University of Bob

DON'T ROB PETER TO PAY PETER

2008-03-07T09:39:00.000-08:00

Self-fulfilling Prophecy Department---When we believe that economic times are getting tough, we curtail our spending and put away some extra money for that "rainy day" possibility. Less spending by consumers is a drag on the economy. Many employers can't stay afloat if customers aren't spending money to buy their products. So they lay off workers. Which means fewer people with money to buy things. Which sends the economy into a ditch. Round and round it goes until consumer sentiment perks up and times get better. One problem in this scenario is that too many people refuse to give up their spending patterns. Uh-oh.

All too many people are borrowed up to the hilt. The credit cards are maxed out. The home equity line is capped. And lenders aren't eager to make new loans or grant credit except to those people who least need it. For those who still have some borrowing room in their portfolio, heed the following.

There are some hard and fast rules when it comes to borrowing. They are all inter-related. #1) Don't borrow long to pay off short. Example: Taking out a 30 year mortgage to pay off last months credit card debts or last summer's vacation. #2) The term of any loan should be equal to or shorter than the life of whatever it is you're buying with the borrowed money. Example: If you trade cars every three years, your car financing should be for no more than three years. Otherwise, you'll end up still owing money on the old car when you trade it in.

#3) Don't rob Peter to pay Peter. Too much of this is happening these days. Your normal cash flow (income minus expenses) doesn't leave enough to pay down your credit card debts. So you borrow on a home equity line of credit to pay the credit card debts. Or vice versa. Who are you kidding? You're swapping one debt for another---robbing Peter to pay Peter.

Any combination of swapping debt, or otherwise reducing your assets, is just as foolhardy. Refinancing your first mortgage to make payments on your home equity loan? Dipping into your 401k or IRA plan to make payments on your first mortgage? Cashing in savings to replenish your 401k or IRA? You're just moving money around, accomplishing nothing and facing possible tax and penalty consequences, not to mention interest costs.

When your expenses start to exceed your ability to pay, THE ONLY SENSIBLE THING TO DO IS TO CUT BACK ON YOUR SPENDING. It doesn't take rocket science to figure that out, but spending addictions can be hard to break. Here are a few suggestions as to how you might be able to cut your expenses without materially sacrificing your life style.

Communications How much are you spending on your cell phones, land lines, Blackberries, iPhones and the like? Can you restructure your calling plans to reduce your monthly outgo? Are you going over your limit on cell phone minutes and getting into higher per-minute costs? Do you (or your kids) really have to be emailing photos and videos via your cell phone as much as you do? Can you reasonably cut back on what you're spending downloading music, ring tones and games on your cell phone? (See yesterday's posting for a broader look at this money gobbler.)

Television It's wonderful to have all of those premium channels, but can you make do with one or two---or even none---instead of the whole smorgasbord? Movies on demand are a wonderful convenience, but at five bucks a pop aren't you being extravagent? Yes, I know, it's a lot cheaper than going out to the movies, but there are cheaper options still. Netflix? Or how about your local library, where there might be hundreds of good movies that are free?

Driving Three-plus dollars per gallon might be just a wake-up call for the four dollar a gallon ripoff. The first and foremost way to save---if you haven't done it already---is to carpool to work, to school, to after-school activities. At $3 per gallon, a 20 mile round trip (10 miles each way) will cost $3 just for the gas, assuming you average 20 miles to the gallon. 20 trips per month uses up $60. How could you put that $60 to better use? Wear-and-tear and other expenses add a lot more cents to that per mile cost. Consolidate your trips to the market and mall---one per week instead of two or three. Keep a tight leash on the kids' often needless cruising. Ask if you can have a work-at-home day once or twice a week. Many employers might be happy to let you

USE ANY MONEY YOU SAVE TO REDUCE DEBT, WHICH IN TURN WILL REDUCE YOUR INTEREST COSTS. When times get better you can always start borrowing and spending again---perhaps more prudently, if you learn any lessons from an economic slowdown.

Meantime, make use of the budgeting and spending guidelines in Personal Finance, Chapter Two pages 57-64 and all of Chapter Three, pages 76-107. They're available at no charge in the textbook, which can be accessed by clicking on the box in the right column.

BEWARE CELL PHONE SMALL PRINT

2008-03-06T15:42:00.000-08:00

"THE BIG PRINT GIVETH, THE SMALL PRINT TAKETH AWAY." These are days when people are saying, "You mean the interest rate on my mortgage can go up? But nobody told me to read the small print." You know the rest of the story. The same "But nobody told me" dithering is also true with the cost of cell phones. Have you read the small print lately?

I have been astonished, to put it mildly, when I hear how much some people, particularly families with kids, are paying for their cell phone service. In many cases the amounts are real budget-benders. So I got out my magnifying glass to read the small print in their ads.

All of the major cell phone networks are currently promoting unlimited cell phone use, all for a base monthly fee of $99.99***** (The asterisks mean that there's a lot of small print in the ads. Don't say you weren't warned. And why don't they just call it $100 and be done with it? Who are they trying to fool with that $99.99. But that's another story.)

Verizon calls its plan "Truly Unlimited Calling." Sprint's is "The Simply Everything Plan." And T-Mobile, with a flair for the unimaginative, calls it "Unlimited Calling and Messaging." You can, if you like, consider that they are all the same. But when you read the small print you might come away having no clue as to what each plan will cost.

Here, magnified for you at absolutely no additional cost, are some bits from each of their ads, all exactly as they appeared. Before I signed a contract, I'd sure want someone to translate this gibberish for me.

From Verizon's full page ad: "Our Surcharges (incl. Fed. Univ. Svc. of 10.2% of interstate and int'l telecom charges (varies quarterly), 7c Regulatory & 70c Administrative/line/mo. & others by area) are not taxes (details 1-888-684-1888); gov't taxes & our surcharges could add 4%-33% to your bill." I know there's a telephone number in there somewhere, but to calculate how much this service would cost me? Fuggedaboudit. (Apologies for the "c"s after the "7" and the "70"---in the ad they are the cents symbol, but I couldn't get my PC to replicate them.

From Sprint: "Sprint may terminate service if a majority of minutes or a majority of kilobytes in a given month are used while roaming. Services are not available for use as modem, in connection with server devices or host computer applications, other systems that drive continuous heavy traffic or data sessions or as a substitute for frame relay connections." Honest, officer, I know the traffic was heavy but I didn't know I was speeding. I thought I was just making a phone call.

From T Mobile: "Per-line activation fee and 2 year agreement required for post-paid customers. 2 year agreement and $4.99/month control charges (unless enrolled in EasyPay) required for FlexPay customers. Regulatory Programs Fee (not a tax or a government-mandated charge) of 86c per line/month applies. Taxes approx. 6-28% of your monthly bill. Domestic only." Post-paid, EasyPay and FlexPay customers, you know who you are. Or do you? And "domestic only?" What's that all about. (Again, apologies for the "c".)

All of this is on top of the $100 per month. Sorry, I know it's only $99.99, but I can't play into their silly games.

All of these newspaper ads were full page---that's 12 inches by 22 inches, a lot of real estate in which larger type could have been used to encourage people to read the material without optical enhancement. If they really wanted you to know this information, they could have used larger type. Lots of space available. Small print is a devious way of hiding the facts. Why, you might ask, don't the newspapers' consumer reporters point all this out to you? What? And antagonize all those full page advertisers?

So, you pays your money and you takes your choice, as the con-man would say. Like the people who were shocked to learn that their monthly mortgage payments were going up, cell phone users who don't read the small print could be in for some bitter pills in their bills.

This article supplements Chapter 3, pages 75-88 of Personal Finance. Access the textbook by clicking on the box in the right column.

TIME TO DOWNSIZE HOME?

2008-03-05T12:34:00.000-08:00

Are you now or will you soon become Empty Nesters? With a glut of unsold houses on the market these days, it might be a good time to shop for a smaller home. Of course, having a glut of unsold houses on the market could mean you'll have a tough time selling your home. So, you might ask, what is there to gain? There is no easy answer, but you have to ask the questions.

First, let's crunch some numbers to see if down-sizing makes financial sense. Bear in mind that the real-life results in every single case will differ from this one, depending on the state of the housing market in your current home town, the market in a town you might move to, and a lot more. This is just to show you a pattern for your own calculations---mainly to see how it will affect your cash flow, which in turn affects your life style.

Let's say you've been in your current home for 20 years. You bought it for $300,000 with a $50,000 down payment, and a 30 year fixed rate (7%) mortgage for $250,000. Your monthly payments (interest and principal only) are $1,665. The home is now---realistically---worth $400,000, and you still owe $150,000 on the original mortgage. (What?! After making payments for 20 years on a $250,000 mortgage you still owe $150,000? Sorry, but those are the realities.)

You can buy a smaller house or condo that will suit you quite nicely for $300,000. You can pay $50,000 down and get a 30 year fixed rate 7% mortgage, which means your monthly payments will remain the same---$1,665, which you can handle with no problem.

You sell your present home for $400,000 and pay off the remaining balance on the mortgage of $150,000, leaving you with cash in hand of $250,000. Subtract from that the $50,000 you use as a down payment, and you're left with $200,000. Let's say you invest that $200,000 conservatively and get a 4% return (after taxes.) You're going to net $8,000 per year from that investment. That's cash in hand, to spend or reinvest as you like. What would you do with an extra $8,000 cash per year?

Of course the variables are myriad, but we're trying to get a sense of your cash-flow position by making this move. Yes, you could get $200,000 out of your current home via a home equity loan (which you'd have to repay) or a reverse mortgage (which you don't have to repay, but could cost you $10,000 to $20,000 in upfront fees. More on reverse mortgages in later postings.) But remember, we're considering that you want to move. So no borrowing against your existing equity.

Bottom line: this overly simplistic example shows you how your cash flow can increase by selling the old and buying the new. The variables are almost imponderable, but you've got to start with some kind of base from which to do further calculations.

THE VALUE OF PEACE OF MIND

If you wait, will you be able to sell your current home for more? Or for less? Will the price of the new house go up or down? Will interest rates change materially? Will you, some time down the road, decide that you really would rather have moved to a different city---to be near grandchildren, to have better weather, to have access to more amenities, whatever?

These are all uncertainties, and no doubt you can think of even more. It sounds almost foolish to just say that life is full of uncertainties. What's it worth to eliminate perhaps one of the biggest uncertainties---where you'll be living---by down-sizing now instead of waiting for who-knows-what? You can't put a dollar value on eliminating uncertainties, like you can on the cash flow issue discussed earlier. Only you can determine what the peace of mind might be worth.

If nothing else, hopefully this article will get your thinking underway on what for so many is a major life decision. You'll have to fill in the blanks---when, where, how much, etc.---but at least this can give you a format for your planning.

You can get all the online calculators you'll ever need for your number crunching at http://www.calculator.com/. Note that that site has an abundance of advertising, maybe like a mine field, so proceed accordingly. I'm not recommending any of the advertisers. You're on your own in making those choices.

This article supplements Chapter 18, pages 517-520 in Personal Finance. Access the textbook by clicking on the box in the right column.

WHAT??? $30 FOR POPCORN AT THE MOVIES?

2008-03-04T12:28:00.000-08:00

Our speculative historian, Hubert Hindsight, is here again. Dr. Hindsight, you may recall, wrote a book in the year 2020, titled "What Were They Thinking?," in which he looked back on many of the foibles and follies of our era. We have the only known existing copy of the book, and Dr. H. has kindly given us permission to print excerpts. Here is one:

.....The movement began in late 2007, and within a few years it had gained seemingly unstoppable momentum: USE ETHANOL as fuel for automobiles to reduce air pollution. President G.W. Bush had signed energy legislation in December of 2007 that would have required the production of 36 billion gallons a year by 2022---just a hop and a skip from now.

But the momentum stalled after the "Popcorn Boycotts." Emmie and Howard Zerm, a young couple in Dayton, Ohio, were at the epicenter of the boycotts. A new movie house had just opened near their apartment, and they were the first in line on opening night. They were shocked to find that the concession stand was charging $30 for a tub of popcorn (with genuine butter on it.) They protested, but to no avail. "Take it or leave it," the theater manager said.

Within days every cinema in the country boosted their popcorn prices accordingly---explanation follows. The Zerms wrote an angry letter to their local newspaper urging that people stop buying popcorn at the movies, and they quickly became the leaders of the Popcorn Boycott movement.

The boycott worked. Not only did concession revenues plunge, but ticket sales also took a nosedive. Movie theater owners panicked, as did movie producers and everyone connected with the making of movies. All of Hollywood went into mourning.

All of the interested parties mounted a campaign to explain the $30 popcorn. Here is a letter that was published in full page ads in almost every newspaper in the nation.

"Dear Movie-goers,

We know how disturbed you are about the sharp increase in the price of popcorn, but unfortunately it is an issue beyond our control. The price we have to pay for the kernels has gone so high, that even at $30 a tub we barely break even. Since the government is supporting the production of corn, which is used to make ethanol, farmers all over the world are planting corn and selling it to ethanol factories at ridiculously high prices. We have to pay for corn accordingly, and to stay in business we must pass that higher cost along to you, which we deeply regret.

We want clean air as much as anyone, but we fear that ethanol is not going to solve our pollution problems. To make ethanol, consider all the gasoline that has to be used to plow the fields, to harvest the corn, to transport the corn to the ethanol factories, to refine the corn into ethanol and then to distribute the ethanol to retail stations. And then there's the butter: cows are fed corn, and they have to be milked, and the milk has to be made into butter, which has to be distributed to the theaters and melted. All of that can cause more greenhouse gasses than using ethanol would reduce. Net result: More pollution, not less.

Further, all around the world so much corn is being so profitably grown for ethanol that other necessary--and less profitable--- food crops are being ignored. This is likely to cause severe hunger problems in many parts of the world. Also, forests and grasslands are being converted to cornfields, which is yet another threat to the balance of nature.

It's a huge problem, and the worst might be yet to come. If you are willing to go to the movies and NOT have popcorn, you'll be helping to solve the problems of pollution, of hunger, and of unemployed movie actors. We know how you love your popcorn, but we are confident that you love the movies even more. So please come back. We'll have other snacks at good prices, and we all will be happy.

Thank you.

The Movies

The letter worked. People began returning to the movies and they were able to sit for more than two hours without nibbling popcorn. Biofuel scientists, intrigued by this phenomenon, began to study other renewable crops that could be used instead of corn without upsetting the entire economic/agricultural balances.

Now, as 2022 rapidly approaches, the issue is far from resolved. Hydrogen is giving ethanol a run for its money as the fuel of choice. But now protesters are claiming that the newly perfected means of cost-effectively extracting hydrogen from its most abundant source---H2O, or water---could deplete the Earth's water supply, and wouldn't that cause more problems?

Now it's in the hands of the politicians......

For other excerpts from Hubert Hindsight's book, "What Were They Thinking?", see postings on Feb. 14, 2008 and January 24, 2008.

HOW HONEST ARE YOU?

2008-03-03T10:57:00.000-08:00

Everyone speculates about this once in a while: you find a wallet on the street....the supermarket cashier gives you back too much change....the waiter makes a mistake on your bill, in your favor....and so on. What do you do? Correct the error and pat yourself on the back for being honest? Or pocket the money and walk away, knowing that no one will know the difference. How's this story for putting someone to the ultimate test?

This bizarre situation was described in the Los Angeles Times a few days ago.

In summary: A young man named Xu Ting, in China, went to his bank's ATM to withdraw $140. He got the $140 from the ATM, and then, when he looked at the receipt, he saw that the bank had erroneously deducted only 14 cents from his account.

What would you have done at that point? What would you tell your children to do?

What Xu Ting did resulted in his getting a life sentence in prison!

After observing the bank's error, Xu Ting stayed at the ATM and made 170 more withdrawals totalling about $24,000 over the next eight hours. He blew the money---gambling and other indiscretions---and eventually the police caught up with him.

Now, a bank's ATM that allows 171 withdrawals totalling $24,000 from one account in a single day is, to say the least, inefficient. And someone who makes those withdrawals, and doesn't realize that the machine is---supposedly---keeping a record of them, is also, to say the least, inefficient. "Stupid" also comes to mind, but that's another story.

Xu Ting was arrested for bank robbery, the penalty for which in China can be life in prison. Harsh, yes, but that's China. The saga doesn't end there. Apparently, ATM machines in China are notoriously glitched, and when mistakes are made it is always presumed to be the customers' fault. Example: If an ATM spits our blank paper or counterfeit money, the bank will claim that you have no proof that it came from the ATM. Go argue. You lose.

Indeed, banking in China with the government-run banks is at the top of the list of Murphy's Law---anything that can go wrong, will. And the customer is to blame. The Times article noted, among other public grievances, that the average waiting time for service at China's four biggest government-run banks is 41 minutes! And you complain over a wait of more than a minute or two at your bank?

Well, public anti-bank sentiment latched on to the plight of Xu Ting, and miracle of miracles, the do-no-wrong government caved in to the protests and agreed to give Xu Ting a new trial.

A result is expected any day now, and hopefully I'll be able to track down the results for you.

I suspect that Xu Ting will still be found guilty, but will get a lighter sentence---maybe only 40 or 50 years instead of life. He doesn't have a whole lot going for him. His family has stood by him, claiming he is innocent. His father said that Xu Ting is "naive," and "unlucky." I'll say.

Xu Ting himself explained that when he got his hands on the money he kept it "to protect it for the bank." He said that he wanted to turn himself in, but a friend dissuaded him.

You won't be seeing Xu Ting's case on Law and Order any time soon, but it sure does add some spice to the issue of whether you should turn in that wallet or give the cashier back the excess change you received.

(Full disclosure time: Many years ago I was playing a dime slot machine in a Las Vegas hotel, and the machine went bonkers. I started winning on every pull of the handle, and soon a crowd gathered around me, cheering me on and waiting to take my place when I finished. A security guard saw the crowd and told me I could stay as long as I liked---house policy, since the glitch was not my fault---but when I quit he would close the machine. I walked away having won $90---that's a lot of dimes---and I kept it all. If I can risk money in a casino, the casino has to risk money on the accuracy of its machines. No guilt. No remorse. No jail time.)

JUST WHAT IS A RECESSION ANYWAY?

2008-02-29T09:55:00.001-08:00

Yesterday George Bush assured the nation that we were not heading into a recession. Federal Reserve Chairman Ben Bernanke echoed the same sentiments. They blame the media for overplaying the news of high costs, slowing growth and low consumer confidence. So, amid all of this banter and posturing, just what is a recession, are we heading into one, and if so, what difference does it make?

The standard definition of a recession is two consecutive calendar quarters of negative growth in the overall U.S. economy. The first quarter of 2008 is two-thirds over, and we might squeak by with a tiny bit of growth. The second quarter, then, will be the telling time: if our economy shrinks between April 1 and June 30, the "R" word could indeed be not far away.

What factors will influence the growth or shrinkage of the economy? George Bush feels that the tax rebate, The Stimulus---which will put $300 to $600 in many people's pockets, and as much as $1,200 in others---will get the economic engines purring again. That money won't be in hand until May, and it won't all get put to use until June or July. A huge amount of it will just be used to pay off back debts, which won't get the economic engines to whimper, let alone purr.

As I read the nation's mood, George Bush's enthusiasm will count for naught. So there go the only two positive factors that could prevent or delay a recession.

NEGATIVES OUTWEIGH POSITIVES

On the negative side we have the following:

A) Higher gas prices, which are felt in almost every economic transaction---not just at the pump, but also in delivering raw materials to factories andfinished products to stores, and much more. Those higher prices will cause people to cut back on other spending.

B) Tight credit, which will remain with us for months even if the Fed cuts short term rates at its March meeting, as is expected, will curtail new investments in production. Less production and less to buy as a result are economic negatives.

C) The weak dollar will cause the prices of goods we import to go up, which dampens growth.

D) All of the above will start to cause layoffs, which means less people buying fewer goods.

E) Layoffs plus rising prices sours the mood of the public, and people start stashing money away for a rainy day instead of spending it.

A + B + C + D + E equals recession, no matter how you or George Bush defines it.

What difference does it make? Not a whole lot, over time. We've been this route many times, and we've always bounced back, usually within a year or two. Yes, there will be some short term pain. Yes, the "R" word will get over-used during the elections, with fingers of blame pointing in all directions, until the public begins to ignore it. Yes, a change in the Administration will prompt changes in the national mood---new brooms always do sweep clean, regardless of what they're made of. Yes, we will awake from a hibernation of slow and/or negative growth and get moving again. And, like childbirth (or so I'm told) we will quickly forget the pain.

The biggest thrust of economic growth comes from consumer confidence. Regardless of interest rates or gas prices or credit tightness, will we regain confidence in our economic potential? Yes, but denial---such as that coming out of Washington---only serves to confuse the public and delay the misery. Let's face facts---tell the public the truth, and get on with it. Mr. and Mrs. John Q. know a lot more about their sense of confidence than any politician can ever know. And any politician who tells you otherwise is just.....well....a politician.

This article supplements Chapter One, pages 16-26 in Personal Finance. Access the text by clicking on the red box in the right column.

LINKS.....LINKS.....LINKS

2008-02-28T12:19:00.000-08:00

LINKS TO HELPFUL SITES THAT DON'T SELL ANYTHING...(plus a few that do.)

Many years ago, at the dawn of the Internet Age, I compiled a list of websites to include in the textbook, Personal Finance, as an extra benefit to readers. It was very important to me that I refer only to websites that were not selling anything. I didn't want my readers/students to get trapped in a scam or otherwise be abused by overanxious vendors.

I spent a huge amount of time finding and later updating those websites. In the Eighth Edition, which you can access at no charge by clicking on the red box in the right column of this page, the chosen websites were designated as "Quick-Clicks." Those 200+ Quick Clicks are no longer operative---thanks to the ongoing development of the web, they've been consolidated into a handful of links that will take you to wherever you need to go to enhance your knowledge of subjects in this website and the Personal Finance text.

Here are those links, with brief comments as to their content.

www.pueblo.gsa.gov This is the home site of the Federal Citizens Information Center (FCIC), and it is a massive collection of just about anything the federal government can do for you. It provides free articles, books and continuing links to other federal agencies and services.

www.ipl.org Just like having a complete reference library at your fingertips. This is the Internet Public Library, and it has more internal links---to free sources---than anyone could ever make use of. One feature of particular interest is its access to the current internet editions of virtually every newspaper in the world. Huge amounts of free consumer info. It's easy to get lost in the IPL, so pack a lunch before you log on.

www.bbb.org This is the site for the National Better Business Bureau (and can also link you to your local bureau). It's probably the best place to research the reputations of business you might become involved with, and the best place to file complaints.

www.ftc.gov The Federal Trade Commission's home, where consumer protection is their main objective. (This can also be accessed through the Pueblo address above, but why not take this shortcut?)

www.irs.gov The name speaks for itself. As with the FTC, this site can be accessed through the Pueblo address, after some navigating.)

www.investopedia.com As the name implies, this is an encyclopedic collection of more than everything you've ever wanted to know about the world of investments. Caution: This site is loaded with advertisements, so proceed at your own risk.

www.calculator.com Whatever type of calculator you might ever need for your personal financial concerns you can find here. As with Investopedia, this site contains ads, so proceed accordingly.

If you know of helpful websites that aren't listed here, please send the details to info@universityofbob.com. Non-advertisers preferred.

IT'S A GOOD NEWS--BAD NEWS SORT OF DAY

2008-02-27T10:27:00.000-08:00

"There are three kinds of lies: Lies, Damned Lies, and Statistics." So said the wise Benjamin Disraeli, British Prime Minister in the late 1800s. We are inundated with statistics to a point of being numb to them. Politicians, government agencies, corporations and all of their P.R. people grind out the numbers relentlessly. Many are misleading. Many contradict each other. Many are taken out of context. Yet they continue to make headlines and seep their way into our brains. Here's one guideline that might help you survive the tsunami of statistics. Ask yourself, when you see the numbers: "Relative to what?" The truth might be surprising.

Enough already with the headlines shouting about the bad times in the housing market. Yes, I agree, there has been a severe downturn. Jobs lost. Investments vanished. National mood somber.

Indeed, the news becomes a self-fulfilling prophecy. Prospective home buyers read about how house prices are falling and mortages are tougher to come buy. So what do they do? Believing the statistics, they say, "Let's wait until prices fall even more, and getting a mortgage is easier." In other words, they put off buying houses. And so the statistics get worse.

WHICH STATISTICS DO YOU WANT TO BELIEVE?

But there's a bigger picture. The housing market is in a rut, but relative to what? New single family home sales in 2007 were less than 800,000. And 2008 might be worse still. But look back just a short way and, according to Department of Commerce records, there were about 1.3 million new home sales in 2005, an all time record high. In 2003, 2004 and 2006 there were over a million per year. From 1991 to 2002 the annual average was 700,000. (New home sales are particularly important because they create jobs, whereas existing home sales don't involve new construction.)

