This political jockeying over who voted "Yea" or "Nay" on the bailout plan is disgusting and disturbing. Does something have to be done to resolve the crisis at hand? By all means, yes. But doesn't the expectation that a $700,000,000,000 (I just got carpal tunnel syndrome typing all those zeros) bailout package will just fly through the system unopposed epitomize political naivite? Especially considering the time pressure of only one week? And to politicize the crisis does not move the country closer to a solution.
Here's an idea, piece meal into the plan and think it out, don't just do a rush job right before the presidential elections.
Start by raising the FDIC insurance cut off to $1 million instead of $100,000. The greater insurance will make people less nervous about losing their life savings, down payment savings or payroll deposits.
Then focus solely on residential home mortgages. I suggest the government assess each foreclosed property case by case. Buy from the banks all properties that are under water, meaning the value of the house is less than the interest due on the mortgage. Waive the closing costs. Work out a payment plan for people that are able to continue to pay for their house. For those folks deemed insolvent who cannot pay their mortgage, switch their home ownership to a home rental. Have the tenants lease back their homes while they look for an alternative place to live. Then the government can sit on the real estate assets until the market bounces back. Those houses that are left vacant should be torn down similarly to how crops are destroyed to prop up prices. In this manner you address the mortgage crisis at the grass roots level and help out the people in need. The government becomes the biggest home owner in the country but at least it owns real assets, not just junk mortgages.
Tighten up and simplify the lending practices. No more zero down mortgages, insist on 20% down.
There's a blunt lesson in this mess. Home ownership is for people who can afford to pay the mortgage. It's not for everyone. There is nothing wrong with renting until you are ready to buy.
Monday, September 29, 2008
Sunday, September 28, 2008
o Hank "Free Lunch" Paulson : Wall Street's Apologist
Hank Paulson was the Chief Executive Officer of Goldman Sachs for a few years before becoming the Treasury Secretary in 2006. You mean to tell me, from that privileged and global prospective, he could neither foresee nor correct the market problems that are now bringing down the economy? Why not?
That's because Wall Street titans contribute heavily to Washington DC politicians' campaigns so the people in power can look the other way. Its the legal equivalent of how the mafia used to have police officers on the payroll. Also, why disturb anything when the markets are red hot and everyone is making money? Maybe Paulson took the job as the Treasury Secretary specifically to bail his buddies out when things turned sour? Let's just put the guy who can be directly implicated in creating this mess in charge of the bail out. Makes sense?
Now Paulson is up to the biggest con in history, hijacking government authority to pass a bailout for companies that made really, really bad decisions. This policy is far off the principles of a free market economy.
Warren Buffet saw the calamity miles away, warned everyone, and no action was taken.
Heads up GWB, we've finally found your WMD's. The banks have been burying them deep in their books.
That's because Wall Street titans contribute heavily to Washington DC politicians' campaigns so the people in power can look the other way. Its the legal equivalent of how the mafia used to have police officers on the payroll. Also, why disturb anything when the markets are red hot and everyone is making money? Maybe Paulson took the job as the Treasury Secretary specifically to bail his buddies out when things turned sour? Let's just put the guy who can be directly implicated in creating this mess in charge of the bail out. Makes sense?
Now Paulson is up to the biggest con in history, hijacking government authority to pass a bailout for companies that made really, really bad decisions. This policy is far off the principles of a free market economy.
Warren Buffet saw the calamity miles away, warned everyone, and no action was taken.
- Warren Buffet on Derivatives
- www.fintools.com/docs/Warren%20Buffet%20on%20Derivatives.pdf
- http://news.bbc.co.uk/2/hi/business/2817995.stm
Heads up GWB, we've finally found your WMD's. The banks have been burying them deep in their books.
o Exchange Traded vs Over The Counter
Exchange traded stocks, futures contracts and options are trade in places like the NY Stock Exchange, NY Mercantile Exchange, Chicago Mercantile Exchange and other exchanges both domestically and around the world. The trades occur both on the floor of the exchange and electronically. Typically there is a clearing process and heavy regulation set up around the exchange.
Over the Counter (OTC) trades are executed outside of any formal exchange. The trade does not pass through the exchange floors or the exchanges electronic trading systems.
