There’s a YouTube video making a buzz right now called Burning Down The House: What Caused Our Economic Crisis that purports to explain the current financial crisis and it lays all the blame on Democrats.

While it appears to be a convincing case, for those who follow its logic, here’s my response:

First of all, in recent years I know lenders have been offering “stated income loans”, aka a “no-docs loans”, “liar’s loans” to anyone. They knew they could resell the loans on the resale market so they were happy to write them and get the loan origination fee as long as the borrower claimed some phoney income level. These were offered to white collar workers too so you didnt have to be in the CRA demographic.

Second, nothing in the video explains wall street’s appetite for the bad mortgages and the seizing up of the private credit markets that it led to. Here’s my understanding for the demand side. The interdependence between the housing market and the global financial markets didn’t previously exist. Mortgage backed securities (particularly Collateralized debt obligations (CDOs)) have allowed wall street to get into an area they had wanted to for a long time…home mortgages. CDOs have grown from 0 in 1987 to $2 trillion today. The bundling and marketing of them has generated considerable fee income. When you can borrow money over night at 5% and use the money to buy a MBS (with a AAA credit rating) that is expected to pay a yield of 5.75%, demand was high. It even looks like something you might want to leverage….why not leverage to 30-1 times your capital. hedge funds and investment banks and some other institutions escape normal banking regulations (and leverage limits) since they don’t take deposits from the public. The problem is, as we’re seeing, since our economy is so tightly dependent on the private credit markets this shouldn’t have been allowed to happen. Once real estate prices fell, it became evident that AAA, they weren’t. Most in the debate agree our financial markets need updating of regulations so this can’t happen again.

A wise friend of mine recently weighed in on the financial crisis. Here is his explanation of the consequences:

Our government is doing a poor job of explaining the stakes for our country with this bailout plan. I’ve heard the terms, “Financial Collapse”, “Financial Meltdown”, and “Seizure of the Credit Markets”. But no one is explaining what that means. Members of Congress came out of a briefing 10 days ago ashen faced, but refusing to “Reveal” what was said. Bush came on national television speaking in generalities.

Speaking as a 20-year veteran in the financial markets, my belief is that a meltdown would mean:

1. No new loans available to businesses or individuals.

2. Any existing loan that can be called due by the lender, will be called. This means the lender would force the borrower to pay back the entire loan balance immediately. Many credit lines, including home equity lines, and business lines of credit fall are callable by the lender. Read your loan documents!

3. All your credit cards could be canceled immediately, although your debit cards would continue to work. American Express has been reviewing and unilaterally lowering credit limits for some of its existing card holders for some time. What would you do if you were a credit card lender? I would cut everyone’s credit limit to reduce my risk.

4. If you need to buy a car or truck, you will need to pay cash.

5. The worst part would be a vicious cycle of job losses. People that lose their jobs don’t buy anything, forcing businesses to cut even more workers. That cycle may already be here, but it would accelerate dramatically. Businesses would start cutting jobs in anticipation of future business losses.

Wachovia Bank is huge, but won’t survive next week, unless a miracle occurs. THE white knights have turned into vultures circling, waiting for the government to shut Wachovia down.

The Bailout Plan

Everyone is hoping that it will work, because it is the only thing we’ve got that has a chance to work. I am all for passing a plan for the FULL $700,000,000,000. However, I have serious reservations about the plan, since WE don’t have any facts about the plan to consider! Why doesn’t the government trust us with the facts?

1. The banks cannot inspire confidence in the market unless they sell EVERYTHING and get some certification that their financials are completely clean.
2. The government has to pay more than the securities are currently worth, otherwise the banks won’t sell the securities.
3. It sounds like the market is currently valuing these securities at 0% to 30% of their original value. Four or five weeks ago I heard about business plans making the rounds for investors to buy up the securities at 30% of original value, then renegotiating the underlying loans at 50-60% of their original value. I wanted in on that deal!
4. If a patient investor can break even buying the securities at 50% of original value, the government could buy the securities at that level and get paid back the $700,000,000,000 completely.
5. If we are paying more than the securities are worth, we need to get something for it…even if we might come out whole.

My Advice

Save your extra money! Don’t pay down any of your debt! (except for credit cards, of course). Instead, put that money into a money market account to build up a fund for emergencies (Like a meltdown). Money market accounts are now completely insured by the US Government for the next 12 months. Expect to earn less than 1% interest on your money market account. Bank accounts are only insured up to $100,000.

Example: If you bought a house for $600,000 with a $550,000 loan. It may only be worth $300,000 when the government, or the investors that hold your mortgage contact you about a deal. The deal could be that they cut your loan down to $300,000. If you haven’t paid down your loan, the lender loses $250,000. If you paid your loan down to $400,000, the lender will lose only $100,000, but you have lost much more. Paying down your loan now, helps the lender, but not you. PUT YOUR MONEY AWAY, you will be in a stronger position to deal with the uncertain future…and take advantage of Wall Street’s mistakes.