Yes, new home sales are in bad shape right now. Just a little while ago they were soaring, but we didn't see many headlines to that effect. Housing has always been cyclical. No doubt too many homes were built from 2003 to 2006, and now the market has paused to catch its breath. Everything is relative. Even pain.

Gasoline prices are another sore subject. Yesterday wholesale prices closed at over $100 a barrel, and predictions are for higher pump prices this spring. Yes, higher gas prices are a bad thing, but relative to what? In 1981, gas prices adjusted for inflation averaged $3.40 per gallon, and we survived.

The Euro today hit an all time high of $1.50. Is that good or bad? Relative to what? If you're going to Europe in the months ahead, your trip will cost a bit more than it would have last year. That bad news applies only to a small number of people---and they're mostly people who can easily afford the higher exchange rate. But if you work for a company that exports products to Europe, those American-made products will be cheaper for European buyers (since their Euros buy more U.S. dollars) and that's good news for your company and it's employees. And that covers a lot more people than travel to Europe each year.

Also today the Federal Reserve announced the possibility of further interest rate cuts to help prime the pump of our nation's flagging economy. Good news or bad news? Relative to what? It's good news for businesses, and their employess, who want to borrow to expand their output. (Don't hold your breath, though, waiting for interest rates on your credit card to come down.) But it's bad news for people whose investments are interest rate sensitive. They'll take a hit, and will have less money to spend.

We will never run out of lies. Or damned lies. Or statistics. (The correct designation depends on who is issuing the statement.) What's important to remember is that statistics do not necessary equal truth. Everything is relative. Be careful what you take to heart.

This article supplements Chapter One, pages 16-26, in Personal Finance. Access the text by clicking on the red box in the right column.

UNHEALTHY HEALTH INSURANCE POLICIES

2008-02-26T10:37:00.000-08:00

By the time election day rolls around we will have had our fill of discussions on health insurance. Who should have it? Who should pay for it? Debate after debate will leave us reeling with an overdose on the subject. But there's another---and perhaps more important aspect---in the area of health insurance. It's this: If you do have a policy, and you're relying on it to pay your medical costs whenever the need arises, what assurance do you have the the company will honor your claim? Don't be too sure.

In my right hand I am holding a flyer that came in the mail three days ago from an insurance company called Health Net. It's touting a Medicare supplemental plan, and inviting people to attend a "free informative seminar", at which a "sales representative will be present with information and applications." Health Net is no fly-by-night company. It's one of the biggest health insurers in California.

In my left hand I am holding the front page of the Los Angeles Times from three days ago, and a headline reads: "Insurer Loses, alters course." The article tells of a woman who had breast cancer, and who was in the middle of a course of chemotherapy, when her health insurance company cancelled her policy leaving her with $129,000 in unpaid medical bills. She had to stop her chemotherapy for months until she finally found a charity that would pay for it. The woman took the insurance company to court, and in a private arbitration the company was ordered to pay her $9 million! The name of the insurance company? Health Net.

"WE PROMISE WE WON'T DO THAT AGAIN?"

Health Net has been under investigation by a number of agencies, as have other health insurers. Health Net was accused of paying bonuses to employees who racked up a lot of policy cancellations. The policies themselves are reportedly filled with enough legal gobble-de-gook to have people unwittingly sign applications saying they have not had pre-existing conditions, when in fact they had. The woman in question in this case had her policy cancelled because, Health Net claimed, she had falsely stated that she had not had pre-existing conditions, the later discovery of which voided the contract. She claimed that the insurance agent came into her place of work and HE filled out the application while she worked, so she didn't know what she had committed herself to. The judge said that she was right. $9 million right.

According to the Times, Health Net has promised to review all of its cancellation protocols, and to cease offering cancellation bonuses to employees. Clever lawyers can write a short paragraph in an insurance application giving the company the right to cancel if an applicant denies having had pre-existing conditions, and then the conditions appear, or if the applicant otherwise answers questions in ways subject to interpretation. And trust me, such clauses can be worded diabolically, to favor the company in the most ambiguous circumstances.

The promise may be well and good for all future policies, but it's not clear what, if anything, the company will do about their existing policies. The case at hand was not unique. There are other lawsuits pending against Health Net, including one class actions case involving 1,600 other people who claim they were cancelled out.

Health Net claims that they can't operate profitably if they're required to pay claims based on false or misleading information, or if they are required to insure all members of a group, including many who might be sick. In other words, "We can't make a buck selling health insurance if we have to cover sick people." Then what's the purpose of having health insurance in the first place?

TIPS TO PROTECT YOURSELF

If you have a health insurance policy, whether with a group or privately, read the policy carefully Yes, it's a real chore, but a necessary one. Pay particular attention to the cancellation clauses, and if you think there's ambiguity there, contact your state's Department of Insurance and/or Consumer Protection agency for some guidance. If your plan comes from work, your Human Resources people ought to be able to help you. If you're shopping for a new policy, ask hard questions of the salesman on this point, and don't take "Don't worry" for an answer.

I think I'll skip the free seminar. What would you do?

This article supplements Chapter 17 of "Personal Finance," pages 494-504. Access the text by clicking on the box in the right column.

BLOW OFF STEAM AT AIRPORT SECURITY

2008-02-25T12:26:00.000-08:00

In the February 9th article we took a look at flaws in today's airline industry. Most frequent travelers are already all too familiar with those problems. Now comes a chance to be heard (or, more accurately, read) via a blog that the Transportation Security Administration (T.S.A.) has set up. Go to www.tsa.gov/blog and see for yourself. The postings are mostly T.S.A. people writing about their accomplishments, but there's a place to comment, and the comments are often brutally honest. Will this blog change anything? Probably not. But at least you'll feel better if you can blow off some steam, and then the security checks might not seem so demonic.

Reminder: Note also in the February 9th article the mention of the Open Skies Agreement, which will soon be allowing international airlines more freedom in flying from any European Union country to the U.S., and vice versa. This should mean more competition which, in turn, will hopefully mean better choices of flights and lower fares.

One more website to look at that can lower your stress level: http://www.gethuman.com/ has compiled short-cuts for scores of company telephone "menus." Rather than listen to endless droning about which number to press, the tips in this website will help you get directly to that most elusive of animals, the human beings on the other end of the line. And many of the companies listed on the site are travel companies: airlines, car rental agencies, and so on.

This article supplements Chapter 3 in Personal Finance, pages 88-98. Access the text by clicking on the box in the right column.

THE REAL LOSERS IN THE MORTGAGE DEBACLE

2008-02-21T11:45:00.000-08:00

There was an announcement today about the government and the financial industry trying to come up with yet another possible solution to the disasters of the subprime mortgage scandal. It's getting more than a little frustrating to hear of these rescue plans, and worry that nothing good will come of them. The "financial stimulus" won't stimulate. The lower payments that will come from restructuring loans will affect only a tiny percent of borrowers. Everyone in Washington and every financial CEO has blueprints for a solution to help out the foreclosed buyers. But the real losers have yet to have their feet put to the fire.

The real losers are the stockholders in the companies that made the bad loans in the first place. Yes, of course, the home buyers who got conned into signing papers they didn't understand might deserve some help. Less help, if any, is owed to the developers who built too many houses, the speculators who bought too many houses, and the real estate agents who encouraged the building and sale of too many houses.

But no help is in the offing for the stockholders. They have to bite the bullet before this storm passes. When they acquired stock they were betting on the future profitability of the company. With that chance of profit comes the risk of a loss. And there's a lesson in that for all of us.

Here's an example of one specific company involved in the subprime mess---Countrywide Financial. Their stock has almost fallen off the charts. Who cares? The top five officers and directors of the company (as listed by the amount of their shareholdings) own almost 1.6 million shares among them.

The top 10 institutions (investment banks and the like) each own tens of millions of shares, ranging from 55 million at the top and 22 million at #10. The top 10 mutual funds own from about 25 million shares to 8 million shares at #10.

How much they've lost is not calculable because we don't know how much the shares cost them. But the total losses, among just these entities, must soar into many billions of dollars. That was risk money. They risked. They lost.

THE BIGGEST WORRY

One swift slice of the sword that can ease their woes, and help millions of borrowers at the same time, has not, to my knowledge, been seriously addressed. That would be to put a moratorium on all interest rate increases that are built into all the mortgage contracts. The biggest worry in the financial world is that the interest rates on millions of loans will be "reset"---or adjusted upwards---in the next year or two, and that will throw even more loans into the trash. If those rate resettings were temporarily banned, say for one to three years, that would give the housing and mortgage markets a whole lot of breathing room, which in turn could give a substantial lift to the stock market.

Foolish talk? Maybe. It would take an act of Congress, the blessings of whoever is President, and likely the concurrence of the Supreme Court. This is an election year, and 2009 will be an adjusting-to-the-new-regime year, so it's a tough time to get anything as complex as this done. Too many of those folks are too busy getting elected.

'WE NEVER THOUGHT THINGS COULD GET THIS BAD..."

Plus, there's one influential group that wouldn't want to see rates capped---the stockholders. That's right. Those same stockholders who are sitting on billions of dollars in losses on their investments. Why? Because capping the rates will curtail the income to the lenders, which could push stock prices even lower.

Poor guys, they're in a lose-lose bind. Tough. They might say, "We never thought things could get this bad." But the fact is, they can. And they have. And you should bear that in mind before you take your money from a safe harbor and put it where the water is too deep to see the bottom. That's the lesson for today.

This article supplements Chapter 16, pages 448-451 of Personal Finance. Access the textbook by clicking on the box in the right column.

GENERATIONS MUST TALK TO EACH OTHER

2008-02-20T11:22:00.000-08:00

Let's keep this brief and to the point. When there is an inheritance that is to pass from one generation to the next, it is IMPERATIVE that the two generations discuss the matter frankly.

Failure to do so all too often results in feuds, broken families, lawsuits, unrealized dreams and all sorts of legal and tax expenses that might have been avoided.

This doesn't apply to just millionaires. Middle class families with little more than a house, some life insurance and savings plans have as great a need to keep lines of communication open.

Parents should keep mature children informed of the general nature and size of the inheritance. Specifics aren't always necessary.

Mature children should inquire---diplomatically, of course---as to the estate planning efforts of the parents.

It might help to have a third party initiate and/or intervene in the matter. A family lawyer. A bank trust officer. A credentialed financial advisor (who isn't selling anything). Even a family therapist, who might not be able to answer financial questions, but who, for starters, can pry open those lines of communication.

Parents can gain peace of mind in knowing that their earned wealth will be treated as they wish. And children can benefit from learning how an inheritance can impact on their lives. Examples include as paying for their kids' college tuition, career moves, buying a home---or not.

This is particularly critical over the next 2-3 years, as the federal estate tax laws might change drastically in 2010 or 2011. It will take time to get all the ducks in a row. Start NOW.

We'll visit this important subject in more detail in the future. This is just a wake-up call.

This article supplements Chapter 19, pages 568-572 of Personal Finance. Access the textbook by clicking on the red box in the right column.

RIVER CRUISES ARE FINE VACATION OPTION

2008-02-19T12:38:00.000-08:00

Ocean-going cruise ships are getting bigger and bigger. They're going to have to find a new word for "mega." How about "mega-mega?" Ships are coming on line that will hold over 4,000 passengers. They'll be so big that the they will be anchored permanently somewhere in the Caribbean, and the islands will be towed to them. Ocean cruising can certainly provide a wonderful vacation---for all budgets---but the experience is not what you'd call cozy. Cruising on rivers, on the other hand, might be an ideal way to go from place to place without having to unpack more than once.

River cruises have been around for a long time, but the big-time glamour and pzazz has always gone to the behemoths of the seven seas. Even the Titanic made ocean cruising look great. (Up to a point, of course.) So let's give some high-fives to ocean cruising's little cousin---the riverboats.

The river cruise boats are tiny by comparison---they hold a rough average of 150 people, so you don't have features like rock-climbing and deck-tennis and Las Vegas-style musical extravaganzas in auditoriums that seat a few thousand fellow passengers. Many river boats don't even have swimming pools, though hot-tubs are frequent amenities. Bars, lounges, dance floors, hair salons, libraries and gift shops are common on riverboats. Cruising time ranges from a few days to a few weeks, and prices are competitive, if not lower per person per day than ocean sailings.

What's particularly attractive about river cruises is that you're rarely more than a stone's throw from shore, so sight-seeing is a full-time delight. Life on shore is always more fascinating than looking at ocean waves. When you dock in a port, it takes just a few minutes, and you're off the boat in a twinkle, often just a short walk to the center of town.

FREE SHORE EXCURSIONS

River cruises offer shore excursions in every port, and most of them are included in the price of the cruise. No extras to bother your credit card. The boats can navigate to places that ocean ships only dream about, so your land activities are unique. Compare, for example, a mega-mega disgorging 4,000 people en masse into the town of Sitka, Alaska, with a river boat that takes a single busload of passengers to the extraordinary civil war remnants in Natchez, Mississippi.

Food on the river boats can be excellent, but given the necessarily smaller kitchens you won't find the assortment you're offered on the biggies. However, you're often in port during meal times, so local restaurants can round out your choices.

Cabins are also smaller on the river boats, again, due to the smaller size of the boats themselves. They have to be able to sail under bridges and through narrow canals, and their drafts have to fit the depths of the rivers. River boats don't have stabilizers like their ocean-going counterparts, but they don't need them. River sailing is calm, and sea-sickness is simply not an issue.

A WORLD OF CHOICES

There are river cruises in the U.S. (which eliminates the need for trans-oceanic flights) and in many exotic countries abroad. Google "river cruises" and you'll find mind-boggling choices. Just a small sampling: In the U.S. you can cruise the Mississippi, the Columbia and inland passageways along the northeast and southeast coasts. Europe is criss-crossed with rivers that can take you to cities not accessible by ocean ships: Prague, Paris, Moscow, Kiev, Lyon, Budapest and dozens more. For more exotic locales you can sail on the Nile, the Yangtze, the Mekong and the Murray (in Australia, and one of the best river cruises you'll find anywhere.)

You can book on the Internet or though travel agents. Shop aggressively, as many sailings offer good bargains.

This article supplements Chapter 3, pages 88-98 of Personal Finance. Access the textbook by clicking on the box in the right column.

HEDGE FUNDS CRAPSHOOT---THE SEQUEL

2008-02-18T11:39:00.000-08:00

On October 31, 2007 I posted an article titled "Hedge Funds High Roller Crapshoot," in which the dangers of hedge fund investing were illustrated. Check it out in the Archives (lower left column.) While hedge funds themselves are geared towards the seven-figure net worth set, there have been a number of mutual funds introduced which invest in various hedge funds, and these mutual funds are available to Bill and Betty Barbeque. And Bill and Betty have been very tempted. So let's take an updated look at the hedge fund industry.

The biggest difference between hedge funds and the race track is that hedge funds use bigger jockeys. Unless you're prepared to risk major losses, leave the hedge funds to the high-rollers who can survive losses in the hundreds of thousands of dollars.

Yes, I know, their sales pitches are appealing, offering returns of 15%, 20%, 25%. Some, indeed, might have generated such returns. But that was then, when the market was riding high. Now, in today's volatile market, not only have hedge fund bettors lost their shirts, but many hedge funds themselves have gone belly-up. And there go the hedge fund jockeys new Mercedes's and Caribbean condos and shopping trips to Tiffany's.

"...STAGGERING LOSSES..."

The New York Times painted a chilling portrait of the hedge fund industry last week, in an article titled "Bad Bets and Accounting Flaws Bring Staggering Losses." If that headline has already convinced you to stay away from hedge funds, there's no need to read the rest of this article.

Still with me? The Times article noted that the number of hedge funds has doubled since 2000, and there are now about 10,000 such funds managing almost $1.9 trillion in O.P.M. (Yes, that's trillion, with a T, a word you don't see often. And O.P.M. is the favorite playtoy of Wall Street's Wizards. It stands for Other People's Money.)

It doesn't take a rocket scientist to know that when you have $1.9 trillion to invest, you have to be very creative to find that many investment opportunities that are somewhat understandable, minimally predictable and relatively legal. When you run out of the good opportunities, you have to start looking at junk.

The crux of the article is in the following quote from Bradley Alford, founder of the prestigious Alpha Capital Management, an investment advisory firm: "This will be the year with the highest number of hedge fund failures...This year there's no clear trend and no safe place to hide."

The Times also quoted a manager of a mutual fund that invests in hedge funds (see above) who asked not to be identified because he does a lot of business with hedge fund managers and, obviously, does not want to bite the hand that feeds him: "People who have been in the business for 20 years are saying January was one of the most difficult and challenging times they have ever seen."

And finally, the words of Mark Fishman, co-founder of hedge fund Sailfish Capital Partners, whose recent collapse with $2 billion of O.P.M. under it's wing was the focal point of the Times article: "It feels like someone has died."

SPECTACULAR FAILURES?

The Times reporter, Jenny Anderson, sums up the situation in words that I can't make any more direct: "After years of explosive growth, this secretive, sometimes volatile corner of the financial world is entering a dangerous new era. The running turmoil in the markets is stirring fears that more of these funds will fail, some, perhaps, spectacularly."

What do I say for an encore to that? Play it safe. The smart guys aren't so smart after all. [This article supplements Chapter 16, pages 421-424 in Personal Finance. Access the textbook by clicking on the box in the right column.]

THE FORECLOSURE FOLLIES OF 2008

2008-02-14T09:32:00.000-08:00

Googling "foreclosures" on Feb. 14 showed 49.8 million hits. Googling "mortgages" showed 188 million hits. Obviously, something is on the minds of the American public. Our guest expert, Hubert Hindsight, retrospective speculative historian extraordinaire, examined this obsession in his classic book, "What Were They Thinking?" which was published in the year 2020. Here is what H.H. said in the book.

"It was like a tsunami. Suddenly, in late 2007 and into 2008, millions of homes of Americans went into foreclosure proceedings. That meant that those millions of citizens could lose their homes. What would this mean? The media spun horror stories of families thrown onto the streets...of lenders in dire financial trouble as a result of their loans going unpaid....a glut of empty houses on the market putting the brakes on new housing starts and all the jobs that go with it.
Indeed it was cause for concern. But there were aspects of the problem that weren't fully explained, and full explanations could have reduced the national anxiety many-fold. Here are some examples:

SPECULATORS AND THE GREATER FOOL THEORY

A huge number of foreclosures were the result of wild and crazy speculation gone wrong. The number of these was impossible to gauge because the guilty parties were not going to admit that they had been foolish gamblers. No one likes to do that.

In the early years of the 2000s there was money galore for the borrowing. That enticed developers to start new housing projects---many more than the market really demanded. Abundant money also provided a field day for mortgage lenders: "No Down Payment" loans were there for the asking. "Teaser" interest rates of 1% were offered on every street corner (After the introductory period those rates would soar to double-digit levels , but borrowers paid that no mind.) Appraisals were made with blindfolds, and verification of income was ignored.

This was fertile territory for speculators. They bought up houses helter-skelter, using more and more borrowed money in the process. They were operating on the Greater Fool Theory, which states that if you buy something at whatever price, sooner or later a Greater Fool than yourself will come along and buy it for a higher price. This is all fine, until you run out of Greater Fools.

That's what happened in 2008. Higher interest rates and an excess of loans gone bad brought the housing market crashing down. The supply of Greater Fools had been exhausted. But the speculators didn't care! The houses had cost them nothing---and many had already profited nicely from the game---so they could walk away from the deals. Let them go into foreclosure. Let the greedy lenders eat the losses. "I'm outa here." So much for Act One of the Foreclosure Follies.

"FORECLOSURE? WHAT MEANS FORECLOSURE?"

Another huge but uncountable source of foreclosures came from people who, a year or two earlier, had never even heard the word "foreclosure," let alone knew what it meant. They bought homes and signed loan agreements that they didn't understand. When they couldn't make the payments the lenders started legal actions called "foreclosure." Word spread rapidly that if you had bought a house with little or nothing down, and you had lived in it almost for free for a few years, and you could no longer make the payments, just walk away and give the key back to the lender. No harm. No penalty. No problem. You've lived virtually rent free, and so the house goes into foreclosure. So what? That's the lender's problem. (Their ruined credit history will come back to haunt them sooner than later, but at their foreclosure party they could care less about that.)

THE PROPERTY PIMPS

All of this buying and lending was fueled by real estate agents---a few among the many legitimate ones---who smelled a fast buck in the game. They enticed speculators with lures of "can't miss" big profts. They lured the unwary home buyers by failing to adequately divulge the hidden traps in their loan agreements. They wooed developers into building more houses than the market really need in order to create more inventory for them to broker. As word of the fast buck possibilities spread, peopel who were otherwise gainfully employed as car salesmen, waitresses, teachers and the like, gave up their jobs to get real estate licenses. This excess of agents stirred the pot to an even greater boil. When the bubble burst---and they had spent their real estate profits and their life-savings trying to buck the collapse---they had to start looking again for jobs as car salesmen and waitresses and teachers.

THE MONEY MEN

Countless Wall Street Suits bought their first class air tickets for London and Hong Kong and Dubai and Singapore and all points in between to sell dubious deals tied mortgages to greedy buyers abroad who knew next to nothing about the exotic securities that the Wall Streeters had created. They were aided by the very influential Ratings Companies who bent their standards far enough to designate sour loan packages as sweet.

THE MEDIA

If you sell advertising space or time, and you're making a bundle of money from the real estate and home loan industries, you wouldn't want to upset those big advertisers by saying precautionary things about the rapidly growing housing bubble. That could cause them to stop advertising. That would mean less income for you. That would be bad. So don't do it. Thus did greed trump knowledge yet again.

THANK HEAVEN FOR THE POPULATION GROWTH

At the time this was going on, the population of the U.S. was about 300 million, and growing at roughly two percent net per year. That's six million new Americans annually, and with an average family having around three people, we're talking two millions homes per year just to accomodate the newcomers. In due time, the population growth would absorb the excess of homes in 2008, and would make way for new building to resume at a less insane pace. Today, in 2020, it's still too early to tell if the Americans learned a lesson from all of this."

LEAVE THAT IRA AND 401k ALONE!

2008-02-13T11:58:00.000-08:00

We've been living it up on borrowed money. When you can't borrow any more, you're living on borrowed time. We borrow to buy cars that do more for our vanity than for our transportation needs. We borrow to buy electronic goodies that will impress the neighbors but won't improve the quality of the TV shows we watch. We borrow to pay bills that will recur before the ink is dry on last month's loan. We borrow to pay off our borrowing. Danger signs abound.

We max out our home equity credit. We max out our credit cards. We max out our "rainy day" savings account. What's next? How about maxing out our future---that is, cashing in or borrowing against our retirement funds, such as the popular IRA and 401k plans. This warning applies to ALL future retirees, whether R day is decades or years or months away.

DON'T PAWN YOUR FUTURE---YOU MIGHT NOT BE ABLE TO RECLAIM IT

Reportedly almost half of all 401k plans are either being cashed in prematurely, or borrowed against for so-called hardship distributions, which are allowed by the IRS. If you do either, you face some very big catches. The hardship distribution loans can be made for medical expenses, to buy a home, to pay tuition and to make repairs from storm damages, among other things. But it doesn't take much under-the-table juggling of the books to borrow for a cruise or a new car or a stylish wardrobe and disguise those loans to pass the IRS tests. If you do this, you're only fooling yourself.

After a few decades of observing the odd financial habits of fellow Americans, I can assure you that cashing in or borrowing from your future nest-egg is extremely ill-advised. That money is too often are not replenished or repaid, and then you wake up one day and, TA DA, it's the future. But you're far short of the money you had hoped to have. You spent it many years ago on the cruise or new car or stylish wardrobe, all of which are now just memories.

TALLY THE COSTS

If you cash in all or part of your 401k, the money you take out is subject to income taxes. And the amount you take out can bump you up into a higher tax bracket, thus raising the cost of your nestegg raid. Further, if you cash in before you are 59 1/2 years old, the IRS will hit you with a penalty of 10% of the withdrawal. That's in addition to the income taxes.

If you borrow against your 401k---and many employers will allow this for the hardship situations---you face even more complications. In general terms, you might be able to borrow as much as 50% of the fund, but it must be paid back in about five years. If you fail to pay it all back, the unpaid balance is subject to income taxes. The same 10% penalty applies if you're under 59 1/2.

WORST CASE SCENARIO

To make matters possibly worse----much worse in some cases---some employers won't allow you to make contributions to your plan if you have a loan outstanding against it. That means you'll be losing out on any contributions the employer might make during that time. And---a double-edged dilemma---if you're repaying the loan, you likely won't have enough extra cash to make your regular contributions to the 401k. Thus do nest-eggs shrink out of site at a time when you can least afford it: you're retired.

