I have been in Orlando and West Palm Beach Florida this week. When preparing for the vacation, I thought that I would see row after row of empty condo units and foreclosure signs. The reality is not exactly matching up with my dire expectations.
I know that my experience is not necessarily indicative of larger trends, but still, it was interesting to see what was supposed to be the nexus of the housing recession for myself. We started in Orlando, where there was tremendous growth during the housing boom. I asked some of the locals about real estate and they reported that there were lots of problem areas but that things appeared to be a little less ugly. Sure, there were stories of phenomenal incentives by builders, but there was also some anecdotal evidence that buyers were out again armed with low mortgages and looking for a bargain.
We visited one development in Orlando to check out the situation first-hand. Celebration is a Disney community in Orlando which looks about as close to the movie “Pleasantville” as anything I have ever seen. The perfectly manicured lawns in front of the well-kept homes should have been the first tip-off. The homeowners in Celebration would not allow the nasty realities of a housing recession to infect them. I should disclose that my brother-in-law left Long Island three years ago and now lives in Celebration full time, so I tease him incessantly about these facts. He told me that houses are still selling in Celebration and that prices have actually remained pretty firm. This proves that there is still a robust market for people who want to live in a sanitized community.
So where was the sub-prime stuff? Where was the evidence of the housing crisis? As we were leaving Orlando, I asked the hotel parking attendant where I could find the bad stuff and he pointed me in the direction of a line of condos in the distance. He said, “I am not sure that anyone ever moved in to those places, but they’re mostly empty right now.”
As we drove from Orlando to West Palm Beach, there was more evidence of the boom and bust—abandoned projects with equipment that appeared to be frozen mid-stream and hundreds of condo units and housing developments with huge signs advertising “new, low prices!” When we neared the East Coast and the ocean-side resorts, there were fewer signs, but the drive convinced me that the housing situation probably has more room to go before we are out of the woods. It many ways, it was far worse and slightly better than I thought it would be.
Friday, April 4, 2008
Thursday, April 3, 2008
Paulson: A Reg-u-lar Guy (Part 2)
Treasury Secretary Henry Paulson is making a splash with his proposals to overhaul the nation’s financial regulatory system. He was immediately attacked by some, lauded by others. Before passing judgment, it’s time to understand exactly what is being considered.
The most controversial part of the plan is the escalation of the Federal Reserve into a “super-cop”, charged with identifying and avoiding a crisis in advance, with the overall goal of keeping the financial system stable. After the Fed’s participation in the Bear Stearns deal, it is now clear that the central bank has de facto changed its role in the financial system. With the shift from commercial banks to investment banks, Mr. Paulson's notes that the new agency “would have broad powers so they could go anywhere in the system they needed to go to preserve that authority.”
The next area of the Paulson plan that is causing turf battles is the call for a combination of market oversight between the Commodity Futures Trading Commission (CFTC), which regulates futures, and the Securities and Exchange Commission (SEC), which regulates securities such as stocks and bonds. This is a thorny proposal, because the SEC is "rules based," which means that it sets regulations that institutions must follow, while the CFTC is "principles based," setting broad parameters under which the regulated entities try to operate. It looks like Paulson favors the CFTC approach to enhance global competition, but this idea ran into criticism almost immediately, as officials from both agencies will be unwilling to cede power or control.
On the banking side, Paulson would like to eliminate various bank regulators, by shutting down the Office of Thrift Supervision, which has oversight of savings-and-loan institutions, and folding those responsibilities into the Office of Comptroller of Currency, which has oversight of national banks. Additionally, the Treasury wants to study whether the Federal Reserve or FDIC should have oversight of state-chartered banks. Again, any proposal to shutter or reduce the responsibilities of an agency will be met with howls.
Finally, Paulson wants to overhaul the insurance industry to create a federal regulator over the insurance industry, which has to deal with 50 different state regulators with 50 different sets of rules. Many are unwilling to strip states of power and the lobbyists from consumer groups are already claiming that states do a better job. This one is likely to face a major uphill battle.
In the end, who knows what portions of this plan will actually turn into lasting changes in the financial regulatory environment? That being said, at least the conversations are starting and for that, Paulson deserves some credit as a reg-u-lar guy!
