When $700 Billion Isn't Enough

One visit to my website, and you know how I feel. Today was simply VALIDATION when I found these two articles at the Wall Street Journal’s website:

The latter of these two articles backs up the message I’m on a mission to remind bankers: “Your customers don’t need you anymore!”

No one needs to be reminded the crisis our country is in today. (Been “off the grid” all year? Read these posts from Oct 14th & Aug 19th.) While there is plenty of blame to spread around, our nation’s financial system neared collapse earlier this year prior to the U.S. Government’s stepping in to provide a $700 billion “bailout” package. The harsh reality is that it is going to get worse before it gets better. Please fasten your seatbelts and place your tray tables in the upright position!

The U.S. unemployment rate for October, as reported by the Bureau of Labor Statistics, was reported at 6.5%, up from 6.1% in September. Mortgage foreclosures are happening at rates not seen in this country since the real estate implosion of the late 1980’s. Despite the fact that the United States has a new President headed to the White House and a power shift in Congress, those new elected officials won’t be in office until late January 2009.

In all fairness, it’s not really the smaller, community banks who are to blame for this financial debacle in the mortgage and banking sectors. In fact, many of those banks represent the viable option for consumers who seek someplace safe to keep their money. Should the trends reported by the Wall Street Journal articles above filter down to these community banks, however, I don’t know why ANYONE would want to continue doing business with ANY bank!

The regulatory environment that governs many of the overall policies to which commercial banks are subject has done much to “protect” our banking system and consumers. While I’m not a fan of over-zealous, government regulation, I simply believe there are many predatory practices banks engage in every day that add BILLIONS to their bottom lines to which the regulators simply look the other way. We’ll get into some of those in some upcoming posts, so keep coming back! You won’t BELIEVE what they can do to you!

Consumers: You deserve ANSWERS, TRANSPARENCY, and COMMON SENSE from the financial institutions whose services you employ. Keep coming back to this blog, and you will learn valuable tips your financial institutions don’t want you to know about.

Bankers: You’d better get your act together, because the public is weary of your ways, and frankly, have alternative ways of obtaining the services for which you used to have a lock on delivery. Do the right thing. Get ahead of the wave and do what’s right. You just might be rewarded with more customers than you’d ever imagined. (Shameless plug: This Consultant Can Help)

Three Card Monte

We’ve all seen the game, Three Card Monte. On a side note, I actually saw some vice cops take down a game that had attracted quite a gathering around it on the Las Vegas Strip. I guess you have to have an actual gaming license in the State of Nevada to actually rip people off….but that’s not my point today.

On the television screen at the gym a few days ago, I watched the mainstream media following the latest on the U.S. financial markets and how they were reacting to the passage of the $700 Billion bailout bill. I was listening to some of my favorite guitar players on my iPod at the time, but just watching the pictures on the screen had me asking, “How in the world get we get into this mess?” Then, immediately, the answer came to me as if in a song, “Greed.” What else?

As a “recovering financial advisor” I have to say all of this madness isn’t all that shocking to me. Don’t get me wrong, as a self-employed person who can’t just take a copy of a paystub down to the local mortgage shop and get a home loan (they still do those, right?) I know it’s going to be a while before I will be able to buy another house….Frankly, that’s okay with me.

It IS the alleged American Dream to own the house you live in…but is all the stuff we see in the mainstream media just financial pornography for the masses?

Somewhere along the way, Americans seem to have shifted from a curious public to public unsaddled with the burden of responsibility, wise judgement, and just knowing what the heck we were getting ourselves into. “It’s okay,” say many. “Someone will come along and bail us out if we really screw this up. Besides, what are the odds this is really going to happen anyway?” [If that last comment intrigues you, here is some recommended reading: The Black Swan: The Impact of the Highly Improbable]

I love this country. I’m also a fan of capitalism – even though it has it’s dark side. Because of the fundamentals (yes, they ALWAYS matter) on which the United States of America was built, we DO have a nearly unlimited ceiling of opportunity for anyone willing to work hard. The problem of it all, though, is when it becomes so difficult to know who you can honestly trust, and who you can’t.

There are a number of financial advisors in this world who truly DO CARE about their clients. I’ve had the priviledge of working around some of them during my tenure in the business. Unfortunately, when you start moving up the food chain toward the top of so many of Wall Street’s operations, there appears to be a real disconnect between what is “right” and what is “right now”. Big finance is driven by deals (a la capitalism), but it’s also driven by greed. When those two are shuffled, dealt, and flipped over on a piece of cardboard on the side of the road by a huckster, all that remains is a house of cards.

There is more than one way to work through this financial crisis we’re all paying for today, and how we got here is another story (read “Don’t Hate the Player, Hate the Game“). I’m personally nervous that Congress has put into play a $700 Billion “bailout” plan for our economy.

