The benefit of the current market mess is that we are learning so much about the most exotic parts of the financial services industry. Think about it---over a year ago, very few outside of the lending community knew about sub-prime mortgages or the securities associated with them. We are now getting a lesson in another segment of the industry: monoline insurers and how they may affect the fragile markets.
Monoline insurers guarantee securities against default. That means if they have insured a bond and the issuer defaults, the monoline insurer will cover the interest and principal due to the investor. Most of these companies originally guaranteed municipal bonds, which rarely defaulted. They then moved into bonds with a bit more risk and as they spotted the mega-profit potential in riskier bonds, the temptation was too great to avoid.
Enter the housing boom in 2001, when defaults were low on even the riskiest loans (subprime) and the monoline insurers started to guarantee risky loans, in addition to their more staid (and less profitable) business lines. Initially, the strategy reaped enormous benefits: revenues rose for the largest firms, including M.B.I.A., Ambac and FGIC but in hindsight, they did not have a clear understanding of the risk they were assuming. As a result of not properly assessing the risk, the insurers did not charge enough for the insurance offered, and even worse, did not earmark enough money to cover loans that might go bad.
The latest worry among investors is that monoline insurers are in serious trouble and may in fact be headed towards failure unless the government can orchestrate a bailout. Estimates go as high as a hundred billion dollars necessary to turn around a quickly deteriorating problem. Even Warren Buffett entered the fray by offering a stop-gap plan to bail them out, which none of the companies have agreed to.
Maybe you’re thinking: just let them fail—who cares if a business that screwed up goes down the tubes? I know, we all have that feeling, but the failure of these massive companies would be terrible for an already-shaky credit market. For that reason, even I have to admit that while it feels rotten to help out a bunch of folks who made a bad business decision, it is important to focus on the bigger picture and mitigate further potential damage to the financial system. Otherwise, the Monoline Express may take global markets down even further, an outcome we all would like to avoid.
Friday, February 15, 2008
Thursday, February 14, 2008
V-Day
I found this old article and remembered that people liked the history and the message so I am re-running it today.
You may not know that Valentine's Day originated in 5th Century Rome as a tribute to St. Valentine, a Catholic bishop. Originally, the Romans had practiced a pagan celebration in mid-February commemorating young men's rite of passage to the god Lupercus. Later, the Church found a more appropriate choice in Valentine, who, in AD 270 had been jailed and ultimately beheaded by Emperor Claudius for secretly marrying young men that came to him (marriage was banned from his empire at the time). During his imprisonment, Valentine fell in love with the blind daughter of his jailer. According to legend, his love for her and his great faith healed her blindness. Before he was taken to his death, he signed a farewell message to her, "From your Valentine." The phrase has been used on his day ever since.
OK, it’s a nice story and all, but in honor of the romantic day today, let’s get a little bit more down and dirty about the thorny issue of money and relationships. From those who are considering cohabitating, to those who are getting married and even to those who are already in long-term relationships, conflicts over financial matters have a way of starting small and escalating to dangerous levels.
Couples have often told me that if only they had more money, they would not fight about it. In my experience, the answer is not simply having more cash, because many wealthy people fight about finances. The reason is that money is more than a way of keeping score, it is power. And since for most couples, there's usually an imbalance right off the bat, the issue can be a lightening rod that brings out the worst in each of us.
The first step in approaching the unromantic topic of money is to do so when there is no particular issue at hand. How you discuss sharing financial responsibilities can often set the tone for how successfully you can understand one another and ultimately achieve your longer term financial goals. Start by being honest about how each of you has handled your financial lives in the past. You can often prevent money issues from becoming a point of contention in your relationship by acknowledging them right from the start. Talk about how money was handled when you were growing up. Share your feelings and fears about money: Were your parents terrible with money? Are you worried you'll make mistakes investing? Does the bag-lady image haunt you? Do you have a horrible pile of debt that keeps you up at night? Talk about what you hope your money will accomplish and what your priorities are.
Then together, you need to create a game plan and identify action steps to get you where you want to go. This will only work if you both buy into the plan. If one convinces the other one, then it will likely fail. Questions include, when do you think you want to retire? Do you want to pay for every dollar of your children's college education? And then the less lofty, but equally important issue of how can you develop a budget and track expenses to help you reach your goals?
