Carnival of Debt Reduction - Sub Prime Crisis Edition
I thought that I would never really invent the deadline for that carnival of debt reduction. John told me earlier that week that I would be hosting and I did not really find out until friday that Mrs Credit Card arranged a trip to New York until Monday to get away for the kids spring break! I was tempted to send John an newsletter asking whether someone would swap places with me. While I could put together the carnival quickly whether I decided to, I had always put in some effort into making a carnival interesting whether I was hosting it. Furthermore, folks who have been hosting carnivals are getting more creative in terms of having themes and even lots of photos!. But I decided to shoulder on.
So here I am writing on a Sunday night after visiting the Museum of Natural History with the kids the whole day. My feet are really hurting so I did not mind spending some date on the laptop. After logging onto the hotels Web access and paying $9.95 for 24 hour access, I suddenly realize that I did not have much instance. Plus I was getting really tired. And I have no theme! So here is my ramble, and I hope the pieces do fall together.
Bears Stearns in Trouble?
One of the events that stuck to my mind that week was the fact that on Monday, a couple of friends of mine who work on wall street’s bond departments told me that Bear Stearns credit default swaps were trading at 900 basis points. Essentially, they were trading at distressed levels. On friday, Bear’s stock collapsed despite getting emergency funding through JP Morgan. Funny things was how the bonds guys knew that might happen and the stock trading community did not know about it until it was too late. whether we look at our own lives, perhaps there are signs that we can gather whether we are heading towards a financial catastrophe. How to Know whether You’re in Deep Financial Trouble by Terry of Savvy Frugality is a good check list for yourself.
Diversify Your Revenue and everything!
Bear Stearns is likely to be put on the block for sale and part of the reason is that they did not diversify their revenues when things were great the last few years. While most investment banks are have thriving bond, stock and investment banking departments, Bear’s strength is mainly in bonds (and Mortgages!). The lesson here is that one has to diversify one’s revenue stream so that you do not become too cyclical with the economy. Applying that to a personal level, PT presents 12 Ways to produce Yourself Recession-Proof posted at Prime instance Money. Another crucial lesson comes from Steve Faber who says that simply reducing expenses is not decent. We plus have to “grow our revenue” and he encourages us to enroll in - Continuing Education Certificate Programs to Earn additional Money.
Where’s the risk management tool?
But Bear’s story is just the latest news headlines that have hit us since last summer when the sub-prime crisis first unraveled. It started to really invent headlines when Merrill Lynch, Citibank and in fact all big banks announced massive write downs on the mortgage securities. Given the amount of write downs, it makes you wonder how banks look at their risk. Aren’t they sophisticated sufficient? Haven’t they looked at their total risk profile. Worse to come, AIG plus announced massive writedowns. Bill Gross from PIMCO described that whole fiasco as the unwinding of the “shadow banking system”. The equity analyst additionally did not anticipate that considering many of these securities were derivatives held “off-balance-sheet”! I guess the lesson is that there is no such thing as off balance sheet items. You have to look at everything as InvestorBlogger writes in his blog aptly titled Is your bank book your financial statement?.
Speaking of risk management systems, it is clear that today’s financial institutions have been found wanting in that area. To be fair, it is a very complicated area as many loans and securities today are modeled by PhDs! For us mortals, our situation can get complicated but fortunately, we do not need rocket scientist to figure that out. There are lots of tools available and they all serve their functions. Here are a few reviews and thoughts on the latest tools.
Millionaire Money Habiits writes about mvelopes personal finance software review
Pete presents 3 weeks with Geezeo.com - A Review posted at Bible Money Matters
Kevin presents No Debt Plan » Blog Archive » Budgeting Tools posted at No Debt Plan.
Hire the Best - Fire the Crap
When Merrill Lynch and Citibank announced massive losses on their sub prime securities, their CEO took the heat for that. And rightly so. When John Thain came to Merrill, he opened said in interviews that their risk management system could be improved upon. That must have been the understatement of the year. We have to give kudos to Merrill to looking outside and hiring someone with better risk management background. In the same spirit, The Happy Rock has just fired himself as his own CPA! and now Spends The Big Money For Tax Prepation.
History Always Repeats Itself
In 1998, faraway Term Capital blew up when liquidity dried up and all their trades went sour and they could not unwind them. They were additionally high leveraged. You would think those lessons have been learned, but we all know history always repeats itself. Recently, Carlyle Capital has gotten into trouble considering of margin calls and by leverage. And to think that they were some of the smartest guys in private equity. Here are a few posts that reminds me of that.
nickel presents Seven Deadly Sins That Lead to Debt posted at fivecentnickel.com.