There are similar income tax and penalty consequences for early withdrawal of IRA funds.

Remember this: If you reach retirement and you find you don't have enough money to live in the style you had hoped for, YOU DON'T GET A DO-OVER. You can't go back to age 30 or 40 or 50 and start again. Better to forego some non-essentials today so you can have the essentials when you need them.

[This article supplements Chapter 18, pages 529-531 in Personal Finance. Access the textbook by clicking on the box in the right column.]

PERSONAL FINANCE---A LOOK AT THE BOOK

2008-02-12T10:01:00.000-08:00

As the right column on this home page states, you have free access to PERSONAL FINANCE, a college textbook by Bob Rosefsky. The first edition was published in 1978 and the eighth edition in 2003. It was used by hundreds of colleges around the country, and PBS was the national distributor of a college-credit television course based on the book. The regular postings on this website will continually update the book. You don't have to register or sign in to access the book. Just click on the box near the bottom of the right column, and it's all yours on your monitor. To return from the textbook to this Home Page just click on the Back Button.

The book is over 700 pages long. There's a lot of ground to cover. Take it in bits and pieces as your needs dictate. To help you navigate, following is a quick summary of the five parts of PERSONAL FINANCE. You can scroll to a detailed Table of Contents of the book in its front pages (not to be confused with the Table of Contents for the articles on this website, which can be accessed from the Home Page.)

Part One---FAMILY ECONOMICS---offers a unique explanation of How the Economy Works, and how it impacts on our day-to-day lives. This has been a very popular part of the book, as it offers a clear and easy-to-understand translation of the mumbo-jumbo that the media and economists toss around. It also explains how governmental policies affect us, whether we like them or not.

Other chapters in Part One include Working, Planning and Budgeting---the nitty-gritty on how to structure the best ways to provide yourself and your family with the needs and the luxuries. Sensible Shopping and Spending contains an abundance of tips on how to get the best values for your money. Frauds, Swindles and How to Avoid Them exposes Snake Oil Sam, his army of con artists, and how they conspire to separate you from your money. Part One concludes with a chapter on Transportation---getting the best value when you buy, finance and insure your cars.

Part Two---A ROOF OVER YOUR HEAD---deals with all aspects of housing: Buying a Home, Financing a Home, Housing Costs and Regulations, Renting and Selling Your Home. It contains numerous charts to help you figure all the costs you'll face, and explains the often misunderstood gobble-de-gook of how mortgages work.

Part Three---WHERE THE MONEY IS---describes the various types of Financial Institutions you can make use of, and the regulations that control them. There is a detailed discussion of Credit and Borrowing, to help you get the loans you need, when you need them, on the best possible terms. Credit abuses and Cures for Overindebtedness are also explored.

Part Four---MAKING YOUR MONEY GROW---covers the full spectrum of investing, starting with an Overview, and delving deeply (but clearly) into The Money Market, The Stock Market, plus Real Estate and Other Opportunities. These chapters will help you determine how much risk you can and should take, how the stock market works, how to evaluate various types of investments, how to measure your return and what criteria you should use in judging an investment. Among the "other opportunities" are discussions on investing in commodities, collectibles, foreign currencies and many other situations that are often pitched (too vigorously?) on television.

Part Five---PROTECTING WHAT YOU WORK FOR---covers the main kinds of personal insurance you should evaluate: Life, Health and Disability Income. All of the basics of insurance policy lingo are explained, and checklists are available to help you determine how much of each kind of coverage you might need. Chapters on Financial Planning for the Later Years and Estate Planning cover the range of retirement concerns, and the discussions are geared not just to retirees but to the children of retirees, who themselves must deal with these matters in the not-too-distant future. The chapter on Income Taxes illustrates ways you can protect your income most effectively from Uncle Sam. And a final chapter on Working For Yourself explores all of the factors you must take into account if you plan to go it alone.

EXTRA FEATURES: All chapters begins with segments titled This Could Happen to You, and What You Need to Know. These segments introduce the realities of financial life and how to prepare yourself to deal with them. Other features in all chapters include Caveats (warnings about dangers in that respective subject area); Strategies for Success (tips that can pay off for you); Personal Action Worksheets (helping you determine how you'll take action if faced with various financial dilemmas); Consumer Alerts (to prepare you to deal with ongoing trends that can affect your financial well-being); Ups and Downs---The Economics of Everyday Life (why things happen that impact on your finances); What If...? (self-quizzes asking you to plan how you would deal with various real life possibilities); and Number Crunchers (how to do the calculations you need to make the right decisions on real life financial possibilities.)

The book concludes with a comprehensive Glossary, explaining all the words and phrases that make up financial reality, and a detailed Index.

THE KING (OF TORTS) IS DEAD.....

2008-02-11T16:11:00.000-08:00

Class action lawsuits have twisted the U.S. legal system into pretzels in recent years. Greedy lawyers have stalked large corporations looking for any possible soft spot into which they could throw a lawsuit. There was no shortage of potential targets---any big corporation with deep pockets and a decent reputation was threatened by those lawyers. And all too often the courts played into the hands of the class action lawyers and allowed frivolous suits to proceed.

The company's stock went down. So sue them, even though the stock market in general went down in parallel fashion. A consumer claimed damages as a result of using a company product. So sue them, even though the consumer was paid under the table to file the claim. A company allowed itself to be acquired in a merger deal. So sue them, even though the merger made perfect sense financially, and was for the benefit of the shareholders. Many companies, thusly sued, preferred to pay the legal-muggers rather than endure a protracted lawsuit. And the lawyers laughed all the way to the bank. Now the tide is turning.

One of John Grisham's most exciting novels was titled "The King of Torts," (a tort being the legal term for a wrong, as in something getting twisted. See "torsion.") The novel told the story of a shark wearing a lawyer-skin suit---the prototype of the greed-driven class action hustler---and it uncovered the tricks of his illicit trade with no punches pulled. Any lawyer (including myself) who once had respect for the profession would have to have been severely embarrassed by this type of chicanery.

William Lerach was one of the leading class action lawyers, and today he was sentenced to two years in prison for his role in instigating improper lawsuits. He and his firms had reportedly raked in hundreds of milllions of dollars in fees for their role in these scams. Much of that money came from the pockets of small investors in the companies---moms and pops and their mutual funds and pension plans. Other Lerach associates are yet to be tried and/or sentenced.

Some self-styled "consumer advocates" praised the actions of the real-life class action lawyers as the only way "the system" could protect the little guy. When it was disclosed that some of the "little guys" were conspiring with, and getting paid by, the lawyers to commence otherwise groundless lawsuits, the courts and Congress finally started paying attention to the abuse of the system that was running rampant. No doubt Lerach will appeal, so it's uncertain whether he'll serve any much deserved time in the slammer.

Once Lerach's involvement became known in legal circles, the law firms playing the class action game started losing their associates, and their clients, and their obscene paydays. At least for now the old king is dead. Long live.....who? Dare we hope that no other scandalous legal trends emerge?

Tired old joke: What do you call 1,000 lawyers chained together at the bottom of the sea? Answer: A good start.

WHAT'S WRONG WITH THIS AIRLINE INDUSTRY?

2008-02-09T12:19:00.000-08:00

You've built up a supply of frequent flyer mileage, and now that you want to use them, the airline has no seats available for when you want to fly. You're flying across the U.S.A. and you get hungry. Peanuts! Deal with it. Or, on some flights you can pay five dollars or so for a pre-packaged "meal," provided they don't run out of selections before the cart gets to you. Want to check your bags curbside to avoid the line at the check-in desk? Be prepared to pay for the privilege. Costs ago up. Service goes down. And the public keeps their lips zipped. What lies ahead?

I fly a lot, domestically and internationally, and one thing I'm seeing more and more---sadly---is that the travelling public puts up with more and more abuse, suffering in silence, discomfort and security-angst. As long as the customers don't complain loudly and clearly, the abuses will only get worse.

Cheap Tickets in Lap Class?

When will the airlines offer Cargo Class flights, where they wrap you in insulation and stack you in the hold? Then comes Lap Class---cheap tickets if you're willing to sit on someone else's lap. And cheaper still if you let someone sit on your lap. Eventually there'll be O.H.C. Class---Overhead Compartment Class, where you get to lie flat and motionless in the dark space where carry-on luggage used to go. It may be claustrophobic, but boy is it cheap.

I kid, of course, but with a frown, not a smile. Air travel on domestic airlines wouldn't be so bad if they kept pace with many foreign airlines. I flew recently from Mexico City to Quito, Ecuador via Panama City, and return, on an airline known as Copa. Never heard of it? Neither had I. But Copa did a fine job---hot meals and free booze on all four segments, and service with a smile. (Stay tuned for an article later this month on the Galapagos Islands, which is where I was headed from Quito.)

My Copa experience compares with a recent flight on American Airlines from Los Angeles to New York, departing LAX at noon (commonly known as the start of lunch time) and was served nothing more than a bag of peanuts. I would have bought a box lunch, but they had run out long before the cart go to my row. (Of course, I should have bought a lunch-to-go at the airport, but the long wait at security didn't allow me time for such a luxury.)

Want to use frequent flyer miles? Fuggedaboudit. Airlines are allowing fewer freebie seats per flight, and encouraging more customers by giving miles for credit card purchases. Screeching frustration is the result for loyal mileage customers.

Meanwhile, the inane security procedures, which reportedly are of no value whatsoever, get even more ridiculous. I've been on a number of flights, and heard of more from other travellers, where passengers have to go through a security check after they disembark from a flight! As if you acquired some forbidden hair gel at 30,000 feet.

Better to Drive?

Given all the time wasted---getting to the airport up to two hours in advance, suffering ever

more frequently delayed flights, waiting for baggage to arrive from another planet---I have crunched the numbers and find that for any journey of upwards of 300 to 400 miles, it's better to drive. My crunching takes into account weather, costs, urgency of the trip, number of people travelling with me, amount and type of baggage, need for a vehicle at the destination and time of day for outbound and return trips. The wear and tear of driving is about equal to the frustration and jostling of flying. Bottom line: I'll pick driving over flying.

"Open Skies" Agreement Offers Hope

Naturally, overseas trips aren't conducive to driving. If you are planning a trip abroad, there is some hope for better times ahead. Starting on March 30, the "Open Skies" agreement goes into effect, That's a pact between the U.S. and the European Union which will allow any airline from either side of the Atlantic to fly to any member-nation destination on the other side. Until now, for example, European-based airlines flying out of the U.S. could fly only to their home country. Air France could fly from the U.S. only to French destinations. British to British. And so on.

Open Skies will allow Air France, for example, to fly from Los Angeles to Rome. Or British Airways from New York to Amsterdam. And vice versa. The European airlines are now plotting out which routes they think will be profitable, and the competition by this summer could be ferocious. That could mean cheaper airfares, as the airlines scramble to create revenue.

Keep your eyes wide open for good deals via the Open Skies agreement. Shop around like you've never done before, both on the Internet and by phoning the airlines directly. Travel agents should be on top of all the good deals (but be prepared to possibly have to pay the agents for their ticketing services.) If you see heavy duty advertising for specific international routes, that could mean a lot of empty seats are available on those routes, which could in turn mean lower prices.

Most all transatlantic flights do offer meals and free booze, but those amenities might end if prices are forced down by competition. Check with each airline to learn what will be served, and prepare accordingly. (As a courtesy to your seat-mates, skip the onions on your Whopper.)

And please, for the benefit of anyone who will be flying in the future, if you are treated poorly complain long and loud, in writing. If you don't, the abuse will only get worse.

NOTHING WILL BE SOLD AT THIS SEMINAR (?)

2008-02-08T10:30:00.000-08:00

If you have a lot of money, you can hire professionals to take care of your taxes, your estate planning and your retirement investment portfolio. If you have too little money, you don't really need those professionals---you need more money. Somewhere between these two extremes is a huge segment of the population that needs help, but can't afford the high-priced pros who are there for the rich and famous. And it's that huge middle segment that are invited to "Free Seminars."

The old saying, "There's no such thing as a free lunch," has never been more true than it is in these days of financial uncertainty. But free lunches do abound, particularly for people on the cusp of retirement planning. There are a lot of people like that in my home town, and invitations to free meals arrive frequently. There's a catch, of course. The free meal is preceded by a "seminar" in which you will learn everything that you will ever need to know about everything having to do with taxation, estate planning and investing. All in one hour. Then, dinner is served.

I attend these freebies when I can, not because I'm hungry, but because I want to see what is being pitched to the eager and unwary (and hungry) public. They all follow the same patterns. The invitation notes clearly that nothing will be sold during the seminar. Nothing, that is, unless you count the hard sales pitch to get people to turn over thier financial affairs to the seminar hosts, who call themselves financial planners of one sort or another.

Some of these planning firms might indeed be of value to the right people in the right circumstances, although some would like you to believe that they can be all things to all people.
As with choosing any professional----medical, legal, insurance, etc.---you should understand the person's credentials and get trustworthy personal references. For many folks, financial planning professionals who generate their clientele at these seminars can be as good as any you'll find, but you MUST do your homework before you sign up.

I was just at one such seminar and it was the same-old-same-old. The speaker started off by trying to scare the attendees into believing that leaving their pension accounts under the control of their employer was dangerous. "Better to turn that money over to professionals like us. Your employer might make mistakes, but we never will...." That kind of brain-game.

Then there were brief and blurry minutes of rushing through subjects that would each take hours to just scratch the surface. Toss out enough question marks and some of them will stick in people's heads. Then came the offer of a free "consultation" with the experts to analyze the prospect's financial condition. During the meal which followed, the speaker flitted constantly from table to table urging everyone to fill out the questionnaire that would become the guidelines of the free consultation.

During the roughly one hour seminar portion there was virtually nothing of any substance that was set forth. Plenty of seeds of doubt and fear were sown. And sadly, I must admit, that most people who need professional help in these areas will not seek it unless they are motivated by doubt and fear. Indeed, the guidance one gets from signing up with the seminar experts might well be better than getting no guidance at all.

If you are tempted to go for the free lunch and whatever it leads to, please be certain to learn, in advance, how the experts charge for their counsel. If they are selling any financial products, such as annuities or mutual funds, they will likely earn a commission. That creates a possibility of conflict of interest---the annuity or mutual fund might be more beneficial to them than it will be to you. Do they charge a flat fee, and if so how is it calculated? Do they charge you a percentage of your assets that they are managing for you, and if so, how does it compare with other advisors who charge similarly? And it bears repeating---get trustworthy personal references from other customers. "Trustworthy" means objective evaluation from someone who is NOT in the pocket of the salesperson. That might be tough to come by. If you can't get it, the precautionary "proceed at your own risk" should be echoed loud and clear.

This article supplements Chapter 19, pages 566-575 in Personal Finance. Access the textbook by clicking on the box in the right column.

NON-TECHIES, HAVE FAITH

2008-02-06T10:11:00.000-08:00

Have you ever sworn at your computer, threatening to chop it up into little piece because it messes up your work, crashes at the worst times, doesn't do what the program tells you it should do plus a host of other annoyances? Are you convinced that the people who wrote the manuals and the "help" material have never actually followed their own instructions to see if they really worked? Do you ever regret how much time you have wasted trying to get the computer to do what it's supposed to do?

The following gospel might not solve your computer problems, but it will give you some consolation that you're not alone in your frustrations.

Walter Mossberg is the Personal Technology Columnist for the Wall St. Journal. For many years he has been giving sound and realistic advice to the public on a wide range of electronic products and services. Indeed, his might be the most popular and worthwhile column in the Journal. This is his mantra:

"ATTENTION NON-TECHIES: Don't be embarrassed by your problems with computers...Just remember, you're not a "dummy," no matter what those computer books books claim. The real dummies are the people who, though technically expert, couldn't design hardware and software that are usable by normal consumers if their lives depended on it."

Hail Walter! He speaks for all of us. And note also: If our cars were as unreliable as computers, we'd all be roadkill.

KEEP YOUR BENCH AT THE READY

2008-02-05T11:17:00.000-08:00

Another football season has finally ended (except for all-star games, drafts, lawsuits, scandals and anything the paparazzi and the lawyers can turn up.) If you've been a fan, you've been aware of the importance of having your bench---your second string---in good health and ready to jump into the fray on very short notice. If you've not been a fan, then this article might help you prepare for some of the most important games you'll ever play.

Our family doctor just retired. He's worked hard for decades and he deserves his time in the sun. He's been our go-to guy for over 15 years, and we knew we could always depend on him. But in all honesty we never thought of him NOT being available to us. Like, retiring! We wish him well, of course, but we have been faced with the task of replacing him. And trust me, that's not fun.

He was a solo practitioner, so there was no back-up roster of younger docs on immediate call to stand in his shoes. He worked hard to find someone to take over his practice, but, alas, the new person was not to our liking. So we went out into the local medical marketplace to find a suitable replacement.

We live in a relatively affluent community with a good roster of medical personnel, but you can't just throw darts at a yellow-page listing and take what comes. You want someone with the right personality, good credentials, a billing system compatible with your insurance, an efficiently run office, a good reputation, the right hospital privileges, reliable back-up, and, needless to say, one who is accepting new patients. That's a hefty check-list, and because your health is at stake you have to pay attention to each and every item. No short cuts allowed.

It took some interviewing, some grapevine inquiring, some near-drastic bad judgment calls and some crossed fingers, but we've found a new doctor who we're quite pleased with. (Odd, isn't it, that when you find a professional you like, you hope you never, or rarely, have to see him or her.)

WHO YOU GONNA CALL? NOT GHOSTBUSTERS!

The point of this little personal dilemma is critically important during your retirement. It applies not just to your doctors, but also to your lawyer, your banker, your financial advisors (investing, insurance, taxes) and, yes, even your handy-man, plumber, electrician, auto mechanic and computer fixer-upper.

Any or all of these peope upon whom you depend on might have to be replaced at a moments notice. They move away. They retire. They become disabled. They die. They sell their business or practice to a stranger. Or, in some cases, for whatever reason, they simply become someone you no longer have faith in. Each category has its own criteria---availability, affordability, reputation, credentials, etc. You have to do your own evaluations as they apply to each person.

Think about it. Please. What would you do if any one of these support-people was suddenly no longer available to you. Hopefully that would occur when there is no urgent rush to find a replacement. But you can't count on that. It can take a long time to build up a rapport, a level of trust, with any of these folks. If you're caught in a crunch you might make decisions based on impulse rather than studied judgment.

If you don't have a suitable replacment at the ready on your bench, you could face unnecessary costs, frustration, confusion and delays. Do a self-survey, and try to determine who you'd want on your bench. Recommendations from friends can be helpful. Local professional associations can give you referrals. The local Better Business Bureau and any appropriate state or federal licensing agencies can help disclose any demerits on someone's record. It might be helpful---although admittedly delicate---to ask your professionals who they might recommend as a possible replacment. You might even want to do some preliminary interviewing.

Ghostbusters can't get the job done. You're on your own to find your own bench, and it can be a most worthwhile effort. The sooner the better.

This article supplements Chapter 16, pages 551-554 of Personal Finance. Access the textbook by clicking on the box in the right column.

MEET THE FACULTY---PROFESSOR GREENBACK

2008-02-04T12:24:00.000-08:00

Professor Gerald Greenback, Speaking Dollar-Wise.

If you came here looking for get-rich-quick schemes, such as "10 Stocks That Will Triple Before Sunrise".....or "Make a Fortune Flipping Real Estate"---or "Retire at 45 With These Can't-Miss Mutual Funds" you're in the wrong place. There are millions of words written every day about the world of money. But our approach is refreshingly different. Since we're not selling anything, we don't hold back on anything. Here's where you'll find objective guidance on such matters as What the Agent/Broker/Salesmen Didn't Tell You.....Important Matters That the Financial Press Overlooked...as well as a lot of Easy-to-Understand Explantations of 'What's Really Going On?' and How to Deal With It. It's all done in crisp bites, with a light touch and a cumulative effect of expanding your financial smarts---and with occassional musings, theories, rules and rants. It will also serve to update the 8th Edition of Personal Finance (See home page, right colum.)

MEET THE FACULTY---PROFESSOR GOSFORTH

2008-02-03T12:44:00.000-08:00

Professor Gulliver Gosforth, Life's A Trip

Getting the best values for your travel dollars can be quite tricky. Experience is the best teacher, and our founder, along with his alter ego, has plenty of it. He was a lecturer on luxury cruise ships for nine years, a tour planner and escort, and has explored the planet extensively. In addition to his own experiences he has learned from observing many thousands of other journeyers first-hand, giving them guidance and solving their day-to-day problems. As a travel journalist he was Editor-in-Chief of CruiseNet, a glossy bi-monthly magazine, has hosted a daily radio travel program and has written for The London Times, Travel & Leisure and many other publications. Mindful of hte "all work and no play" mantra, you'll also find his travel-related amusements included he for your leisure pleasure.

MEET THE FACULTY---PROFESSOR WYZE

2008-02-02T13:24:00.000-08:00

PROFESSOR WILY B. WYZE, Enrich Your Retirement

First some advice. When the subject of retirement appears, most younger people turn off their receptors and go on to something else. Big mistake. The counsel in these segments certainly applies to older readers, but it could be just as important for younger readers. Not only can you get a head start on building your awareness, but you can also learn things you can teach your elders, and perhaps save them from making so many of the common mistakes. If nothing else, consider that by studying this material you might avoid having your elders become dependant on you in the future. That can be worth a lot.

How better to teach about retirement than to actually do it...And do it successfully....From an early age? That's what our team has done, and you can do it too. Advance planning is the first and most critical step. Implementing those plans come next, and doing it properly is equally critical. We'll explore all the options, and we'll motivate you to shape your goals and acivate a workable retirement scenario. We don't pretend to offer all things to all people in one package, as some books try to do. But books can't offer immediate updates to ever-changing circumstances. So we take a middle road. Building on the foundation of the retirement material in Personal Finance (see Home Page, right column) we add appropriate new items as they become realities, thus giving you both background and update in one easy-to-navigate format. Special Bonus: A Spa For Your Brain---A unique do-it-yourself learning adventure that will enjoyable nourish your mind.

MEET THE FACULTY---DR. HINDSIGHT

2008-02-01T13:46:00.000-08:00

ADJUNCT PROFESSOR HUBERT HINDSIGHT, Looking Back

The University of Bob is proud to exclusively offer this unique material. Dr. Hindsight is a most unusual member of the team. We were fortunate to find one of the few exisiting copies of a book he wrote in the year 2020 entitled, What Were They Thinking? It's a fascinating study of the early decades of the 21st century, in which Dr. Hindsight reviews the foibles and follies, misjudgments and miscalculations of our nation, and the perils that those eye-popping mistakes held for our society. Dr. Hindsight has kindly consented to let us print occassional excerpts from his very controversial book. We regret that he is not available for personal interviews.

TRAVEL BABBLE 101

2008-01-31T13:12:00.000-08:00

When you see an ad for travel, your mind is quickly distracted by thoughts of happy, relaxed, leisure vacation time. Danger thus lurks, because you might not be paying enough attention to what the words in the ad really mean. Or don't mean. Here's a simple reminder of some of the most common double-talk in travel advertising.

No doubt some of these common sleight-of-hand words in travel ads are familiar to you. It can't hurt, though, to get a little jog as to what might be lurking behind the ad-speak.

"FROM" This is far-and-away the most common travel-babble word. Cruise lines, tour packagers, hotels, airlines---they all use it almost all the time. "From", of course, means that the price quoted is the lowest possible price among a wide variety of selections. If you select the "From" price, you will be getting the least desirable---and therefore the lowest priced---offering. When you see a "From"
price it will usually look like this, in terms of the size of the type, say on a cruise ship cabin: from $1,199. The "From" is so small that you might not even notice it. The reason travel vendors use "From" is to grab your attention with the low price, and then get you to phone for details. Cynics might call this "bait and switch." And, in some cases, it certainly is. It's not illegal per se. But it can be dangerous.

"UP TO" This is another price-bending play on words, as in, "Savings of UP TO 75%." You might thus think that the prices quoted in the ad represent a savings of 75%, or close to it. Such a deal. But the words mean something else. If the normal price of, say, a Florida vacation package, is $795, and the "discounted" price works out to $755, that's a saving of about 5%, not 75%. UP TO means ANY percentage or dollar amount from zero UP TO 75%. And whatever is offered at a full 75% savings, if anything, you might not want. Don't let the funny numbers fool you.