Finally, if you really are having a hard time dealing with your money situation, bring in an unbiased party. (Note: this is NOT one of your parents!) A competent financial planner or CPA whom you both trust can help you define goals and create a strategy to meet them. A professional can also point out problem areas and mediate solutions.
Discussing money issues is not as romantic as a dozen roses, a big chocolate heart or even a lovely card, but it may be a way to minimize future angst over finances. Hopefully, with money off the table as an issue, there will be plenty of time for romance. Of course, it goes without saying that the one day you should not talk about money is February 14th!
You may not know that Valentine's Day originated in 5th Century Rome as a tribute to St. Valentine, a Catholic bishop. Originally, the Romans had practiced a pagan celebration in mid-February commemorating young men's rite of passage to the god Lupercus. Later, the Church found a more appropriate choice in Valentine, who, in AD 270 had been jailed and ultimately beheaded by Emperor Claudius for secretly marrying young men that came to him (marriage was banned from his empire at the time). During his imprisonment, Valentine fell in love with the blind daughter of his jailer. According to legend, his love for her and his great faith healed her blindness. Before he was taken to his death, he signed a farewell message to her, "From your Valentine." The phrase has been used on his day ever since.
OK, it’s a nice story and all, but in honor of the romantic day today, let’s get a little bit more down and dirty about the thorny issue of money and relationships. From those who are considering cohabitating, to those who are getting married and even to those who are already in long-term relationships, conflicts over financial matters have a way of starting small and escalating to dangerous levels.
Couples have often told me that if only they had more money, they would not fight about it. In my experience, the answer is not simply having more cash, because many wealthy people fight about finances. The reason is that money is more than a way of keeping score, it is power. And since for most couples, there's usually an imbalance right off the bat, the issue can be a lightening rod that brings out the worst in each of us.
The first step in approaching the unromantic topic of money is to do so when there is no particular issue at hand. How you discuss sharing financial responsibilities can often set the tone for how successfully you can understand one another and ultimately achieve your longer term financial goals. Start by being honest about how each of you has handled your financial lives in the past. You can often prevent money issues from becoming a point of contention in your relationship by acknowledging them right from the start. Talk about how money was handled when you were growing up. Share your feelings and fears about money: Were your parents terrible with money? Are you worried you'll make mistakes investing? Does the bag-lady image haunt you? Do you have a horrible pile of debt that keeps you up at night? Talk about what you hope your money will accomplish and what your priorities are.
Then together, you need to create a game plan and identify action steps to get you where you want to go. This will only work if you both buy into the plan. If one convinces the other one, then it will likely fail. Questions include, when do you think you want to retire? Do you want to pay for every dollar of your children's college education? And then the less lofty, but equally important issue of how can you develop a budget and track expenses to help you reach your goals?
Finally, if you really are having a hard time dealing with your money situation, bring in an unbiased party. (Note: this is NOT one of your parents!) A competent financial planner or CPA whom you both trust can help you define goals and create a strategy to meet them. A professional can also point out problem areas and mediate solutions.
Discussing money issues is not as romantic as a dozen roses, a big chocolate heart or even a lovely card, but it may be a way to minimize future angst over finances. Hopefully, with money off the table as an issue, there will be plenty of time for romance. Of course, it goes without saying that the one day you should not talk about money is February 14th!
Wednesday, February 13, 2008
Numero Uno
For one night, I forgot about the anxiety surrounding financial markets or even the primary season and focused on one of my favorite investment indicators: the Westminster Dog Show. I love the show and try to use the characteristics of the winning breed as a metaphor for the investors.
The winner of the 2008 Best In Show Trophy was "Ch K-Run's Park Me In First," a.k.a. "Uno," a Beagle. A BEAGLE? Yup, just like good old Snoopy, Uno is a beagle, not some fru-fru poodle or a weird, esoteric breed from the hinterlands of Europe. I dug around a little to find out what makes a beagle tick. I have added my comments about the parallels to investors in parentheses to the description found on www.dogbreedinfo.com:
A hardy, sturdy squarely-built, small hound, the Beagle has a sleek, easy-care, short coat, which can come in any hound color, for example, tri-color, black and tan, red and white, orange and white, or lemon and white. (Let’s think of these colors as basic asset classes---investors can not confine themselves to only stocks, or bonds, but should use a mix of the various asset classes available.)