Both exchange trades and OTC trades are legitimate, accepted and widely used means of executing business for professional traders. Its up to the institution or individual trader on how best to achieve his trading goals of discovering price and volume. However, while exchange traded deals are cleared, Over the Counter deals are not cleared in all cases. At times, the deals are done as direct counterparty or bilateral transactions.
Going forward, all Over the Counter trades must be cleared. Clearing should include not only trades executed on Credit Default Swaps, but other asset classes such as energies and metals.
Over the Counter (OTC) trades are executed outside of any formal exchange. The trade does not pass through the exchange floors or the exchanges electronic trading systems.
Both exchange trades and OTC trades are legitimate, accepted and widely used means of executing business for professional traders. Its up to the institution or individual trader on how best to achieve his trading goals of discovering price and volume. However, while exchange traded deals are cleared, Over the Counter deals are not cleared in all cases. At times, the deals are done as direct counterparty or bilateral transactions.
Going forward, all Over the Counter trades must be cleared. Clearing should include not only trades executed on Credit Default Swaps, but other asset classes such as energies and metals.
o Auto Industry Bailout
Now that Congress passed $25 Billion in loan guarantees for the auto industry, can we make any real reforms to the industry?
How about just posting in big bold font the miles per gallon of each car on the road? Aren't calories posted everywhere now, from Starbucks to McDonald's? The first step in improving auto efficiency is knowing what the starting point is.
We are bailing out a failing industry and no one cares to impose stricter standards. Seems to be a general theme in today's world.
- Electric Cars
- Ethanol Cars
- Natural Gas Cars
- 100 miles to the gallon Cars
How about just posting in big bold font the miles per gallon of each car on the road? Aren't calories posted everywhere now, from Starbucks to McDonald's? The first step in improving auto efficiency is knowing what the starting point is.
We are bailing out a failing industry and no one cares to impose stricter standards. Seems to be a general theme in today's world.
o word of the day: UNIT COST
The unit cost is the cost incurred by a company to produce, store and sell one unit of a particular product. Unit costs include all fixed costs (i.e. plant and equipment) and all variable costs (labor, materials, etc.) involved in production.
Imagine if we could create a table of all the unit costs for consumer goods made in the US. The unit cost of a shirt, made in America, assume is $10.00. Then imagine a world in which free trade is fair trade and US workers are put on par with global workers. A world where slave labor is discouraged. What the US could do is to tax foreign good shipped to the US if the goods are being sold below unit costs. Because of minimum wage, a variety of taxes and other government enforced conditions, US manufactured goods are priced out of our own market. The current system is simply not fair.
Or, we can choose to keep things the way they are. Let's apply this notion to sports, where fairness and rules of the game are very important. From now on, for all Indian and Chinese tennis players, the doubles alley is considered fair play and in bounds. Yao Ming can have ten personal fouls, take four steps before shooting, and can shoot foul shots from five feet away. We are doing the exact same thing to American manufactured goods.
Imagine if we could create a table of all the unit costs for consumer goods made in the US. The unit cost of a shirt, made in America, assume is $10.00. Then imagine a world in which free trade is fair trade and US workers are put on par with global workers. A world where slave labor is discouraged. What the US could do is to tax foreign good shipped to the US if the goods are being sold below unit costs. Because of minimum wage, a variety of taxes and other government enforced conditions, US manufactured goods are priced out of our own market. The current system is simply not fair.
Or, we can choose to keep things the way they are. Let's apply this notion to sports, where fairness and rules of the game are very important. From now on, for all Indian and Chinese tennis players, the doubles alley is considered fair play and in bounds. Yao Ming can have ten personal fouls, take four steps before shooting, and can shoot foul shots from five feet away. We are doing the exact same thing to American manufactured goods.
o Tax Reform
Tax reform is necessary to eliminate the weird loopholes, deductions and other nonsensical tax breaks. The solution lies in combining two taxation alternatives.
1) Set up a flat income tax of 10%. I want to clarify that a flat income tax is not really flat in absolute terms. I hate pointing out the obvious but most people are uninformed about this, so I must. If John Q. make $100,000 a year, a 10% tax for him is $10,000. If Joe Schmoe makes $50,000 per year, his yearly tax obligation is $5,000 assuming a flat tax rate of 10%. In absolute terms, the higher salary earner John Q. is contributing twice as much to the wasteful US goverment programs as Joe Schmoe. The flat rate will make the end of the year calculation for taxes very simple. I am suggesting the single rate, flat income tax for selfish reasons too. I don't want to have to sit in my accountants office for several hours and pay him hundreds of dollars to fill out tax forms I barely understand.