"AIR INCLUDED" There's air, and then there's air. There are flights that leave from Los Angeles at a convenient 9 AM, that land in New York at a convenient 6 PM,---New York time---without stopping along the way. Then there are flights that leave from Los Angeles at 9 PM and land in New York at a very red-eyed 8 AM after stopping along the way in Phoenix and Chicago, just to make sure you don't sleep through the night. Needless to say, you'll fly in Economy Class. When air is included, as it often is in cruise packages, know full well that the packager or the cruise line will try to get the cheapest flights available. And that can involve red-eyes, extra long travel times due to layovers, having to make connections (often a challenge in their own right, particularly when baggage transfer is required), not knowing your flight schedule until the last minute, and overall fatigue. No way to start or end a vacation. Check to see what the cost is without the flight. It might be worth some extra bucks to pay the difference and choose your own flight times.

"SIGHTSEEING ITINERARY INCLUDES…" Whether you're in San Francisco or London or Beijing or Washington or wherever, there are some things you're going to want to see and enjoy at your own pace. If you have a sight-seeing trip as part of your package, you must make certain that you'll be able to do your own thing to suit yourself, not the other 57 people on the bus. Merely mentioning a place on an itinerary----Fisherman's Wharf, or Westminster Abbey, or The Forbidden City, or the White House---doesn't necessarily mean that you will be getting off the bus to visit that place. It might mean that you are just DRIVING PAST it. ("….On your left you will see the White House…." says your friendly tour guide Swell.) If the tour brochure leaves you with any doubts as to what you'll visit, and for how long, check with the tour operator for specifics. If your desired spot isn't given enough time, plan to visit it on your own. And remember, a 30 minute visit to anyplace might include 15 minutes of 58 people getting on and off the bus. And someone will always be late while you wait to get moving again. Not fun.

"PARTIAL OR RESTRICTED VIEW" On cruise ships that might mean that your view of the ocean is blocked by a lifeboat hanging over the deck. It might be just the tippy-tip of the lifeboat. Or it might be the whole life boat. Big difference. In a hotel it might mean having to stand at the far end of a window and looking out between two other hotels to glimpse a sliver of the ocean. (And in some cases that might even be called an ocean view room, with no asterisks.) Those cabins and rooms are priced to attract, but the view they promise might not be very attractive.

"FOUR….FIVE….SIX STARS…" Who decides how many stars a hotel or a restaurant or a cruise ship deserves? It's usually some kind of travel trade organization, which offers some degree of comfort. But different places and different facilities can have different standards of measuring the number of stars. So what might be four star by one set of standards could be three stars by another set. And then there are hotels and restaurants and cruise ships that simply name their own number of stars. If you're paying a price for the number of stars, do some homework to be sure you're getting the right value for your money.

"STANDARD….SUPERIOR….DELUXE…" Just like the Stars category, hotel rooms are rated, and priced, according to their size, location and amenities. But who decides the difference between the types? And does a "Superior" room at Hotel A equal a "Superior" room at Hotel B? For a short stay it might not matter, but for a longer stay you don't want to be ripped off. Look at the room you're assigned before you take occupancy. And if you don't like it, ask for an upgrade. Don't wait for them to offer an upgrade. They won't. Trust me.

"DAYS AND NIGHTS" This can get tricky, particularly if you're on a package deal and flying across an ocean. Here's an example: You leave Los Angeles on October 1st at 11 PM for a flight to Rome. That day of departure, October 1st, might be counted as the first day of your trip. You get to your hotel in Rome at about 5-6 PM Rome time on October 2nd. That counts as the second day of your trip, but you're too wiped out to enjoy it. So far you've used up two days and one night of your trip, and it hasn't really begun yet. The same funny math can happen on your return. If you leave for home late at night and arrive the next day, you've used another two days and one night. So, when you see a package plan that says, say, "12 nights" or "10 days" you want to find out exactly how many usable days and "sleepable" nights you're going to have. (If you see some packages that honestly advertise "11 days and 9 nights" or vice versa, you'll now know how they arrived at that strange scheduling.

Keep this mini-dictionary in mind when you plan your next trip. It could save you money, time and energy.

This article supplements Chapter 3, pages 88-98 in Personal Finance. Access the textbook by clicking on the box in the right column.

CHEAPER BOOZE----GOOD NEWS?

2008-01-30T10:12:00.000-08:00

Hallelujah! The Federal Reserve Bar and Grill has today lowered the price of a good stiff martini by 50 cents, to just $3. This is the second price cut in just the last eight days---on Jan. 22 the price was cut from $4.25 to $3.50.

Ben Bernanke the Bartender also hinted that more price cuts could be in the offing. But why wait? If you're feeling nervous about being able to pay your debts, your worries are over. Just tap your plastic for another advance and get blotto! You've been spending money like a drunken sailor for years now. Why not keep the party going. Drink is cheap, so........

Wait. Wait! WAIT! I got a bit carried away for a moment. Of course you knew the realities---that the Federal Reserve cut interest rates, not martini prices, for the second time in eight days. But the harsh reality is that the last thing our economy needs is a cheap way to stay on our national spending binge.

WANTED: NATIONAL HANGOVER

What we really need is a solid, blistering, head-crunching hangover. We have to put a brake on our excessive spending. That goes across the board, from the government to each individual and family, and all points in between. It's fiscal rehab. Detox the spending frenzies from our systems. Sweat out the urges to buy, buy, buy. It only hurts for a little while, and we can come through it with a fresh realization that prudence and moderation and restraint can be healthy.

Cutting interest rates will only encourage more spending---that's the point of it, after all---and that can be devastating, because we have forgotten how to spend wisely. We have forgotten how to budget sensibly. We have forgotten how to evaluate risk intelligently. Putting a bottle of booze in the hands of a drunk can give him another day or two of revelry. But the added damage to his liver will creep ever closer to the fatal stages.

The teenager sneaks a gulp of rotgut whiskey from his parents' liquor cabinet. Next thing he's hustling someone to buy him a sixpack at the nearby 7/11. Then he's a regular at the local booze hall ("Honest, I just went in to watch the game. How could I know it would go into three overtimes?") Then he's having a few drinks at lunch, a shot or two in the afternoon, a stupor in the evening and a blackout on the weekends.

It's a cycle that goes on forever. We started out a few years ago getting suckered into signing up for half a dozen "too good to be true" credit card deals. When we hit our borrowing limits, the banks lured us with home equity loans, which we tapped to the max because our homes had surged in value. When the mortgage payments got too high we refinanced with the fat guy from the TV ads. When the interest rates on those loans got boosted, we yowled for the government to bail us out of our dilemmas.

MONEY FOR VOTES

And along gallops government to the rescue. In addition to the interest rate cuts, the President and Congress are girding up to put hundreds of billions more in our pockets. All this in an election year, when "what have you done for me lately?" is all our elected pimps hear.

Oh, yes, these government programs will result in huge ongoing annual deficits. Today they are estimated to be around $400 billion for 2008 and 2009, giving a new incoming President a royal red ink carpet. As our deficits soar, so does our national debt, and the interest thereon, which we increasingly pay to foreign investors.

Then we reach a point where we have to say, "No more deficits." So we simply print more money. Literally. Too much money floating around is an open invitation to inflation. We panic at the thought of rising prices, so we borrow in order to buy, buy, buy before prices go up. Our panic buying indeed causes prices to go up. And the wheel has come full circle. Once a drunk, always a drunk. Deal with it.

SHOP BANK'S QUALITY OF SERVICE AS WELL AS COST OF SERVICE

By the way, the Fed's interest rate cuts will be felt first by banks which borrow from the Fed on a regular basis. The banks' lower borrowing costs will be passed along, in part, to their prime borrowers: the big businesses which will hopefully spend the borrowed money on job-creating projects. Very little, if any, of the banks' lower borrowing costs will filter down to the public. Why not? The banks' first priority is to boost their profitability. They might offer tiny cosmetic rate drops on credit card debt, but they'll increase their other charges swiftly and decisively. Then, in time, as their profit pictures improve, competition for your business will stimulate the possiblity of lower banking costs. Meanwhile, shop carefully, not just for the costs of a bank's services but, perhaps more importantly, for the quality of a bank's services.

This article supplements Chapter 1, pages 16-18 in Personal Finance. Access the textbook by clicking on the box in the right column.

THE DUMMY'S GUIDE TO IDENTITY GIVEAWAY

2008-01-29T12:09:00.000-08:00

It’s bad enough to have your identity stolen. But what if you GIVE IT AWAY? Can’t happen to you? You say you wouldn’t fall for a “phishing” scam. But millions of people do, despite the fact that many of the scammers are incredibly stupid. Their come-ons might look legit, but you can tell at a glance that they’re phony…IF you take the time to give them a glance. Here are some that flew into my inbox today.

“Good heavens, Morrie…we just got an email from eBay/ PayPal/ Amazon/ Citibank/ Visa….They said that there’s a problem with our account, and we have to email information back to them right away or they’ll cancel the account! Quick, Morrie, solve the problem!”

Cautious, concerned and wary, Morrie clicks onto the return link and types in the details that the phony phisher has asked for: bank account number, Social Security number, credit card numbers----all those little items that constitute your identity.

“Just in time,” says Morrie. “We could have been in real trouble.”

And bingo, within minutes they ARE in real trouble. The phishers are out having a field day with Morrie’s money. They didn’t steal Morrie’s ID. He GAVE it to them. A gift, pure and simple.

Little lessons from recent mail:

#1 A phishing letter from Bank of America, complete with their logo, their copyright notice and wording that sounds like what a real bank might say. Except---Here, exactly as the phishing bait was worded, are the flashing red lights: “…The update process is very simple and fast one….” See the goof?

It gets better. “This process is mandatory , and if not completed within the nearest time your To securely confirm your information please click on the link bellow…”

Bankers might not be sweethearts, but they do mind their grammar and their spelling. And the stupid goofs in this letter are a dead giveaway that you’re not dealing with a bank, but with a phony. “…The update process is very simple and fast one…?” Missing a little “a?” Give that guy an F minus in Phishing 101.

Next goof---forget the statement that “this process is mandatory….” That’s nonsense. The rest of the sentence is hellacious! “…nearest time…?” “….your To securely confirm…?” “….information please click on the link…?” And, best of all, “BELLOW.” With goofs like that you wouldn’t want these people to really handle your banking, would you?

#2. This one was from Wells Fargo Bank, with logo of course---horses pulling a stagecoach---all looking very Wells Fargoish. Once again, the exact wording: “We recently viewed your account, and suspect that your Wells Fargo Internet Banking account has been accessed by an unauthorized third party. Protecting the security of your account and of the Washington Mutual network is our primary concern……” Wait a minute! Hold those Wells Fargo horses! What’s wrong with this picture? Wells Fargo Bank is worried about the Washington Mutual network? Right. Just like Ford wants you to shop at Chevy dealers.

Just a typo, you say? Anyone can make a mistake? Go a few inches down on this inanity, where the print gets really small, and read “Privacy and Security: To access the Washington Mutual privacy policy go to wellsfargo.com/security…”

#3. A totally different letter from Bank of America, and you don’t have to read beyond the greeting to know that you’re dealing with dingbats: “In attention of Bank of America customers.” In attention of???. Whatever happened to “Dear?”

#4. Another greeting from another dodo: “Dear Citi Bank Customer.” The bank’s name is Citibank, all one word. I am not making this up.

#5. This one came to me from Downey Savings and Loan Association, where, by the way, I have never had any accounts. The salutation read, "Dear Downey Savings and Loan Association." Oops. It went on to say, in kooky language, "Your Internet Banking Account is currently locked! You must update your Internet Banking Account urgently!" They had my account number listed as "XBBHPJMZUC." What number do you suppose follows that?

Okay, enough is enough for one day.

Who do these dummies think they’re kidding? A lot of other dummies, that’s who. Identity theft is bad enough. Identity giveaway is shameful.

This article supplements Chapter 4, pages 108-134 in Personal Finance. Access the textbook by clicking on the box in the right column.

DOWN UNDER? STUDY YOUR MAP!

2008-01-27T12:32:00.000-08:00

It's summer Down Under, a great escape from the cold.

A huge number of people who want to travel Down Under are, sadly, clueless about how much time they'll need to "do" both Australia and New Zealand. This posting will help you get started with good planning, but what you need most is a map. A good map. With distance scales on it.

"We're going Down Under!" say our dearly naive traveling friends. "We're going to visit New Zealand, from Aukland to Queenstown and all points in between. And then we're going to Australia, and we'll visit Sydney, Melbourne, Perth, Ayers Rock and the Great Barrier Reef. We're allocating two, maybe three weeks, to do it all. Any suggestions?"

Yes, I have a suggestion. Don't do it. Unless you're willing to pay for and experience nothing more than an exhausting siege of vertigo. Australia in three to four weeks? Okay. New Zealand in two to three weeks? Okay also. But the whole area in 15 to 21 days? Save your time and your money. These are wonderful places to visit, and you won't do them, or yourself, justice unless you allow plenty of time. (Consider as an alternate plan separate trips to New Zealand and Australia.)

A Fool-The-Eyes Ad

Part of this problem is due to an advertisement I've seen countless times in Sunday Travel Sections and various magazines. It's an ad for "Down Under" and it shows New Zealand snuggled up real close to Australia, and it looks to be almost the same size. That gives an unmistakeable impression that it's take just a hop, skip and a jump to cover both nations.

The real maps say otherwise. Aukland, in northernmost New Zealand, is over 2,000 miles from Australia's main cities, Sydney and Melbourne. You're looking at a five hour flight across the Tasman Sea, plus another three to six hours getting to and from airports, going through security, waiting to board, collecting baggage, emplaning and deplaning, and so on. That's in both directions! In other words, it's a full travel day---you'll wake up in the morning and go to sleep in the evening having done nothing but travelling.

And, by the way, figure that same three to six hours to and from your hotel bed to your airline seat, and vice versa, on all your flights. That also holds in the U.S.A., which is why if I can drive to any destination in three to four hours, I will do so instead of flying in today's crowded, demanding and uncomfortable airline environment, which is made all the worse by the inanity of security routines and the people who run them.

Australia is as large as the United States, geographically. Sydney to Perth is like New York to San Francisco. Singapore is closer to Perth than Sydney is. Melbourne to Cairns (for the Great Barrier Reef) is like going from New York to Miami, plus another hour or two to drive from the Cairns airport to Port Douglas where you board catamarans for the reef. So, call it New York to Miami, followed by a drive to Key West.

Package Deals vs. Do-it-Yourself

Sure, there are package deals of two and three weeks that hold out the promise of seeing everything Down Under. But after the first 48 hours everything will be a blur. A sleepy blur. A dizzy blur. Los Angeles to Sydney is a 14-15 hour flight, and crossing the International Date Line does weird things to your body clock. And that's just the first day!

Besides, you don't really need a package. (A good travel agent, yes. A "hurry-back-on-the-bus" package tour, no.) Everyone speaks English. You can read all the ads and the signs and the schedules and the menus. Everyone is extraordinarly friendly. You want to mingle and dawdle and stroll and give in to your curiosity at the slightest whim. You don't want to be herded. And a well-planned self-guided trip can be in the same price range as a package tour.

So, please go Down Under. The sooner you go, the longer you'll have lovely memories. But do it when you have done ample planning and have ample time. We'll visit a lot of the Down Under delights in future posts. Meanwhile, study that map.

This article supplements Chapter 3, pages 88-106 in Personal Finance. Access the textbook by clicking on the box in the right column.

SOMETIMES IT'S GOOD TO DO NOTHING

2008-01-25T10:38:00.000-08:00

The stock market is bouncing up and down. (So what else is new?) Interest rates could go higher or lower. (….And?) Housing prices are getting very fluttery. (How quaint.) There are rumors that your company will be laying off workers (Update that resume.) SO WHAT SHOULD YOU DO?

We have all been conditioned to react to such phenomena. How? By panicky phone calls from stockbrokers., By unsubtle warnings from lenders. By anxious suggestions from real estate salespeople. By news stories and headlines that are, by the nature of the beast, supposed to shock you, to get your attention. By water cooler gossip. By parents and/or kids who think you don’t know anything.

So, all too often you DO do something.

You’ll sell or buy shares of stocks and mutual funds. You’ll switch bank accounts. You’ll put your house on the market, or take it off the market. You’ll quit your job and/or start looking for another.

And if you don’t actually DO something, you fret and sweat that you shouldn’t be doing nothing.

Please, take a deep breath, count to ten, and listen to me.

Sometimes it’s good to do nothing. Maybe more than sometimes. Maybe often.

Acting on impulse is the worst enemy of financial sanity. First, whatever is motivating you to act might not be real. Facts are elusive in this wired age. Second, the stimulus to action might come from someone (a stockbroker?) who has an agenda---to get you to trade, for better or for worse, as often as possible. Third, you probably haven’t done the homework or research to validate your decision to do something. Fourth, even if you do research alternative actions, you could still make a wrong decision. This is particularly true if you’re trying to second-guess the stock market or the interest rate arena. Because whatever you decide to do (say, sell shares of stock) there is someone taking the opposite action (buying those same shares.) Who is right?

Think back to the last time you made an impulsive decision to do something. How would you have fared if you did nothing? If you just waited for the crisis or the panic or the stampede to end?

Ask yourself too, if you did do something that turned out to be wrong, what will it take for you to recover from your mistake? That has to be part of the overall equation.

Doing nothing does not mean ignoring the call to action. There well may be cause for concern. But before you leap, you must look, and measure, and calculate, and analyze the source of the call to action. Again---is it a stockbroker, or someone else who might stand to gain by whatever action you do take?

Don’t get me wrong. Lots of those action-motivators (such as stock brokers) do have their clients’ best interests in mind. But you shouldn’t have to mind-read someone every time there’s a tick or a tock.

There’s a lot to be said for taking a deep breath and counting to ten before you jump off the handle. Maybe even better---take ten deep breaths and count to 100. Don’t let impulse waste you.

This article supplements Chapter 15, pages 395-401 in Personal Finance. Access the textbook by clicking on the box in the right column.

HOW THE LOCUSTS ATE AMERICA

2008-01-24T09:47:00.000-08:00

The University of Bob is proud to offer an exclusive look at a most extraordinary book, "AMERICA---HOW WE GOT THIS WAY" written by historian Hubert Hindsight, Ph.D., and published in the year 2020. From his vantage point, Hindsight looks back on some of our most defining events. He urges all readers to engrave in their minds the saying of philosopher George Santayana: "Those who cannot remember the past are doomed to repeat it." Hubert's quotes will appear from time to time, and can be identified by the "Looking Back" logo.

Chapter 8, "Like Locusts, They Just Keep Returning."

In the second decade of the 21st century there arose a phenomenon---still not under control---that critically threatened the world's financial stability. Known as "ACEs,", then "ABCDs," it had been gestating for many years. It resembled the most horrific swarm of locusts imaginable. Presidents Hillary and Chelsea Clinton couldn't stop it, and now, in 2020, with the Bush twins running for Co-Presidency, the threat still exists.

The Locusts came from all walks of life. Some had been used car salesmen. Some had been real estate hustlers selling vacant lots in the wilderness. Then they graduated to the world of banking and high finance. They had very special skills enabling them to sell over-valued products to people who either didn't need them, couldn't understand them, or were just plain greedy.

Most of those sales required the buyers to sign I.O.U.s, which would typically involve a high rate of interest. Banks and other investors were anxious to buy these I.O.Us to cash in on the high interest. When the authorities started to discover that a lot of the transactions involved fraud-----the land was sold on false pretenses, the used car had had its odometer set back, etc.----new laws began to put the scams our of business. They may have stopped the scams. But there was no way they could stop the scammers, the Locusts. They had skills that would always be profitable, so they just sat back and waiting for their next opportunity to sell junk.

It didn't take long for those new opportunities to pop up. The Locusts, their skills honed to near perfection, had great success through the 1970s and 1980s selling time-share condos, travel agencies, taco franchises, motivational seminar companies and television shows promising fast and easy riches. The pickings were ripe, but the Locusts' hunger was never satisfied.

Bigger Bucks on the Horizon

In the 1980s the Locusts invaded Savings and Loan companies, America's prime source for home loans. They posed as appraisers, overvaluing properties right and left. They posed as loan officers, making doomed-to-fail loans based on the excessive appraisals. They posed as builders who sold homes for far more than their true value, with the builders pocketing the excess (after sharing with his co-conspirators.)

The swarm was nation-wide. The entire Savings and Loan industry caved in. And because most of the S&L deposits were insured by Uncle Sam, U.S. taxpayers had to foot the bill for over $300 billion that the failed S&Ls owed their depositors. As icing on the cake, a stock market crash followed soon after.

But wait. There's more. In the 1990s the Locusts spread their next generation of larvae. Dot-com was all the rage. Clever techies created internet browsers and thigamajigs and business plans and double-latte-frappucinos and all kinds of science-fiction stuff that lenders and investors couldn't throw enough money at. Visions of fortunes danced in their heads.

The Locusts posed as venture capitalists who invested $25 per share in InterGalactic GigaBytes (IGGB) and started a pump-and-dump campaign (pump up the price per share and then dump it asap.) The Locusts posed as Wall St. analysts who said that IGGB would go to $300 per share by next Tuesday. And it did. The Locusts posed as stock brokers and mutual fund salesmen who said that IGGB would go to $400 by Wednesday. And it did. And all along the way there were Locusts posing as financial commentators who said that the venture capitalists and the analysts and the stock brokers were all right.

When the dot-com market crashed the Locusts all swarmed to Houston and nested in a place known as the Enron Building.

Mortgages Again---With A Twist

After devouring Enron and its wannabes, the Locusts revisited the mortgage markets. By now they had mutated into very clever money-crunchers. Once again the Locusts posed as appraisers and loan officers and builders, but now they were the 3.01 models. They created doomed-to-fail loans worth trillions of dollars, disguised them in intricate packages of securities mixed up with good quality debts and legal gobble-de-gook, and sold these packages to investors all around the world.

When it appeared that so many of these packages would default, lenders got cold feet and the financial world that is lubricated by borrowed money was in danger of grinding to a halt.

By 2009-2010 the mortgage crisis began to fade, as loans once thought worthless were being repaid bit by bit, and the clouds of doom began to dissipate. But the swarms of Locusts didn't dissipate. They grew even more powerful, more threatening.The government imposed strict regulations on all the players in the home loan industry, and they returned to safer traditional lending practices. So the Locusts had to create new abra-cadabra to sate their lust for money.

Any Debt Will Do

The Locusts knew that any debt, or I.O.U., properly structured, could be sold to investors. If X owes Y $100, plus interest at 6% per year, there will always be a Z to whom that 6% return would look attractive. So Z would buy X's I.O.U. from Y. That's the essence of doing business, and has been since the dawn of time.

If the debt is collateralized---that is, something of value can be grabbed by the lender if the debt isn't paid---so much the better. Collateralized means "safety." But what if the true value of the collateral is questionable?

Over the years car loans, credit card debts, home loans, student loans, etc.---all of these had long been turned into investment packages, but now they were were either too tightly regulated or not profitable enough.

How about bank escrow accounts? What are they? When banks lend people money to buy a home, they often require the borrower to make extra monthly payments to cover their property taxes and property insurance. That money is held in an "escrow account" and is used to pay the taxes and the insurance bill when they come due.

Say that the monthly payment for the mortgage alone is $1,000, and the monthly tab for taxes and insurance comes to $350. The loan agreement could then require the borrower to pay $1,350 per month. When the taxes and insurance become due the bank pays them out of the escrow account. Many borrowers like this arrangement---it's a sort of enforced savings to cover those big bills. SMALL PRINT: If the borrowers don't pay their monthly escrow amount, they could be in default on the mortgage.

The dollars that accumulate in those escrow accounts are, in a sense, debts that have to be paid to the city and to the insurance company. Many cities and insurance companies would rather have that monthly inflow, instead of getting it yearly, so they could spend or invest the money as it flowed in more rapidly.

So, said the newest breed of Locusts, let's convince the cities and insurance companies to agree to take, say, 90 cents on the dollar to get their money monthly instead of annually.

Using the above example, the Locusts buy an escrow account for $3,780 (90 cents on the dollar, or 90% of $4,200.) The city and insurance company agree to take the $3,780 in full payment for the taxes and insurance. That leaves Locust X with the $420 difference---a nice profit for their work, which can be handled by a couple of computer clerks. Multiply the $420 by millions of such loans, and you're talking serious money.

Thus were created ACES---Accumulated Cash Escrow Securities. They became really hot. Good return. Safe. The Locusts created a gazillion dollars worth and sold them in little chunks to pension funds and mutual funds all over the globe. The ACES were so successful that similar plans were started for life insurance premiums and for auto insurance premiums and for estimated income taxes that self-employed people pay, and for any and every form of I.O.U imaginable. They all funneled through banks.

The Plot Thickens as the Government Enters the Scene

None of the above "payment due" items are really collateralized. If you don't pay your life or auto insurance premium, nothing gets taken away from you. You just lose your insurance. Also, there is no taxable event in paying those bills: Uncle Sam doesn't get a cut from what you pay your insurance companies.