The coat is close, hard and of medium length…The skull is broad and slightly rounded, and the muzzle is straight and square. The feet are round and strong. The black nose has full nostrils for scenting. The long, wide ears are pendant. (All of these features seem pretty basic—I would interpret this to mean that every investor should take care of the fundamental issues of planning in addition to focusing on investing.)
The brown or hazel eyes have a characteristic pleading expression. The tail is carried gaily, but never curled over the back. Beagles have a distinct howl / bay of a bark when they are on the hunt. (Investing is emotional -- sometimes investors beg for certain outcomes, especially when they have imbalanced positions in place, while other times we howl with pleasure when things go our way. We should fight these urges and carry our tails gaily as we navigate our financial lives.)
The Beagle is a gentle, sweet, lively and curious dog that just loves everyone…sociable, brave and intelligent, calm and loving...they have minds of their own. They are determined and watchful. (What better message for investors: use your own mind, be determined, though not intractable. Finally, play well with everyone-never brag about your successes or whine about your missteps.)
The winner of the 2008 Best In Show Trophy was "Ch K-Run's Park Me In First," a.k.a. "Uno," a Beagle. A BEAGLE? Yup, just like good old Snoopy, Uno is a beagle, not some fru-fru poodle or a weird, esoteric breed from the hinterlands of Europe. I dug around a little to find out what makes a beagle tick. I have added my comments about the parallels to investors in parentheses to the description found on www.dogbreedinfo.com:
A hardy, sturdy squarely-built, small hound, the Beagle has a sleek, easy-care, short coat, which can come in any hound color, for example, tri-color, black and tan, red and white, orange and white, or lemon and white. (Let’s think of these colors as basic asset classes---investors can not confine themselves to only stocks, or bonds, but should use a mix of the various asset classes available.)
The coat is close, hard and of medium length…The skull is broad and slightly rounded, and the muzzle is straight and square. The feet are round and strong. The black nose has full nostrils for scenting. The long, wide ears are pendant. (All of these features seem pretty basic—I would interpret this to mean that every investor should take care of the fundamental issues of planning in addition to focusing on investing.)
The brown or hazel eyes have a characteristic pleading expression. The tail is carried gaily, but never curled over the back. Beagles have a distinct howl / bay of a bark when they are on the hunt. (Investing is emotional -- sometimes investors beg for certain outcomes, especially when they have imbalanced positions in place, while other times we howl with pleasure when things go our way. We should fight these urges and carry our tails gaily as we navigate our financial lives.)
The Beagle is a gentle, sweet, lively and curious dog that just loves everyone…sociable, brave and intelligent, calm and loving...they have minds of their own. They are determined and watchful. (What better message for investors: use your own mind, be determined, though not intractable. Finally, play well with everyone-never brag about your successes or whine about your missteps.)
Tuesday, February 12, 2008
Personal Financial Responsibility
I read yesterday’s article after the passing of a relaxing weekend and realized that it’s time to regroup and reframe my message. I have learned that negativity, however well-justified, is not helpful. So here goes with a more positive approach: I invite you to join me in a campaign for personal financial responsibility.
I don’t know about you, but when the world is awash in forecasts of doom and gloom, I find comfort in knowing that I can take care of myself. Recession is a heavy word that needs an equally weighty counterpart. Well here it is: YOU! You have the power to control your financial destiny, regardless of your station in life, but only if you choose to do so.
In fact, your employer can’t do it, your parents shouldn’t do it, politicians will never do it and the market surely won’t do it for you, but you can make personal financial responsibility a driving force in your everyday life. It starts with the recognition that you must address your financial issues head on—no more waiting until a better time (after the holidays, after tax season, after the summer); rather we all must come to see that this process must start right now!
And when I say that it does not matter where you are in your life, I mean it. Think of it like making the decision to go to the doctor for a physical. Some are in perfect health, others are ailing and some think that they are healthy, but they aren’t. Still, we all need to measure where we are and develop either a maintenance plan or a prescription to help us get better. So too with your financial life: you may feel like you have nothing or that you can manage the money yourself, but the development of a plan to help you get where you want to go is key to fulfilling your goals and the process is quite empowering.
