Often when a problem is revealed there is tendency of government to over react and the cure is worse than the disease. This is the reason why adequate investigation into solutions is necessary and it concerns me that there is a rush into passing financial reform.
Some even suggest that derivatives be outlawed which would be a disaster for most businesses. For example, take farming which is big business throughout the Midwest and most of us are familiar. Typically a farmer has a pretty good idea of what his crop will produce but he is not as sure about the price. In the spring it is a common practice for a farmer to purchase a contract to sell his crop at a set price in the fall. He knows that he needs three dollar wheat to make a living so he buys a contract that guarantees he can sell his wheat in the fall for three dollars. This contract is a derivative, a kind of insurance policy to help him stay in business. This is how derivatives first started, as a way to satisfy a need.
Let’s say that the farmer anticipates, based on past years, that he will have an 80,000 bushel harvest so he purchases a contract that guarantees that some buyer will pay him $3 per bushel for his crop. If there is a shortage of rainfall and he only harvests 60,000 bushels he will have to go out into the open market and purchase 20,000 bushels at the current price to satisfy his contract. This may work to his advantage if the price is lower than $3 or to his disadvantage if the price is higher than $3. This is a straight contract with wheat to back up the deal. Now bring in the concept of leverage and see how things change. Suppose he buys a contract to sell 800,000 bushels of wheat and he uses a bank loan to pay for it. He is now betting that wheat will be higher than $3 so he can make a big profit. He is now leveraged 10 to 1 which is pretty darn risky. If he guesses right a big profit but if he guesses wrong he might have to sell his farm to pay off the bank.
The reason I offer this example is that I heard on the news today that some of the banks who were dealing in the mortgage derivatives were leveraged at 33,000 to 1. You see when you’re betting with other people’s money you tend to take bigger risk. The big insurance company that was backing up these bets (AIG) was leveraged even more.
Even the big life insurance company that I worked for, Equitable of New York, had two billion of assets to back up 100 billion in insurance policies. At 50 to 1 this seems high but what are the chances of all 10 million of their clients dying at one time.
John/Jack
Saturday, June 5, 2010
Mothers Day
Monday, May 10, 2010
Hi All,
As I look back over the past 70 plus years I think it is amazing when I realize all of the places I have been, all of the things I have done, all of the people I have met, all of the challenges I faced, all of the mistakes that I’ve made, and all of the great times that I have had. It seems almost impossible that all this happened to one person in less than one life time and after all is said and done, I have no regrets. I made mistakes, that is for sure but they were not life altering but rather learning experiences for the next stage of development. Without those mistakes I would not have learned the important lessens that carried me forward to the next level. I have won and I have lost but those were only words because in both cases I grew and developed and became the person I am today and I am comfortable with myself.
In analyzing the reasons for the path that I have chosen I am convinced that the secret to a good, healthy and happy life is to marry a good woman or more precisely to have a good woman select you. I don’t know why this happened but on this Mother’s Day when we honor the good wife, mother, grandmother and overall good person that is my wife, I am thankful that she selected me.
John/Jack
Hi All,
As I look back over the past 70 plus years I think it is amazing when I realize all of the places I have been, all of the things I have done, all of the people I have met, all of the challenges I faced, all of the mistakes that I’ve made, and all of the great times that I have had. It seems almost impossible that all this happened to one person in less than one life time and after all is said and done, I have no regrets. I made mistakes, that is for sure but they were not life altering but rather learning experiences for the next stage of development. Without those mistakes I would not have learned the important lessens that carried me forward to the next level. I have won and I have lost but those were only words because in both cases I grew and developed and became the person I am today and I am comfortable with myself.
In analyzing the reasons for the path that I have chosen I am convinced that the secret to a good, healthy and happy life is to marry a good woman or more precisely to have a good woman select you. I don’t know why this happened but on this Mother’s Day when we honor the good wife, mother, grandmother and overall good person that is my wife, I am thankful that she selected me.
John/Jack
taxes
Monday, May 10, 2010
Hi All,
I do taxes for a number of relatives including my daughter in law who is a self employed consultant. I told her last year to pay quarterly and that she had to pay self employment tax of 15.3% in addition to her income tax and this was quite a shock to her
Tim Geithner our Secretary of the Treasury, the man who is in charge of the IRS forgot to pay his self employment tax, you know the 15.3% tax you had to pay on your income from Portola. He said it was an oversight but there is doubt about that because it first came out that he didn’t pay it for tax years 2003 and 2004 and when it was brought to his attention he paid the $17,230 he owed. Then later they came back and said he also failed to pay for 2001 and 2002 and he had to pay $25,970 more. I might believe that he forgot but when he was reminded it is hard to understand how he would not have thought about earlier years. By the way the IRS charged him interest but no penalty. They could not charge a penalty because that would mean that he knowingly did not pay what was due and that is tax evasion and carries with it jail time.
