the economic pain that further foreclosures would inflict.  The law will also give states and municipalities access to resources they can use to buy and rehabilitate foreclosed properties so they will not depress property values and destabilize neighborhoods.”  This bailout will not undo the hundreds of thousands of foreclosures that have already occurred, nor will it help ease the billions of dollars in losses that many banks are dealing with.


In the United Kingdom, the Treasury is considering giving “a taxpayer guarantee to billions of pounds of bonds known as mortgage-backed securities created by banks out of high quality mortgages, in a radical attempt to revive Britain’s rapidly shrinking mortgage market” according to Robert Preston of BBC News (see Treasury’s mortgage rescue plan).


As individuals, what do we need to know?  Hopefully you are sitting pretty with a nice 30-year (or less) fixed mortgage and you have no trouble making your monthly payment.  If you are struggling to meet your financial commitments, and have some form of exotic adjustable rate mortgage, contact your mortgage company as soon as possible to find out what your options will be once the bailout is implemented.  Until you know the options, you should do everything you can to stay current on your mortgage payments to avoid foreclosure.


If you will soon be applying for your first mortgage, I strongly recommend you consider a fixed-rate mortgage before anything else.  You should compare offers from several lenders, including banks, credit unions, and mortgage companies before selecting one.  Compare and consider the following features: interest rates and points; interest rate lock-ins; required down payments; mortgage insurance requirement; prepayment penalties; and estimated closing costs.  If you do decide to go with an adjustable rate mortgage (ARM), you should know what financial index is used and the lender’s margin (% markup) over the index.  You will also want to know the rate caps and payment caps – and of course any provisions and fees for conversion to a fixed-rate loan.  The good news about the mortgage meltdown (if there is any good news) is that you are less likely to be approved for a mortgage you can’t afford.  These are interesting times…aren’t they?

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Jul 23 2008

What To Consider About Credit

“Credit is a system whereby a person that cannot pay gets another person that cannot pay to guarantee that he can pay.”  – Charles Dickens


Credit…most of us cannot live without it; some of us wish we never knew it existed.  I suspect this sentiment goes back to the beginning of mankind – because with credit comes debt.  When managed carefully, credit is a powerful tool that allows both businesses and individuals to reach for and achieve beyond what could ever be possible if all payments were required up front or upon receipt.  Just stop and think about how your life would be different if you had zero access to credit.  You would need to save every dollar you could for over half of your life just to be able to buy your own home.  You would also have to pay for every purchase immediately or you would need to transfer money in advance of any service you intended to use.  This simply wouldn’t be practical in the world we live in today – you get the point.


As recently as mid-2007, it was so easy to qualify for significant levels of credit – in the form of business loans, lines of credit, mortgages, home equity loans, credit cards, etc. – that many a business or person fell into the “credit trap.”  Now you can’t watch the news without hearing about the soaring level of business and personal bankruptcies and mortgage defaults.  It is simply amazing how quickly the worm can turn.  Tony Pugh of the McCatchy-Tribune News Service reported this month that commercial bankruptcy filings for the first half of 2008 are up 45% from last year.  From April through June, 15,471 U.S. businesses ceased operations.  Today it was reported that quarterly losses for Wachovia were nearly $9 billion due almost exclusively to sub-prime mortgage defaults.  Considering this news, it is no surprise that credit is not quite so easy to come by suddenly.  Regardless of whether it is easy or hard, many of us need to do a better job of making sure we know what we could be getting into before taking the plunge.


As a general rule, it is usually better to avoid using credit if you have a choice – unless of course you are investing in an asset that will likely increase in value over time or the cost of rental exceeds the cost of financing (principal and interest) and you clearly have a long-term need.  If you can deduct the interest on your taxes it makes even more sense to utilize credit and finance…but do not let this be the only reason that you finance an asset.  Easy credit in any form can lead to overspending.  The resulting payments absorb funds that could or should be used for other needs or opportunities (see opportunity cost).


The number one rule of thumb regarding credit is: if you feel like you shouldn’t be purchasing something with credit, you probably shouldn’t.  This applies to personal and business situations.  And finally – never use credit on high-risk investments that would threaten your security if they do not produce the desired results.  I think now we should all go to work getting the economy back on track. 

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