Tag Archives: finance

One Word 365: Discipline

Towards the very end of 2013, I stumbled upon a website that intrigued me with it’s premise. The site is “OneWord365.com”, and the premise of the program is that you choose one word you want to focus on in the coming year.

Such a simple premise, but one with the potential for a great deal of power. Almost any New Year resolution that anyone has ever made can be boiled down to one word, so I decided to give the program a try. And so here we are today.

My one word is “discipline”, though I don’t mean it in the negative sense, where punishment is involved (though at times it may seem like a punishment is going on, for sure.) No, my efforts are more towards the concept of “self-discipline”, the training and control of oneself and one’s conduct which is usually undertaken for personal improvement.

Frankly, I feel that my life could use a little personal improvement in a number of areas, and my own efforts at undertaking greater discipline in those areas this year could, if successful, mean major, positive change in my life. Those main areas include diet, exercise, finance, and what I am calling “presentation”, how I am presenting myself to the outside world.

I realize it is nothing more than a concept at this point, a thought in my head, supported only by the idea being expressed in some words here at my website. But I am going to begin planting that idea, specifically that word “discipline”, into my consciousness, and am going to begin taking action towards greater self-discipline as well.

I am going to fundamentally change what I eat and the way that I eat it. I am going to undertake a regular exercise program, and then maintain and even expand on it as the year progresses. I am going to spend less, save more, and be more charitable when I am able. That takes care of the areas of diet, exercise, and finance.

The final area is that of “presentation”, which will include improvements in how I speak to people, how I approach my career, how I conduct myself online. When I am able to do so financially and responsibly, I am even going to dress better. I am going to write more here on my website, on more important topics.

It has been said that self-discipline is all about actually thinking on your words and actions, and then making choices that are right for you and the others who have importance in your life. The “OneWord365.com” FAQ says that the program is about choosing to live with purpose and intentionality.

I think those concepts merge perfectly into my own personal plan of greater self-discipline: thinking about what I am doing and saying much more often, being less reactionary and more under control, and intentionally make better choices in word and deed with purpose.

So there you have it, a fairly major 2014 New Year’s resolution. I have joined the “OneWord365” program publicly with the choice of “discipline”, specifically focusing on my own self-discipline. As the year moves along, I will provide some specific updates on my progress, in hopes of inspiring myself to continue, and others to join in.

That’s another thing about “OneWord365” – it’s never too late to jump in and start a program of your own. Go and visit the website. Pick out a word that encapsulates the area of your life which you want to focus upon. And then begin, holding yourself accountable along the way to the person who, in the end, matters the most in any positive change – you.

The bailout and the bloodbath

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The Down Jones Industrial Average, the most popular and famous benchmark to guage the strength of the American economy, plummeted down almost 700 points today.

The index, which is based on the scaled average of the stock prices on 30 of the largest and most widely held companies here in America, was celebrating the one-year anniversary of closing at it’s all-time record high of 14,164. Today it closed at 8,579.

Just last Friday, October 3rd, the U.S. House of Representatives passed a $700 billion bailout of Wall Street and the banking industry. US News & World Report stated “A failure to pass the bill would have been devastating for markets.”

But you can’t just pick on one publication, because there were many individuals and media outlets, and quite obviously the Congress and President Bush, who believed the same thing.

So despite calls from myself and many like me that they were bastardizing capitalism, they passed the bailout package and signed it into law to keep us from devastating losses and to save our economy.

Oops! Here we are a week later, and the Dow has been devastated by a stock market crash.

Today’s collapse marked the 11th-worst percentage loss in Dow history. The Dow has declined by more than 20% over the past week, something that has traditionally defined a ‘crash’ when it happens close together like this.

None of this is to say that the market would have been fine had Congress never passed the bailout bill. It clearly wouldn’t have been. But neither has the bill been the panacea that it’s proponents, including George Bush who signed it into law and both presidential candidates John McCain and Barack Obama who voted for it, sold us on it being.