2) Institute a Federal sales tax on all consumer items of somewhere between 5%-10%. Fact: Higher income earners buy more goods than lower income earners. A consumer tax is nothing more than a progressive tax on wealthier people. The Federal sales tax will make up for the loss in tax dollars from the flat tax. So future government bailouts should be safe.
These tax reforms have been put forth in great detail many times, I want to reiterate that the flat tax and Federal sales tax make sense out of a muddled and antiquated tax system.
1) Set up a flat income tax of 10%. I want to clarify that a flat income tax is not really flat in absolute terms. I hate pointing out the obvious but most people are uninformed about this, so I must. If John Q. make $100,000 a year, a 10% tax for him is $10,000. If Joe Schmoe makes $50,000 per year, his yearly tax obligation is $5,000 assuming a flat tax rate of 10%. In absolute terms, the higher salary earner John Q. is contributing twice as much to the wasteful US goverment programs as Joe Schmoe. The flat rate will make the end of the year calculation for taxes very simple. I am suggesting the single rate, flat income tax for selfish reasons too. I don't want to have to sit in my accountants office for several hours and pay him hundreds of dollars to fill out tax forms I barely understand.
2) Institute a Federal sales tax on all consumer items of somewhere between 5%-10%. Fact: Higher income earners buy more goods than lower income earners. A consumer tax is nothing more than a progressive tax on wealthier people. The Federal sales tax will make up for the loss in tax dollars from the flat tax. So future government bailouts should be safe.
These tax reforms have been put forth in great detail many times, I want to reiterate that the flat tax and Federal sales tax make sense out of a muddled and antiquated tax system.
Saturday, September 27, 2008
o Who to vote for in 2008
Who cares? The system is broken.
Until the current system changes, any vote for a major party candidate is just perpetuating the flaws. The real solution lies in mapping out how the current election process works, what the role of government agencies are, how the budget is managed, and then deciding how to make the entire system better. Its time for a new Constitutional Convention.
Proof that system is broken:
1) Financial markets not properly regulated.
2) Year on year deficit spending.
3) Votes on bills are either 100% on party or 100% the other. If the ideas in a bill are sound, then party lines should not separate the votes.
Here's a few suggestions:
1) Lobbyist cannot have their offices within the city limits of Washington DC.
2) Instead of having members of the House do whatever they do, have them run the government agencies. For example, the Department of Agriculture should be run by elected congressmen. Let the Senate do the law passing.
3) A Republican President must appoint Democrats or another party to the cabinet positions. A Democratic President must appoint Republicans or another party to their cabinet. This eliminates that intense and bitter rivalry for president. Everybody wins in some way.
4) Enforce a five Party system instead of a two Party system so there is some choice among elected officials. Heck, I have more choices when I want to buy toothpaste than I do electing a President. How about a political party called the "Solution Party?" One party that has no political ideology, and whose only objective is to set up economic systems that work.
5) Instead of the House of Representatives, have a jury duty-like selection to pick 50 experts and have this "jury pool" convene in Washington DC. The "jury" would provide advice for measures that are currently under the consideration of the Senate and ready to be passed as law. The Senate would get real advice from a politically neutral team of experts, not just "ding dongs" that won a popularity contest from their constituency.
This is how it would work. Let's say a bill is up for debate that allows citizens to invest their Social Security in the stock market. Call on 10 Wall Street brokers, 10 finance professors, 10 authors of books on the subject, 10 teachers, and 10 random people to show up for an all expenses paid trip to Washington DC. Sit the 50 people in a room for a week and have them draft a cost benefit analysis of the proposal. The Senate can then use the document as a recommendation on how to vote.
6) Force a playoff type election system. Each party should have primary challengers with equal funding for each candidate. Only primaries with 2 or more candidates running against each other should be considered as legitimate competition.
7) Pay bonuses based on job approval ratings.
Until the current system changes, any vote for a major party candidate is just perpetuating the flaws. The real solution lies in mapping out how the current election process works, what the role of government agencies are, how the budget is managed, and then deciding how to make the entire system better. Its time for a new Constitutional Convention.
Proof that system is broken:
1) Financial markets not properly regulated.
2) Year on year deficit spending.
