Hank Paulson Now Moves to Bailout Credit Card Companies

Sectary Paulson announced today that he is no longer interested in purchasing “illiquid” assets from banks in the U.S. The problem is he warned us that if we did not buy these bad loans/etc from the banks that entire U.S. financial system would collapse. After spending $290 billion on buying up preferred shares in failing banks and AIG, Paulson changes his mind about the real cause of the recession. Could it be that he never knew what the real cause was and he was only stalling? Or could he have used the air cover of the bailout to help his friends in the banking industry in other ways? Only time will tell. What I can tell right now is Hank Paulson and his Goldman Sachs boys need to be shown the exit soon. (Well in advance of January 20, 2009)

In 2008: 19 Banks Fail and 40 Banks Get $173 Billion

Is it me or does this headline fall outside the laws of reason? What makes this even more damming is that the U.S. Treasury is using our tax dollars to fund future failures. Hank Paulson has committed at least $350B to this effort if you include the recently added $40B to AIG. To date AIG has been allocated $110B in Fed loans and $40B in bailout cash. With this type of economic policy coming from the Bush administration, is there any wonder why Barack Obama won in a landslide?

A New President – 74 Days and Counting

The economy had a big part in Senator Barack Obama becoming President Barack Obama. Unfortunately for John McCain, the economy tanked before November 4^th. ON the flip side if a national security emergency had happened before this past Tuesday, John McCain would be President-elect. Usually, stock markets trend higher in the months leading up to a Presidential election. However the situation with the mortgages and credit lock-ups made this scenario impossible for 2008. What was not excepted was the 2-day drop that was the largest since 1987. The natural feeling was that Barack Obama had the intelligence and discipline to select the right people to assist him in pulling America out of this recession. The reality was that markets continued their volatile runs based on the negative information (like America losing 240,000 jobs in October alone) that flows relentlessly from Washington.

 

With the President-elect meeting with his most trusted economic advisors today (like billionaire investor Warren Buffett, former Fed Chairman Paul Volcker, former Treasury Secretary Robert Rubin, former Treasury Secretary Larry Summers), we should see a more detailed proposal on how he aims to fix our economy. What complicated matters is the lame-duckness of the sitting President, $450 billion remaining of the bailout money and Bush’s desire to preserve his legacy. Senator Obama spent the past two days on the phone with world leaders talking about, among other things, the world’s response to the financial crisis. Many leaders have already signaled their intention to work with the new President to not only improve overall relations but solve this crisis or at least stop the bleeding. On November 15^th, President Bush will convene an economic summit in Washington D.C. with some of these same leaders and discuss what can be done now to help. How are these leaders going to treat Bush when many think that: (a) He helped cause the crisis and/or (b) His power in Congress is inadequate enough o get any real solutions passed? This puts Senator Obama in a peculiar situation of usurping power from a current President or allowing a lame-duck negotiate important matters for another 2 months. There is no easy way to resolve this situation which expands beyond just the financial crisis. I think that Bush should lead and run the meeting with Obama attending and continuing to serve in his Senator capacity. These matters are far too important for the incoming President to sit on the sidelines and not be informed fully about all negotiations with other world leaders. This should also be the “last hurrah” for President Bush as his administration comes to a close and a new era dawns. After this meeting, President-elect Obama should be the point man for all U.S. activities for both domestic and international issues. Americans have decided that we cannot afford 4 more years of Bush-like politics and I can’t afford 74 more days of it.

The Economic Ramifications of a Single Vote

If you are an American Taxpayer, then according to the laws of capitalism, you have a vested interest in placing your vote today for President of the U.S. You might be in love with Senator Barack Obama or hate the way John McCain keeps calling himself “Maverick,” but this is the one chance you have to change the course of this nation.

 

Does your vote count? OF COURSE! Consider that your vote when added to other votes in your state, decide who wins the Electoral College votes your state has. The states with the most electoral votes often get the most attention because the votes cast in those states carry more weight for the candidates. The winning candidate only needs 270 Electoral College votes to win the election. You vote added with all other votes cast nationwide, decide who wins the Popular Vote. The problem is that a candidate can win the Popular Vote and still lose the election like Al Gore did in 2000. There have been several attempts to rectify this situation and abolish the Electoral College system of voting but all have failed.