The most controversial part of the plan is the escalation of the Federal Reserve into a “super-cop”, charged with identifying and avoiding a crisis in advance, with the overall goal of keeping the financial system stable. After the Fed’s participation in the Bear Stearns deal, it is now clear that the central bank has de facto changed its role in the financial system. With the shift from commercial banks to investment banks, Mr. Paulson's notes that the new agency “would have broad powers so they could go anywhere in the system they needed to go to preserve that authority.”
The next area of the Paulson plan that is causing turf battles is the call for a combination of market oversight between the Commodity Futures Trading Commission (CFTC), which regulates futures, and the Securities and Exchange Commission (SEC), which regulates securities such as stocks and bonds. This is a thorny proposal, because the SEC is "rules based," which means that it sets regulations that institutions must follow, while the CFTC is "principles based," setting broad parameters under which the regulated entities try to operate. It looks like Paulson favors the CFTC approach to enhance global competition, but this idea ran into criticism almost immediately, as officials from both agencies will be unwilling to cede power or control.
On the banking side, Paulson would like to eliminate various bank regulators, by shutting down the Office of Thrift Supervision, which has oversight of savings-and-loan institutions, and folding those responsibilities into the Office of Comptroller of Currency, which has oversight of national banks. Additionally, the Treasury wants to study whether the Federal Reserve or FDIC should have oversight of state-chartered banks. Again, any proposal to shutter or reduce the responsibilities of an agency will be met with howls.
Finally, Paulson wants to overhaul the insurance industry to create a federal regulator over the insurance industry, which has to deal with 50 different state regulators with 50 different sets of rules. Many are unwilling to strip states of power and the lobbyists from consumer groups are already claiming that states do a better job. This one is likely to face a major uphill battle.
In the end, who knows what portions of this plan will actually turn into lasting changes in the financial regulatory environment? That being said, at least the conversations are starting and for that, Paulson deserves some credit as a reg-u-lar guy!
Wednesday, April 2, 2008
Paulson: A Reg-u-lar Guy (Part 1)
I needed a day to digest the sweeping regulatory changes that were introduced by Treasury Secretary Henry Paulson before writing about it. With the benefit of a good night’s sleep (and a day of Florida sun) I am ready to say: Bring it on!
The changes put forth by Paulson, the former head of Goldman Sachs, intend to update rules that have been in place since the aftermath of the Great Depression. The current framework for financial regulation is based on a structure that includes:
o Five federal depository institution regulators in addition to state-based supervision
o One federal securities regulator and one futures regulator, with additional state-based supervision and self-regulatory organizations with broad regulatory powers
o Insurance regulation is almost wholly state-based, with over fifty different regulators
There is near universal consensus that the current system has not kept up with the pace of innovation of financial markets, but fixing it is not easy. That’s why as soon as Paulson spoke on Monday, the vultures were out, saying that (in particular order): the plan stinks, we don’t need more regulation; the plan is good theory, but can’t be put into place because political jousting won’t allow it. As soon as all of the negatives were swirling about, I started to think that maybe something good might come of this.
Paulson noted that the optimal regulatory structure needs to attract capital based on its effectiveness in promoting innovation, managing system-wide risks, and fostering consumer and investor confidence. The Treasury report presented a series of short, intermediate and long-term recommendations for reform of the US regulatory structure.
Nobody seems to dispute the short-term actionable items, the least controversial of which includes modernizing the President’s Working Group on Financial Markets (“PWG”)—this group was formed in the aftermath of the 1987 crash and includes heads of the Treasury, the Fed, the SEC and the CFTC. Another short-term idea that is likely to be supported is the creation of a new federal commission which will evaluate, rate and report on each state’s system for licensing and regulating the mortgage origination process. Tomorrow I will delve into the more controversial parts of the Paulson regulatory overhaul, which will take months, perhaps years to put into place.