3) Votes on bills are either 100% on party or 100% the other. If the ideas in a bill are sound, then party lines should not separate the votes.
Here's a few suggestions:
1) Lobbyist cannot have their offices within the city limits of Washington DC.
2) Instead of having members of the House do whatever they do, have them run the government agencies. For example, the Department of Agriculture should be run by elected congressmen. Let the Senate do the law passing.
3) A Republican President must appoint Democrats or another party to the cabinet positions. A Democratic President must appoint Republicans or another party to their cabinet. This eliminates that intense and bitter rivalry for president. Everybody wins in some way.
4) Enforce a five Party system instead of a two Party system so there is some choice among elected officials. Heck, I have more choices when I want to buy toothpaste than I do electing a President. How about a political party called the "Solution Party?" One party that has no political ideology, and whose only objective is to set up economic systems that work.
5) Instead of the House of Representatives, have a jury duty-like selection to pick 50 experts and have this "jury pool" convene in Washington DC. The "jury" would provide advice for measures that are currently under the consideration of the Senate and ready to be passed as law. The Senate would get real advice from a politically neutral team of experts, not just "ding dongs" that won a popularity contest from their constituency.
This is how it would work. Let's say a bill is up for debate that allows citizens to invest their Social Security in the stock market. Call on 10 Wall Street brokers, 10 finance professors, 10 authors of books on the subject, 10 teachers, and 10 random people to show up for an all expenses paid trip to Washington DC. Sit the 50 people in a room for a week and have them draft a cost benefit analysis of the proposal. The Senate can then use the document as a recommendation on how to vote.
6) Force a playoff type election system. Each party should have primary challengers with equal funding for each candidate. Only primaries with 2 or more candidates running against each other should be considered as legitimate competition.
7) Pay bonuses based on job approval ratings.
o My Bailout Plan
The $700 billion bail out plan is untenable, because most in Congress are uninformed in economics and business, plus they have a tough time making good decisions. I think every elected government official should hand in his/her resignation after this mess is over. So here is my bailout plan for these morons that stuck us into this quagmire.
1) Pricing.
Few even know what a credit default swap is and they definitely don't how to find its fair market value. Subpoena the quants from the top banks and trading firms to determine a market standard pricing model for credit default swaps and options.
2) Exchange and Clearing
Set up a credit derivatives exchange to trade these instruments in an open outcry or electronic market place. Set up a clearing house to clear all Over the Counter transactions. No more bilateral transactions for any type of derivative.
3) Transparency
Publish the settlement price for the credit derivatives daily. The information can be obtained from the credit derivatives exchange. All banks should publish their current position holdings in the derivatives so that risk can be properly measured. Publish historic and implied volatility numbers to help in the pricing of options.
4) Leverage
Reduce the leverage of banks over a 5 year time frame to 10:1. Require high margining for market participants.
5) Create a Hedge Fund
Instead of giving out a $700 billion handout, create a $100 billion dollar hedge fund. That hedge fund's governance is to make markets and provide liquidity in credit default swaps and options. The hedge fund will jump start the market for credit derivatives. The fund may take a hit in its first few years of existence, but at least it will have liquid and transparent assets on its books.
Any part of a bailout that does not address the above issues is a farce and should be looked at with extreme skepticism because it will not work in the long run.
Now can I get back to surfing YouTube? Or do I have to worry about my bank going under. Oh wait, it's Washington Mutual, it's already gone under. Thanks for ruining another one of my weekends, Hank "Free Lunch" Paulson, Bernanke, "no-oversight" Congress, Fed, SEC, CFTC and all you other jerks.
1) Pricing.
Few even know what a credit default swap is and they definitely don't how to find its fair market value. Subpoena the quants from the top banks and trading firms to determine a market standard pricing model for credit default swaps and options.
2) Exchange and Clearing
Set up a credit derivatives exchange to trade these instruments in an open outcry or electronic market place. Set up a clearing house to clear all Over the Counter transactions. No more bilateral transactions for any type of derivative.
3) Transparency
Publish the settlement price for the credit derivatives daily. The information can be obtained from the credit derivatives exchange. All banks should publish their current position holdings in the derivatives so that risk can be properly measured. Publish historic and implied volatility numbers to help in the pricing of options.
4) Leverage
Reduce the leverage of banks over a 5 year time frame to 10:1. Require high margining for market participants.