Ryan Healy presents Why public Stay in Debt posted at Debt Reduction Formula.
debt freedom fighter presents Money, Mathematics, and Personal Behavior – Dave Ramsey is Right! posted at Discover Debt Freedom!.
Why Minimum Monthly Payments Will Cost You Big advice will always be ignored by most.
Would Carlyle have learned anything by reading these articles? ha - probably not. But once again, to folks like us, I would devour every word of these.
Over leverage is dangerous
A major reason of the mess that we are facing is simply the amount of by leverage in the system. From financial institutions to hedge funds and to us as individuals. Financial institutions have “off balance sheet” items (which are legitimate). Individuals as well got by leveraged considering we could get 0% downpayment, get our sort new plasma TV with our HELOC! Warren Buffet used to describe an LBO as putting a dagger on the steering wheel. It makes you careful (debt makes you efficient!), but one accident and that’s it. The lesson here is do not set yourself up such that you have a razor thin margin for error. Here are a couple of posts that relates to that.
paidtwice presents Don’t Set Yourself Up To Crash and Burn - Wiggle. posted at I’ve Paid For that Twice Already….
Randy Peterman presents The Moved Buffer Theory Budget posted at Watch My Money Maker.
But how that all that happened?
After the fact, every financial journalist began to talk about how that whole sub prime mess cam e about. Easy financing, new debt securities that carved and tranched risk into different risk profile and next sold them off to investors. considering of the investors huge appetite for risk, underwriting standards become lax. that is all good and well writing on “hindsight”. insert : : Here’s an interview by Emily Starbuck Gerson with Debtors Anonymous!
Problem is why didn’t anyone foresee that years ago? possibly it is instance we looked at some trends in the personal finance world that might get us into trouble these days. For example, FMF has warned us to Be Careful with Home Equity and 401k Credit Cards. Actually, he did not even write that post! But I’ll let him get away with it since he got a good guest blogger.
To mark to market or not
Since AIG had to announce a massive $11bn write down, they have made noises and arguments against “fair value accounting”. In fact, there has great amount of debate about that recently. While investment banks and hedge funds have to “mark to market”, banks and insurance companies can shift their declining assets into their “lengthy term buy and hold books”. Part of the debate going on now is whether having to mark to market in a declining market actually makes things worse since everyone has to sell in a falling market which sets a spiral. However, the other side of the argument is that the Japanese banks were not due to mark to market in the 90s and they took ages to finally get around their poor debt problem. As far as folks like us are concerned, we are marked to market and it is for the better. In the spirit of full disclosure, Aryn discolses February Debt Reduction Process at Sound Money Matters
Not everyone was hurt
Despite the market action during the last six months, not every hedge fund or money manager was hurt. Paulson fund was a standout. He correctly anticipated the sub prime mess and was massively short short prime related securities. His funds were up a few hundred percent and one of them was up about as high as 500%! Who says manages cannot beat the S&P. His 2007 performance alone means he can lag for as enlarged as he wants going forward! In the spirit on Paulson’s fund outperformance, here are a few stand outs from that weeks submission.
Vicki is now credit card debt free.
Ana presents Debt Reduction Success Story in Army Times posted at DebtFREE-Revolution. Debt Reduction of $90,000 in one year! That has to be equivalent to Paulson’s 500% return last year!
Debbie tells us how How She Got Out of Credit Card Debt.
Take Action - Replenish Capital with Sovereign Funds
So far, we’ve already have had a big big financial institutions replenish their capital from investments from Sovereign funds. Merrill Lynch, Citigroup, UBS have all had foreign investments to shore up their capital. Congress may get jittery about that but these banks did the right thing considering having adequate capital in times of a liquidity crunch is vitally vital. Mr. Debtbeater recently Cut Up His Credit Cards. Hey, whether that is what it takes, so be it.
Deleted Scenes
Well, even George Lucas had to delete tons of scenes from his final movie and unfortunately, here are some posts that can’t fit into the movie (or could it be that it is midnight and I’ve no desire to stay up any longer!). But at least, these post are still in the collectors DVD!
Dividend Money Presents student loan reduction strategy
Amanda presents 4 Credit/Debt/Money Documentaries
Squawkfox presents Rent vs. Buy Calculator
Erek Ostrowski presents Getting Out of Debt (Part 1)
Bear sells out for $2
Just when I thought I could go to bed, the news is out that Bear has sold itself to JPM for just $2 a share! What more can I say?
Orginal post by Mr Credit Card
No comments yet. Be the first.
Leave a reply