 

This still should not deter you from voting today because many local officials are also decided and they have a more direct impact on your daily life. Suppose a Hurricane destroys your city and the Senator/Congressmen from your state are not in a hurry to help the disenfranchised. Well if you did not vote for their opponent during the last election, then you have no right to complain. The Constitution set up this system so that every registered, American taxpayer over 18 will have a voice in how this government is run. If you choose not to use your ‘voice’ by abstaining to vote then why would anyone want to listen to your complaints any other time?

Now the Treasury Finds the Root of this Crisis

Most of this economic turmoil finds its genesis with the American homeowner. Today the Treasury and FDIC finally figured out that Wall Street was an effect and not the cause of the bad and overpriced mortgages that were easily handed out from 2001-2007. They are preparing to spend up to $500B to guarantee loans to give mortgage companies a safety net when refinancing high interest ARMs and other loan structures. JP Morgan already plunged in, before the US Govt intervened, to proactively save its customers from foreclosure.

Most of the foreclosures could have been prevented if the banks and mortgage companies would have worked with people who were suddenly facing a 30% to 50% increase in their monthly mortgage payment. The problem was they would not concede anything to their “Customer” because we should have known what we were getting into. I am not talk about people who lied on their mortgage applications or did some other illegal thing to get a home, I am talking about the people who had low credit scores and steady jobs and wanted to join those who to have obtained a piece of the American dream. Sure they might have gotten their home by the skin of their teeth, but they could make the payment (and were making the payments) before the interest rate increase. These people should have been saved and need the relief.

These loans are relatively easy to spot so lenders should have been proactive to offer help. However, the average lender was only accumulating enough loans to package and sell to Wall Street so they didn’t care if someone was struggling to make payments under the new interest rate. They were only concerned when the loan was on their books. When those avenues to sell dried up in 2007, then lenders got serious about how to save their loans. They initially did this by foreclosing on the property to rapidly sell the home and limit the loss on the loan. When property values dropped through the floor, they then went to the U.S. Govt to get a bailout. It is not only until now that many lenders are trying to work with the homeowners to save the properties. To me this seems like the bassackwards way to do business.

GDP Accurately Reports Economy with a .3% Drop

With the U.S. economy shrinking at a rate not seen since 2001, most everyone has acknowledged that we are in for a long recession and it won’t be good.  Many on Wall Street predicted more a more drastic decline so the market rose during the day. I predict that they will get their wish when the report comes for the 4th Quarter of 2008. With numbers ranging from 1-5 percentage drop, my estimate is 4%. Keep in mind that the GDP rose 2.8% in the 2nd quarter so dropping to a negative number just one quarter later is significant.

If the GDP numbers were not bad enough, there is more bad news that we received in the Commerce Department report:

3.1% Decline in Consumer Spending (Biggest drop since 1980)

6.1% Unemployment Nationwide (trending to over 9% for 2009)

6.4% Decline in Spending on Clothing and Food (biggest drop since 1950)

It looks like we will have one hell of a hole to climb out of in 2009 and beyond. Don’t be discouraged at the prospect of overcoming this near impossible task. Americans have that, “Never Give Up” attitude and I expect a complete reversal of fortune in the 1st quarter of 2011.

Hank Gets Tough on Banks (albeit too late)

It seems that Hank Paulson thinks (correctly) that some of the banks needing the cash from preferred share purchase should die or merge with another bank. This makes perfect sense because America had way too many banks to begin with (8,000 FDIC members) and many were poorly capitalized from the start. These banks began to pop up all over the country due to lax formation rules and convoluted regulatory procedures that catered to people with the right connections. Typically former bank executives would secure a few investors and strike out on his own hoping to steal customers from his former employer and make a profit for himself in the process. The problem was the FDIC approval gave consumers a false sense that the bank management was competent and genuinely had the customers’ best interests in heart. Too often the banks made loans to fellow good ol’ boys and similar demographics to create private bank feel and boost their egos.