5) Create a Hedge Fund
Instead of giving out a $700 billion handout, create a $100 billion dollar hedge fund. That hedge fund's governance is to make markets and provide liquidity in credit default swaps and options. The hedge fund will jump start the market for credit derivatives. The fund may take a hit in its first few years of existence, but at least it will have liquid and transparent assets on its books.
Any part of a bailout that does not address the above issues is a farce and should be looked at with extreme skepticism because it will not work in the long run.
Now can I get back to surfing YouTube? Or do I have to worry about my bank going under. Oh wait, it's Washington Mutual, it's already gone under. Thanks for ruining another one of my weekends, Hank "Free Lunch" Paulson, Bernanke, "no-oversight" Congress, Fed, SEC, CFTC and all you other jerks.
o word of the day : CLEARING
Clearing a contract eliminates (clears) the bilateral counterparty risk when two parties enter into a contractual obligation. Clearing takes place through a Clearing House, an entity that takes the opposite side of every trade. The clearing house mechanism clears, settles, nets and guarantees all matched transactions in a given contract.
Here is a simple example to illustrate the benefits of clearing. I want to bet $1,000 on the big football game next week. But I don't want to bet with Johnny because I feel that if his team loses he's going to stiff me for the money. Johnny has a bad reputation for walking out on debts. In financial terms, he's a default risk and has a poor credit rating. In layman's terms, he's a Lehman. So Johnny and I will place our bets through Vinny our bookie (the clearing house). If I win my bet, I know I will get paid regardless of whether or not Johnny pays the bookie. The bookie charges a small fee for his service of taking on the counterparty risk. The other side of the bet may default on his $1,000 payment. Vinny may even ask Johnny to pay half the amount of the bet in cash upfront as a good faith deposit should Johnny lose (margining). If Johnny does not pay up in full, Vinny will make sure Johnny loses the ability to use his right thumb (trading operations are shut down). Both parties have eliminated the exposure that would be present in a bilateral transaction by using a third party intermediary.
Guess which type of derivatives have no clearing process set up to ensure the performance of the contracts. If you guessed Credit Default Swaps, you get a big fat shiny star on your forehead. Each counterparty to a trade is held directly accountable to the other company for the payment and performance of a credit default swap. A situation like this can lead to a domino effect where, for any given counterparty failing and defaulting, many others will be hurt financially. They may in turn default.
Here is a simple example to illustrate the benefits of clearing. I want to bet $1,000 on the big football game next week. But I don't want to bet with Johnny because I feel that if his team loses he's going to stiff me for the money. Johnny has a bad reputation for walking out on debts. In financial terms, he's a default risk and has a poor credit rating. In layman's terms, he's a Lehman. So Johnny and I will place our bets through Vinny our bookie (the clearing house). If I win my bet, I know I will get paid regardless of whether or not Johnny pays the bookie. The bookie charges a small fee for his service of taking on the counterparty risk. The other side of the bet may default on his $1,000 payment. Vinny may even ask Johnny to pay half the amount of the bet in cash upfront as a good faith deposit should Johnny lose (margining). If Johnny does not pay up in full, Vinny will make sure Johnny loses the ability to use his right thumb (trading operations are shut down). Both parties have eliminated the exposure that would be present in a bilateral transaction by using a third party intermediary.
Guess which type of derivatives have no clearing process set up to ensure the performance of the contracts. If you guessed Credit Default Swaps, you get a big fat shiny star on your forehead. Each counterparty to a trade is held directly accountable to the other company for the payment and performance of a credit default swap. A situation like this can lead to a domino effect where, for any given counterparty failing and defaulting, many others will be hurt financially. They may in turn default.
o There is no such thing as "Cool"
As part of my efforts to slow down rampant consumerism and all the ills that go along with it, I have thought of a shaming mechanism. From this day forward, there is no such concept as "cool" or "being cool". Instead, replace the word "cool" with the word "tool" in your vocabulary.
For example, suppose you buy a pair of $200.00 sunglasses and you walk around town thinking I am sooooo cool. Your friends may even say, "those sun glasses are sooooo kewl." My response to you and your over priced eyewear accessory is "you are such a tooool." See how it works? What's the point of buying expensive designer clothes, sunglasses, shoes, purses, electronics and the like? It's to try to be cool. Which, if you remember the title of this blog, does not exist any more. Ha.