Did something have to be done? Yes. Might there be a better way? Yes. Is it time for the United States to have it’s leveraged head handed to it for pushing too close to the financial edge of the world? Maybe.

Let’s just make sure we’re not playing a high stakes game of Three Card Monte.

Don't hate the player, hate the game!

I’m one of those people who reads various Business Journals to keep a finger on the pulse of our country ‘s business climate. On any given day, I might browse up to five different city-specific editions to see what’s going on in markets like Phoenix, Atlanta, Nashville, or Denver. Each email summary typically has a link to the “Question of the Day”, which today got me thinking….

Today’s Poll (from the Phoenix edition) was soliciting input on who was to blame for our country’s current mortgage crisis. The choices provided were as follows:

  1. Wall Street for bundling sub-prime securities
  2. Lenders for pushing risky loans
  3. Homebuyers for borrowing beyond their means
  4. Federal regulators lax oversight
  5. Other

As a “recovering financial adviser”, I’d like to think I know something about all angles of this issue. In a somewhat lengthy (on the record) rant on this colossal failure of the mortgage-lending system in America, let’s address these point-by-point of the choices given to this question:

  1. Wall Street– Of course. Anytime there is a huge financial hiccup it’s easy to point fingers at the very institutions that best represent the capitalism which makes this country (and the world) so wonderful. That’s odd, coming from me – for she is the same financial machine, fueled by the greed of Wall Street, I’ve so intimately dated over the years–and our relationship hasn’t exactly been roses. Wall Street (and banking, for that matter) works on the notion of leveraging OPM (Other People’s Money) to create enormous profits for the middle-man. It is the same machine that has built efficient markets for selling bonds, stocks, and other securities over the years that have generally built a lot of wealth for ordinary, passive investors over the years. I can’t really fault “the street” for just doing what they do best, making money by creating markets to trade supply and demand.
  2. Lenders, for pushing risky loans– Hmmm, we might be on to something here. In the addiction recovery business, these people are called “enablers”. As a finance major in college, the key fundamental element of finance I learned is the correlation between risk and reward. The more risk one takes, the greater the anticipated reward for taking said risk. That works well when someone is risking their own capital. In this case, though, the concept of OPM comes into play once again. You see, in order for Wall Street to create bundles of smaller, less attractive individual loans for the consumption by larger, institutional sized investors, those smaller loans must first be made. As the demand for the bundled securities rose, so did the demand by the middle-men for those loans. Well, at some point, as the networks of the mid-tier players in the securities “food chain” became unable to support the demand, they simply began dishing out cash to borrowers of lesser and lesser quality through a further expanded network of mortgage brokers and specialty lenders. You might even be suprised to learn that your local bank actually holds very few of the mortgages it provides to it’s own customers, instead offering to accept a commission from these “upstream” institutions while at the same time, dodging any potential risk of default by the borrowers.

    Did you catch that? Now you have institutions making mortgage (investment) decisions based solely on what information was being collected by third and fourth party gatherers (read: those farther from the ramifications of poor risk analysis) versus their own people. While it’s not really an issue for those borrowers with great credit history, raise your hand if you think this is a good idea when dealing with borrowers with a declining ability to repay borrowed funds. (If you just raised your hand, you must now check yourself into a twelve-step program for those addicted to poor choices.)

  3. Homebuyers for borrowing beyond their means- The last time I checked, the way most people buy a home is to a) gather up personal financial information b) take it to a lender c) see how much they will lend you 4) go buy a house. I can remember the first mortgage application my ex-wife and I ever filled out. When the lender came back to us with the amount they were willing to lend us, I had to be picked up off of the floor. Without much hesitation, the mortgage company was willing to lend us about twice (measured by payment amount) what we were comfortable with. Had we not both been keenly aware of our own responsibilities associated with taking on a mortgage, we could have easily been suckered into a commitment far beyond our means. For the millions of Americans struggling to get by, I think a system fueled by greed put too much faith in Joe Paycheck turning down too large of a loan in an effort to continue fooling his family that everything was better than ever.
  4. Federal regulators lax oversight– Unfortunately, it’s because of a series of unfortunate, repeated, ill-thought-through decisions, the political repercussions of this mortgage meltdown will likely result in a “cure” that will swing the pendulum far in the opposite direction, likely slowing down the number of people taking steps to own a piece of the “American Dream” of home ownership for a while.
  5. Other -Okay, to the people who didn’t choose any of the above options…seriously, what the heck could be “other”?

In the style of the late Bernie Mac, I say, “America, why can’t we all just make responsible decisions and do the right thing. You know people are always going to push to see how much they can get away with!”