An Interesting Class This Week

[crokett]

Took a crash course in finance/accounting - reading accounting statements, income sheets etc. Also relearned the time value of money formulas. Pretty cool stuff. I was this close to switching majors to accounting in college.

Anyhoo, funny part is a guy at work has an annuity being paid out (wife's dead relative with some bucks) and he mentioned yesterday he was thinking of using somebody like jg wentworth to buy it from him so he could do a major overhaul on the house. I asked him ballpark how much the offer was for. He told me. I ran the calculations and showed him how much the annuity company stood to make. was his reaction. Then I pointed out he could get a loan and use the annuity to pay it. He says 'but then I'm paying interest'. I says 'but it is a lot less than you are paying the annuity folks to buy the annuity from you. And the interest is tax deductible'.

I told him if I had that annuity I'd borrow, invest what I borrowed to return more than I am paying in interest, then write off the loan interest.

[Uncle Cracker]

JG Wentworth is definitely a scam. They're just taking advantage of people in need, and ignorant of the fact that JGW is making about 50% on the deal, if not more. I am so sick of seeing their "We wanna help you" commercials on the tube.

[cabinetman]

JG Wentworth is definitely a scam. They're just taking advantage of people in need, and ignorant of the fact that JGW is making about 50% on the deal, if not more. I am so sick of seeing their "We wanna help you" commercials on the tube.

Their ad says: "It's your money...use it when you need it". They never say you get to use ALL your money.
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[Uncle Cracker]

Their ad says: "It's your money...use it when you need it". They never say you get to use ALL your money.
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It probably should say: "It's your money, but with your help, we could make it our money..."

[jackellis]

Many people are absolutely clueless when it comes to money. Why else would they take out mortgages they could never afford to pay.

Many people are completely irrational when it comes to money. My mother-in-law is obsessive about tax avoidance, even when it costs her more money in the long run.

I don't understand why basic financial literacy is not part of the school curriculum these days.

[JR]

I don't understand why basic financial literacy is not part of the school curriculum these days.

Good point. When we were growing up, pensions were still available for many workers. Nowadays, one is expected to manage retirement planning independently. Not enough people are prepared for this.

I have to admit this latest round of problems in the financial markets has left me confused on a number of days. Following the CDOs, capital assets inventories vs loan portfolios, distressed financing window, bond insurance segment de-ratings, etc. has been an education of hard knocks.

JR

[Hoyden]

Many people are absolutely clueless when it comes to money. Why else would they take out mortgages they could never afford to pay.

Many people are completely irrational when it comes to money. My mother-in-law is obsessive about tax avoidance, even when it costs her more money in the long run.

I don't understand why basic financial literacy is not part of the school curriculum these days.

JG Wentworth commercials remind me of the time share commercials, they will get it sold “ before the next payment is due.”

The schools are so busy teaching to the NCLB tests they don’t have time to teach finance or the arts or how to actually think. All the kids want to do today is take a test answer the multiple answer questions and go on. None of them want to write or read. Oh well this could go on and on subject for another forum.

[Hellrazor]

Good point. When we were growing up, pensions were still available for many workers. Nowadays, one is expected to manage retirement planning independently. Not enough people are prepared for this.

A CEO didn't get 100-500x the normal joe employees wages either. That is where the pension $$ went.


The mortgage issue is due to greedy lenders AND ignorant people. A good lender isn't going to put you in a financial situation. A good example: When I was 19 I bought a new Nissan SE6 4x4. I was dead set on only wanting a short loan, they wouldn't approve it because the monthly loan cost exceeded the % of wage formula they used. So I landed up with a loan for a year longer then planned.

[JR]

A CEO didn't get 100-500x the normal joe employees wages either. That is where the pension $$ went.

I agree that the compensation for CEOs is off-the-chart stupid. I'm not sure it can be said that the direct result is the end of pensions. The advent of the 401k, originally designed for fat cats to shelter income from taxes, has provide a convenient way for Americans to save on their own, without corporate participation (or with some participation, depending the co.).

The mortgage issue is due to greedy lenders AND ignorant people.

Once again I find myself agreeing onn the fact, but sort of disagreeing on the result. Those sub-prime loans were great if you were a very smart manager of money, but horrible for people barely able to get a loan. Literally a disaster waiting to happen.

What I've learned, though, is that the ways that mortgages are packaged and re-sold is probably a bigger part of the problem. There is a lack of transparency as to what the nature of the underlying loans within a package is. Eventually even conservative banks were holding investments in mortages that went south. It's still unknown today what percentage of CDOs (collateralized debt obligations - mortgages mostly) are composed of risky loans. So now the banks don't want to do business with each other - the "lack of liquidity" so frequently discussed - because they don't know the financial strength of the counter party.

All of this translates into banks unable to move money when they need to, putting their survival at risk. This is the Bear Stearns situation that caused them to be sold for a pittance. When individual homeowners are at risk, everyon is sad. When the large banks are at risk, everyone is deathly afraid. When investors are fearful, markets go in the tank.

As I said above, I've learned a heckuva lot lately about the financial markets. I suppose it will make a stronger person of me, but I the meantime I'm quaking in my financial boots.

JR

[jackellis]

The mortgage issue is due to greedy lenders AND ignorant people.

It's a little of both. I'll tell you, though, that banks lending standards swing from one extreme to the other. What seems to change less is the borrower's willingness to take chances.