Was rudely awoken by a text message this morning at 6AM telling me I need to jump on some godforsaken penny stock before it makes a big run this week. The message came from 265-060 which apparently is the AOL Instant Message-to-SMS gateway. Verizon Wireless doesn’t have an easy way to block this since it’s not actually coming from an email address. So, even though I never opted-in, I need to opt out by sending a text to 265019 with the word “out” in the message. More info here: How to opt-out of receiving AOL IM messages. These spammers are the scum of the earth.

In an effort to build my asset base, I am always on the lookout for finding good safe investments as well as finding ways to reduce or maintain my expenses to a reasonable level. After all, the old saying should be, a penny saved is 1.3 pennies earned…..after taxes. I drive a 10 year old car for my daily commute because it runs fine and it would cost a lot more to replace than I care to sink into a depreciating asset. Now, I’m no miser and I enjoy nice European vacations and the finer home amenities like my wall-mounted plasma TV but I just can’t see driving a frivolous car. Anyway, I was talking with my friend, Carlos, who runs the car-wash operation that comes to my company twice a week. We had an interesting conversation. Carlos, is a hard-working guy and while he has a crew of 3, he works harder than any of them scrubbing, waxing, claying, and drying his customers cars. Today, he showed me his brand new BMW 325 with all the bells-and-whistles. I mean this thing was loaded. His lease is “only $800 a month”. So, I told Carlos how impressive it was and that it must be useful for impressing the ladies. No, he said, his lady doesn’t care. He bought it because he was already leasing two other vehicles for a total of $1100 a month and he had to trade one in to change (I didn’t fully understand either). I went on to tell him I was looking to “retire” from the corporate world in a year or two and that I needed $2 million in liquid assets to feel safe doing that. I explained that I would probably be driving my old car for a few more years until it gives up so that I can get to that point. After a few more chatty words, I left Carlos and headed for my building. I could see he was thinking about how he could get to $2 million too. I wonder if he is thinking about his car in different terms.

Warren Buffet, the sage of Omaha, and probably the greatest stock investor of all-time was on CNBC today and in this MarketWatch assessment of his statements:
Buffett gives nod to index funds over ETFs he appears to be dissing ETFs.

Well, I happen to think the writer took Buffet’s comments out of context at least in the creation of the sensationalized headline. Buffet clearly states that there’s nothing wrong with ETFs. The problem is when people try to trade them rather than buy-and-hold them which he has always advocated for individual investors. Further, he dislikes the fact that ETFs today are getting too niche-oriented (anyone want an Oil Sands ETF? they have one). Broad market ETFs, such as Vanguard Total Stock Market index VTI, are super low cost and allow an investor to get a diversified basket of stocks with even small investments. And, for a regular dollar-cost averaging investor, the commissions are sometimes lower for buying an ETF over a mutual fund. What’s not to like? These are the ETFs a beginner (and most people) should probably be looking at: VTI (represents the the entire U. S. Market; somewhat mimics the Russell 2000 index and carries a low, low 0.07% management cost. It doesn’t get lower than this.). If you dont want to be an active investor, you could make a strong argument for putting 85% in VTI and for international exposure, 25% in EFA, which represents foreign developed markets and mirrors the Morgan Stanley MSCI EAFE index. If you want to look at Emerging Markets, you’ll want to look at the iShares EEM index ETF. Personally, I would never put more than 10% of my liquid assets in emerging markets.

Just read last week’s Robert Kiyosaki article on Yahoo entitled
Playing the Mutual Fund Lottery.

I cant believe Yahoo keeps him on. This article is dangerous information to spread to the uneducated. Seems to be saying mutual funds are no better than playing the lottery because of the high cost of some funds. I’m not sure what else one could take from the article.

Folks, there are extremely low-cost index funds and ETFs that one could choose that entirely invalidates any point he appears to be making here. The Vanguard Total Stock Market ETF (Ticker: VTI) has an annual cost of 0.07%. That is ridiculously low. In fact, there is a good Jeremy Siegel article on Yahoo yesterday, The Bullish Case for Stocks, that points out that reduced transaction costs that began with deregulation 30 years ago have made the stock market more liquid and fairly priced. Back then, it was not unusual to have to overcome an annual cost of 2% due to the aggregate effect or high spreads and brokerage costs. That was a pretty large leak that no longer needs to be paid if one sticks to no-load index funds and broad market index ETFs.

Following up on the disastrous EBay laptop purchase and failed PayPal dispute:

Here was their response when I tried to appeal:

Thank you for contacting PayPal.

Because you had stated you installed software on the computer, we were
unable to grant your claim.

If you have any further questions, please feel free to contact us
again.

Sincerely,
Katharyn
Protection Services Department
PayPal, an eBay Company

Here’s my response:

Dear Katharyn,

Wanna good deal on a laptop? It is in “good condition” and depending on how you define use, I’ve only actually used it for about 15 minutes. Your purchase would be protected by PayPal dispute resolution.

Sincerely,
A Long-time PayPal and EBay customer

Following up on the disastrous EBay laptop purchase

Well, I lost the Paypal dispute resolution. What a joke. The response from PayPal:

“Based on our definition of significantly not-as-described, this claim does not qualify for a refund.We found the seller to has accurately represented the item(s) in question.”