What the bailout accomplished was to relieve financial pressures on fat cats at the taxpayers expense. When the government borrows $700 billion dollars, we all borrow that money, because the government is us. We have to pay that money back, with interest, using our tax dollars. That is not simplistic – it’s simply the truth.

So now we not only have our stock market crash, those ‘devastating losses’ that we supposedly needed the bailout to avoid, but we are $700 billion in debt on top of it. And perhaps most importantly, the line to get more bailouts is forming.

The hard lessons of capitalism, allowed to play out in their fullest, will always weed out the bad actors and those who take negligent risk over time. Again, if they are allowed to play out naturally. By bailing out many of these bad actors and fool-hardy risk takers, the government sends the horrible message to “go ahead, do whatever you want, and if you lose, we got your back.”

For U.S. taxpayers, this was not a bailout silver bullet, or even one necessary piece to a financial recovery puzzle. This bailout was just more bullets fired into a wounded economic carcass that each day gets worse in what we can now rightly call the ‘bailout bloodbath.’

God help us all if Obama wins the election and Democrats retain control of both houses of Congress. The tax increases and spending increases that they initiate over the next few years will deal a further blow to American capitalism and greatness. And that is no over-exaggeration.

$700 billion dollar roller coaster quick fix

Our government is considering, and is at this moment negotiating, a $700 billion dollar package to ‘rescue’ the economy from what is being sold to us as certain ruin.

This ‘ruin’, of course, was completely and totally self-inflicted. Interest rates at historic lows combined with a loosening of lending policies, especially by mortgage companies, resulted in a number of bad loans to poor credit risks that was inevitably going to come crashing down around many people and companies.

Those who bet on an ever-expanding economy were right in the long run, because the fact is that over time the economy will likely expand, assets will increase in value, and investments will rise.

But some people also forgot that the economy takes ups and downs, much like a roller coaster, on the way to the ultimate thrill of an ending. Some people are going to get caught in a ‘down’, they are going to lose in the market. That is the risk involved in the ride, that every once in awhile one is going to run off the tracks and crash.

The ride is often a true thrill, because you have great highs where you soar, where your investments rise and you feel invincible as your account balances inflate. However, you also have to suffer the anxiety of the downturns.

The economy will adjust from time to time, weed out the bad, and hit that roller coaster dropoff. Your stomach may rise into your throat at this point, and you may even scream out of sudden fear for your safety, the safety of your assets in this case.

Thankfully on a real roller coaster, as on the roller coaster of life, we usually rise again. There are brakes and seat belts and safety bars to protect us, and there are also ‘the odds’, which say that the overwhelming majority of the time you will survive that dropoff and rise once again.

Over time in the economic world, you will rise to a point higher than the point at which you started. However, like real roller coasters, every once in a blue moon one is going to go crashing off the rails. Often this will be as a result of poor maintenance, or a sudden brake down in a normally reliable part.

The same thing will happen with the economy. It will run off the rails, and those on the roller coaster are going to go down – hard – some to never get up again.

It should never be the role of our government to bail out capitalist companies that live and die with their bottom lines. Individual investors, as well as companies big and small, take risks in order to experience rewards. Many will ultimately succeed. Some, and sometimes many, will fail and will collapse.

It is these collapses and negative adjustments that the rest of us learn from, and that create opportunities for others to come in and build a better mousetrap. The government has no business bailing out this economy with our tax dollars.

The government does not have any money of it’s own, it has only the funds collected from you and me in taxation. In taxing our businesses, our incomes, our investments, and in the interest they make on the investments they make with our money. Key words being ‘our money.’

Businesses, banks, mortgage companies, individuals were riding high on the up-slope for years, and they also need to go through the down-slope for the free market to naturally adjust at the bottom of its drop-off.

It may be a long, hard, jaw-dropping, stomach in your brains drop, and some may not survive the scare. But the fact is that the real crash will occur by artificially propping up this economy with a bailout. It will have the ultimate effect of putting glue on a broken roller coaster rail.

The force of the coaster will, sooner rather than later, overwhelm the glue. The rail may actually need to be taken up and replaced. The roller coaster may need to be taken off-line for a short period while true repairs are done.