Once you have the plan in hand, chances are it will force you to focus on a basic fact: to reach any of your goals, you will have to contribute regularly and faithfully, sometimes at the exclusion of doing other “more fun” stuff in the short-term. But in an industry where promises are nigh, I promise you that if you make this choice and forego a tiny bit in the short run, you will find that retirement is not a lofty vision in the distant but a reality that you can create for yourself.
Here’s another promise: I will be there to help shine a light when the fog rolls in and you can’t seem to find your way. Make no mistake about it, there will be hard times—recessions, market crashes, lay-offs, tax law changes—but through all of these temporary situations, I will try to point out opportunities that will help you be more successful in the endeavor. Can we together try to remember that the goal is not to beat the market or live in a larger house than your neighbor, but to get you where you need to go with the least amount of risk possible? My guess is that if you can focus on personal financial responsibility, you will feel more in control, empowered and never, ever victimized. So let’s get going, stop whining and make something great happen for you!
Thanks to my friend Wally, who inspired this concept and reminded me why I do what I do…
I don’t know about you, but when the world is awash in forecasts of doom and gloom, I find comfort in knowing that I can take care of myself. Recession is a heavy word that needs an equally weighty counterpart. Well here it is: YOU! You have the power to control your financial destiny, regardless of your station in life, but only if you choose to do so.
In fact, your employer can’t do it, your parents shouldn’t do it, politicians will never do it and the market surely won’t do it for you, but you can make personal financial responsibility a driving force in your everyday life. It starts with the recognition that you must address your financial issues head on—no more waiting until a better time (after the holidays, after tax season, after the summer); rather we all must come to see that this process must start right now!
And when I say that it does not matter where you are in your life, I mean it. Think of it like making the decision to go to the doctor for a physical. Some are in perfect health, others are ailing and some think that they are healthy, but they aren’t. Still, we all need to measure where we are and develop either a maintenance plan or a prescription to help us get better. So too with your financial life: you may feel like you have nothing or that you can manage the money yourself, but the development of a plan to help you get where you want to go is key to fulfilling your goals and the process is quite empowering.
Once you have the plan in hand, chances are it will force you to focus on a basic fact: to reach any of your goals, you will have to contribute regularly and faithfully, sometimes at the exclusion of doing other “more fun” stuff in the short-term. But in an industry where promises are nigh, I promise you that if you make this choice and forego a tiny bit in the short run, you will find that retirement is not a lofty vision in the distant but a reality that you can create for yourself.
Here’s another promise: I will be there to help shine a light when the fog rolls in and you can’t seem to find your way. Make no mistake about it, there will be hard times—recessions, market crashes, lay-offs, tax law changes—but through all of these temporary situations, I will try to point out opportunities that will help you be more successful in the endeavor. Can we together try to remember that the goal is not to beat the market or live in a larger house than your neighbor, but to get you where you need to go with the least amount of risk possible? My guess is that if you can focus on personal financial responsibility, you will feel more in control, empowered and never, ever victimized. So let’s get going, stop whining and make something great happen for you!
Thanks to my friend Wally, who inspired this concept and reminded me why I do what I do…
Monday, February 11, 2008
Cry Babies
Who likes to lose money? The answer is, nobody! But I am getting a little bored by the cry babies who bemoan the fact that they are losing money. WAAAHHHH! Usually it is retail investors, who whine about losing, but lately I’ve been hearing the wails from the banks and the folks who borrowed the ultra-cheap money made available. Poor babies!
Let’s remember what happened here: in 2003, Federal Reserve Chairman
Alan “Easy Al” Greenspan reduced interest rates to one percent, a level not seen in 40 years, and kept them there until mid-2004. Historically low rates combined with an unexpected influx of foreign money, particularly from emerging nations, into U.S. Treasury bonds, kept the US financial system awash in liquidity. If you think that nature abhors a void, you ought to see how fast an economic system can put cheap money to work!
It did not take long for some to realize that borrowing cheap money and investing it in an asset class that thrives on leverage (real estate) would reap great rewards. A speculative real-estate boom quickly developed, which led the wizards of Wall Street to create new-fangled ways to securitize mortgages, wringing the risk out of the process. Of course we now know that there could never be reward without risk.