Fast forward to 2007: As business slowed and companies laid off workers, the “good” loans began to run later and later. Mr. Bank CEO does not want to call his friend about the $50k credit line or foreclose on his friend’s $500k home so he gives his friend time to make up the difference. In early 2008 too much time passes and the loans begin to default. In the meantime the Bank CEO’s friend has purchased a $250k condo downtown and abandoned the half-million dollar home which is now only worth $350k. He does this because he is afraid that he will get fired from his job so he wants to stack as much cash as possible before the other shoe drops. Meanwhile, the Bank CEO has to freeze the overdrawn credit line and foreclose on the home which leaves the bank holding onto at least $500k in bad debt. Repeat this process about 20-30 times per bank and you begin to see why the $700B bail out was invented.

English Philosopher Herbert Spencer coined the phrase “survival of the fittest” after reading Darwin’s On the Origin of Species. This is exactly how the Treasury should see the remaining banks in its system. There should be no money given to banks that are on the verge of collapse or are too small to compete on a regional level. Merge or die. What Paulson did not want to do was for banks to use the Treasury cash to fund these acquisitions. He should have placed stronger stipulations during negotiations with these banks. Be careful what you wish for Hank, you just might get it.

How To Join that Top 5% That Barack Obama Keeps Referring To

Mark Cuban has some ideas that are great for people who want to get rich 20 or 30 years from now. Although there are no shortcuts on the road to success, you can choose the car you drive to get there. From concentrated observations over the past 15 years, I would like to add three additional elements to getting rich: Goals, People, and Position.

“If you don’t know where you are going, then how will you know when you get there?”

– Unknown

Goals are needed first and foremost because you need a target to shoot at. If your goal is to be rich then you need to specify what rich means to you. Is having $1mm in the bank rich to you or is a person that has a $2.7B net worth what you consider rich? Of course this threshold can change but you have to start somewhere. Warren Buffett wanted to be a millionaire by the age of 35. (He made it) He set this goal when he was 10 years old! Because Warren started with some goal in mind, it allowed him to be on the right track to become the richest man in the world 30 years later. If you want to be rich, pick a 1 year, 5 year and 10 year money goal and then shoot. All your actions from this day forward should align with at least one of those three money goals.

You are who you hang around so consider your friends carefully. Do these people aspire to be successful as you do? Are they already successful now? Are they taking more from you than they are giving back? You only have a limited amount of time on this earth and since we don’t know when God will say, “Time’s up,” we need to take better control of life’s most precious resource. Hanging out with your buddies is fun but, as Mark said, hanging out with your buddies “rich” doesn’t suck. If they believe in you and you can trust them, they will help or at the very lest, not hinder you in achieving your goals. Don’t be afraid of making someone else rich on your journey to being rich yourself. Master salesman Zig Ziglar says, “You can have everything in life that you want if you help enough other people get what they want.” Please note that being in the “physical” presence of people is not necessary to surround yourself with greatness. Books and the internet can keep your “Money Mentors” closer than any other time in history. For the billionaires-in-training, I recommend going back a few generations and read about Rockefeller and JP Morgan. Ron Chernow has the best books out there. Also read about the world history during that time so that you can place the stories and fortunes in context. Keep abreast of current news and trends both inside and outside your desired industry. This will keep your mind open to outside-the-box ideas on how to get rich.

