THE FINANCIAL MELTDOWN: WHAT DOES IT MEAN FOR ME AND YOU?

Well, it is hard to miss what is going on in the financial markets. It is all over the TV and radio and internet. If you missed it one day or even one hour, you are out of date. These are momentous times and rival the previous financial meltdowns. This meltdown was brought on by the mortgage crisis.

Or should I say the discovery of the mortgage crisis. We discovered that as interest rates went up that people could not afford the new monthly payment brought on by the floating nature of their payments and interest rates. They then had to sell their homes. There were also those that bought homes or positions in new homes with the hope that they could be sold for a quick profit. Thus, there were too many homes for sale and not enough buyers. Maybe it was also brought on by the deficit financing of the War in Iraq (I just had to slip that one in) and resulting effect on our economy.

“What”, you say, “this time it is different”! I don’t think so. It is only the names that are different. "No" you say, "when you lose a Lehman Brothers firm to bankruptcy and Merrill Lynch is bought out by Bank of America, it is different." You say "it is different when JP Morgan is recruited to “buy” Bear Stearns." Breaking news: the government will extend a loan to AIG in order to give it time to unwind risky assets. Surely this is different!

Don’t you remember when Chrysler almost went bankrupt? It was bailed out by the government with loan guarantees. The government ultimately made money on the deal. How about when Kmart was going down the tubes and was merged into Sears? What about the huge stock market meltdown in 2001/2002 due to the technology bust? What about the real estate related crash in 1974? What about the inflation induced recession in 1981/1982?

My point is: it is not different. It is only the names and situations that are different but the game is the same. The name of the game and ultimate cause of the problem is Greed.

Let’s play Greed. You don’t know how? The objective is to make more money than anyone else. Here are the rules:
Find a product that you can sell.
Then pay people to sell your product instead of anyone else’s product.
You do this by incenting the sales people regardless of the quality of the product.
However, don’t let them sell too much more each quarter than in the previous quarter. You want each quarter to show an increase in sales.
It is ok and even preferred to sell on credit.
Don’t worry about the credit quality of the accounts receivable because you are going to sell off the receivables to someone else.
Then take the money from selling the receivables and make more product and push it on your sales people.
If it becomes too hard to sell more product, then make your financing terms better so that it is easier for the customer to buy it.
Repeat the process until you end up with more money than the other players. The losers end up in bankruptcy!

This game was played by all those companies mentioned above and many, many others. It is still being played as we speak. For example, why is Bank of America buying Merrill Lynch? Do you think they are doing this out of the goodness of their hearts and trying to save our financial system? Do you think they are the Good Samaritan of the financial world?

I don’t think so. They even admit this is the opportunity of a lifetime! Buying a brand name such as Merrill will catapult them to CitiCorp status. But it is not without risk. Risk to their stockholders and to their depositors and even to their debtors.

The game of Greed is still being played and will continue to be played forever.

So, then how do we as normal people operate and exist in this society without getting overly hurt?

Are you ready for Ray’s Rules of Financial Risk Remediation?
Never buy anything if you (not your broker but you) don’t understand how it works in good markets and bad markets.
Do not buy what everyone else is buying.
Do not put all your money in one stock or fund.
Certainly don’t hold just company stock in your 401k.
Likewise, if you get stock options in your company, sell them when you have some profit, pay the taxes and move on.
Do have multiple asset classes among your invested funds.
Always have emergency money on hand. What this means is you should have 6 months of expenses in savings accounts, CDs, money market accounts or short term bonds.
If you are getting a mortgage, get a 30 year fixed rate loan and pay it back early or at least on time.
Don’t have credit card debt or get rid of it if you have it.
Have enough life insurance, disability and hazard insurance.
Be sure you saving 10% to 15% of your income for retirement and other future needs.
Just like you have a doctor for your medical needs, find a financial adviser or financial planner for financial consulting. Just like a doctor has his or her MD certification, be sure the financial person has his or her CFP (Certified Financial Planner) designation. Don’t pay them based on product sales but pay by the hour or project or based assets under management. The CFP can be consulted on all these financial topics mentioned and more.

Well, I could go on and on but you get the picture. There is no free lunch and there is no sure thing. If it seems to be too good to be true, it probably is not true. If everyone is making money on something, they are either lying or it is too late for you to get in. The music will stop and you will be left without a chair!

This crisis will end at some point. Things will get better and we will back to “normal”. However, the game of Greed is ongoing and the players will be playing. At some point, we will have another financial crisis. You and I are just the game pieces but we do have some control over where we move. So, remember my rules and good luck!

Ray