There certainly were some players, who were able to sell at the top (mid-2006), but most were content to let it ride—after all, the real estate market was on FIRE! It took a while for the geniuses to realize that as soon as the housing market tanked, many borrowers would not be able to make their mortgage payments and ultimately, without that cash flow, it was nearly impossible to get out of a position where no secondary market exists. The scene was akin to when the passengers on the Titanic realized that there were not enough lifeboats available to save all of their lives. That’s usually the moment when panic ensues.
This most recent financial panic caused the bankruptcy of hundreds of mortgage lenders; the collapse of hedge funds; massive losses at some the world’s largest banks; and the foreclosure of thousands of homes. All of this has led to lots of crying. I have heard some very smart people say that the problems were contained to “one bad trader” (note to big investment banks: you may want some new folks in your risk departments if that’s the case!) or homeowners who said that they “never would have taken the loan if we knew that the house would drop in value!” In other words: I never would have taken the risk if I knew that I could actually lose.
Instead, the big guys enjoyed their earnings and paid themselves handsomely. Similarly, homeowners were busy extracting cash from their homes as if they were big ATM machines, or even worse, refinancing their beautiful fixed rate mortgages with adjustable ones. Most were not “tricked” into these crazy products—if that were the case then they would not have lied on their mortgage applications. The vast majority of people who are being punished for assuming too much risk actually deserve it.
As Warren Buffet recently noted, "It's sort of a little poetic justice, in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end…What has happened is a re-pricing of risk and an unavailability of what I might call ‘dumb money,’ of which there was plenty around a year ago." Those who made the dumb money are now among the biggest cry babies of all and I think that we can all agree that there is no crying in investing.
Let’s remember what happened here: in 2003, Federal Reserve Chairman
Alan “Easy Al” Greenspan reduced interest rates to one percent, a level not seen in 40 years, and kept them there until mid-2004. Historically low rates combined with an unexpected influx of foreign money, particularly from emerging nations, into U.S. Treasury bonds, kept the US financial system awash in liquidity. If you think that nature abhors a void, you ought to see how fast an economic system can put cheap money to work!
It did not take long for some to realize that borrowing cheap money and investing it in an asset class that thrives on leverage (real estate) would reap great rewards. A speculative real-estate boom quickly developed, which led the wizards of Wall Street to create new-fangled ways to securitize mortgages, wringing the risk out of the process. Of course we now know that there could never be reward without risk.
There certainly were some players, who were able to sell at the top (mid-2006), but most were content to let it ride—after all, the real estate market was on FIRE! It took a while for the geniuses to realize that as soon as the housing market tanked, many borrowers would not be able to make their mortgage payments and ultimately, without that cash flow, it was nearly impossible to get out of a position where no secondary market exists. The scene was akin to when the passengers on the Titanic realized that there were not enough lifeboats available to save all of their lives. That’s usually the moment when panic ensues.
This most recent financial panic caused the bankruptcy of hundreds of mortgage lenders; the collapse of hedge funds; massive losses at some the world’s largest banks; and the foreclosure of thousands of homes. All of this has led to lots of crying. I have heard some very smart people say that the problems were contained to “one bad trader” (note to big investment banks: you may want some new folks in your risk departments if that’s the case!) or homeowners who said that they “never would have taken the loan if we knew that the house would drop in value!” In other words: I never would have taken the risk if I knew that I could actually lose.
Instead, the big guys enjoyed their earnings and paid themselves handsomely. Similarly, homeowners were busy extracting cash from their homes as if they were big ATM machines, or even worse, refinancing their beautiful fixed rate mortgages with adjustable ones. Most were not “tricked” into these crazy products—if that were the case then they would not have lied on their mortgage applications. The vast majority of people who are being punished for assuming too much risk actually deserve it.
As Warren Buffet recently noted, "It's sort of a little poetic justice, in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end…What has happened is a re-pricing of risk and an unavailability of what I might call ‘dumb money,’ of which there was plenty around a year ago." Those who made the dumb money are now among the biggest cry babies of all and I think that we can all agree that there is no crying in investing.
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