Personal Finance Blog by Debit versus Credit

When Will The Bailouts End?

September 18, 2008 | Filed in: Miscellaneous | 3 comments

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Maybe it’s just me, but these bailouts seem to be happening more and more frequently these days. Six months ago it was Bear Stearns. Just two weeks ago we bailed out Fannie Mae and Freddie Mac. Now, as you’ve undoubtedly heard, the U.S. government has taken it upon itself to bail out American International Group, otherwise known as AIG. What was their reasoning this time around? What does this mean to us as taxpayers? Will the bailouts ever end? These are all questions that you have probably found yourself asking. I’d like to attempt to answer them for you.

Why Did We Bailout An Insurance Company?

To be fair AIG is involved in more than just insurance.  That is, however, their primary business.  Unfortunately they have had large levels of exposure to the credit crisis through an insurance-like product that protects the purchasers of the product from bond defaults.  Essentially they insured investments.  As so many of these investments are going south so is the cash of AIG as they are forced to pay out to their customers.  The problem lies therefore with their current level of capital.  They were unable to raise enough in time and their credit ratings were dropped.  This may have forced them to declare bankruptcy because they did not have enough cash coming in.  The fed stopped this though by offering an $85 billion dollar loan and agreed to taking an 80% stake in the company.  Essentially they just bought AIG.

Will This Affect Our Taxes?

More than likely this will not have an impact on our taxes.  But it may.  There’s something that a lot of American’s don’t know about the Fed and our government.  They have been running a budget deficit for a LONG time.  That much is common knowledge.  But think about it.  Where did they get the $85 billion to loan to AIG?  It wasn’t sitting in a vault somewhere twiddling its thumbs.  That much is for sure.  No.  When the government needs money they print it.  Just out of thin air.  They fire up the money machine and call it cash.  Of course if I tried to do this I’d be arrested for counterfeiting.  They ought to be arrested for causing high inflation.

So rest assured this money did not come from our taxes.  It may not either.  If AIG can pull through this ok the Fed hopes to sell their portion of the company back to the general public, at a gain.  But that doesn’t help the damage that’s already been done.  The fact is that the Fed and the treasury have thrown billions upon billions of dollars into the economy.  Dollars that didn’t exist before.  Is it any wonder why gas costs so much?  It shouldn’t be.

When Will The Bailouts End?

I’ll be perfectly honest with you.  I was surprised when the Fed let Lehman file bankruptcy.  I was pleasantly surprised in fact.  Don’t get me wrong.  I feel terrible that such a large business with so many employees was allowed to fail.  But it has to happen.  We are supposed to have a free market system.  There will be ups and there will be downs.  Right now we’re facing some serious crisis’ on wall street and in the financial system as a whole.  Things will eventually get better, but in the meantime there will be pain and there will be losses.

Right now WaMu looks like it may be the next target for failure.  They’re currently shopping themselves around for a buyer.  Their problem is also a lack of capital.  Cash truly is king.  Like I’ve been telling all of you, make sure you have an emergency fund for when a crisis comes into your personal life.

On that note I don’t think we’ve seen the last of the bailouts.  The Fed and the Treasury department have been too forgiving and too quick to pull the trigger.  These companies more or less deserved what was coming to them.  I hope that these bailouts will not create an attitude of “we can’t fail” in companies.  I hope that our country will be stronger after this crisis.  Unfortunately it’s looking to be quite the opposite.

What are your thoughts?

Tags: AIG, Bailout Nation, Bear Stearns, Debt, Economy, Fannie Mae, Federal Reserve, Freddie Mac, Rants

The Bailout of Fannie and Freddie

September 9, 2008 | Filed in: Miscellaneous | 1 comment

The United States of America has officially become a nation of bailouts.  With the government takeover of Fannie Mae and Freddie Mac on Sunday, September 7 they have also become the nation’s largest mortgage provider.  They now own (or back) around $5-6 trillion in mortgage loans, which is roughtly half of the existing mortgages in the U.S.  What does this mean for the taxpayer?  For the homeowner?  For the investor?  For the financial markets as a whole?

Expect To Pay More In Taxes

Fannie Mae and Freddie Mac are HUGE companies.  They alone service over half of the mortgages in the U.S.  They have trillions of dollars worth of liabilities as well.  In fact according to the former president of the Federal Reserve Bank of St. Louis, William Poole, they have up to $6 trillion dollars in liabilities (as reported by the Wall Street Journal Online).  He believes that it would not be unreasonable to assume that they may end up taking a loss on as much as 5% of their loan portfolio which would provide taxpayers a burden of some $300 billion dollars.  While this would more than likely just be added to the national debt of almost $10 trillion dollars it would eventually have to be paid off and those who are ultimately responsible for this debt are the taxpayers.  You, me and your neighbor.