John/Jack
Hi All,
I do taxes for a number of relatives including my daughter in law who is a self employed consultant. I told her last year to pay quarterly and that she had to pay self employment tax of 15.3% in addition to her income tax and this was quite a shock to her
Tim Geithner our Secretary of the Treasury, the man who is in charge of the IRS forgot to pay his self employment tax, you know the 15.3% tax you had to pay on your income from Portola. He said it was an oversight but there is doubt about that because it first came out that he didn’t pay it for tax years 2003 and 2004 and when it was brought to his attention he paid the $17,230 he owed. Then later they came back and said he also failed to pay for 2001 and 2002 and he had to pay $25,970 more. I might believe that he forgot but when he was reminded it is hard to understand how he would not have thought about earlier years. By the way the IRS charged him interest but no penalty. They could not charge a penalty because that would mean that he knowingly did not pay what was due and that is tax evasion and carries with it jail time.
John/Jack
Diversity
The experts say the Supreme Court should mirror the general public as much as possible so six of the judges are from Harvard and three from Yale and only one tenth of one percent of the general public graduated from those two schools. One half of senators and one third of congress are lawyers and only point four percent of the population are lawyers. While getting more minorities and women in these positions is admirable maybe we should get more diversity in schools and professions first.
Jack/John
Jack/John
Banks
I first entered the financial business in 1973 and at that time we learned about the Glass Steagall Act. This law was passed in the 1930’s to prevent banks from failing as they did during the Great Depression. Before that time banks had two separated functions, the first was the commercial bank that we are all familiar with and that is our local bank. The purpose of the local bank is to provide loans to citizens and businesses for things like cars and inventory. The second function was to sell new investment products to big investors, things like IPO’s, initial public offerings. This happens when a big company like 3M wants to sell a new issue of stock in order to raise money to expand. This new stock is sold by investment bankers to large volume investors.
During the depression years and before these dual purpose banks would have an IPO to sell and in addition to offering it to big investors they would sometime purchase some of the stock with the commercial banks money (depositors money) and when the IPO didn’t pan out they lost depositors money and sometimes went broke.
The passage of Glass Steagall was supposed to end this practice by breaking the bank into separate entities and this is where things were when I entered the business. Realize that this was still one big bank but they had separate areas for different types of business that is they were to separate commercial banking from investment banking.
The first thing I was introduced to in the area of banking was something called “The China Wall”. This was a mysterious invisible wall that separated the commercial people from the investment people. If I worked in the investment bank where I had access to the inner workings of a business I was not allowed to discuss this with someone who worked in the commercial side as it would be considered “insider information” and that would be illegal.
The way things worked was that I would schedule lunch at a certain restaurant at a certain time to discuss inside information but somehow one of my colleagues from the commercial side would be having lunch at the table next to mine where they would inadvertently overhear my conversation.
Since everyone in the industry knew what was going on it was no big deal to them when Clinton repealed Glass Steagall in 1999. Now we could discuss companies without sneaking around but this was deemed to be one of the main causes of the recent banking debacle so they have now introduced the “Volcker Rule” which is the modern day equivalent of Glass Steagall. What comes around goes around, and so I guess the secret lunches will be back in style. Now I feel much better.
John/Jack
During the depression years and before these dual purpose banks would have an IPO to sell and in addition to offering it to big investors they would sometime purchase some of the stock with the commercial banks money (depositors money) and when the IPO didn’t pan out they lost depositors money and sometimes went broke.
The passage of Glass Steagall was supposed to end this practice by breaking the bank into separate entities and this is where things were when I entered the business. Realize that this was still one big bank but they had separate areas for different types of business that is they were to separate commercial banking from investment banking.
The first thing I was introduced to in the area of banking was something called “The China Wall”. This was a mysterious invisible wall that separated the commercial people from the investment people. If I worked in the investment bank where I had access to the inner workings of a business I was not allowed to discuss this with someone who worked in the commercial side as it would be considered “insider information” and that would be illegal.
The way things worked was that I would schedule lunch at a certain restaurant at a certain time to discuss inside information but somehow one of my colleagues from the commercial side would be having lunch at the table next to mine where they would inadvertently overhear my conversation.