Enter the U.S. Government. By the final years of Hillary Clinton's administration, the staggering national debt had doubled since the G.W. Bush years because of Mrs. Clinton's final but costly success in passing a national health insurance law. Congress then---at Hillary's bidding--- passed a law saying that those "payment due" transactions were, indeed, subject to a new-fangled tax they called a Transaction Levy. Income from that levy, it was felt, could reduce the national debt and, within just a few years, could make the government solvent again.

"Pay a little bit extra now to avoid a real mess a few years later," Congress and Hillary told voters. But the SMALL PRINT stated that if anyone failed to make a "payment due" on time, it would be tantamount to being delinquent on your incomes taxes. Uh-oh.

The Locusts pushed hard for this new tax because they saw as a new form of debt they could sell. They called them ABCDs, or Aggregate Bank Collateralized Debentures . ALL of the "payment due" items were lumped together as investment packages and sold to eager investors around the world. Safety was the key feature of ABCDs. Being delinquent with the IRS was such a threat that no one dared skip their payments, and thus every analyst on Wall St. gave ABCDs the highest quality rating: AAA.

But trouble was lurking. When Chelsea Clinton was elected to succeed her mother as President in 2016, her first initiative was to get rid of the Transaction Levy. There was never enough of a majority in her party to kill the levy, and the battle has raged since. Chelsea's alleged motive for turning against her mother was not fiscal policy, but, as she said, "Mom could have been a little more strict with Daddy."

Co-Presidents?

As this is written, the Bush twins, Jenna and Barbara, are running on the Republican ticket for the office of Co-Presidents, and they have made it clear that they will continue to support the Transaction Levy. At stake is the entire U.S. economy. Suspending the Transaction Levy would prompt tens of millions of people to skip their payments due, and the approximately $19.76 trillion in ABCDs would be downgraded from AAA to the lowest rating: Junk.

What the Locusts had wrought threatens to throw the financial world into total chaos. We had forgotten the past, and the final bill is now coming due.

A momentous legal battle is assured, but politics being what they are, Supreme Court Chief Justice Alito, appointed by the twins' father, is known to favor retaining the levy. His vote would be the swing vote to keep the levy in place.

(The legal challenge to the twins running as co-presidents is yet to be heard by the Supreme Court, but their recent ground-breaking decision* regarding the number of people constituting a marriage is a strong indicator of co-presidents being allowed.)

* In A.C.L.U. vs. United States, 2019, in a 5-4 vote the Court said that since the Constitution does not specifically prohibit a marriage between three or more people, then it follows that the Presidency---also not specifically prohibited from being more than one person---can consist of two or more people as co-Presidents. "Even though the Constitution refers to 'The President' in the singular, it does not specifically say that the President cannot be more than one person." This was the crux of the deciding vote, written by Justice Scooter Libby, G.W. Bush's last minute appointment on his final day as President.

BEWARE THE DEBIT BITE

2008-01-23T15:37:00.000-08:00

You might think you have plenty of money in your checking account, then you get a charge of $30 or so from your bank telling you that your account is overdrawn. Yes, it happens more than you’d think. Here’s what you need to know.

Crunch some numbers along with me. It could prove enlightening.

We’ll keep it as simple as possible.

You start off on a Wednesday with $100 in your checking account.

At 10:00 AM you deposit a check for $185 into your account. The check is a gift from your Uncle Toody who lives in Spokane. You now have $285 in your account.

At noon, while on your lunch break, you buy $200 worth of clothing and pay for it with your debit card, thus reducing your balance to $85.

Your lunch tab is $18, and you pay for that with your debit card, bringing your checking account balance to $67. Friday is payday and you’ll deposit your paycheck for $800 next Monday.

Is everything okay?

No. Far from it.

The next day, Thursday, you get a notice from your bank that your account is overdrawn by $178! The bank gives you this explanation:

“ We tally up all deposits and withdrawals (check and debit card charges) at the end of each day. We do not tally them in the order they came in. Rather, we tally them by amount----largest first. Thus, when you charged the clothing for $200, we debited your account by that amount, resulting in an overdraft of $100, plus a penalty charge of $30 for any overdraft, bringing your balance to minus $130. The overdraft charges are debited immediately. Then came your $18 lunch---this was another overdraft, so there’s another $30 penalty. In other words, your lunch cost $48---$18 for the lunch itself, and $30 for the penalty. So, adding that $48 to the prior overdraft amount of $130 leaves you with a negative $178 balance. Please deposit that amount into your account immediately or we’ll start adding further penalties for every day you remain in overdraft status.”

“WAIT A MINUTE! What about the $185 check I deposited first thing in the morning? That would have brought my balance to $285, which would have more than covered the $200 clothing cost and the $18 lunch?”

“Sorry, but that $185 was drawn on an out-of-town check, and we can’t give you credit for an out of town check until we’ve given it time to clear---three business days. So it didn’t count in your balance for that day. Now please pay up.”

“That’s terrible. What if I deposited a check for $185 from, say, the United States Government, such as an IRS refund?”

“Technically, we still could have waited one day for the check to clear, so it might not have helped. However, had you deposited $185 in cash, we could have credited it that same day and you could have avoided the whole problem, overdrafts and all. Of course, if we knew you better----well enough to be sure that you’d cover Uncle Toody’s check if it bounced---then we could have credited it to your account before we debited the charges, and you would have avoided the overdrafts. But we didn’t know you better. So you owe us $178. Now!”

To be sure, this is a worst case scenario, but it happens all the time. A recent Congressional study showed that banks reap billions per year in overdraft charges---many of them perfectly legitimate, but a big chunk arising from this practice of tallying a day’s business as your bank had done. Not all banks tally that way---many tally the debits and credits in the order they’ve been received, rather than largest first and so on But if your bank does like the one in this story, you’re vulnerable. A bill is being introduced in Congress to protect consumers from such abuse, but until it becomes law (if ever) you have to take care of yourself.

As a general rule---even if you’re a long-time customer of the bank---it’s wise to ask your teller at the time you make a deposit when an out-of-town check will have cleared and be credited to your account. Tally your ongoing balance accordingly.

Some banks will bend the rules and cancel overdraft penalties if your account has been otherwise kept in good condition---that is, no overdrafts or bounced checks. In the case at hand, you certainly have nothing to lose by pleading your case with a sympathetic officer. Many do have the discretion to cancel charges, and you might also find that many are willing to do so because they also don’t think the debiting method is fair.

This article supplements Chapter 11, pages 277-283 in Personal Finance. Access the textbook by clicking on the box in the right column.

WHEN IS A "LOSS" REALLY A LOSS?

2008-01-22T12:29:00.000-08:00

We're being told on a daily basis how much is being lost as a result of the sub-prime mortgage crisis. I agree that it's a rotten situation, caused by the greed of both borrowers and lenders, and spreading pain throughout the entire economy. It is also a case---and I hope you'll find this helpful---of how the naive media are confusing the naïve public, and perhaps compounding the problem due to accounting semantics. If we feel depressed economically, we act depressed economically. If things REALLY aren't as bad as they seem, our national economic spirit might get perky. Read on.

When do you incur a loss? If you put five bucks on number seven on the roulette table, and the ball falls into slot twelve, you've lost five bucks. It's gone. Fuggedaboudit.

If you bet $50 on Shady Lady to win the fifth race at Santa Anita, and she comes in second by a nose, you've lost $50. Gone without a trace.

If you total your new $50,000 Chevrolet Subdivision by smashing it into a wall and you don't have insurance, you've lost $50,000. Pfffft! Deal with it.

But a lot of incidents that are called "losses" really are NOT losses. In the financial world that happens quite a lot. Call it "accounting semantics" if you will. The fact is that things are not always as dire as the word "loss" may make it seem.

The media have gone overboard in recent months reporting the "losses" suffered by banks, brokerage firms and investors because of the sub-prime mortgage chaos. The articles spook the markets. Investors sell out and run for cover. The affected stocks go into free-fall. And the headline writers go back to work scaring their readers about the plunge. Bad news is largely a knee-jerk self-fulfilling prophecy.

MISSED PAYMENTS DO NOT EQUAL "LOSSES"

The fact that payments are not being made on a loan does not necessarily mean that the amount of the loan is "lost." Joe has a loan from his bank of $2,400, payable at $100 per month for 24 months (plus interest.) Joe makes his payments for six months and then stops. He still owes the bank $1,800.

Two months, four months, six months go by with no payments from Joe. Has the bank lost $1,800? No. Joe might catch up on what he owes, and the bank doesn't lose a penny. Or, Joe might refinance the loan, thus giving the bank a chance to get all its money back. Again, no loss. When Joe misses payments, his loan might be considered "non-performing," or "delinquent" or "in collection." But until Joe completely abandons his debt, "loss" has not occurred.

There's always a chance that Joe will make good on the loan. People who have been saddled with high interest rate mortgages might scrimp and save….OR inherit….OR get a nice raise….OR win the lottery….OR work harder and spend less, OR sell their home to free up some cash….OR finish paying other debts so they can resume payments on their mortgage….OR sell some unimportant assets so they can get square with the debt on their important asset, their home….OR negotiate a new and comfortable repayment plan with the lender….OR add a co-signer to their IOU to give the bank more security, OR…. OR…. OR…. etc. You get the picture. There are a lot of ways that people can and will honor their obligations. But the media aren't recognizing that important fact.

Likewise with foreclosures. Yes, the number of new foreclosures is frightening, but the VALUE of the properties that are being foreclosed is not necessarily LOST. Most of those houses will be resold, and their loans taken over (or replaced) so that a high percentage of the original foreclosed loan will go back on the books as a good loan.

LIKE YOU, LENDERS SET ASIDE FOR "RAINY DAYS"

The lender might, at some point in Joe's delinquency, designate Joe's loan as "Uncollectible." Lenders know that this will happen with a certain percent of their loans, so they set up a "Reserve For Bad Debts." Each month or quarter they take some of their income and put it into this "bad debt kitty." It's like you putting away a few dollars every so often to cover yourself for that "rainy day."
When Bad Debts in the Reserve are paid off, that inflow of money counts as current income. When times turn bad the Reserve is topped off. And so it goes.

In the sub-prime mortgage situation, a huge amount of money has been transferred into the Reserve for Bad Debts by the lenders. The problem is that the media reports give the impression that the money being put into the Reserve is money that has been LOST. The fact is that a good chunk of those "bad" debts could be repaid. But that repayment doesn't get reported in the mass media. It's lost in the auditors' mumbo-jumbo many months later, and the public doesn't know about it.

Unfortunately, Accounting Semantics 101 is not taught in Journalism Schools. And only experienced financial journalists pick up the meanings during their tenure. Meanwhile---given uninformed or imitative reporters and editors---the public is getting its collective head filled with jargon that can be meaningless and misleading. You have to educate yourself if you want to be on top of the game and know how to deal with gobble-de-gook.

HOME SWEET SOMEONE-ELSE'S-HOME

2008-01-20T12:26:00.000-08:00

When we go on a vacation we stay in a hotel looking forward to getting a taste of another city or country and meeting some locals. But there are no locals staying in the hotel---just a lot of folks like yourself. You could have stayed at a hotel in your home town and saved the travel expense. Here’s a fascinating alternative.

Thanks in large part to the internet, a huge industry has grown up offering people’s homes to stay in on your vacation. There are websites galore brimming with listing companies which in turn are chock full of specific listings of houses and apartments all around the world. Check out “Vacation Rentals” on your search engine of choice and you’ll see what I mean.

Here are some of the advantages of booking a “rent by owner” accommodation. In no particular order: a well-chosen home or apartment can be a lot cheaper and a lot more spacious than a hotel….You’ll be part of a neighborhood where you can meet local people in the shops, restaurants and pubs.….You’ll no doubt have the use of a well-equipped kitchen, which can save you lots of money by having meals in instead of going to restaurants…..Many homes have good libraries in which you can indulge your reading habits….A home is a home.

Here, again in no particular order, are some precautions you can take in choosing a rental home for a vacation. They should help you get the best deal for your money.

Good Research Can Pay Off

---Never was there a better use for a google map, or a mapquest one, if you prefer. It can zero you in to the immediate neighborhood, and list all kinds of businesses in the area. Use it to gauge how far the house is from the center of town, or other places you might want to be near. Beaches? Malls? Zoos? Museums? Golf courses? Playgrounds? Highways? Airports? Whatever. The google maps can show you a satellite photo of the immediate surrounding in many cities, a good way to orient yourself to the nearby
amenities.

---The rental sites will, or should, show you some photos of the place. Be aware that photos can be staged and manipulated. Staged means that a lot of attractive furniture, etc., is brought in for the photo shoot, to replace the grunge that’s really there. Manipulated means that rooms can be made to look bigger and brighter than they really are. Scrutinize any photos with those factors in mind. I hope that my negative suspicions are proved wrong.

---Try to get referrals from past tenants, although if the landlord chooses them you might not be getting the real deal. If any of the past tenants give you their phone number, a phone call might elicit more important information than the letter. Probe politely.

---You don’t have to read a contract when you stay in a hotel, but when you’re renting someone’s house there will be a contract, and you should understand it thoroughly. Get a lawyer’s help if you’re not sure what some of the words mean. Assume that the landlord had a lawyer draft the contract, and you’ll understand why you might need legal counsel.

Contract Issues

Within the contract itself you should make sure all these points are covered to your best advantage.

Rental deposits---when, how much, under what circumstances is it refundable? Cleaning and breakage deposit---how will original conditions and termination conditions be determined? Photos? Personal inspection?

Liability---What personal liability insurance does the landlord have that will cover you if you (or your family) are harmed by some defect in the property? Also check your own homeowners or tenants policy to see if you’re covered if you do any damage to the landlords property.

Automobiles---Some vacation leases include use of the landlords’ cars. Be certain that all details regarding damage, loss, mileage and condition are expressly spelled out in your rental contract.

Utilities---(including telephone, internet and tv connections) Who pays for what, to whom, and when?

Repairs and maintenance---If something goes wrong and you need a plumber, electrician, handyman or any other trades person, who pays how much. If you broke it, you’ll likely have to fix it. If it came broken, it’s the landlord’s responsibility. Proving which was the case can be tricky.

Noises and nuisances---This might seem a bit silly, but all houses have their own special noises. Occupants might be so used to them that they don’t even notice them any more. But if you are awakened by a strange squeaking sound in the middle of the night, it may be just the wind. Or it may be something that needs fixing. Know up front what to expect. The same goes with neighbors who might have late parties, loud boom-boxes, and barking dogs. The landlord might be used to these nuisances. But they can ruin your peace and quiet. Again, know up front. Unlike in a hotel, where you can complaint to a manager 24/7, you’re on your own in a rented home.

This article supplements Chapter 3, pages 88-98 in Personal Finance. Access the textbook by clicking on the box in the right column.

ADVICE ON INVESTING IN FORECLOSED PROPERTIES

2008-01-18T11:21:00.000-08:00

INVESTING IN FORECLOSED PROPERTIES

So, you want to make a killing by buying homes that are in foreclosure---on the cheap---and flipping them for a quick profit. Such a deal---taking advantage of people who are losing their homes because they couldn’t make timely payments on their mortgages. Innumerable home loans (nicknamed “sub-prime”) are flooding the housing market. The banks/lenders have to take back the houses and try to sell them to recoup their losses on the defaulted loans (which probably shouldn’t have been made in the first place) Do the words “anxious seller” come to mind? And if so, might you be an anxious buyer, looking to grab sweetheart deals from overloaded lenders, and turn some quick profits?

Buying and selling foreclosed properties has long been a favorite in the savvy real estate investors’ book of tricks. As with any kind of real estate investment, success requires skill, capital, patience and a keen knowledge of the local market. Know well the primary rule of investing in real estate: The Expert Profits at the Expense of the Novice.

In foreclosure dealings much of the profit will go to those hucksters who offer you “free” seminars on Valuable Secret Ways To Make Huge Profits Buying and Selling Foreclosed Real Estate. Some of the ways they can profit:

1) After the free seminar they’ll sell you overpriced books and DVDs which repeat what they’ve already told you in the seminar.

2) They have already taken options to buy foreclosed profits from lenders, and will sell you the options at a nice profit to themselves.

3) They’re in cahoots with real estate people and lenders to generate sucker lists of possible buyers, for which they receive a fat finder’s fee, and a fatter commission if a deal goes through.

4) By attending the seminar you have put your name on a list of potential victims who will be invited to every “get rich quick” seminar on the planet.

5) Any combination of the above.

Now ask yourself: “If the secrets they’re selling are so valuable, why are they willing to sell them? Must be that they can make more money by selling you the secrets than they can by using the secrets themselves. And if enough people buy the secrets, they’re not secrets anymore, and thereby no longer valuable.

Suppose, though, that you bypass these seminars, which will be flourishing like the grass after a spring rain, and decide to try it on your own. Here is a checklist for would-be profiteers in the foreclosure market.

Now Please Pay Close Attention

A) It’s gospel in the lending business that people who don’t take care of their financial obligations often also don’t take care of their property. Call it human nature. Repossessed cars are in need of far more fix-up work than those with clean payment histories. Businesses that fail are riddled with problems you’d not likely find in a business with a good track record. Homes that have been foreclosed have been physically abused by their residents---abuse that can often be hidden and that can often be very expensive to fix. Just as you should hire a housing inspector before you buy a home to live in, you are hereby admonished to hire a housing inspector before you buy a foreclosed property. Yes, this will cost money. If you’re not willing to pay for this simple form of insurance then you should stay away from the foreclosure business.

B) Don’t be so sure that the lender will let the house go cheaply. They are out for every penny they can squeeze from the property, and they, and their real estate agents, will use every trick in the book to get you to increase your bid. “Somebody else is is ready to pop for $10,000 more than you’ve offered….” And so on. Sound familiar?

Yes, of course they are stupid for not taking the first decent offer that comes along. Every day that goes by means that many more dollars in interest they’re losing, and that much more costly manpower to administer a portfolio of bad loans. . But consider: if they were stupid enough to make the loan in the first place, who says they can’t be so stupid as to try to sell it for more than a weak and overloaded market dictates?

If a foreclosed home needs major repairs, wouldn’t the lender take care of that to facilitate selling the house? Ever heard of throwing good money after bad. The lenders don’t think that way. They want cash, and they want it fast and trouble-free. Let the buyer deal with the troubles.

C) How healthy are your supplies of capital, patience and luck? You’ll need plenty of each, maybe more than you think you have.

Capital: Whatever cash you tie up to make a down payment is not earning a penny for you. Indeed, if you’re taken over the former owner’s IOU, you’ll have to be making regular payment on that loan. How about paying for needed repairs, which often can be hidden and beyond guesstimating as to cost? Then there are the costs of advertising, paying a real estate commission if you sell through a broker, capital gains taxes if you are lucky enough to turn a profit, and hazard insurance. If you need to borrow to cover any of these costs, can you do so quickly and at a reasonable price? A second mortgage or a home equity loan on a foreclosed property can be tough to come by. Do you have the credit capacity to borrow without interfering with other credit needs you might have? There are a lot of numbers to crunch before you know whether you’re looking at a good deal or a bad deal. Failure to crunch can mean failure to profit.

Patience How long is it taking to sell comparable houses? Check with your local Real Estate Board to get some ballpark figures. How saturated with foreclosed homes is the area likely to become? Check with a few mortgage lenders to get a sense of what lies ahead in that regard. (All you’ll get is a “sense.” They might not know have a clue as to how many loans in their portfolio will be going bad.) What prices are comparable homes selling for? Note that the price you might be able to get will definitely depend what the competition is today as well as months from now. Money aside, how long can you wait until you find a buyer---how long before your anxiety affects your work and family life and emotional stability? If you answered, “I haven’t the foggiest idea because I’ve never done anything like this before,” you are being honest and wise. Unless you can answer that question, and live with the answer, speculating in foreclosures could prove disastrous.

Luck This is the great unknown. The bigger the foreclosure market, the more competition you’ll be facing---other speculators who don’t know what they’re doing; investors who really do know what they’re doing; lenders themselves whose strategies for dumping foreclosed properties are kept close to their vests; insiders who can get non-public information from lenders as to what those strategies might be. Other unknown factors include how quickly your locality can absorb new foreclosures coming on line; what direction interest rates on home loans are going; and what underlying economic realities might come into play in your community, such as a major industry leaving, or a new one arriving, either of which will affect the job market and the housing market, for better or for worse.

So, roll the dice. Put the quarter in the slot. Drop a chip on odd or even, red or black. Raise the stakes while you’re hold a pair of twos. Use your kids’ ages to bet big on the trifecta. Take a hit on 16. And then pray.

You’ve just been reading the counsel of a conservative and successful real estate investor, who has seen it all, coming and going, through the ups and downs and over many years. You’re on your own. Don’t say you weren’t warned.

This article supplements Chapter 16, pages 432-442 in Personal Finance. Access the textbook by clicking on the box in the right column.

ADVICE ON BEING FORECLOSED

2008-01-17T11:57:00.000-08:00

You, or others you know (friends, relatives, co-workers) might be faced with the prospect of losing their homes through foreclosure. It’s a devastating situation, not only financially but emotionally, and the ripple effects can be felt for years. There is some action you can take to protect yourself. Heed!

Please don’t be embarrassed to tell anyone you know who’s in such a plight to take defensive steps IMMEDIATELY. (Hopefully it’s not too late.) Post this on your bulletin board at work….email it to your cyber-correspondents….however you do it, get the word out that there are steps to take to minimize, if not altogether avoid, the shock of foreclosure.

FIRST---This step is tricky but absolutely necessary. Sad fact of life: When people are in a financial jam, the LAST thing they want to do is go face-to-face with the lender. In reality, the FIRST thing they should do is pay a visit to the lender to plead your case. NOT by letter. Not by telephone. NOT by email. IN PERSON.

When a loan starts turning delinquent---and lenders can spot these a mile away, ---the lender assumes that the borrower is intentionally avoiding making the payments promptly UNLESS the borrower makes a sincere attempt to explain the situation. And the best, if not only way to show that sincerity is by a personal visit to the lender.

Your visit will be most productive if, in the months preceding, you have A) responded promptly to any and all attempts by the lender to contact you, by mail, phone or otherwise; B) given timely notice to the lender that your next payment might be late. These simple tasks help establish your credibility and your intent to do the right thing.

BE PREPARED. BE VERY PREPARED

How should you prepare yourself for a personal visit? Draw up a list of all your current income and your current debts, including the payments you’re making and the interest rate you’re paying. If there have been ANY circumstances that have caused your payments to become late, bring in whatever proof you have of 1) medical problems in the family; 2) salary cutbacks or job termination; 3) demands from other creditors---including the IRS---that threaten imminent debt collection procedures; 4) evidence of unexpected and necessary expenses you’ve had to make, such as costly home or car repairs. And so on.

Yes, the lender might take your word for all of this. But remember, you’re there because you have not kept your contractual word regarding your monthly payments, so the lender might need more convincing, such as the above evidence.

What can you expect from the lender if your story is credible? Lenders do NOT want loans to become delinquent. It’s not just a matter of them losing money. It’s a royal pain, and a costly pain, to handle delinquencies---extra paperwork, extra surveillance of your account, extra notification to credit bureaus, extra time listening to excuses, extra anxiety when you yet again fail to keep a promise to pay.

Here are the main things a lender can do for you. If these options aren’t offered, ask about them.

YOU DON'T ASK, YOU DON'T GET (ROSEFSKY 'S RULE 378b)

---Determine if you are in the small percentage of home owners who qualify for help from the plan announced in early December designed to aid certain home loan debtors. The government played a small role in this program, but any help must come voluntarily from the lenders. If you do qualify, take whatever advantage works best for you.

---Your payment date can be delayed to give you some breathing room each month, maybe enough to get you back on track within an agreeable time frame. You might score some important points in this regards if you seek the lender’s advice on how to better budget your family finances.

---Late charges can be waived, at least for a short time. This won’t get you off the hook entirely, but it can give you some breathing room.

---Discuss refinance options. You might be able to write a new loan for the same amount you now owe, but with a lower payment schedule. You might be able to write a new loan that will provide you with extra money you can use to pay off other more costly debts, such as high interest rate credit cards or other IOUs that are tacking on late charges and threatening legal action.

This is where the tricky part comes into play. Very likely, the lender you originally dealt with in getting the loan no longer holds your IOU. They may have sold it to an investment group, which in turn packaged your loans with other loans and securities, and then sold chunks of that package to mutual fund companies, who in turn peddled shares in the mutual fund to any and all takers. Your IOU changed hands every step of the way. You must determine who in that chain has the authority to modify the terms of the original loan, and deal with them as best you can. Ultimately, you must convince whoever has the authority to modify the loan that a refi will put control of the loan back in his (and your) hands. If there’s a prepayment penalty in the original loan that would kick in on a refi, you’ll have to try to negotiate around that.