Great. Now I’m out almost 400 bucks and I have a doorstop.

I have always had pretty good experiences buying from people on EBay. So, when I recently decided that I would get a used laptop on there I didn’t worry too much. I found one for around $350 that was adequately equipped and bought it and paid with PayPal. After 2 weeks, I started to get concerned and sent a polite email to seller informing that I hadn’t received it. He immediately replied with the shipping tracking number (good sign). For some reason, I hadn’t gotten the Postal notice at my door but they had tried to deliver twice when I wasn’t home. No problem, I went and picked it up at the post office.

I get it home and start unpacking. Hmmm, the packaging is a little sparse….just some foam balls underneath and the laptop, in its leather bag, is pushed in the box on top of them. I pull out the laptop and turn it on. Well, the hinges are a tad loose but what do you expect, its not new….I can deal with that. I start it up and put in my wifi card and installation software that came with it…and just like that, I’m on the internet. Great. I download my favorite browser, Firefox, and my favorite email software, Thunderbird, and then boom…..the dreaded blue screen of death. It’s frozen up completely.

I email the seller. He says it was perfect when he sent it….used it all the time….maybe damaged by post office. He turns out to be a guy who claims his work is putting together computers and he also says a blue screen is not a big deal….give it more time or install another operating system….whoa…that’s not what I paid for….but I try to keep my cool….EBay’s always been good to me. I reboot it after a couple hours and leave it on overnight. In the morning….its dead again…..its a piece of crap. I want my money back. Seller says no….must be post office damage….he will not do returns. Uh-oh, this is turning into a raw deal. It was shipped insured, so I take it over to post office. After waiting an hour, they make me fill out a bunch of forms and then take it away to “be assessed”. They’ll let me know but the clerk says she sees no damage so a payment seems unlikely. I email the seller to ask his phone number should the post office need to contact him. No response….for 3 days…previously he was replying within hours…..uh-oh…

So, I initiated a paypal dispute…and clearly explained I received a laptop that was not in “good condition” as it was advertised and that it was crashing, etc. The seller responded. With lies!
Defense No.1 :”The buyer of this laptop first claimed he did not receive the laptop, despite the fact I provided a tracking number with paypal shipping.” not sure if he’s trying the red herring diversion tactic here but I had said I hadn’t seen it and then after getting the tracking number, I picked it up at post office.
Defense No. 2: ” the software crashes happened after the buyer installed his own software.”…did he think I bought it so I could play with Paint, Notepad and Calculator?
Here’s the rest of his nonsense:
“The laptop did not crash until his own software was installed. Recommended reinstalling the Operating system to determine if this was a hardware issue and buyer did not do so. This laptop was sold in good condition, owned it for 3 years and never experienced these types of crashes. From the very beginning, this owner was looking for a refund from not receiving it to one supposed Windows 2000 crash. I have proof of ALL e-mail exchanges with the buyer.”

How does a person sleep at night that tries to make a buyer out to be the bad guy? This buyer invested a few hours in making this broken down laptop work, in addition to time spent at the post office to tell them it might be a shipping issue. I have bent over backward for this seller and he spits on me. We’ll see where PayPal goes with this.

Here’s a concern I have with PayPal. I posted my argument in a “dispute” form on their webpage. The seller was able to post his nonsense and elevate to “claim”. This enables him to have last word apparently and I have no place I can rebut him. The PayPal email notifications are “do not reply” and the website says “We have received a statement from the seller disagreeing with your claim. We are reviewing this case and will contact you if we require additional information or when we reach a decision. No further action is required of you at this time.”

Will fairness prevail? Stay tuned.

RESULTS FROM FIRST ROUND RECOMMENDATIONS:

Midwest:
Take ODU +1 (lost 3) vs Butler (WIN)
Take Jackson St +27.5 vs Fla (won 3) (LOSE ..were down only 6 at half)
Take GT -1.5 vs UNLV (won 3)…must be bet online (LOSE)
East:
Take Ark +2 vs USC (won 3) (Removed…was a mistake…see prior note)
Take Vandy -3 vs GW (won 3) (WIN)
West:
Take Duke -7 (lost 3) vs. VCU (LOSE)
Take Indiana -1.5 vs Gonzaga (lost 3) (WIN)
South:
Take CConnSt +21.5 vs OSU (won 3) (WIN)
Take Tenn -7 vs LB St (won 3) (WIN)
Take Stanford +5.5 (push, loss, loss) vs. Louisville (LOSE)
Take Nevada -1 vs Creighton (won 3)…online only (WIN)
Take Memphis -18 vs. N Texas (won 3) (LOSE)

Take Miami +9 vs. Oregon (WIN)
Take Marquette + 2 Vs Mich St (LOSE)

For a net of 8 wins and 7 losses.
Against the house edge (or juice or vigorish) which amounts to me winning $150 each time a $165 wager wins and losing $165 whenever I’m on the wrong side:
8*150 - 7*165 = a measly $45 profit.

Not very successful but at least it wasn’t a loss. And great fun was had in Las Vegas. Poker was very successful as there were plenty of bad players at the Monte Carlo no limit games.