But in the long run, this will be best. The rail will be fixed, the rides will begin again, and the thrill will come back.

The government needs to let the market do its work, and save us all the irresponsible $700 billion dollar quick-fix that it is trying to push on those of us who understand what riding a roller coaster is all about.

Greed is not good

“…Greed — for lack of a better word — is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms — greed for life, for money, for love, knowledge — has marked the upward surge of mankind. And greed — you mark my words — will not only save Teldar Paper, but that other malfunctioning corporation called the USA.” – Michael Douglas as Gordon Gekko in “Wall Street

The Catholic Church divided sin into two classes – venial sins, which were relatively minor, and the more serious cardinal sins, which became known classically as the ‘seven deadly sins’. These were said to “destroy the life of grace” and brought the threat of eternal damnation on those who practiced them, unless absolved through a formal confession or forgiven through an act of perfect contrition by the offender.

One of these was the sin of ‘Greed’, which is seen as a sin of excess, and is applied in particular to the acquisition of wealth. It is closely aligned to avarice, which can manifest itself in bribery, robbery or theft by means of violence, trickery, betrayal, and even treason. It also covers the scavenging and hoarding of materials, as well as manipulation or abuse of authority.

In the film ‘Wall Street’, Michael Douglas’ character Gordon Gekko delivered the above now-famous speech at a shareholder’s meeting. Gekko was trying to woo shareholders to accept a bid that his company was making to takeover the Teldar Paper company.

Gekko’s sales pitch highlighted that the current Teldar management was bloated, wasteful, and borderline incompetent. Either that, or they were intentionally abusing their positions to ensure their own personal gain, and those shareholders be damned.

Gekko flat out says in his speech that the management was not greedy enough. They were not nearly as interested in turning a profit for the company, and increasing it’s value for the shareholders, as they were in enjoying, as he put it, “steak lunches, hunting and fishing trips, corporate jets, and golden parachutes.

But while Gekko painted himself as a “liberator” of companies, the fact is that his greed was every bit as dangerous for the company and the shareholders as any inappropriate or incompetent acts of the current management.

The film highlights the many subjects in play in recent corporate scandals such as the Enron Corporation and Arthur Anderson accounting firm debacle, and today’s collapses and bailouts involving Fannie Mae & Freddie Mac, Lehman Brothers, AIG, and Merrill Lynch.

Big business, finance, mortgage, and insurance companies playing fast and loose with what is often other people’s money, thinking that they have the system so securely managed that nothing can burst their upwards bubble, and not concerned if the bubble does burst because either they will be bailed out by the government, or be able to personally escape with few ramifications as individuals, or both.

Fact is that financial speculation comes with risks. If a company or individual manages their finances well, and makes good, sound, stable decisions, they will usually come out ahead in both the long and short terms.

If decisions are made on a more short-sighted basis, this can result in high financial rewards for both individual loan and account managers, as well as for customers. But it may also expose all involved parties to greater risks. The fact is that if the worse case develops everyone is going to take a financial hit.

In fact, history would say that in such speculative periods the more appropriate word would be ‘when’ the worse case develops, not ‘if’.

So lots of bad loans were made, many speculative investments were made, over a number of years, and finally, inevitably, these markets have not been able to hold up, at least not in the short term.

Companies and institutions are being sold or folding, or the government has been forced in to prop them up or outright take them over with public money.

We the taxpayers have become the owners of mortgage and insurance companies. Much as in the mismanagement of the fictional Teldar Paper in the film “Wall Street”, the poor decisions of these very real companies are coming home to roost.

And much as the fictional Gordon Gekko, many of the big money men have proven too big for their britches. But most of them will soar off into the sunset without individual responsibility, some with those golden parachutes that Gekko spoke of in the film.

In the end, it will be you and me, the regular tax payer, who will foot the bill for their poor business decisions, and that is not how our system is supposed to work.

You can debate the importance of these institutions and their solubility from now until doomsday. The fact remains that the winners are supposed to take it all, and the losers are supposed to take the fall, based on their business decisions.