Do me a favor, stop buying all that marked up crap you don't need, running up your credit card debt, then declaring bankruptcy and letting those that are fiscally sound pick up the pieces. Credit card applications should have a process around them. Why do I get twenty new credit card offers per day when these companies have no idea about who I am and whether I am credit worthy? The consumer should have to apply to the credit card company, not be bombarded with junk mail about 0.00% interest rate gimmicks. The applicant should provide two pieces of documentation:
1) A pay stub showing weekly, bi-weekly or monthly income.
2) A rent invoice or mortgage check for all properties under the consumer's name.
The formula for calculating credit limits on a credit card can then be simplified. Take the monthly pay and subtract out the monthly cost of housing. The balance, assuming its positive, should be multiplied by five. This will give you a credit leverage of five times disposable income. Late payments should knock down the credit limit immediately. That's it. You either pay your bills on time or risk losing your credit lines. This plan makes way too much sense to ever happen.
WARNING: The expression "You look dorky in your cheap sunglasses." may still apply.
For example, suppose you buy a pair of $200.00 sunglasses and you walk around town thinking I am sooooo cool. Your friends may even say, "those sun glasses are sooooo kewl." My response to you and your over priced eyewear accessory is "you are such a tooool." See how it works? What's the point of buying expensive designer clothes, sunglasses, shoes, purses, electronics and the like? It's to try to be cool. Which, if you remember the title of this blog, does not exist any more. Ha.
Do me a favor, stop buying all that marked up crap you don't need, running up your credit card debt, then declaring bankruptcy and letting those that are fiscally sound pick up the pieces. Credit card applications should have a process around them. Why do I get twenty new credit card offers per day when these companies have no idea about who I am and whether I am credit worthy? The consumer should have to apply to the credit card company, not be bombarded with junk mail about 0.00% interest rate gimmicks. The applicant should provide two pieces of documentation:
1) A pay stub showing weekly, bi-weekly or monthly income.
2) A rent invoice or mortgage check for all properties under the consumer's name.
The formula for calculating credit limits on a credit card can then be simplified. Take the monthly pay and subtract out the monthly cost of housing. The balance, assuming its positive, should be multiplied by five. This will give you a credit leverage of five times disposable income. Late payments should knock down the credit limit immediately. That's it. You either pay your bills on time or risk losing your credit lines. This plan makes way too much sense to ever happen.
WARNING: The expression "You look dorky in your cheap sunglasses." may still apply.
Sunday, September 21, 2008
o Credit Rating Companies
The three main debt rating firms are:
1) Standard & Poor’s
2) Moody’s Investors Service
3) Fitch Ratings.
The companies measure the likelihood that the issuer of a bond will fulfill its payment obligations in a timely manner, with respect to both interest and principal commitments. A rating of "AAA" means the firm's credit is good and the default risk is almost zero, while a B rated bonds are risky and considered junk or non-investment grade bonds.
You can find bond ratings on the FINRA website.
Allow me to review the top of the register of companies whose corporate bonds were not so long ago rated "investment grade" by the rating agencies:
1) Lehman Brothers
2) Bear Stearns
3) Countrywide Financial
4) AIG
5) IndyMac Bank
6) Washington Mutual
...and others too numerous to list.
Who is rating the rating companies' performance?
I've created my own rating system for the rating companies. An "A" means "good job pal, you are able to properly assess the risk of a corporate bond". An "F" means "you suck ass, you might as well have chosen that bond rating randomly." S & P's, Moody's and Fitch's ability to rate companies - not so good. I rate them all a suck ass "F".
1) Standard & Poor’s
2) Moody’s Investors Service
3) Fitch Ratings.
The companies measure the likelihood that the issuer of a bond will fulfill its payment obligations in a timely manner, with respect to both interest and principal commitments. A rating of "AAA" means the firm's credit is good and the default risk is almost zero, while a B rated bonds are risky and considered junk or non-investment grade bonds.
You can find bond ratings on the FINRA website.
Allow me to review the top of the register of companies whose corporate bonds were not so long ago rated "investment grade" by the rating agencies:
1) Lehman Brothers
2) Bear Stearns
3) Countrywide Financial
4) AIG
5) IndyMac Bank
6) Washington Mutual
...and others too numerous to list.
Who is rating the rating companies' performance?