[cabinetman]

It's a little of both. I'll tell you, though, that banks lending standards swing from one extreme to the other. What seems to change less is the borrower's willingness to take chances.

Just today on "The Today Show" they did a segment on the "Harvesting Credit Cards", which are designed to nickel and dime the creditor with a fee for everything.
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[jackellis]

Just today on "The Today Show" they did a segment on the "Harvesting Credit Cards", which are designed to nickel and dime the creditor with a fee for everything.

As a consumer, I hate being nickled and dimed. But putting myself in the position of a business owner (I own small amounts of stock in Discover and Citicorp), I also don't like it when people run up credit card debts they can't (and on occasion won't) pay.

If I were in charge of the credit card issuer, I think I would worry less about growing as much as I could and worry more about being profitable by limiting who gets my cards to those who I think can pay them off. Only fees would be for interest and paying late. Of course, that means a lot of people would never be issued credit cards, at least not from my bank.

But it's still pretty complicated. How do you deal with intermittent late payments as opposed to very occasional late payments? How about someone who stops paying altogether - the bank is on the hook for that. Then there are the folks who like to play all the angles - look for loopholes they can take advantage of. The bank has to bear the costs of fraud and theft, too.

So yes, the banks try to extract all they can, just like consumers try to take advantage of every angle and every loophole. I'm not suggesting anyone shed a tear for them. But hey, I'm the bank CEO (at least for discussion's sake) and I'm interested in hearing other ideas about making this work better.

[JR]

Jack, there was a very good program on PBS a few nights ago on this topic.

I don't dispute your points about clever cardholders working all the angles. It's hard to imagine them being more clever than the banks, though. I didn't see the whole program, but some of the activities I recall are:

Due dates on Sunday, therefore raising the possibility of late pay.
Cashing the check on time for bill payment, but not recognizing until after due date.
Just plain not recogizing payments, fraudulently.
Changing the terms of the contract without notification or justification.

The PBS program made the case that banks are making more from fees than from charges at this point. They seem to have adjusted their model to fee-based revenue and are actively pursuing new fee opportunities, as opposed to your (apparently now archaic) model.

Federal statutes which have been proposed which would rein in these activities. They have so far been succussfully battled by the CC lobby.

JR

[Hellrazor]

CC companies are a bigger ripoff than the mortgage people. Think about this, your bank gives you 3-4% interest to play with your money and they charge you 20+% to play with their money via a CC.

I haven't carried a balance on a CC in atleast 10 years. I pay every bill I can with a CC, for the protection and the % back, but I pay it off instantly. They don't make money on me.

[jonmulzer]

On the topic of said annuity, why not just cash it out Crokett? You take a hit, but in most cases you could take the amount you get from the annuity company and invest it long-term and you stand a net gain if the stock market does what it has historically, grow at 12%.

The subject of cardholders looking for every loophole, moot point. The card companies write the contract, they have tons of lawyers on staff. They know the loopholes better than every cardholder combined. On a P&L, any loss due to that would be in parentheses and italics.

Credit card companies have been fleecing their flock for years. Providian used to either process payment late or they actually had a small department of highly paid people set up to pull "random samples" from the mail to shred them. Just to get the $35 late fee and $100 OTL fee. Consumers and credit cards are like Siegfried and Roy with that tiger. For years they kept it tamed and under control and then one day it ripped his face off. It is like playing with snakes.

The credit companies lobby is the largest special interest machine ever put into motion. These companies have massive amounts of money to spend. The Bankruptcy Reform legislation passed recently was the single most expensive piece of legislation ever. That is known. What we do not know, is what all that money was spent on. Well over a billion dollars in total. The piece of paper it was written on, maybe a buck (if it were REALLY nice paper!!!!). So, the majority of this went to "campaign contributions" and other such things. Bribes basically. Call it otherwise if you wish, but that would be semantics. How is the consumer to compete with that?

For this current credit crunch that we are in, I say good. The problem I do have with it is that they are bailing out the mortgage companies. Let them fail and go bankrupt. They rolled the dice on these subprime mortgages, they came up snake eyes, they lost. What the government is proposing to do does not help the common citizen in the slightest. The only people it will possibly help are the CEO's. And if we bail them out this time, they will think we will every time and this cycle will repeat with another iteration.

If I were in charge of the credit card issuer, I think I would worry less about growing as much as I could and worry more about being profitable by limiting who gets my cards to those who I think can pay them off.

Therein lies the rub. They make the most money off the people who do not pay on time. They do not want you to pay on time. Even with the level of bankruptcies that we had in the near past, there was still a massive net gain on those who were not paying on schedule. The Bankruptcy reform act was the most useless, most greedy, most expensive piece of legislation ever seen. The powers that be got greedy. They realized they were making money hand over fist on those who were subprime, even with the level of bankruptcy they had, but they wanted the rest. They could have fixed the majority of the problem by just screening people better, but that would have cost them money and reduced their profits massively.

The sad fact of the matter is, less that 10% of all applications receive any screening whatsoever. The only part they process is the name, address and SSN. If you do not believe me, next time you get a solicitation from Citibank or someone, fill it out but multiply your household income by 5x. I bet it goes right through, no problem. There are over 6 billion credit card offers sent out every year. Dead people and dogs receive them. It is just sickening.