The changes put forth by Paulson, the former head of Goldman Sachs, intend to update rules that have been in place since the aftermath of the Great Depression. The current framework for financial regulation is based on a structure that includes:
o Five federal depository institution regulators in addition to state-based supervision
o One federal securities regulator and one futures regulator, with additional state-based supervision and self-regulatory organizations with broad regulatory powers
o Insurance regulation is almost wholly state-based, with over fifty different regulators
There is near universal consensus that the current system has not kept up with the pace of innovation of financial markets, but fixing it is not easy. That’s why as soon as Paulson spoke on Monday, the vultures were out, saying that (in particular order): the plan stinks, we don’t need more regulation; the plan is good theory, but can’t be put into place because political jousting won’t allow it. As soon as all of the negatives were swirling about, I started to think that maybe something good might come of this.
Paulson noted that the optimal regulatory structure needs to attract capital based on its effectiveness in promoting innovation, managing system-wide risks, and fostering consumer and investor confidence. The Treasury report presented a series of short, intermediate and long-term recommendations for reform of the US regulatory structure.
Nobody seems to dispute the short-term actionable items, the least controversial of which includes modernizing the President’s Working Group on Financial Markets (“PWG”)—this group was formed in the aftermath of the 1987 crash and includes heads of the Treasury, the Fed, the SEC and the CFTC. Another short-term idea that is likely to be supported is the creation of a new federal commission which will evaluate, rate and report on each state’s system for licensing and regulating the mortgage origination process. Tomorrow I will delve into the more controversial parts of the Paulson regulatory overhaul, which will take months, perhaps years to put into place.
Tuesday, April 1, 2008
Fool Me Once…
Ah, April 1st— a day to reflect on all of the foolish things that people do to themselves when managing their finances. Although there are a myriad of challenges and uncertainties in today’s economy and markets, some of the biggest money mistakes are self-inflicted. To honor the day, here is a brief list of some of the foolish things that investors do from time to time.
1) “Non-management” of your investments. You may be a highly motivated person who loves diving into the financial pages and creating a spreadsheets for tracking your assets. If so, you are in the minority (and probably an engineer!) Most people barely have the time to balance their checkbooks, let alone determine the most appropriate allocation for retirement accounts. Even if you like the analysis part of investing, it is hard to have the discipline necessary to be a dispassionate investor. If you are not really managing your money or are ruled by your emotions, then you have two choices: create a system or get some help. Either one requires some work—sorry!
2) Buying high and selling low. For some reason, no matter how many booms and busts that we live through, it seems easier to buy an asset when it has already increased in value then when it plummets. Just because something has gone up or down for a while doesn't mean that it can’t reverse course. If you become a bit more contrarian, you may find that it is easier to sell when assets are rising and buy when they drop.
3) I don’t want to take a loss-itis. There is an irrational tendency to keep loser positions to avoid taking losses. One way to check is to pose the following question: would I choose to purchase the position right now? If the answer is “no way”, get rid of it and move on—there are far too many opportunities that abound in the marketplace to cling needlessly to a loser. The secondary application of this advice is directed to friends who are in bad relationships!
4) Wearing rose-colored glasses. Investors are generally an optimistic bunch. This can be a worrisome tendency, because a healthy dose of pessimism can sometimes open your eyes to risks that exist. See item number two for proof of what over-optimism can lead to!
5) There is no secret. Turn off Cramer and stop buying get-rich-quick books. Reaching your financial goals over the long term requires saving and investing wisely and not falling prey to the carnival barkers who promise the world. Turn down the noise and stay on your path.
1) “Non-management” of your investments. You may be a highly motivated person who loves diving into the financial pages and creating a spreadsheets for tracking your assets. If so, you are in the minority (and probably an engineer!) Most people barely have the time to balance their checkbooks, let alone determine the most appropriate allocation for retirement accounts. Even if you like the analysis part of investing, it is hard to have the discipline necessary to be a dispassionate investor. If you are not really managing your money or are ruled by your emotions, then you have two choices: create a system or get some help. Either one requires some work—sorry!
2) Buying high and selling low. For some reason, no matter how many booms and busts that we live through, it seems easier to buy an asset when it has already increased in value then when it plummets. Just because something has gone up or down for a while doesn't mean that it can’t reverse course. If you become a bit more contrarian, you may find that it is easier to sell when assets are rising and buy when they drop.
3) I don’t want to take a loss-itis. There is an irrational tendency to keep loser positions to avoid taking losses. One way to check is to pose the following question: would I choose to purchase the position right now? If the answer is “no way”, get rid of it and move on—there are far too many opportunities that abound in the marketplace to cling needlessly to a loser. The secondary application of this advice is directed to friends who are in bad relationships!