Positioning might be more abstract than the other two entries. Mark talks about going to work in the industry in which you desire to be successful. This is part of positioning. The Marines use what is called the OODA Loop. (Observe-Orientate-Decide-Act) Once you observe where you want to be, you must orientate yourself to benefit from your current surroundings or move to a better position. Sometimes you are moved by others. Consider Mark getting fired from his job at your Business Software. All he was doing was helping a customer and his manager was too short sighted to see it. However, Mark had already “positioned” himself as a trusted and knowledgeable resource to his customer so when he decided to put out his own shingle, he was able to prosper. One of those customers, Martin Woodall, trusted him enough to give him office space and other resources to help him launch his small business. This goes back to the entry on surrounding yourself with the right people. As Mark indicated, saving money is another form of positioning yourself for success. Only when you have the right cash position, can you fully capitalize on the opportunities that cross your path.(thus making yourself rich in the process)

Hear is a note on how not to get rich: Investing in the stock market. Warren Buffett just took a bath on his GE (invested $3B at $22/share) and Goldman Sachs (invested $5B at $115/share) stock investments. Sure is guaranteed 10% dividends but he loses on the pricing of his future warrants. GE is currently trading at $19 and GS is at $90.

This goes to show you that if Buffett jumped in too early and he can absorb the loss and afford to wait 10 years to recover, then how much smarter than him are we? The short sellers coming back did nothing to stabilize the markets so I think that there is still too much volatility for the sub-millionaire investor.

Companies, specifically financial companies, will continue to drop as the third phase of the credit crunch hits their books. First Phase: Credit dries up and banks refuse to lend; Second Phase: Companies who cannot get loans beginning using up existing loans and credit facilities; Third Phase: Companies begin to default on those loans and credit lines. This is bad news for all public stocks. Based on my research, I see 1Q2010 as a good time for sub-MM investors to enter the public stock markets. Follow Mark’s advice and stick to CDs.

GM and Chrysler are Looking for Another $10B (after getting $25B in September)

How do your explain giving $35B to a group of companies that have ignored market indications for decades and continued to invest in failed product lines? With Congress talking about sending another $10B to these two merger candidates, we should soon have an answer. Mergers are notorious for sapping the energy, brainpower and other resources from the combined entity for years afterwards. If GM and Chrysler are already failing then what will happen when they merge? How about more layoffs; more lost of market share; and more requests for billion dollar bail outs.

While we were watching the BailOut, a $634B bill was just signed by President Bush with a $25B bail out going to the Chrysler, Ford and GM, and no one said a thing. They initially asked for $6B in January but with Congress handing out $700B, they decided to up the ante. The auto makers intend to ask for another $25B next year to follow the decline of their revenues. This is American ingenuity at its best! The managers cannot figure out how to put out a product that can compete in the marketplace but they know enough about finance to land a multi-billion dollar bail out when they suffer losses. What really needs changing is the hiring practices of all major companies in America. Instead of just looking for JDs from Yale or MBAs from Harvard, they need to develop, and then give all applicants a common sense test.

This Recession Is Not All Bad for the U.S.

At least we will be able to move up on the Household Savings Rate for developed countries. Easy credit and cheap money has allowed the U.S. to fall in a false sense of security about the health of the global economy. The rapid rise then fall of the price of gas allowed Main Street to really get in touch with their frugal selves and force them to think more about their financial decisions. There are more benefits to living through an economy in recession:

Pollution Levels will Fall: Due to the high cost of gas and loss of discretionary income forcing people to stay home or carpool.

Family Time will Increase: Because parents will not have money to give to kids to go to the mall or gas up the family car.

Internet Adoption will Skyrocket: Due to people cutting back on phone and travel costs. Even the most technology illiterate person will venture into the unknown world of this newfangled contraption called e-mail.

Productivity On the Job will Rise: Due to the widespread layoffs and fear of “Will I be next,” growing amongst employees in every corner of America.

These are just a few of the “pluses” of living through a recession. Many will argue that the negatives outweigh the positives, but I look at the glass from a half-full perspective. Another aspect that people ignore is the feeling that the good times were never going to last forever. We all knew that the big bonuses could not be sustained but we cashed the checks anyway. We knew that our credit score was in the low 600s and our income could not justify the $5,000 a month mortgage note, but we sure out-Jones the Joneses. Sure that leased BMW 760iL was a little high at $1795 per month, but we could pay Paul later, right after we wrote this check to Peter. Vacation now; pay Visa next month. For those of you who can relate to any of this, shame on you, for those who cannot then you are in a better position than 80% of America so stop complaining and go back to work.