OTHER WAYS TO STAVE OFF DISASTER
:
---Explore what the lender will do for you if you can add a co-signer to your loan, or if you can provide some good collateral in addition to your house. Doing either of these things might win you a short hiatus from making payments, after which you’ll have to catch up and stay caught up.

---Contact non-profit agencies that might be able to help: HUD (the federal office of Housing and Urban Development). 1-800-569-4287, or online at http://www.fha.gov/. ; Association of Community Organizations for Reform Now (ACORN) at http://www.acorn.org/ (888-409-3557); Homeownership Preservation Foundation (HOPE) at http://www.955.org/, 888-955-HOPE.

DON'T SAY WE DIDN'T WARN YOU

LAST BUT NOT LEAST: WATCH OUT FOR SCAM ARTISTS WHO WILL PROMISE TO CHASE AWAY THE FORECLOSURE WOLVES. SNAKE OIL SAM HAS A FIELD DAY WITH POTENTIAL FORECLOSURE VICTIMS. HE CAN CONVINCE YOU TO PAY HEFTY FEES IN ADVANCE TO SOLVE THE PROBLEM, AND YOU CAN BID THAT MONEY FAREWELL. HE CAN MANIPULATE YOUR MIND SO THAT YOU UNWITTINGLY SIGN PAPERS TO STAVE OFF FORECLOSURE, BUT INSTEAD GIVE HIM TITLE TO YOUR HOUSE. MANY SO-CALLED LOAN CONSOLIDATORS ARE REALLY SNAKE OIL SAMS IN SHEEP’S CLOTHING---CHECK WITH YOUR LENDER AS TO THE RELIABILITY OF LOCAL LOAN CONSOLIDATORS.

This article supplements Chapter12, pages 320-326 in Personal Finance. Access the textbook by clicking on the box in the right column.

"MEGO"---THE TRAVELER'S DEMON

2008-01-16T12:54:00.000-08:00

If you haven't already seen it or been afflicted by it, you will sooner or later. You'll be enjoying a vacation, and taking some time to visit a famous museum or art gallery or shopping venue, and WHAM, you're attacked by MEGO, and you succumb. Plan in advance and keep MEGO at bay. It's easy. It's free. It's wise.

You're spending a lot of money to fly somewhere, to stay in a nice hotel, to enjoy good restaurants, to soak up another culture, to have fun people-watching, to shop for things you can't find at home (even at Costco). It's every vacationer's dream, right?

ou're So much to do and so little time. You wisely study the guidebooks, surf the internet, talk to friends who have already been there, and you set down a schedule that will give you time to do everything you care to do. Except stay conscious.

The Warning Signs

I've seen it happen to other travelers more times than I can count. And I admit that It used to happen to me until I recognized the warning signs of MEGO: Suddenly, nothing makes sense any more. You forget where you are, or why you're there. Your mind can only focus on having your body lie down and rest.

MEGO: My Eyes Glaze Over. It's probably the most frequent symptom of carefree travel planning. Fortunately it's easily cured by a nap----if you're anywhere near where you can take a nap, which isn't always the case. Once you're afflicted with MEGO the rest of your day is shot. You get short-tempered with your companions and kids. You find yourself dozing when you should be gazing. You start feeling angry that you've come all this way and you just don't understand what everyone sees in the Mona Lisa or the Eiffel Tower or the Smithsonian. Your feet ache and your stomach rumbles and your head throbs and you are not a happy camper! And you've got just as busy a schedule for the next day? Oh dear.

Here are some simple scheduling tips that can help you avoid MEGO, and thus let you get the most pleasure out of your travels. It's better to enjoy what you see and do than to be a miserable grouch because of a MEGO attack.

First You must carefully prioritize what you want to see and do, and how long you want to spend on each activity. This is where the most careful research is essential. You must take into account the wishes of any companions or children traveling with you. Some compromising might be necessary, but that is all for the common good. Shopping and eating times must be included in this list as activities in their own right.

Second This is something that is too often overlooked---you must determine how long it will take you to get from Place A to Place B to Place C and so on. That means taking into account driving and/or walking time, mass transit scheduling, and the all-too-frequent waiting in line to see what you've spent so much time getting to.

Third This is the tough part, and you should work it all out on a schedule divided into days and parts of the days. How much time you allocate to each specific activity is up to you. These are only general guidelines, but they're based on a lot of experience. Let's say you want to plan your days in units of 60 or 90 minutes. Allocate how many units you want to spend at each activity. To keep things most simple, plan to spend two units each morning and two more each afternoon. Between each unit you must set aside eating time, rest time, and travel time if any. The rest time is mandatory---15 to 30 minutes depending on your energy level and what rest facilities are close at hand. Sit on a park bench and feed the pigeons or people-watch. Dawdle over a cup of mochachino frappe latte, or whatever those things are. Stretch out on any dry grass that's nearby. Above all, relax. Recharge your batteries. Then proceed to your next unit, followed by a leisurely lunch, and your afternoon program.

Only four to six hours a day doing and seeing everything? Modify the time slightly if you wish, but yes, four to six hours (not counting eating or traveling) is the limit if you want to fend off attacks by MEGO.

Younger travelers might increase their time units. Elders might want to keep them on the short side---remembering that you can't keep up a thirty-something schedule when you're sixty-something.

By the way, one of the more interesting things you'll see if you stick to your MEGO-avoidance planning is other people who didn't read this article being attacked, right in front of your very eyes. But don't approach them to explain what's happening to them. They won't understand until a day or two later.

This article supplements Chapter 3, pages 88-98 in Personal Finance. Access the textbook by clicking on the box in the right column.

TRICKY TIMING WHEN SELLING BUSINESS OR PRACTICE

2008-01-15T11:25:00.000-08:00

You've begun to anticipate retirement, and you have all your ducks in a row as far as investments are concerned. But what about selling your business or professional practice? How much will it be worth come retirement? When is the best time to sell? It can be a slippery slope.

Here is a very sad story. A good friend had a booming professional practice. He was making good money, had a fine reputation, and worked his buns off. He was getting tired. Retirement started looking more and more intriguing. He looked far and wide for the right person to take over (buy) his practice---someone who would look after the clientele properly, and would run the office efficiently enough to make payments on the debt he incurred in buying the practice.

He found someone, made a deal and went fishing. Loved it.

Uh-Oh

Alas, everything went wrong. No need to dwell on details. In brief, after almost two years the buyer couldn't hack it, and the seller had to come out of retirement and go back to work again. He needed the income from the sale of the practice to meet his needs. Either that or cut back his life style drastically.

This is not an uncommon problem. Psychology plays a major role---as retirement time nears, the more anxious the would-be retiree gets. And the more anxious he gets, the less attention he pays to detail in running the business. He's thinking "fishing," not "income and expenses." It's arguable that the value (and now we're talking cash-on-the-table value) of a business or practice diminishes as retirement day nears, all other things being equal. As one's attention drifts from profit statements to fishing trips, the business begins to suffer.

There is no easy formula to determine the exact best time to sell a business. There isn't even a hard formula. Each case has to be evaluated on its own merits. The longer you wait to seek a buyer, the more anxious, and vulnerable, you will become. On the other hand, if you project selling a few years down the road, and you take on a potential buyer as a partner, you can train him or her to keep the shop running smoothly. That's the good news. If, after some time has gone by, you find that your new partner/buyer is bad news, you're in a real quandary.

So Many Questions, But You Must Tackle Them

Then there is the equally difficult question of how much value do you personally bring to the enterprise? Do your clients/patients come to you because they are so appreciative of you? If someone takes over from you---financial questions aside---will your clientele stay with the new person, or will they flee, saying, "She's not as good as the previous one, so I'm splitting."

Every prospective buyer of your business or practice has a totally different set of credentials that must be examined. Money. Personality. Reputation. Experience. Connections. Age. Family stability or lack thereof. Debt. Good and/or bad habits. Health. And more.

Then add in the inevitable financial and legal aspects of a sale. Down payment? Ongoing payments? Interest rate on money owed? Right of seller to examine financial records of buyer? What happens if the buyer defaults (financially or in maintaining the proper operating condition of the enterprise)?

And then there's the worst case scenario. You might not want to think about it, but I have to, for your sake. It's my job. What if you had to come out of retirement to take over the enterprise? What if you found that it had been left in poor condition, financially and/or physically? How would your life be affected financially and emotionally?

Here Comes the Cavalry----Your F.A.I.L.- Safe Team

All of these issues must be examined by you, your family and your F.A.I.L.-Safe team. F for Financial---your banker to advise you on the credit conditions and needs of a would-be buyer.

A for Accounting---your accountant to evaluate the tax implications of a sale, in whatever form, and to help you analyze the ongoing condition of the business once you've gone fishing. I for Insurance---your insurance agent to help you make sure that your buyer is properly insured to protect you against insurable losses once he/she owns the enterprise. That includes hazard insurance (fire, etc.); public liability coverage; key man life insurance if your buyer dies before he has paid you off; disability income insurance if your buyer is disabled and can't work; health insurance to keep him afloat if heavy medical costs threaten what's owed you. (Your F.A.I.L.-Safe Team can also be valuable in estate planning, so use them to the fullest.)

This brief essay is only the tip of the iceberg. We'll examine specifics more closely in other posts, as time goes by. If nothing else, what you hopefully will have learned today is to get busy NOW arranging your F.A.I.L.-Safe team. The sooner they get on the case, the better off you'll be when the Big R Day comes.

This article supplements Chapter 21, pages 637-639 in Personal Finance. Access the textbook by clicking on the box in the right column.

THERE'S NO SUCH THING AS FREE MONEY

2008-01-12T09:50:00.000-08:00

The U.S. government has not done a very good job (among other things) at marketing coins. Remember the Susan B. Anthony dollar coin that looked and felt just like a quarter, which is just one reason why it never became popular. And then there was the Sacajawea dollar of a few years ago that had a similar fate. Will they never learn?

How can you resist when you're being offered free "Presidential Golden dollar" coins? That's the latest in a very long chain of come-ons meant to lure collectors and anyone else wanting a handful of free money. The full-page full color ad in my local newspaper (and, for sure, many other papers) touted it as a "free money giveaway."

Let's play a game of "The Big Print Giveth, The Small Print Taketh Away" to see just what you'd be getting if you fell for the pitch.

* The ad say that the coins are "golden," not "gold." Big difference. "Golden" refers to the color, or appearance, not to the base metal.

* To hype the supposed (in your dreams) appreciation in value of some coins, it notes that "if you had saved just one uncirculated Eisenhower dollar from as recently as 1973…believe it or not it's now worth 1,200% more today." It doesn't say "any" such coin. It says "just one." Clever wording, right? Maybe, out of the millions of those coins minted there is "just one" that has zoomed in value. But it took only about two minutes on an internet search to come up with coin dealers who would sell brilliant uncirculated 1973 Ikes for $10 to $20 a pop. That's a far cry from $1,200. If you believe what you want to believe, you may get what you deserve.

* The offering includes 2---count 'em---2 free coins. At a value of one dollar each that comes to, let's see, $2. But wait. There's more! Act within the next 72 hours and you also get a frame to put all 40 coins in, "a $231 value" for only $28, plus service and handling, of course, of $4.85, bringing your total to $32.85.

GET READY FOR THE HARD SELL

Hold on there. 40 coins? Right. The two free ones are just for starters. Four times per year for the next 10 years you will get another coin to add to your valuable collection. Oh, and how much will those additional coins cost? The nice young salesperson on the phone didn't know what the cost of each coin would be year by year. But---get ready for the hard sell---if you want to sign up right now, you can buy the whole ten years worth for the incredible price of just $162, payable at $18 per month for the next 9 months, and that includes service and handling. Add to that the $32.85 you pay for the starters, and your total cost, for 40 one dollar coins, is $194.85.

Incredible price? Do the math. It's about a 500% markup. And….AND…your name will be included, at absolutely no extra cost, in every sucker list that the promoters can sell it to. For 10 years.

Still interested? Lots of folks who don't read this article will be. For all the credibility that such ads lose because of their outrageous claims, they gain credibility because the ad was "in our newspaper." And "our newspaper" would protect us from such evils. As noted earlier, in your dreams.

This article supplements Chapter 4 in Personal Finance. Access the textbook by clicking on the box in the right column.

TWO JEREBOAMS AND A METHUSELAH

2008-01-10T11:04:00.000-08:00

About 4 million Americans travel to the United Kingdom each year, and, needless to say, London is their primary---if not only---port of call. But London has become horribly expensive in the last few years. Your travel budget might tell you to wait.

London is not just a destination in its own right. It’s also the main jumping off point for tourists visiting other parts of Europe. But London has become so expensive that you might want to make other plans in you’re going across The Pond. I say that sorrowfully, because London is my favorite city. I’ve lived there and have visited there almost every year for the last two decades. But on my most recent trip I was stunned at the prices, enough to discourage me from returning in the near future.

Getting Clipped at a Pizza Joint?

First let me give you some examples. A ride on the Underground, as short as one stop in the center of the city: $8. That is not a misprint. Eight good (?) old American dollars. (You can buy a long term pass and your trip will cost only about $3, but even that’s a shocker.) We clipped a coupon from a local paper that offered a special deal at a nearby pizza joint---buy one, get the second at half price. My wife and I each had a small pizza and we shared a small salad. One beer. One glass of house wine. The bill---after getting credit for the coupon---$52. A taxi to or from Heathrow---$100 plus tip. And there might be a surcharge for extra luggage or at night. Figure $120 plus plus for Gatwick. Are you getting my drift?

There are two main reasons for this exhorbitance. The most obvious is the weak U.S. dollar. Today one British pound will cost two U.S. dollars, give or take a penny or two. Comparison---during the many years I’ve been visiting London an average price for a pound was around $1.70, sometimes as low as $1.50. Why the upswing in the pound? Well, it’s more a downswing of the dollar, for which there are two reasons---psychological and political. You may have heard that the U.S. is having a bad time, public relations-wise, in most of the world. When we express resounding disapproval of our own government it should come as no surprise that other nations pick up on that. Uncle Sam is held in more disregard than we realize---and so echo the world’s money markets.

In terms of politics, a cheap dollar makes the products we export more attractive to foreign buyers. Thus there is pressure by U.S. exporters to keep the dollar low. Since it’s the government that has the tightest controls on the value of our currency, the political influence on pricing the dollar can’t be denied. We may never know who twisted whose arm, but you can bet that they’re selling a lot of achy-muscle-ointment in D.C. On the other hand, the cheap dollar wreaks havoc on the travel budget of Americans going abroad.

Boris Bigbucks Goes to London

The other reason for London’s costliness is simply that prices there---regardless of the value of the dollar or the franc or the peso---have escalated out of sight because of an invasion of foreign billionaires. The U.K. has a tax structure that is very appealing to the wealthy of the world: If you are not domiciled in the U.K. (that is, it’s not your permanent home) you are taxed only very minimally on any income you generate in the U.K. or bring into the U.K. That tax rate has been in the 10% range---a pittance. U.S. citizens have to pay U.S. taxes on any earnings anywhere in the world, and the rates are upwards of 40%. By hook or by crook (?) the foreign billionaires---from Russia, China, India, Iran, the Middle East, Scandinavia and other places---are able to manipulate their income so that it is all taxed in the U.K. at unconscionably low rates, leaving them with gazillions to spend freely in the U.K. And spend they do!

A domino effect takes place: Boris Bigbucks from Moscow buys a house in London, in effect saying to the real estate agent, “I want that house….here’s a check….you fill in the numbers.” It’s like play money to them, so what difference does it make how much they pay? Then all the houses in the vicinity suddenly spurt up in value, and their owners in turn become big spenders. And so it goes, spreading from neighborhood to neighborhood, from shop to shop and from pub to pub. The British government loves this because with all the wealth being spread around the government gets a nice big chunk from their V.A.T. (Value Added Tax) which is the equivalent of our sales taxes, and is 17.5%, which everyone pays.

A Hefty Methuselah

Some examples of conspicuous consumption were tallied in an Oct. 5 article in the Wall St. Journal. One stands out: in a London nightclub a customer from the Middle East recently ran up a tab of $216,400 in just one evening of partying, most of it on champagne, including a bottle of Dom Perignon in a white-gold case that cost $19,400. For one round, quoted the Journal, he ordered two Jereboams (the nickname for a huge bottle that holds four regular bottles) and one Methuselah, which holds the equivalent of eight bottles. The Methuselah had to be carried by two people, and it alone had a price tag of $61,200.

You could call this a fairy tale, but I was there and with my own eyes saw countless Rolls Royces and BMWs and Mercedes clogging the streets….Boutiques with price tags that you used to see on houses…Not-so-fancy restaurant menus that could, in a blink, soak up $200 for a not-so-fancy dinner for two (with wine, thank you very much)…Homes for Sale classified ads that offered what looked like bungalows and barns starting a million pounds (and I’m sure the photos were doctored to make the places look more appealing.)

So, dear travelers, if London is on your places-to-go list, do lots of homework and crunch lots of numbers. Your budget might dictate compromising on the type of hotel you’d stay in, on the types of restaurants you’d patronize, on the number of days you’d stay. My financial sources there speculate that prices might have hit their peak and could soon be coming down. As for the dollar strengthening, that’s a crapshoot. London is still a fabulous place, but is it worth paying an excessive premium? Pay it if you choose, but it sure takes some of the fun out of being there.

This article supplements Chapter 3, pages 88-98 in Personal Finance. Access the textbook by clicking on the red box in the right column.

SNAKE OIL SAM IS ALIVE AND WELL IN ZAKOPANE

2008-01-09T12:46:00.000-08:00

I’ve been tracking the exploits of Snake Oil Sam, the quintessential con-man for more decades than I care to remember. I’ve written and broadcast his antics time and again, and if there’s one absolute certainty in the world of money, it’s that Snake Oil Sam will always be around to separate you from your money.

“Not me!” you proudly protest.

Want to bet?

I was recently visiting Poland---a most unusual and delightful country with a history that sit-com writers would envy. ) While there I spent a few days in a charming mountain town called Zakopane (Zok-oh-PON-ee.) In the winter it’s big a ski resort, attracting Eastern Europeans like Aspen attracts Yanks. In the summer, it’s a holiday destination for families, loaded to the gills with every fun kind of carnival ride/ junk food/ strolling Smurfs/ musicians/ trained animals/ mimes and no doubt pick-pockets.

This is fertile territory for Snake Oil Sam---people out spending money, many of them with small children whose pleadings for every gimmick and gumdrop can hardly be ignored.

And it was there, strolling with my wife on Krupowki Street, the main drag of Zakopane, that I saw Snake Oil Sam pulling off the exact same scam that I had seen with my own eyes while strolling with my parents on Fifth Avenue, the main drag of New York City, decades earlier.

Some things never change: the scam works beautifully because the victims are willing to believe the impossible, and the dozens of spectators are willing to let the victims enjoy their fantasy.

Lo and Behold!

Here’s the deal, whether on Fifth Avenue back in the day, or in Zakopane, Poland, in July of 2007. Sam has a box full of paper dolls wrapped in cellophane. The dolls are the kind with accordion-like arms and legs, so that if you shake them up and down all the limbs wiggle. I’m sure you’ve seen them. There is music playing---a tap-toe dancing beat. Sam has one or two dolls out of the cellophane, and he sets them down towards the ground and, suddenly, abracadabra, he takes his hand off them and there they stand, on their own two little paper-accordion legs, bouncing in time to the music! Paper dolls! Suspended in space! Dancing!

This almost doesn’t need a spiel from Sam. The darned things sell themselves. Sam hands them over---still wrapped tightly in the cellophane---to the victims in exchange for a few Polish zlotys And, just like on Fifth Avenue back in the dark ages, each and every sucker tucks the packet into his pocket and walks away, grinning with glee until he can get it home and show the family. They even shush their kids who want to see it NOW, preferring to wait and do the big act before everyone.

Not a single buyer bothered to unwrap the doll on the spot to see if it worked. And not a single spectator (some of whom had to have figured out how the trick worked) bothered to warn the suckers in advance, or caution them after they had left the scene.

Here’s how it works. (What? You mean paper-accordion legged dolls can’t stand on their own two feet and bounce in time to the music? Come on!) I spotted the trick when I was a little kid and I was amazed at what I saw. I walked around to the back of the scammer and saw another guy, his accomplice, with his hands folded behind his back, and one of his fingers was twitching. They were standing in a darkened doorway, so you had to get to the right angle and height to see the deception. I qualified. A length of thread was tied to the twitching finger, and the other end of the thread was tied to a hook in the opposite wall. The twitching finger thus caused the thread to wiggle, and a little clip stuck to the back of the doll’s head let Sam hang the doll on the thread and bounce it’s little arms and legs off. So cute. So simple. So clever. So profitable.

As it was on Fifth Avenue, so it was on Krupowki Street.

And so it is with so many of Sam’s scams---one of which is liable to catch you on a day that you’re willing to believe the impossible and your friends don’t warn you of the consequences.

You Know What They Say About a “Free Lunch”

Here are just a small sampling of scams that involve those human frailties---they are active and thriving today, raking in millions as easily as you rake the fallen leaves.

“This FREE seminar will teach you how to buy real estate without any down payment, and sell it at a huge profit almost immediately…..”

---“This product of mother nature’s own making will help you lose 50---60---70 pounds in just weeks, without dieting or exercising. Listen to these testimonials….”

---“I am the attorney for a Nigerian princess who has just inherited $60 million, but needs the cooperation of a U.S. citizen with a bank account to have the money released to her. We will gladly pay 40% of the proceeds to you if…….”

---“Why let your money sit in the stodgy old stock market or boring CDs when you could be making extra thousands per month, SAFELY, in foreign currency markets…. precious metals….pork belly futures….home flipping….Texas Hold ‘Em tournaments…..just sign up for our series of exciting DVDs….you’ll get one per month….no salesman will call….BUT WAIT….THERE’S MORE….”

I could go on and on. But I don’t have to. Snake Oil Sam does.

Stay tuned to this site for an unending array of his scams.

This article supplements Chapter 4 in Personal Finance. Access the textbook by clicking on the box in the right column.

WE KNOW WHERE YOU LIVE

2008-01-07T11:21:00.000-08:00

Social networking websites for younger people (high school, college and beyond) like Myspace and Facebook, have been huge successes for the entrepreneurs who created them. They became fertile advertising venues, and sold for giant profits. Now the phenomenon is coming to the senior crowd. Are you ready for it?

I’m really very nervous about recommending websites. There are millions of them out there, containing probably billions of ads and offers---most no doubt legit, but the flaky ones are well disguised. You can visit a hotel, eat at a restaurant, open an account at a bank and in all these cases you can give a pretty clear and brief opinion about your experience. But a website? It can take months just to visit all the ads and links, and you’ll be on overload before you know it.

I’m the skeptic. The watchdog. The scam-scanner. Websites are great places for Snake Oil Sam to hide, to entice and to make fortunes from unwitting victim. Thus it is with great trepidation that I’m going to describe social networking sites for seniors and boomers-approaching-seniorhood.

I have spent hours reviewing a random sampling of these sites, and I come away with mixed feelings. On the plus side they do offer material that can be of value to readers. And I trust that the people who created the sites are honorable and upstanding citizens. (The fact that they may hope to make a bundle of money does not make them bad people.)

On the minus side there is, indeed, an abundance of ads, both directly from the sites and indirectly through the search engine’s advertising program. Most, no doubt, are legitimate. But I have difficulty assuming that all of the ads are from 100% trustworthy entities. There are some that definitely warrant avoidance, such as those seeking “actors for auditions to be in movies with….name your favorite celebs.” And “Writers wanted….” These are vanity ads---they appeal to your ego, and your ego tells your pen to sign a check and send it to these people, who will laugh all the way to the bank with your money. There are ads offering the services of financial advisors whose backgrounds, which require checking, are not checkable. There are ads offering travel, work-at-home plans, get-rich-quick schemes. The list goes on and on.

Caveat Emptor---Seriously
Just as with any advertising medium---newspapers, magazines, TV, radio, etc.---it’s impossible for the media to check, let alone verify, the integrity of every advertiser. All too many folks see an ad, in whatever medium, and assume that the product or service being sold must be legitimate because it appears in an otherwise legitimate medium. That’s why someone invented the important warning, Caveat Emptor---let the buyer beware. Caveat Emptor falls into the same category as the Law of Gravity and the Law of Supply and Demand in terms of eternal and universal validity.

Websites differ from the standard print and broadcast media in one critically important way---anyone can create one. There is no license required, or to worry about losing, as with radio and TV. There is no community credibility to have to establish or worry about losing, as with newspapers and magazines. Anyone means anyone. That opens the door very very widely to anyone who wants to do some flim-flam. Add to that the fact that a lot of web advertising can be very cheap, and you have the ingredients for Snake Oil Sam to whip up some tasty enticements.