4) Wearing rose-colored glasses. Investors are generally an optimistic bunch. This can be a worrisome tendency, because a healthy dose of pessimism can sometimes open your eyes to risks that exist. See item number two for proof of what over-optimism can lead to!
5) There is no secret. Turn off Cramer and stop buying get-rich-quick books. Reaching your financial goals over the long term requires saving and investing wisely and not falling prey to the carnival barkers who promise the world. Turn down the noise and stay on your path.
Monday, March 31, 2008
When Fear is Good
Sometimes a healthy dose of fear can keep you out of trouble. In fact, if more people were a little nervous a couple of years ago, they may not have found themselves in the pickle they are in today. But when the party is rocking, it sure is hard to stop from indulging. Now that the clock has struck midnight and the guests have scattered, there finally appears to be a healthy dose of caution spreading across the nation.
We saw evidence of this fact when data on personal spending was released on Friday. The Commerce Department reported that personal consumption increased by a paltry 0.1% compared to the month before, despite the fact that incomes accelerated (personal income increased at a seasonally adjusted rate of 0.5% compared to the month before.) I interpret this as a rational reaction to a plethora of bad news. As the housing recession continues, the credit crisis escalates and the mood seems almost universally dour, people are thinking twice about how they spend. That means that folks are shelling out money for the stuff they need, not the stuff they want -- a most welcome development.
I experienced this first hand last week when I spoke to my client “Jane”. At our meeting last summer, Jane laid out plans to spend $150,000 on a home improvement project. Although I was not in support of the idea, I knew that they were going to do it anyway, so I came up with a couple of ways to finance it. I reminded them that assuming the additional debt meant that saving for retirement and college would move to the back burner. Jane and her husband are not irresponsible sorts, but they had convinced themselves the project “had to be done”. In other words, they turned a discretionary spending item into a necessity.
Fast forward to last Thursday when Jane sent me an e-mail saying “it just feels like this may not be a good time to make this expenditure. The news talks about recession and how people are cutting back on big ticket purchases. We don't want to overextend ourselves, especially at a time when everything seems so uncertain.” When I spoke to Jane, she was resigned, but not happy about the decision. I reminded her that they could do the project when they had saved the majority of the money necessary to do it, to which she responded, “Using our own money-wow, what a concept, but of course, it makes all the sense in the world. I guess over the past few years we have forgotten the basics!” Funny how a boom can make you do lots of crazy things, but thankfully, fear can correct those excesses quickly.
We saw evidence of this fact when data on personal spending was released on Friday. The Commerce Department reported that personal consumption increased by a paltry 0.1% compared to the month before, despite the fact that incomes accelerated (personal income increased at a seasonally adjusted rate of 0.5% compared to the month before.) I interpret this as a rational reaction to a plethora of bad news. As the housing recession continues, the credit crisis escalates and the mood seems almost universally dour, people are thinking twice about how they spend. That means that folks are shelling out money for the stuff they need, not the stuff they want -- a most welcome development.
I experienced this first hand last week when I spoke to my client “Jane”. At our meeting last summer, Jane laid out plans to spend $150,000 on a home improvement project. Although I was not in support of the idea, I knew that they were going to do it anyway, so I came up with a couple of ways to finance it. I reminded them that assuming the additional debt meant that saving for retirement and college would move to the back burner. Jane and her husband are not irresponsible sorts, but they had convinced themselves the project “had to be done”. In other words, they turned a discretionary spending item into a necessity.
Fast forward to last Thursday when Jane sent me an e-mail saying “it just feels like this may not be a good time to make this expenditure. The news talks about recession and how people are cutting back on big ticket purchases. We don't want to overextend ourselves, especially at a time when everything seems so uncertain.” When I spoke to Jane, she was resigned, but not happy about the decision. I reminded her that they could do the project when they had saved the majority of the money necessary to do it, to which she responded, “Using our own money-wow, what a concept, but of course, it makes all the sense in the world. I guess over the past few years we have forgotten the basics!” Funny how a boom can make you do lots of crazy things, but thankfully, fear can correct those excesses quickly.
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