Monthly Archives: November 2011

Financial Watergate

It’s taken 3 years for us to uncover the details of what should go down as one of the most disturbing periods of government action since Watergate.

In 2008, as the financial world stared at the precipice, our government acted as follows:

Hank Paulson – Secretary of the Treasury at the time, was providing hedge fund managers (many of them Goldman Sachs alumni $GS) with non-public information about how bad the crisis might become and how the Treasury would likely wipe out the common and preferred stocks of Fannie Mae and Freddie Mac.

The Federal Reserve – was secretly lending a total of $7.77 trillion to banks around the world with the vast majority going to the largest US Banks. These below market-rate loans provided the recipent banks with an estimated $13 billion in profits and again raise questions about how the Fed chose who would survive and who would fail during the crisis. The fact that the Federal Reserve and large banks fought against this disclosure for more than two years was likely a move to prevent this new information of exactly how bad off the banks were from being incorporated into the already passed Dodd-Frank reform bill.

Congress – Rep. Spencer Bachus, a ranking member of the House Financial Services Committe attended a highly secretive evening briefing with Ben Bernanke and Hank Paulson where they described how the global financial system was close to meltdown. The next morning he use options to establish a short position on the Nasdaq 100.

Any of these acts individually have to deeply shake the average citizen’s already low confidence in our government and the fairness of financial markets. Combined, they are a devastating blow that may significantly damage the value of the financial services industry for years to come.

Retail trading is especially vulnerable to a reduction in the public’s perception of the market. The charts of $SCHW, $AMTD and $ETFC look  like no one is expecting the public to return in great numbers to the market any time soon. Given what they now know, who could blame them?

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Debt – The Opiate of America

Debt is a drug. Not one of those “good” drugs they advertise on TV which promise to cure you of some horrible disease while only subjecting you to dizziness, nauseau and an upset stomach. No, debt is much more clever than that. Debt is a bonafide opiate – extremely addictive and able to manipulate our mind. It gives us the warm and fuzzy feeling that we’re saving money and ‘doing the right thing’ while we’re spending more than we could ever imagine. The withdrawl symptoms are brutal, like an opiate.

We want to avoid debt, we really do, but its peddlers are everywhere. When we go to college, we’re offered government guaranteed loans with deferred interest – our first hit. When we buy a car the first conversation is about ‘financing’. When we need a place to live we’re taught about ‘good debt’ and deducting mortage interest. By the time we look up, we’ve already spent the majority of our near term future income. We’re complete junkies.

We decide to get smart about money, cut back on the ‘foolish’ things that we feel guilty about – nice meals, vacations, massages, etc. With a little self restraint we’re now saving an extra few hundred $’s a month. Like a junkie who is using less often, we start to feel better about ourselves. We can beat this.

Then it happens, not immediately as even debt cannot penetrate our iron will when we first start something. It waits quietly in the corner, until just the right moment. When we have quietly begun to tire of our self-imposed austerity. We are tired of being ‘good’, frustrated that so much of our hard earned money goes to pay off so little of our outstanding balances. At this exact moment, when our guard is down just a little bit, it pounces.

Not in the way a lion pounces, this is much more subtle. It plants in our head the seed of an idea. The idea of a new car. We can’t stop thinking about it. How much happier would we be if we had the latest model? It looks so nice in the brochure. It’s practical too. It has more room for the family, has more airbags than our current car. It also comes with a new warranty and maintenance included. We’ll save money on repairs over the next few years.

Don’t we deserve it? We’ve been working so hard, we’ve been so good. Forgoing all those guilty pleasures for all these months. We definetly deserve a reward.

How much will it cost? That’s the best part. The dealership is running a low interest finance special and by going with a slightly longer term loan the cost is only $100 more per month than our current payment. $100 a month? For all of this? How can we say no? Afterall, we’re saving more than that by forgoing our guilty pleasures. Even after buying the car we’re still saving more than we were before we decided to ‘get smart’ about money. How very clever we are.

But we are wrong. We have been fooled again into spending tens of thousands of dollars over the next 5+ years in return for saving a few hundred dollars over a few months. And yet we think we have won.

And we are still addicted.

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Thankful for the US Dollar

With the chaos that is raging around the Euro, I’m more grateful than ever that I was fortunate enough to be born in the US.  Having lived my entire life in the US it’s easy to lose sight of how lucky we are to be in such a wealthy and stable nation.

While the 2008 credit crisis felt to us like an economic disaster, it was a mere blip compared to what happened to Iceland, Ireland and may soon occur in many of the other European nations.  I can only imagine what choices will face many Europeans if the Euro dissolves.

Will their bank go under?  If so, will the government bail it out?

If their bank account is denominated in Euros, will they be forced to convert to a local currency?

If they’re forced to convert, what will be the conversion rate?

How will their new currency compare to either what’s left of the Euro or other major trading partners (US, China, Germany, etc.)?

How much buying power will they lose?

If they work for a multinational company, what currency will they be paid in and what will their salary be going forward?

Will there be riots?  Will their government fall?

What will happen to their private or public pensions?

What about their investments?

The permutations are endless and none of these questions are likely to have good answers anytime soon.  Whiles its easy for us to look at the breakup from a distance and observe we shouldn’t lose sight of how many citizens living in “1st world countries” are looking at the very real possibility of a significant reduction in their financial well being.

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