What disturbs me even more than the open door is the fact that you have to divulge personal information in order to do business with an advertiser. And once that information is out there, you have no control over where it can go. Mailing lists are sold at premium prices, and if you give your personal ID one time it can show up on countless mailing lists---particularly if you have paid for something. And sooner or later, one of the nasty pitches on one of those mailing lists is liable to hit you for some big bucks.

If your curiosity compels you to explore this phenomenon, simply search “senior social networking” and you’ll have more to choose from than you can imagine. Scan them for yourselves. They may be wonderful outlets for some folks. And they maybe minefields for others. Heed the old saying, “Trust everyone---but always cut the cards.”

In no way should you construe this referral as my recommendation that you have any commercial dealings with any of the advertisers on these sites. You’re big boys and girls now. Exercise the sound judgment that comes with your years, and choose wisely.

This article supplements Chapter 4 in Personal Finance. Access the textbook by clicking on the box in the right column.

LIFE INSURANCE GOBBLE-DE-GOOK?

2008-01-04T19:18:00.000-08:00

Comparing the costs and benefits of life insurance policies is one of the trickiest problems in the entire world of personal finance. This is particularly true for senior citizens who might be vulnerable to the swift sales pitch that promises them coverage that they thought they couldn't get. Here's a case in point.

If I get these sales pitches, then certainly tens of thousands of other people do too. It's my job to help you evaluate them. This particular one bothered me. It was offering up to $10,000 of "Graded Benefit Whole Life Insurance." Now, I've been writing about life insurance for more decades than I care to remember, but I've never heard of any called "Graded Benefit," and the sales pitch described it as such time and time again.

Whatever it is, the pitch was made more alluring by these come-ons: "No medical exam"...."No health questions"...."Acceptance guaranteed"...."Premiums will never increase"....and that wonderful bit of mumbo-jumbo that was invented by the credit card hustlers: "Pre-Approved Application." (Translation: "Your application has been approved before you submit the application." Isn't that considerate of them?)

Knowing that a lot of people would fall for this diabolical word-play, I took it upon myself to phone the company---a very big one whose name would be very familiar to you*---and ask them directly. I used an example from their mailer, which said that a male in his 60s could get the $10,000 coverage for about $60 per month, or $720 per year.

So just what is "blended coverage"? Simply put, you get no insurance---repeat, with emphasis, NO INSURANCE---for two years. If you die of natural causes within two years and one day of the policy being issued, your estate does NOT receive $10,000. It receives only a refund of the premiums you paid plus a 10% kicker to your beneficiary. In other words, your estate would get back only $1,440 ($720 times two) plus another $144 as the kicker. That kicker is about what you could earn on a money market account at your bank. (If you die of accidental causes---very long shot---you are covered for the full amount from Day One.)

Where the real knife-in-the-gut hurts is with people who didn't know what they were buying, and believed that they were fully insured from Day One, when in fact they weren't. Yes, after the initial two years and a day you are covered for the amount you bargained for. But, sadly, a lot of seniors are shooting crap with the insurance company, and their survivors end up empty-handed when they thought there'd be a nice chunk of money available for whatever.

I asked the nice lady why the company didn't just say what "graded benefits" meant in the sales literature, so as not to mislead people. That's a question that answers itself. Obviously, if they said what "graded benefits" meant, they wouldn't sell much insurance. But by using gobble-de-gook instead of honesty, they lure the innocent and/or gullible into buying something whose worth is not what they think it is.

Speaking of worth, you can buy a lot more insurance for a lot less money through well-rated companies. Run a search to compare life insurance costs, and you'll see what I mean. Note well that almost all insurance comparisons involve a lot of apples vs. oranges calculations. Do your homework with the help of a respected local agent whose reputation can be easily checked.

* Remember that little asterisk in the fourth paragraph of this article? It's full disclosure time. I do not name names when referring to companies. If I say that company X is bad, you might think that all the others are good. If I say that company X is good, you might not research other companies that could be even better. Or, you might think that I am getting a kickback from company X. My objectivity is my best credential, but regretfully that means you're on your own to evaluate who you'll give your business to. Sorry about that. I point the way for you, but you're better off in the long run if you do your own research.

This article supplements Chapter 17, pages 472-492 in Personal Finance. Access the textbook by clicking on the box in the right column.

HAPPY HOLIDAYS TO ALL

2007-12-20T12:49:00.000-08:00

WE'RE TAKING A BREAK UNTIL AFTER THE START OF THE NEW YEAR. UNTIL THEN, HERE ARE SOME RANDOM THOUGHTS THAT ARE VALUABLE YEAR IN AND YEAR OUT.

---The Lord didn't do it all in one day. What makes me think I can?

---To ignore the facts does not change the facts.

---Life is like a roll of toilet paper. The closer it gets to the end, the faster it goes.

---One good turn gets most of the blanket.

---Whatever hits the fan will not get evenly distributed.

---We are all responsible for what we do. (Unless we are celebrities.)

---Artificial intelligence is no match for natural stupidity.

---It takes years to build up trust, and only suspicion---not proof---to destroy it.

---Don't sweat the petty things. And don't pet the sweaty things.

---If you pay peanuts, you get monkeys.

---Nostaligia isn't what it used to be.

---To err is human, but to really foul things up you need a computer.

---If you want to make a small fortune in the stock market, start with a big fortune.

---Life is a sexually transmitted disease.

---Under everyone's hard shell is someone wanting to be appreciated and loved.

Best wishes for a healthy and sane new year!

The Faculty and Administration of the University of Bob

THE RUPERT AGENDA

2007-12-18T10:48:00.000-08:00

No, this is not a crime story by Robert Ludlum. It’s a lot more intricate than that, and it could take years to play out. We may never know who-dunnit. Fact is, we may never even know what the “it” was.

This is a story about people and their agendas. Everyone has an agenda, and media people have them in 3D. Financial media people have them in 3D and High Definition. The personal agenda of a financial media person can have an impact on your own financial well-being.

Simple examples: Product X is made by a company that you work for, or that you have invested in, or that your company depends on for its business. A print or TV editor with an agenda can downplay or accentuate news about Product X…A radio talk-show host can steer conversations towards or away from a discussion on Issue X….An editorial writer can put Product X in a good or bad light. And so it goes. These agenda activations may be legal or illegal, moral or immoral. They are difficult to spot, and even more difficult to prove. But make no mistake, they exist like oxygen in the air exists.

Conflicting agendas are common in all walks of life and in all facets of the financial world. The “market” has its own ways of reconciling conflicting agendas, sooner or later. Just hope you’re on the right side until the conflict is reconciled.

Rupert Murdoch has finally closed the deal on his purchase of the Dow Jones Corporation, and its jewel in the crown, The Wall St. Journal, for some $5 billion. Rupert has worldwide media holdings. The London Times and The Fox Network are but two of the higher profile ones. The New York Post and the Daily Sun in the UK are but two of the lower profile ones. The Post thrives on bombast and gossip. The Sun’s claim to fame, aside from having the highest circulation in the UK, is their daily featured photo of topless “page 3” girls. All part of The Rupert Agenda.

Rupert’s purchase of the Journal now gives him ownership of one of the pre-eminent financial publications in the world (The Financial Times and The Economist, both published in London, are arguably better.) And how might the Rupert Agenda---pro or con on this or that---affect your own personal financial decisions, for better or for worse?

What will The Rupert Agenda be? First, anyone who spends $5 billion on something that may be worth only $3 billion has got to have some fierce agenda to validate his investment. Dow Jones stock had been selling for about $35 a share before Murdoch made his offer of $60 per share. What was he thinking?

Murdoch’s track record in other acquisitions has been on the nasty side. One prime example is The London Times. Despite promises that he would leave it editorially intact, he converted one of the world’s finest (though financially bereft) newspapers into a tabloid with a growing emphasis on the old journalistic mantra, “If it bleeds, it leads.” Part of The Rupert Agenda there, without doubt, was to turn red ink into black ink.

In his negotiations with the Bancroft family who controlled the voting stock in Dow Jones, he reportedly promised that he and they would work out some committee arrangement which would give the Bancrofts major clout in choosing top brass for the Journal. The Bancrofts wanted Rupert’s money, but not his say in how the paper was to be run. The Rupert Agenda, needless to say, is to control the paper from the very top on down. How long will that committee compromise last? Don’t hold your breath.

In a more serious vein, The Rupert Agenda involves more than trying to make a buck on the Journal. He has launched a financial TV network via his Fox holdings. That could combine powerfully with the Journal’s editorial assets. He is known to speak his mind on political issues---sometimes from his own mouth, sometimes as a ventriloquist with his editorial people. The Journal gives him another outlet, one very high on the credibility and integrity scales.

News vs. Opinion---Can You Tell the Difference?

The Journal has long been known to be excellent at its news gathering and reporting. While its slant is, of course, on business, it covers a wide spectrum of life, and it does so with the highest standards. It gives extensive coverage to consumer concerns, arts and cultural interests, medical and legal issues and much more. As such, it has been a bible for me for 40+ years.

On the other hand, its editorial pages are notoriously far on the right edges of our political spectrum. That’s its privilege of course. No one who reads the Journal’s news stories is required to read the editorial pages.

Given the new breadth to Rupert’s holdings via the Journal acquisition, The Rupert Agenda might be to play a bigger role in the political arenas. That can be done subtly and effectively by tweaking the editorials and by giving more or less access on the op-ed page to those who favor or disfavor his Agenda, respectively. Old columnists and op-ed contributors fade away, and new ones replace them. Simple enough. Do you suspect that Rupert’s purchase of the Journal was in any way connected to the beginnings of the 2008 elections? Coincidence?

Ditto for The Rupert Agenda in the financial world: Certain companies and institutions get better access and positioning to tell their stories on the Journal’s pages, and some get shut out, or shunted to the bottom of page 57. The companies that make up the Dow Jones averages can be changed. Some companies and/or industries get praised in the opinion section, some get hack-sawed. Good earnings announcements can get prominent placement, or minimal. These are all ripple effects of an agenda, and they can all affect investments, employment, profitability and image of virtually any or all American companies.

Of course, such agendas have been at work for many years by the departing owners. We won’t know until The Rupert Agenda has taken effect whether it’s better or worse than the departing agendas.

But all those who rely on the news and opinions found in the Wall St. Journal must become super-vigilant and somewhat cynical. You owe it to yourself to explore other sources of financial information (realizing as you do that those other sources also have their own agendas), rather than rely solely on the Journal, if that had been your habit. What you used to take as gospel in the Journal you now must take as propaganda, at least until you feel you’ve safely discerned how The Rupert Agenda might affect you. And note well, part of The Rupert Agenda will be to tell you, in as many ways as possible, that you can believe in and trust Rupert’s Agenda.

[Full Disclosure---My agenda: I am very concerned that too much media power can reside in too few people, and the public at large is not alert enough to sense the impact of that. The Murdoch takeover of the Journal, coupled with its presumably being blended into the Fox Business Channel, presents a potential danger in slanting business news unfairly. I’ve spent decades in the media---all forms, radio, tv, newspapers, magazines, lecturing---and I shall use my experience and instincts to track The Rupert Agenda and keep you informed of how it can lead you into places you should be avoiding.]

BANKS THAT IGNORE THE MISTAKES OF THE PAST ARE DOOMED TO REPEAT THEM----INTRODUCTION

2007-12-16T13:18:00.000-08:00

The three postings after this comprise a three-part series on the chaos in the financial industry, mostly arising out of home loan abuses. They are written in plain English---not the jargon that you usually find in financial articles. It will pay you to become familiar with this mini-history of financial folly, because it will happen again, and if you see it coming you can best protect yourself. The series of articles supplements Chapter 11 in Personal Finance. Access the textbook by clicking on the box in the right column.

BANKS THAT IGNORE THE MISTAKES OF THE PAST ARE DOOMED TO REPEAT THEM----PART ONE

2007-12-15T12:16:00.000-08:00

A MINI-HISTORY OF FINANCIAL FOLLY

About 25 years ago America’s lenders made such a gigantic industry-wide goof that it took hundreds of billions of U.S. taxpayer dollars to rescue the nation. Most of the boys and girls who are loan officers today were still awaiting puberty then so they wouldn’t remember the trauma that the nation suffered. Give yourself some time to read this three part series. It will help you understand the crazies in our financial markets.

Now they’ve gone and done it again. The numbers will differ, and a different group of people will be hurt, but here we have another shocking reminder of how undisciplined the financial industry can be. Let’s review the history, because it will repeat itself yet again, and you’d best keep the lessons thereof in the back of your mind.

Going into the 1980s almost all home loans were made by financial institutions: banks and those formerly known as “savings and loans,” or S&Ls. S&Ls were the biggest players. The more deposits the banks and S&Ls could attract, the more home loans they could make. Investors were willing to deposit their money in banks and S&Ls because they knew that up to $10,000 was insured by the U.S. Government (Federal Deposit Insurance Corp. For any amount over $10,000 the depositors relied on the lenders’ expertise in making loans that would be paid off properly. If the lender made bad loans that weren’t paid off properly---uh oh. The depositors would want their money, and the lender wouldn’t have it.
.

The $10,000 coverage protected most all of the small depositors, but not the big depositors----those with hundreds of thousands, and more, to invest. So those Fat Cats invested their hundreds of billions elsewhere, such as with Uncle Sam himself (U.S. Treasury Bills, Bonds and Notes) or with big corporations (corporate bonds.)

Here Comes the Clout

Enter the Construction Industry, particularly the Home Builders division. They wanted Congress to increase the amount of deposit insurance so that more people would deposit more money with home loan providers such as S&Ls, so, in turn, more people would buy more houses. Simple enough logic, right? The builders wanted to get their mitts on those billions of dollars that were being invested outside the home loan arena.

Bear in mind that the home builders had a lot of clout. In addition to their own companies, a huge chunk of American industry profited from home building: lumber companies, carpenters, brick-layers, electricians, telephone installers, carpet retailers, appliance dealers, and on and on. And lots of those people would vote and make campaign contributions along the same pathways that their money came from.

Congress responded to the pressure by increasing the amount of deposit insurance from $10,000 per account to $100,000! Big jump. Now the lenders could be more liberal, lots more liberal, in making loans. The lenders knew that Uncle Sam would step in to protect deposits of up to $100,000, so if some bad loans slipped into their books, not a problem.

In those days, $100,000 could buy a pretty fine home in almost all of the country. And the lenders started having a field day. People who otherwise might not have been able to get home loans suddenly found themselves being hustled by the lenders, who now had little worry about making less-than-safe loans. (“If this loan goes bad, no problem. Uncle Sam will make sure the depositors get their money when they want it.”) Loans that otherwise might have been turned down were being made. The lenders were reaping a fortune. And, lo and behold, they found that they could sell a lot of the loans to other investors and keep the loan origination fees for themselves, and let those who bought the loans worry about getting the payments promptly.

Getting Sloppy

The experienced loan officers---those who knew how to make a safe and proper loan---were swamped by the applications. To speed matters up (and increase the flow of income) the lenders hired loan officers who weren’t sharp enough to know a good loan from a bad one. The lenders said, “Don’t worry if the appraisal of the property isn’t high enough---we can fudge it if we need to.” And “Don’t worry if the borrower’s income isn’t high enough to warrant making the loan.” And “Don’t worry if the borrower’s credit history is spotty. Just get the loans on the books, grab the origination fees, sell the loan to some other hungry investor, and move on to the next deal.”

You can guess what was about to happen. And remember---we’re back in the 1980s, not the present day.

The next deal, it turned out, was not another home. It was a shopping center. Or an office building. Or an indoor skating rink. Or a fast-food eatery. Or whatever. The big bucks weren’t in houses. One strip-mall shopping center mortgage equals ten home loans, and it doesn’t take that much more work to do a shopping center loan than it does to do one home loan. Or so they thought.

Problem was, the lenders were clueless as to how to make safe and proper loans on commercial buildings. Even the ones who were skilled in making good home loans didn’t know the fine points of making good commercial loans. Aside from the basic construction elements, commercial properties required careful analysis of tenants, leases, building and safety regulations, insurance (particularly public liability), and lots more.

Greedy borrowers lied to greedy lenders. Greedy appraisers lied to greedy loan committees. Greedy stockholders of the banks and S&Ls looked the other way. And before you could say “Catastrophe!” the whole lending industry was near the edge of going under. A plague of bad loans bankrupted hundreds of lenders, who walked away unscathed and unpunished because the U.S. Government was writing checks to the depositors for up to $100,000 to bail out the lenders by paying off their otherwise defunct deposits.. Pardon me. The taxpayers of the United States were writing checks to cover the otherwise defunct deposits. It cost Mr. and Mrs. America hundreds of billions of dollars to bail out the depositors---many of whom, of course, were themselves. It didn’t cost as much as the Iraq war, but in terms of 1980-90 dollars, it was close.

Virtually all of the S&Ls closed. Many of them were absorbed by still healthy banks. Many just fired their employees and shut their doors. It was a debacle of extreme proportions. Ripple effects caused a stock market crash in 1987. The housing market was in turmoil: prices plunged and didn’t recover until the early 1990s. Builders and realtors, and all their employees, were clobbered. Hundreds of thousands of families who had bought homes with mortgages that they really couldn’t afford had to endure foreclosure, eviction and their own bankruptcies.

As all of this was happening, news reports told the stories fairly accurately. The storm was clearly visible on the horizon, but nobody, nobody, did anything about it. Not Congress. Not the banking industry. Not the home-building industry. And certainly not the individual families who were buying dream-houses they thought they never could afford. Everyone was too happy with the cash flow.

When the storm subsided, everyone, everyone, said, “We can’t let this happen ever again!” And it didn’t. At least not for about 15 years.

Tomorrow---Part Two: History Repeats Itself

BANKS THAT IGNORE THE MISTAKES OF THE PAST ARE DOOMED TO REPEAT THEM----PART TWO

2007-12-14T12:06:00.000-08:00

A MINI-HISTORY OF FINANCIAL FOLLY, continued

Now here we are again in 2007-08 facing the same greedy borrowers, lenders, appraisers, realtors, builders and stockholders. In the 1980s it was called the “Savings and Loan Bailout.” Today, how does “The Sub-prime Mortgage Disaster” sound?

DEJA MOO?

The script has been rewritten somewhat, but the consequences can be just as traumatic. It’s Deja Moo----I think I’ve heard this bull**** before. This time around, there is no safety net. In a worst case scenario, the housing industry, the financial industry and the tens of millions of people whose jobs depend on them will feel the squeeze.

Think of it as a nation-wide Enron: jobs lost, pension evaporated, investments disappeared. The guilty parties in the Savings and Loan Bailout got slaps on their wrists, and were told, “there there, don’t do that again.”

“There, there.” What a fearsome punishment. Don’t you just hate it when someone tells you, “there, there.”

The bad boys stood in the corners for some years, and as quick as they could devise new twists in the lending game, they were back at their posts. Only this time, unlike the 1980s when their misdeeds were covered by Uncle Sam’s deposit insurance, now they were playing with Real Money. No bail-outs. No cavalry to the rescue. If you messed up---as so many did---you lost your job, your home, your investments.

This new 21st Century banking mega-goof involved making bad loans and then selling the IOUs to middleman packagers who bundled lots of loans together in “pools”, then sold the pools to big-time Wall St. investment banks, who then sold big chunks of the pools to mutual funds companies, who finally sold small chunks of the big chunks to…..guess who…..you and your friends and neighbors and relatives and pension funds.

Complex? You bet. But let’s put some names on the players and it might help you understand why it’s going to be so complicated and costly to unravel the whole mess.

HERE COMES THE GOBBLE-DE-GOOK---BEAR WITH US

You’re Boris the Borrower. You want to buy a home, but you have peanuts for a down payment, your credit history stinks and your income is from odd jobs every now and then. Buy a home? Not in this lifetime.

Then you see an ad on TV: Ladbroke the Loan Broker is offering home loans to the poor, the hungry, the homeless---and at an interest rate of just one percent per year! A phone call to Ladbroke gets you involved in making an application on the phone. No obligation!

You’re an honest fellow, Boris. You tell Ladbroke that you don’t have any money for a down payment. “Not to worry,” says Ladbroke. “And my credit stinks.” “Not to worry.” “And my income is quite irregular.” “Not to worry….go and find a house you want to buy and get back to me.” You shop around and see your dream house: $150,000.

The house is owned by Selma the Seller. $150,000 boggles your mind, but then Ladbroke sends Applebaum the Appraiser to drive by the house and give him an appraisal. “$200,000, minimum!” says Applebaum, gratefully folding the hundreds that Ladbroke has slipped him and sliding them into his pocket. “Call me any time.”

Ladbroke can’t verify Boris’s income from work, so he just writes “$50,000 per year” on the Income line of the application, and Boris signs off on it. The loan application is approved for $160,000----$10,000 more than the purchase price of $150,000 (“Remember,” Ladbroke tells Boris as he pockets the extra $10,000 as his fee for arranging the loan, “We told you that you didn’t need a down payment.”)

Boris pays Selma the $150,000 in cash, and she splits. If by chance Selma took back any IOU from Boris for any part of the price----as is often the case----she has to pray that Boris doesn’t flake out. Ladbroke now owns an IOU from Boris, with the house as collateral, for $160,000, $10,000 of which he has already put into his pocket.

Boris is so thrilled he doesn’t read the small print in the loan agreement. And even if he had, he wouldn’t have understood the legal gobble-de-gook. So he glosses over the sentence that says, “The interest rate shall be one percent per year for the first 30 days of the loan, after which it will be adjusted to 14%.”

Boris is so happy that his monthly payment will be a slam-dunk $125 (for the first month) that he’s numb to any other data. The standard going interest rate for good quality loans at that time was about 7%. A good loan means that the borrower has good credit and good income, and the house is worth at least 10% to 20% more than the amount owed. Because of all those good qualities, such a loan is known as a Prime Loan. Take away those good qualities and the IOU becomes a “Sub-prime” loan, a name which will live in infamy.

Boris settles down in his new house and make his first monthly payment of $125. When he is notified that from the second month onward his payment will be $1,750, he goes into cardiac arrest.

THE PLOT THICKENS

Meanwhile, Ladbroke has taken Boris’s IOU to Home Sweet Home Financial Corporation (HSH) and offers to sell Boris’s $160,000 IOU to HSH for $160,000. At that same time, Ladbroke also sells HSH another nine iffy loans he has arranged from other borrowers, totaling $1.5 million, and from which Ladbroke has pocketed over $100,000 in origination fees.

Why would HSH buy Ladbroke’s loans---including Boris’s? They’re getting a high-interest rate loan on their books and they didn’t have to go through the whole application/ appraisal/ legal/ accounting processes, which would have cost them thousands of dollars.

The whole $1.5 milllion package of loans that HSH bought from Ladbroke will generate $210,000 a year of interest once the 14% rate kicks in. If HSH had loaned $1.5 million at the standard rate of 7%, their interest income from that would have been $105,000 per year. So in addition to cutting their expenses, they’ve given a huge boost to their income.

Further, as icing on the cake, Ladbroke gives a personal written guarantee that if any of the loans go into default, he, Ladbroke, will buy them back. Sounds good, but what if Ladbroke turns out to be a flake? (Details at 11.)

All of this lending activity is fed by a crazy housing market---prices are going up faster than realtors can change their listings, and as the prices go up, so does the rush to buy before prices go up even higher. The extra-easy availability of home loans, in turn, feeds the buying frenzy.

Now things get a bit tricky---to say the least. HSH bundles those 10 weak loans, plus a number of stronger ones, into a package they call “a collateralized debenture.” The bad loans are somewhat balanced by the good loans, and the high interest on the bad loans give some extra star-power to the whole package.

Because of the bad loans, the package is inherently weak (“…a chain is no stronger than its weakest link…”) but HSH has dressed it up to look like a quality investment. (And let’s not forget Ladbroke’s personal written guarantee, which by now has been written up to sound like a warranty from heaven.) A securities analyst (who doesn’t examine the portfolio as closely as it should, or looks the other way) gives it an A rating---instead of the B or C it deserved---high enough to appeal to big investors.

Personal Security and Prosperity Mutual Fund Company (PSP) is just one such big investor. They negotiate with HSH to buy the Ladbroke package for $1.3 million---a $200,000 discount from the face value. Why would HSH part with that collateralized debenture for a $200,000 loss? Two possible reasons: 1) HSH has begun to smell something rotten in the loan portfolio, and they want to get out while the getting is good. And/or 2) interest rates have climbed even higher, and HSH can now invest that $1.3 million at 16% and earn $208,000 per year instead of $182,000 at a 14% return. Plus, when the mortgages eventually are paid in full, they will have taken in the full $1.5 million plus interest.

Yes, this higher rate investment is more risky, but to HSH that’s the name of the game. “A turtle never gets ahead until it sticks its neck out.” PSP is now going to blend the HSH debenture into its various mutual fund groups and sell shares to the public.