If it takes a few big businesses going under, if it takes a ton of money being lost, to straighten out what has ultimately become a house of cards, then so be it.

Incompetence and greed, which despite what Gekko said is not good, should never be rewarded. The results of both deserve to be left to suffer the consequences, as educational for both the participants and for the rest of us.

Freddie & Fannie getting some help

You may have heard of them, but you probably don’t know a whole lot about them. They are your good friends in the area of housing, and their names are Freddie and Fannie.

That would be Freddie Mac and Fannie Mae, to be more precise, and as Treasury Secretary Henry Paulson was quoted recently they “play a central role in the housing system and must continue to do so in their current form…”.

On Sunday, Treasury and the Federal Reserve moved to secure the finances of the two giants, to ensure that they do not drown under the weight of what is termed the current ‘correction’ in the housing market.

Freddie Mac is the Federal Home Loan Mortgage Corporation, a mortgage finance system that makes home ownership and quality rentals a reality for more American families, reducing the costs and expanding the choices by linking Americans to the world financial capital markets. It is stockholder-owned, and is authorized to make loans and loan guarantees.

Freddie Mac was chartered by Congress back in 1968 in order to provide competition for Fannie Mae, so the two are not so much a couple as they are competitors in the housing capital market.

Fannie Mae is the Federal National Mortgage Association, which was founded back in 1938 as a part of Franklin Roosevelt’s ‘New Deal’ programs. Fannie is also a stockholder-owned company that is authorized to make loans and loan guarantees.

The basic premise is that both of these Federally designed, but publicly owned, corporations provide the money that props up the U.S. secondary mortgage markets. Stay with me for a quickie and simplistic lesson on the process here.

For instance, you own your home and you have a mortgage with your bank for the financing of that home. Your mortgage is bundled in with a group of others to form what is known as a ‘collateralized mortgage obligation’, or CMO. This basically reduces the risk for the lending institutions, since the larger group is less susceptible to individual mortgages being defaulted on if a homeowner fails to meet their obligation of paying the mortgage.

The grouping is then further sold to other investors as a product called a collateralized debt obligation, or CDO. These CDO’s can then often be bundled with other CDO’s to make giant CDO’s made up of numerous mortgages.

The CDO’s are then publicly traded as investment products. So when housing is going good, the value of mortgages go up, and the value of the CDO’s goes up as well. When housing prices and sales fall, the value of your mortgage declines, and thus the value of the larger CDO’s also declines.

Fannie Mae and Freddie Mac’s role is that, for a fee, they guarantee that the money on each mortgage will be paid back, regardless of whether the actual individual mortgage-holder every really pays back their particular mortgage. Investors in CDO’s with Fannie & Freddie allow the two to keep the fees based on this guarantee.

However, when particularly nasty down markets occur, such as is happening now, many individuals default on their mortgages and walk away, never to pay them off. Fannie & Freddie are stuck with having to payoff these obligations, and thus the risk is very real for these corporations in a poor market.

On Sunday, the government moved, through the Treasury Department and the Federal Reserve Bank, to ensure that Fannie & Freddie would be able to remain solvent today.

Both corporations have a $2.25 billion dollar line of credit with Treasury that is designed to get them through tough times until the market can turn around again, which it historically has always done. However, this downturn has been so severe that both Fannie & Freddie could exhaust these lines of credit this week.

So today, Freddie Mac is planning to attempt to sell $3 billion worth of securities on Wall Street for financing. There is real fear that they will not be able to sell these securities, and that this failure would set off a crisis of confidence in the world markets, and a worldwide sell off in all types of securities.

If investors don’t believe that they will get paid back on their investments, they will sell. That is where we are at. This is all high finance stuff, but it is all backed and affected by your own individual mortgages.

The Sunday moves by the Fed and Treasury ensure that, should these debt securities sales fail, Fannie & Freddie will still be supported by the increased federal credit lines.

Bottom line for the long haul is that what is needed is for the market to again turn around, as it always has, and begin another upturn. This will happen again at some point, but the sooner the better for the stability of American and world markets, as well as for individual mortgage holders.