I've created my own rating system for the rating companies. An "A" means "good job pal, you are able to properly assess the risk of a corporate bond". An "F" means "you suck ass, you might as well have chosen that bond rating randomly." S & P's, Moody's and Fitch's ability to rate companies - not so good. I rate them all a suck ass "F".
o Energy Self Sufficiency
Energy self sufficiency is the notion that the United States should rely on itself for sources of fuel and not on foreign countries. Would you feel comfortable if your relied heavily on another (possibly hostile) country for water, food, or as an extreme example air? Fuel is almost as important to people's livelihoods and standard of living than the items mentioned above.
Note that self sufficiency is both a supply and demand issue. The solution to self sufficiency must be attacked from both the supply side (e.g. nuclear power, wind, solar, ethanol) and the demand side (e.g. auto fuel efficiency, public transportation, efficiency standards in buildings and homes). This entry addresses the supply of fuel and is about one source of supply for car fuel, ethanol.
The U.S. consumes roughly 25% of the world's oil production. We are oil hogs!
Roughly 50% of a barrel of crude oil is refined into gasoline, depending on the grade of crude oil. So if the US can devise a plan to replace gasoline distilled from foreign oil with a domestic source of gasoline, we can eliminate a huge percentage of our demand for oil.
Americans are really good at brewing, from moonshine to whiskey to beer. The solution is to have citizens distill their own ethanol either at home, using local distillers, or in large facilities. Ethanol can be produced from a variety of agricultural and non-agricultural crops. Biotech firms can create special enzymes to speed up the fermentation process.
On the political side, get rid of the "A" part of the ATF (Bureau of Alcohol, Tobacco and Firearms). Let people home brew as much alcohol as they want. Now that I think about it, get rid or the "T" part as well.
Natural Gas Vehicles would be another alternative to explore since its a domestically produced commodity.
The US government will be the biggest blocker of this plan. Tax revenues are generated from gasoline purchases at the pump. The government does not want to lose a source of taxes, how else can they afford $700 billion bailouts?? The current system of taxing gasoline is impeding the progress toward using alternative fuels. The solution could be to cut spending as the fuel taxes decrease. I am being such a comedian today.
Here are some interesting reads about ethanol :
Note that self sufficiency is both a supply and demand issue. The solution to self sufficiency must be attacked from both the supply side (e.g. nuclear power, wind, solar, ethanol) and the demand side (e.g. auto fuel efficiency, public transportation, efficiency standards in buildings and homes). This entry addresses the supply of fuel and is about one source of supply for car fuel, ethanol.
The U.S. consumes roughly 25% of the world's oil production. We are oil hogs!
- Geo Hive
- http://www.geohive.com/charts/en_oilcons.aspx
- EIA
- http://tonto.eia.doe.gov/dnav/pet/pet_cons_psup_dc_nus_mbbl_a.htm
Roughly 50% of a barrel of crude oil is refined into gasoline, depending on the grade of crude oil. So if the US can devise a plan to replace gasoline distilled from foreign oil with a domestic source of gasoline, we can eliminate a huge percentage of our demand for oil.
Americans are really good at brewing, from moonshine to whiskey to beer. The solution is to have citizens distill their own ethanol either at home, using local distillers, or in large facilities. Ethanol can be produced from a variety of agricultural and non-agricultural crops. Biotech firms can create special enzymes to speed up the fermentation process.
On the political side, get rid of the "A" part of the ATF (Bureau of Alcohol, Tobacco and Firearms). Let people home brew as much alcohol as they want. Now that I think about it, get rid or the "T" part as well.
Natural Gas Vehicles would be another alternative to explore since its a domestically produced commodity.
The US government will be the biggest blocker of this plan. Tax revenues are generated from gasoline purchases at the pump. The government does not want to lose a source of taxes, how else can they afford $700 billion bailouts?? The current system of taxing gasoline is impeding the progress toward using alternative fuels. The solution could be to cut spending as the fuel taxes decrease. I am being such a comedian today.
Here are some interesting reads about ethanol :
o word of the day : LEVERAGE
Leverage is the ratio between an initial cash (debt) investment and the total notional value of the underlying asset. Leverage magnifies both gains and losses.