Mortgage Rates May Finally Drop

The rising level of defaults on mortgages over the past year or two has forced Fannie and Freddie to get more defensive and stop buying up so many mortgages.  This has led to an increased risk for mortgage originators, as they might not be able to sell off their risky loans.  It has also decreased the amount of cash flowing through the mortgage market and as such has had a strong effect on mortgage rates.  Because of the increased risk and the limited capital mortgage lenders have been forced to raise mortgage rates and keep them high.  Now that the U.S. has virtually guaranteed the success and liquidity of Fannie and Freddie mortgage originators are likely to have a less difficult time securing cash and selling off their loans.  This should lead to a drop in mortgage rates over the next six months or so.

Start Investing Now If You Haven’t Already

The markets rebounded on Monday with the Dow Jones Industrial Average ending up almost 300 points (or 2.59%).  Investors are excited about the future now that they don’t have to worry about Fannie and Freddie.  If the Treasury Department and Paulson are right (and I personally doubt they are) then this bailout should fix everything.  After all the housing market is the primary cause of the “recession” that we are currently facing.  By shoring up the two largest mortgage companies and providing much-needed capital to the mortgage industry they’re hoping to end this downturn once and for all.  Things aren’t quite that black and white however but we’ll come back to that in the next section.  In the meantime for the purposes of investing they (the feds) may be right about one thing.  By taking over Fannie and Freddie they should increase investor confidence and lower mortgage rates.  This should have the effect of a declining bear market if not the return to a bear market.

The Financial System Is Nowhere Near A Full Recovery

It is true that the primary cause of the economic turmoil that the U.S. is currently facing is due to the uncertainty in the mortgage markets.  It’s also true that the decreased cash flowing into these markets due to Fannie and Freddie’s cutbacks was having a negative affect on the entire market.  However one would have to be nieve to assume that by taking over Fannie and Freddie and providing capital to the mortgage markets that this mess will clean up quickly.  The fact is that homeowners are not walking away from their houses because their mortgage lender was unable to sell their mortgage to Fannie - they are walking away because they are upside down on their house by a lot of money and they are unable to afford the payments.  Losses will continue to come.  The process may be slowed down and stopped sooner than it might have without this bailout (due to the increased affordability of purchasing a home) but unfortunately home values have not reached their lows, as most would-be homeowners are not ready to jump into the market even with today’s home prices!

The fact is that homes are STILL unaffordable in many markets across the U.S.  Homeowners are losing money and are bailing ship which is slowly decreasing home prices but there is probably quite a ways to go still before the buyers start to line up.  Bailout out Fannie and Freddie may help some, but as I stated already, the financial system is nowhere near a full recovery.

Technorati Tags: Fannie Mae, Freddie Mac, mortgage news, stock market, investing, taxes

Tags: Economy, Fannie Mae, Freddie Mac, housing bust, housing market, Rants, Real Estate

Don’t Do Business With This Credit Union

August 12, 2008 | Filed in: Miscellaneous | No comment

I know a girl who recently had her car repossessed by her financial institution.  She got behind on the payments and because of extenuating circumstances mostly beyond her control she was never able to communicate with her credit union about the delinquent loan in order to keep it from being repossessed.  They took her truck and sent her a notice letting her know she had 10 days to pay the delinquent payment amount plus a repossession fee in order to get her truck back.

The problem?  The notice was sent to an address that she does not reside at.  She never got the notice and when she was able to get hold of her credit union it was 8 days into this 10 day period.  Naturally with this short of notice she had difficulties putting together the cash that was needed in order to try to save her car and by extension - her credit.

By day 10 she had pulled together about 1/4 of the cash that was needed, but nonetheless took it in to a sister credit union to pay towards the loan.  On day 11 she took the remainder of the cash that she needed back to this other credit union hoping that her credit union would make a one-day exception to the 10 day rule.  They didn’t.  They didn’t care that she had the cash, that her credit would be ruined, that she would not have a car and most of all they didn’t seem to care that they would be losing well over $10,000 dollars on the deal.  With an $18,000 payoff on a truck worth only about $6,000 that would go to auction and probably sell for around $4,000 they were putting salt in their wounds by not accepting the cash.

This poor girl, as I hear, went home absolutely devastated.  Of course rules are rules, right?  Sure.  I agree.  Also banks and credit unions aren’t in the business of charity.  They’re in the business of making money.  But when it comes to credit unions they stand behind a philosophy of member service and putting those members’ needs first.  Don’t believe me?  This is on her credit union’s about page.

…These reasons explain how we adopt the “people helping people” philosophy of credit unions. When making decisions, we put members’ needs first. It’s just the way we do business.

You won’t often find me badmouthing a credit union, but I may just do that today.  Here they profess to put members’ needs first and yet they refuse to bend a policy in order to help one of their members.  In fact not only would it be helping their member, but it would help their bottom line as well.  Writing off losses is not fun, no matter the amount.  They were downright rude to this girl and also the credit union representative who was calling them on her behalf.  Not a very good way to run a business, let alone a credit union.  The culprit?  Mountain America Credit Union which is based in Utah.  Check out the site, but don’t sign up to do business with them.  At least if I lived in Utah I wouldn’t.  Not after hearing about this horror story.

Tags: Credit Unions, Financial Institutions, Rants

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