The glowing sales literature for the mutual funds holds out the “hope” that investors will earn 6% per year, which is a good return at that time. PSP will charge investors a 5% up-front loading fee and a 1% per year management fee. An investor who carefully studies the PSP prospectus to see where his money is being invested will see dozens and dozens of stock, bonds and other securities, among which will be an “an A rated collateralized debenture” from HSH in the amount of $1.3million. Looks good. What’s to worry about?

BLINDED BY GREED---SO WHAT ELSE IS NEW?

This story, and millions like it, represent quintessential greed run amok. Everyone in all these daisy chains of mortgages is counting the profits that they hope to be reaping down the road. And nobody, NOBODY, is paying any attention to the warning signs that something really bad is about to happen. Nobody, NOBODY seems to recall the Savings and Loan Bailout of barely 20 years ago.

What now? Now Boris defaults on his loan. Poor guy, he really worked hard to make the payments, but $1,750 per month was beyond his reach. Boris tries to reach Ladbroke, whose number is no longer in service. Boris is evicted, the mortgage is foreclosed and PSP, via HSH, now owns an empty house, which they can’t sell because the whole town is filled with Borises, and there are no buyers, just evictees.

Matter of fact, all ten of the loans that HSH bought from Ladbroke are delinquent, and HSH then has to tell PSP that there’s a problem. Word leaks out to the media that PSP has some serious problems in its portfolio, particularly the mortgages that they had bought from HSH. Before you can blink, investors who own PSP shares want to dump them as fast as they can. The shares fall from $10 to $8 to $6. Every month there are reports of more bad loans in the PSP portfolio, and the shares drop even further.

CASUALTY COUNT

PSP is in trouble.....Banks that have loaned money to PSP are very worried...... Shareholders who own stock in PSP or any of its 24 other mutual funds are worried.....The pension plan manager at your job, who has 10,000 shares of PSP invested for workers’ retirement is worried......HSH has already gone out of business because its credibility has been totally destroyed and 7,563 employees lost their jobs......Ladbroke has moved to Florida where he sells used Saturns at a Tallahassee dealership (Surprise?).....Housing prices in most major American markets fall by about 10%, leaving countless families owing more on their mortgages than their homes were worth.....New home starts drop like a stone, putting tens of thousands of construction workers out of work.

Things aren’t much better in the used home market, thus idling thousands of real estate agents across the country.....Banks became super-cautious regarding new home loan applications, so countless would-be home buyers have to look at much tighter credit scrutiny and higher interest rates....Stock prices for lenders and home builders plunge, and investors in general, spooked by the fear of the plunge spreading into other industries, flee the market.....

And Boris? He’s back to Square One: Poor, hungry and homeless. This, in a rather large nutshell, is the Sub-Prime Mortgage disaster.

Tomorrow: What Does All This Mean to You?

BANKS THAT IGNORE THE MISTAKES OF THE PAST ARE DOOMED TO REPEAT THEM----PART THREE

2007-12-13T12:01:00.000-08:00

YOU CAN RUN BUT YOU CAN'T HIDE

Now, you may be asking, what does all this have to do with you?

--- If you owe money on one of these mortgages---the kind where interest rates can change periodically, upward as well as downward---be prepared for an increase in your monthly payments. Even though interest rates in general might go down around the country, some of these diabolical mortgages have clauses in them that can boost their rates while other rates are going down. If you’re not sure if that is the case with your loan, check with your lender.

--- If you’re in the market to buy a home or condo within the next one to three years, be ready for a more-than-tough scrutiny of your credit history, your income and debt situation and the true market value of any house you’re thinking of buying.

---If you’re thinking of investing in any mutual funds, carefully scrutinize how the fund has its money invested. They are not going to advertise that they have an excess of sub-prime mortgages waiting to default. Many of these born-to-be-bad loans are cleverly disguised as well-rated corporate bonds. This is not science fiction. Many big mortgage companies have already gone bust. Many big banks and financial institutions have had to absorb huge losses, some in the billions of dollars.

The casualty list includes a lot of foreign banks, making one ask, “How could they have gotten suckered into putting money into complex American scenarios that were far beyond their normal scope of understanding?” They were sold a bill of goods on these sub-prime deals by a band of roving salesmen from the U.S., pitching the deals to all who were gullible and/or greedy.

Unraveling the loan packages to determine the ultimate outcome of who gets what may take years to determine. “The Sub-Prime Mortgage Disaster” will be a Chapter Title when the history of the early 21 century is written.

As this is written, it’s too early to tell how far the ultimate fallout will reach. Lawyers will have a field day. Remember Ladbroke’s guarantee? These deals were loaded with guarantees and buy-back clauses and recourse positions and other things that the lawyers are so good at making up. Cutting through the jungle will cost more in legal fees than can be recovered. But there will be those who’ll try nonetheless.

Of course, one important way that major harm to borrowers can be avoided is if the lenders themselves take a sympathetic approach and work with the borrowers to help ease their payment crunches and facilitate refinancing as and when practical. This will make the banks’ stockholders unhappy. But that’s a relatively small price to pay to keep the markets stable. Will the lenders take such a sympathetic approach? Hard to say. It often costs a bank more to foreclose a property and fix it up for resale than the actual delinquent payments total. In other words, they might well be better off letting the owners of the homes stay there, making whatever payments they can, rather than foreclosing and dumping innumerable houses into an already glutted market.

Also, the governments (state and/or federal, wisely and/or unwisely, or any combination thereof) have made moves to regulate interest rate increases, lenders and loan brokers. Many borrowers were conned into signing up for loans that they didn't understand. And there are arguments that borrowers who were greedy enough to falsify facts on their applications shouldn't be given government protection. Only time will tell who gets what protection from whom. And until time tells, you must be careful in shopping for a home loan, and in making any investments that have sub-prime loans (hidden or otherwise) in their portfolios. Stay tuned at this site for updates as they occur, as they can affect you and the economy as a whole.

HOW MANY FORECLOSURES DOES IT TAKE TO MAKE A PANIC?

2007-12-08T18:12:00.000-08:00

I haven't seen or heard a news report in weeks (months?) that doesn't blabber on about the shocking number of foreclosures sweeping the nation. Frankly I'm getting quite bored with it all, mainly because it's yet another case where the media's right page doesn't know what the left page is saying. How about adding a dose of common sense to the pot?

There they go again, shouting fire in a crowded theater. The more "foreclosure" headlines there are, the more people start foreclosure proceedings. It's a self-fulfilling prophesy, and one that can only bring chaos.

Why are there so many more foreclosures this year than there were in 2006 and 2005? Because in 2006 and 2005 people were just getting the loans (many of which were very ill-advised) and they hadn't had enough time to become delinquent on their payments. That's why!

The home loan industry was acting like spoiled brats stealing apples from a fruit cart. But instead of stealing apples they were making questionable home loans. The leader gets away with one. Then he comes back with some friends and they get a handful. Then comes a whole gang, and they rip off the whole cart. And they don't get caught until their pile of stolen apples/ bad loans starts to rot, and they are smelled out.

Little by little, starting earlier in this decade, some aggressive lenders asserted that they could make loans to people with poor credit histories, and they would prove to be perfectly good debtors, thank you very much. Of course, there are huge numbers of borrowers who always make their payments, even if they have to scrape by and sacrifice. Many of them couldn't buy homes because of their poor credit, and in many cases that was a shame.

When Hungry Borrowers Meet Greedy Lenders
The aggressive lenders started to pay less and less attention to credit histories and to borrower's income and appraisals. The hungry borrowers were so eager to get the loans that they agreed to pay extra fees and higher rates of interest. And the aggressive lenders were off to the races. They had struck gold, and they mined it furiously.

In short order---barely a few years---the aggressive lenders had all but abandoned even the most liberal standards, and they were making loans that were doomed to go bad. As noted earlier, it takes a while for even a shockingly doomed loan to go bad. The first few payments are made on time. Then they start lagging in, and the lenders gives them some extra time. Then the payments become nervously overdue. Then the nasty letters start threatening. Then a few payments are made to catch the borrowers up, and the delaying game starts all over again. It's amazing how two years can whiz by as this dance of doom plays on and on.

That brings us to 2007, and the press is roaring about the foreclosures and the bandits who allowed it to happen. Where were these indignant newsies when the manifestly bad lending standards were infused throughout the industry? Why didn't the reporters report the bad stuff then? Could it be because the naughty mortgage lenders were spending a lot of money advertising in those very same media? (Ohhh nooo. That couldn't be. Could it?)

The Foreclosure Industry
Emboldened by the media coverage, foreclosure mentality swept across the land. People who otherwise would have worked their butts off to make their payments started getting wooed by "mortgage workout specialists" who offered ways to avoid the shame and scorn of being foreclosed---for hefty fees of course. Check out "foreclosures" on a search engine. Today, in a nanosecond there were over 33 million sites listed! Seminars. Books. Refi programs. Counseling. All too many of them scams that would just make things worse for the beleaguered borrowers.

People who never would have abandoned their home started hearing how others walked away from big mortgages and, having made little or no down payment, just snubbed their noses at the lenders. So those honest hard-working folks get caught up in the "what have we got to lose" game.

The momentum built, and now we're in Foreclosure Hell. The huge pile of bad loans turned rotten. Some of the aggressive lenders have cut back on their hard-charging tactics, but many are still out there pushing the deals of a lifetime. So the storm is yet to subside. The financial markets are in turmoil. Investors are getting burned. Home values in many areas are plunging. Many neighborhoods are blighted by vacant foreclosed homes. Governmental efforts to bail out borrowers will help only a small fraction of the total.

Want a happy ending to this sad story? Sorry. Not this time. Maybe in a year. Or two. Or three. Stay tuned.

FANNING THE FLAMES OF THE CREDIT CRISIS

2007-11-30T17:47:00.000-08:00

Why can’t the financial media tell the whole story, and tell it accurately? Reporters, headline writers and editors often react to the raw news of the moment, giving too little perspective to matters that seriously need lots of perspective. The result---investors and home-owners get needlessly see-sawed, and intelligent decisions are harder to make. Sound familiar?

Headlines have been all but screaming lately that housing prices are X% lower than they were last year at this time….that home sales are at their lowest level in Y years…that there are Z% fewer mortgage lenders now than a year ago. And on and on.

What the articles do not say is that housing starts a year ago were extraordinarily high, thus a drop-off from last year to now should have been foreseeable.

---That home sales a year ago were off the charts, so its perfectly normal for the volume to drop in what has always been a traditional cyclical market.

---That a year ago there was such an excess of mortgage lenders floating around it’s no wonder some of them have failed, as businesses often do when there’s too much competition.

So it should come as no surprise that the flood of “bad” news upsets the markets, and the ripple effects are felt all across the land. I don’t mean to minimize the problems (and I have and/or will explain them in past and future blogs.) There are serious problems out there in Credit and Borrowing Land, and lots of people will be impacted by them. But know well that the problems are made worse by shoddy media treatment.

What I want to make clear to you is that many media outlets---for lack of experience, proper research, common sense, reasonable restraint or any/all of the above---are shouting “fire” in a crowded theater. (Many years ago the U.S. Supreme Court mandated that the freedom of speech does not extend to shouting “fire” in a crowded theater. No argument on that point.)

Not only are they shouting “fire.” Many of them are pouring gasoline on the fire. Stories abound of banks supposedly in trouble because fearful depositors are running to withdraw their money. These stories are made more frantic by scary headlines, by pictures of customers standing in lines, by repeating worrisome quotes, and by using inappropriate headline words like “bankrupt,” “collapse,” “failure” and the like.

Of course, to compare this year’s numbers with those of the past would take extra work---checking old files and doing things like arithmetic, which is not part of the newspersons job description.

But the fact is that almost all of the necessary information regarding the health of financial institutions is available, for the present and for the past. Failure to set forth the appropriate background and perspective on a financial story cannot be excused by “lack of information.” It’s lack of research that’s the culprit.

Publicly traded companies (such as banks whose stock is traded on one of the exchanges) must make their financial details known to the federal Securities and Exchange Commission. Non-public companies (including smaller banks and lenders) are licensed by the state and/or the federal government, and their data is thereby available to the public. Even real estate people are regulated by their state government, though this protection is varied and enforcement procedures can be lax.

Recall the old saying in broadcast and print newsrooms: “If it bleeds, it leads.”
A story that instills shock or fear is going to get a lot more attention than a story that says, albeit accurately, “things aren’t as bad as they might seem.” And face it, we’re so accustomed to being shocked and frightened that we might have lost the ability to discern scary stuff from solid in-depth reporting.

Good financial reporting---ever more important in today’s world of 401k plans and IRAs---is a rare commodity, particularly in markets smaller than New York, Los Angeles, Chicago, Philadelphia, Boston and similar megalopoli. Here are some reasons why:

---Financial reporters and editors usually come by their jobs through other positions at their paper or station. They don’t come from MBA schools. They are reporters who may have, most recently, been doing movie reviews or police blotter stories or local school board coverage. That doesn’t make them bad reporters. But it certainly doesn’t endow them with the kind of knowledge needed to correctly analyze and properly report stories that can impact people’s financial well-being. You don’t want to get important financial news from someone who’s getting on-the-job-training. But you may not have any choice unless you seek out broader views in other available media.

---Financial reporters don’t hang around the financial desk for very long. It can be boring and career-stifling for the wrong kind of personality. There’s not much exciting you can say about a stock dividend or an annual report, and you’d rather have lunch with a local celebrity than with a CEO. Those who do hang around can get to be quite good at their jobs.

---Financial reporters are inundated with press releases (in print and on video), phone calls from publicists and invitations from corporate suits. All the better to influence what the reporters write. Everyone has an agenda, but even the most intrepid reporter can be swayed by persuasions, subtle or otherwise. When you next read or hear a business story in your local media, ask yourself how the reporter’s views might have been influenced in the course of his/her research.

---Financial reporters are just like all other reporters in one particular aspect: they crave seeing their byline attached to a “big” story. That means bragging rights in the newsroom, a faster track to higher pay, more juicy assignments, and a most stimulating ego massage. If a small or dull story can be made “big” by the right choice of words---be they correct or not---it’s tough to resist the temptation to go for the “big.”

Who knows how this recent credit-housing-mortgage crunch might have unfolded if the news reports had been more restrained, more researched, more reflective? One thing we will know for sure is that crises like this one will recur again, and again, and again. I’ve been around long enough to say, “Will they never learn?” And I’m afraid “they” won’t.

(Full Disclosure: I wrote a nationally syndicated newspaper column for eight years and spent nine years in the newsroom of a major market network-owned television station. High journalistic standards were almost always trumped by the “if it bleeds it leads” mindset. We, the public, are the worse off for that. Too bad. Don’t hold your breath waiting for a change.)

TIGHT FLIGHT CONNECTIONS---BEWARE

2007-11-15T10:04:00.000-08:00

When you book a flight that requires a connection, the agent (or airline website) will likely offer connections that give you an hour or less between flights. Book that at your own risk. Never could that advice be more important than during the upcoming holiday season.

It has long been standard practice for airlines to consider as little as 45 minutes as a legal connection time between flights. In these days of security searches and wayward baggage, you are likely to be left standing at the departure gate if that's all the time you have.

Particularly in larger airports, where arrival and departure gates can be quite a distance from each other, I recommend that for any flights you book that require connections you should allow AT LEAST FOUR HOURS from the time the first flight arrives until the connecting one leaves. That's right, four---count 'em---four hours. Even better---six hours.

I've recently had connecting flights at four of the world's biggest airports---and they're ones you're likely to be using if you have any trans-Atlantic travel plans in your future: LAX, JFK, Chicago's O'Hare and London's Heathrow. I wouldn't risk a connection time of less than four hours in any of them.

Door to Door?

In a perfect world (which we're a long way from) your arriving flight will be just a gate or two away from your departure gate. You hop off the plane before anyone else, skip 10 or 20 yards, and jump into your departing plane. Meanwhile, the baggage handlers down on the ground see your arriving baggage first and shuttle it right onto your nearby departing flight. 45 minutes? A piece of cake.

But in the real and imperfect world, this is a more likely scenario: At any of the four above airports, or dozens more that you might be connecting through---domestic and foreign---your arrival gate and your departure gate might be half a mile or so apart. (The airlines have no clue as to which gates you'll be arriving at or leaving from until shortly before scheduled landing or take-off. Those gates are assigned depending on aircraft ground traffic at the airport.) First of all, your arriving flight has to land on time. That 45 minute connections does not take late arrivals into account, and more and more arrivals are getting later and later.

Then, depending on where you're seated on your inbound flight it can take 10 to 20 minutes just to get off the plane! Then, if the concourse is crowded---a common fact in most airports most days---you'd have to do some creative broken-field running to get to the departing gate within another 10 to 20 minutes. So all of the tea-leaves would have to read in your favor to make the connection. One slip and you're stranded. And that's just for you personally, on a domestic connection and in a single terminal building. Your baggage is a whole 'nother matter, and rest assured that the baggage handlers do walk, not run, from one plane to another with the outgoing luggage.

If your departing flight is in a different terminal, as can be the case in all four of the airports mentioned earlier, you have to face the daunting task of getting from Terminal A to Terminal B in record time. You still have to get off the first plane and dash to wherever the inter-terminal shuttle is, then dash from the end of that little ride to your departing gate. 45 minutes? That piece of cake has long gone stale.

And don't think the problems don't exist with smaller airports. I've also been in and out of Pittsburgh, Las Vegas, Philadelphia and San Francisco recently, and the distance between gates in all of those airports can be challenging to all but the hardiest cross-country runners.

International Connection? You Might Want To Pack a Lunch

The dilemma multiplies exponentially if you're making an international connection from one country to another. Add to all of the above tasks the requirement that you collect your baggage, take it through incoming customs, stand in line to get through incoming passport control, get to the departure terminal and go through security again before you can board your connecting flight. If it's a busy day---and most are these days---all of that connecting activity can easily take up to two hours. If it all takes place in a single terminal. And if everything runs smoothly.

When you have to change terminals on top of everything else, which is not uncommon, you'll be glad you had six hours between flights. When you make a booking, check with the reservationist as to whether your incoming and outgoing flights are in the same terminal, and, if not, how you get from one to the other. Also check the airline's terminal maps on their internet site. (On most international connections your baggage will be sent to your outgoing flight after you've cleared incoming customs, so that will save you having to shlep it to the outgoing terminal.)

I know, when you're offered a swift and seamless connection that will take only an hour or so, or even two hours, it's very appealing. No one likes to hang around airports any longer than necessary. But play it smart and play it safe---by leaving yourself at least four hours to connect, you could be sparing yourself a six hour or eight hour or ten hour or even overnight delay if you miss the original connection. True, if the airline doesn't connect you within the legal connection time, they might treat you to a drink or a packet of peanuts for your troubles. By why take the risk?

On the bright side, bear in mind that most airlines don't serve meals on most flights, so during that longer connection gap you can have time for a leisurely---but not necessarily good or inexpensive--- meal at the airport. Or, you can have time to shop for a take-out meal. Extra onions on that? Why not? Your seat-mate will probably have them. Bon Voyage!

This article supplements Chapter 3, pages 88-98 in Personal Finance. Access the textbook by clicking on the box in the right column.

HEDGE FUNDS?----HIGH ROLLER CRAPSHOOT

2007-10-31T11:13:00.000-07:00

Unless you’ve been hiding under a rock somewhere, you’ve been hearing a lot about hedge funds as a form of investment. Investment? Maybe crapshoot? See for yourself.

How does this sound for an investment program? You give me a chunk of your money to invest for you. Here are my terms:

---You will pay me an annual fee of 2% for my services.

---I will take 20% of any gains I generate for you, but I won’t reimburse you for any losses.

---I may not tell you how I have invested your money and what risks I’ve taken.

---You cannot cash in your chips without giving me three months notice.

---I am not regulated by the government, so you’re unprotected if I mess up.

---Your investment is not insured or guaranteed.

---Your future rate of return is totally unknown, despite past performance.

Who would be crazy enough to put their money at risk in this way? No one, you say? Wrong. This scenario, in general terms, is what “hedge funds” are all about, and at last count hedge funds in the U.S. had well over $1 trillion dollars of investor’s money under management. And in large measure, it’s the mismanagement of investors money that has caused the financial turmoil that we’ve been going through.

Granted, hedge funds are available only to very wealthy investors---multi-millionaires and up. They can’t be sold to the public at large, as normal mutual funds are. (But we’ve started seeing publicly sold mutual funds that invest in hedge funds, and the risks involved therein can be very scary.)

Wall Street on Steroids

Hedge funds don’t just buy stocks and bonds like normal people do. They have invented some techniques that would take a team of Harvard MBAs to figure out. How does “derivative arbitrage” sound? Hedge funds do that a lot. Don’t ask. It’s Wall St. on steroids, and as rich as hedge fund investors might be, they’d flunk any exam that asked them to explain how their money is working for them.

Hedge funds have soaked up just about all the money that’s floating around the world looking for something better than a federally insured CD at your local Eighth National Bank. Indeed, they have absorbed so much of the commonplace types of investments that, as of recently there was hardly anything of quality left for them to invest in.

They had gobbled up shopping centers…and apartment buildings…and start-up electronics companies…and leases on airplanes and freight cars… and packages of credit card debts, college loans, car loans and home loans.

Ah, yes, home loans. Mortgages. The good ones were already taken, so how about buying bad ones, or “subprime mortgages” as they’ve been called. They pay higher rates of interest, and we can mix them up in packages with good homes loans so that our investors won’t be able to tell the difference. Sound familiar?

Indeed, the greed of many hedge funds, their aggressiveness and their blind rush to invest in anything that they could turn around and sell to their investors, were part of the root cause of the subprime mortgage chaos that has stunned the nation. (Legions of banks and other investment companies were also on the bandwagon, equally complicit with the hedge funds.)

Of course, if it weren’t for the rich individual investors throwing their personal money into the hedge fund’s machinery, the whole debacle might not have happened. But greed is a mighty motivator. And now the downside of greed---lost money---has been taking its toll.

Read more about this shocking display of monetary madness in my posting:
“Banks That Ignore the Mistakes of the Past Are Doomed to Repeat Them---A Mini-History of Financial Folly.”

GOODBYE BANGALORE, HELLO PORTLAND

2007-10-27T12:57:00.000-07:00

Wouldn’t it be nice, for a change, to make a telephone call for tech support, or customer service, or to make a purchase, and speak to a real live human being who is based right here in the United States of America? Help might be on the way.

“Impossible,” you say? “People in India are willing to work for a fraction of American wages, so companies that need to serve the public will hire them instead of Americans.” In recent years, hundreds of thousands of American jobs have been “outsourced” to India and other countries that have a strong base of English speakers.

For some American companies the experiment has not worked. Complaints from U.S. customers about their problems in dealing with incompatible accents and robotic personalities have caused many companies to “insource” those jobs back to the States.

Now along comes a company that has not experimented with outsourcing. Most of their communications have been through email. But they have begun a daring and costly program to win the hearts and minds and dollars of their U.S. customers. The company is Netflix, and according to the New York Times it has opened a call center in the suburbs of Portland, Oregon, to handle all customer dialogue.

Reason? They are losing customers to Blockbuster, which last year began a program that allowed DVD renters to exchange their rented discs at Blockbuster stores, thereby eliminating the need to wait a few days for a Netflix disc to arrive in the mail. Blockbuster, of course, has well-stocked rental stores all across the country, and Netflix has none, relying solely on the mail to generate its business.

The Customer Is Always Right---Except When a Computer is Involved

Particularly in service businesses, customer satisfaction is the engine that drives profits. Netflix carefully surveyed the market and found that an outstanding percentage of American Netflix customers wanted to discuss their DVD renting questions with Americans Netflix human-being-customer-service-reps. Person to person. On the phone. Not online. Not across the Pacific Ocean. Not “please-leave-a-message-when-you-hear-the-tone-and-we-will-get-back-to-you-as-soon-as-possible.”

So they have invested millions of dollars to create a 2007 version of “taking care of business.” Will they succeed? A lot of people who are growing increasingly angry at having to deal with outsourced personnel certainly hope so. So do people who have lost their jobs because of outsourcing.

If you’re not happy with the telephone service you’re getting as a customer of any company, complain! If they don’t hear from you, they will assume that you don’t mind talking to someone 7,000 miles away. Use your search engine to locate the home office address of any U.S. corporation, and write/ phone/ email to the VIPs in charge of Public Relations or Corporate Communications. It will take you less time than you’ll have to wait on hold to talk to someone in Bangalore.

One more tip: While you’re waiting on hold to talk to Bangalore, go to www.gethuman.com. It’s a unique data base that will show you how to get directly through to a real live human being at hundreds of major U.S. companies. (No guarantee that you won’t get a Bangalorian human again, but that can be better than weaving your way through those diabolical “menus” or sitting on hold interminably.