Since everyone in the industry knew what was going on it was no big deal to them when Clinton repealed Glass Steagall in 1999. Now we could discuss companies without sneaking around but this was deemed to be one of the main causes of the recent banking debacle so they have now introduced the “Volcker Rule” which is the modern day equivalent of Glass Steagall. What comes around goes around, and so I guess the secret lunches will be back in style. Now I feel much better.
John/Jack
Oil
It seems that there is a great irony developing with the oil spillage in the Gulf. First off, the environmentalist would not allow drilling close to shore in shallow water since they feared an oil spill would cause damage to the shore line. If this leak had been in shallow water, it is likely that the leak would have been contained, before it caused a problem but since it was in deep water the containment has been much more difficult.
It is well known that twice as much oil that leaked from the Valdez spill, seeps up from the ocean floor in the Gulf each year but nature has a way of handling it. Could it be that the deep water leaks are also handled by nature? It will be interesting to see how this plays out. It might be a case of dumb luck that saves the day.
It is well known that twice as much oil that leaked from the Valdez spill, seeps up from the ocean floor in the Gulf each year but nature has a way of handling it. Could it be that the deep water leaks are also handled by nature? It will be interesting to see how this plays out. It might be a case of dumb luck that saves the day.
Unemployment
During my working years I specialized in retirement planning and often times people were surprised when I pointed out that if they chose to work past age 62 they would be working for free. How does this happen?
Suppose you had worked thirty years for a company that had a pension plan that paid you 1.5% of your final salary for every year you worked or they would pay your 45% of your final salary. Assume that your salary was $50,000 so your pension would be $22,500 per year. First step is to determine what your net pay is if you continue to work.
Gross pay $50,000
Less standard deduction for two people $11,400
Less personal exemptions (2) $7,300
Taxable income $31,300
Federal tax $3,861
State tax (MN) $1,158
Less social security $3,825
Take home pay (net) $41,156
The pension will be income tax free and no social security withheld so it will net out at
Pension $22,500
Husband social security ($1,200/mo) $14,400
Wife social security (35% of husbands) $5,040
Take home pay (net) $41,940
Often times the cost of health insurance is not covered until age 65 when Medicare kicks in so I tell them if they like what they are doing and they feel good to keep on working but if they are burnt out they should retire and take a part time job doing something they like and earn enough to buy health insurance.
This is all leading up to people, who today, are collecting unemployment, which pays about one half of salary up to a maximum of about $500 per week. Assume you were making ten bucks an hour or $400 per week and you get laid off and start collecting $200 per week. While you are working, assuming you were a family you didn’t pay any income tax but you did pay social security tax so your take home pay was $369. If you go back to work your income will increase by $169 ($369 - $200) so you will be earning 169 divided by 40 or $4.22 per hour which is kind of depressing. If you have to pay a baby sitter you are better off not working.
The point here is that for low income people, those who make less than $25 per hour, the difference between working and collecting unemployment is not that great and since unemployment benefits now run for 99 weeks, it may be a while before these people get serious about looking for work and I guess you can’t really blame them.
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Suppose you had worked thirty years for a company that had a pension plan that paid you 1.5% of your final salary for every year you worked or they would pay your 45% of your final salary. Assume that your salary was $50,000 so your pension would be $22,500 per year. First step is to determine what your net pay is if you continue to work.
Gross pay $50,000
Less standard deduction for two people $11,400
Less personal exemptions (2) $7,300
Taxable income $31,300
Federal tax $3,861
State tax (MN) $1,158
Less social security $3,825
Take home pay (net) $41,156
The pension will be income tax free and no social security withheld so it will net out at
Pension $22,500
Husband social security ($1,200/mo) $14,400
Wife social security (35% of husbands) $5,040
Take home pay (net) $41,940
Often times the cost of health insurance is not covered until age 65 when Medicare kicks in so I tell them if they like what they are doing and they feel good to keep on working but if they are burnt out they should retire and take a part time job doing something they like and earn enough to buy health insurance.
This is all leading up to people, who today, are collecting unemployment, which pays about one half of salary up to a maximum of about $500 per week. Assume you were making ten bucks an hour or $400 per week and you get laid off and start collecting $200 per week. While you are working, assuming you were a family you didn’t pay any income tax but you did pay social security tax so your take home pay was $369. If you go back to work your income will increase by $169 ($369 - $200) so you will be earning 169 divided by 40 or $4.22 per hour which is kind of depressing. If you have to pay a baby sitter you are better off not working.
The point here is that for low income people, those who make less than $25 per hour, the difference between working and collecting unemployment is not that great and since unemployment benefits now run for 99 weeks, it may be a while before these people get serious about looking for work and I guess you can’t really blame them.
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