For example, suppose you only have $5,000 to use as a down payment for a house. Let's assume a bank issues you a $500,000 mortgage to buy the house you want. With a 1% down payment, you are able to buy a $500,000 house. By loaning you the amount you needed to purchase the home, the bank willingly enables you to leverage yourself 100:1! What's wrong with this scenario? If the housing market keeps rising and the value of the house appreciates to $600,000 in value, on paper you've made $100,000 profit on your $5,000 down payment. However, if the value of the house drops below the outstanding interest balance of the mortgage, the rational economic decision for the homeowner is to walk away from the house and default on the loan. When leveraged to these extremes, banks and mortgage owners become engaged in a high stakes game of roulette placing huge directional bets on the future price of real estate.
In the business world, a company can use leverage to try to generate shareholder wealth, but if it fails to do so, the interest expense and credit risk of default destroys shareholder value. If a corporation can’t afford the risk of being highly leveraged, or even if the CEO and board of directors are uncomfortable with the level of risk, the only sound advice is don’t take on so much risk.
In the current market environment, not only are banks giving formal consent for consumers to be leveraged 100:1, banks themselves are leveraged 40:1 in the broader institutional market place. Therefore a bank that is dealing with a highly leveraged consumer is actually placing their leverage at 140:1. That's unconscionably high.
The housing crash should not just be the end of a bubble, it should be the end of a business model based on extravagant leverage. In future, set the down payment on residential homes to 20% of the value of that asset. Do not allow commercial banks to be leveraged more than 10:1 as a ratio of assets controlled on their books versus cash on their balance sheets.
For example, suppose you only have $5,000 to use as a down payment for a house. Let's assume a bank issues you a $500,000 mortgage to buy the house you want. With a 1% down payment, you are able to buy a $500,000 house. By loaning you the amount you needed to purchase the home, the bank willingly enables you to leverage yourself 100:1! What's wrong with this scenario? If the housing market keeps rising and the value of the house appreciates to $600,000 in value, on paper you've made $100,000 profit on your $5,000 down payment. However, if the value of the house drops below the outstanding interest balance of the mortgage, the rational economic decision for the homeowner is to walk away from the house and default on the loan. When leveraged to these extremes, banks and mortgage owners become engaged in a high stakes game of roulette placing huge directional bets on the future price of real estate.
In the business world, a company can use leverage to try to generate shareholder wealth, but if it fails to do so, the interest expense and credit risk of default destroys shareholder value. If a corporation can’t afford the risk of being highly leveraged, or even if the CEO and board of directors are uncomfortable with the level of risk, the only sound advice is don’t take on so much risk.
In the current market environment, not only are banks giving formal consent for consumers to be leveraged 100:1, banks themselves are leveraged 40:1 in the broader institutional market place. Therefore a bank that is dealing with a highly leveraged consumer is actually placing their leverage at 140:1. That's unconscionably high.
The housing crash should not just be the end of a bubble, it should be the end of a business model based on extravagant leverage. In future, set the down payment on residential homes to 20% of the value of that asset. Do not allow commercial banks to be leveraged more than 10:1 as a ratio of assets controlled on their books versus cash on their balance sheets.
o Mortgage Calculator
Before buying a home, you should ask yourself, "Is it better to rent or to buy?" The interest costs on a mortgage loan are front-end loaded, meaning that the majority of interest costs are paid in the early years of the mortgage loan. This means that most of your monthly payments in the first half of your mortgage loan are going to pay interest, and very little of them go toward actually paying down the loan principle. If your monthly rent is cheaper than the monthly interest payments on your mortgage, you should probably continue to rent. Prepayments on your mortgage help to save money and should be factored into your overall cost of carrying a loan. The mortgage loan officer should make you do an analysis of the interest rate cost versus the cost of renting.
Additional costs of home ownership are maintenance and repairs, property taxes and insurance. A house, for most people, represents a large percentage of their overall wealth tied up in a single asset class. Real estate prices can move both up and down; its not a risk free investiment.
Below are some calculators to help you make your decision:
Additional costs of home ownership are maintenance and repairs, property taxes and insurance. A house, for most people, represents a large percentage of their overall wealth tied up in a single asset class. Real estate prices can move both up and down; its not a risk free investiment.
Below are some calculators to help you make your decision:
- NY Times
- http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html
- Northwood Realty Services
- http://www.northwood.com/finance/default.asp
- Bloomberg.com
- http://www.bloomberg.com/invest/calculators/mortgage.html
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