AIG

We have heard the phrase, “too big to fail” and a perfect example is AIG, the large insurance company that insured all of the bad mortgage loans that banks had provided. Recall these were loans given to people who did not have the where with all to repay unless the housing market continued its climb. The market did not cooperate and the buyers lost their homes. As the value of homes declined the mortgages that backed these loans lost value and the banks called on AIG to cover their losses, since that was the purpose of buying the insurance. As an aside, AIG did not call these products insurance because that would have meant oversight by the state insurance department so they called them credit default swaps. Now it was AIG’s time to step up to the plate but everyone knows that insurance is based on the concept that not everything will go wrong at once but that is just what happened. AIG’s stock went from $70 to one dollar and they were facing bankruptcy. Keep in mind that filing bankruptcy generally means your liabilities exceed your assets. AIG was a conglomerate that owned many different businesses and many not associated with the mortgage scene still had value but the losses suffered with the mortgage crisis exceeded the total value of the company. Now comes the fun part. The government stepped in and anted up 180 billion so that AIG could meet its commitment to the banks. Then AIG sold off some of its assets and the value of these toxic mortgages, begin to rise. Keep in mind we are not talking about the actual value but the perceived value, that is, what a willing buyer will pay a willing seller. This increase was accelerated as the home market bottomed out. The end result is that AIG stock price begin to rise and when it hit $30 the government sold off its shares and made a profit. These shares became so in demand that the government sold them at auction and many bidders participated. The same banks that got hurt the first time around buying these mortgage bundles are now outbidding one another for the same bundles. They are betting that the recession is over and that housing prices will continue to rise. They are also assuming that if the bottoms drop out that the US government would once again come to the rescue. This is what is meant by the term, “moral hazard”. They are willing to take a greater risk knowing that the government will cover any downside loss. This is also what is meant by too big to fail.

budget

I am once again surprised at my own surprise at our federal government. On the news every day we face the “sequester”. That is the terrible thing that is due to happen in two weeks where we cut the federal budget by 85 billion dollars. First of all, that will bring this year’s budget down from 3,800 billion to 3,715 billion. If we want to avoid that’ just eliminate one month of stimulus three, which we are now in the middle of, as we print up 85 billion dollars per month, to buy mortgage backed securities and government bonds. The “sequester” is a manufactured crisis being used by both political parties to bad mouth the other side. It also gives the 24 hour news people a reason to drum up ratings, and they will continue to play that to the hilt.

Quantitative easing

Quantitative Easing (QE) is a euphemism that means printing and borrowing money by the Federal Reserve Bank. We have been through QE 1 and QE 2 and a few months ago we started QE 3 where the Fed would purchase 40 billion a month in mortgage backed securities. QE 4 has now joined QE 3 and the Fed will purchase 45 billion a month in long term government bonds. Recall that a mortgage backed security was a group of home mortgages usually about 100 in a bundle that were sold as securities on the open market. These individual mortgages were purchased by home owners through various financial institutions and then they were sold to other investors around the world. It was joked that the buyers of these securities had no way of knowing what they were worth. The only sure way to determine the value was to open them up and have each of the individual homes appraised and this was obviously too costly and too time consuming. Imagine what this means! Sophisticated buyers around the world were purchasing securities for a set price when they had no idea what they were worth. Now after thinking that through, understand that the Fed is currently buying these securities at the rate of 40 billion dollars a month and no one is the least bit concerned. Taking a closer look at a mortgage bundle we learn some things. First of all if there are 100 mortgages in the bundle and the average mortgage is $200,000 we are talking 20 million dollar which means that there are no small investors in this market. Second say the average mortgage in this bundle has a 6% rate so the return on your 20 million is 1.2 million per year. Understand that when these bundles were most popular interest rates on things like CD’s were 1 or 2 percent. Now let us say that the value of houses drops by 20% and another 20% of these go into default so the new value of the bundle is 12 million and the return is now 3.6%. The value of this bundle has decreased from 20 million to 12 million but no one knows this. People are now just buying and selling paper. If the houses were worth nothing it would not matter. To put this in the proper perspective assume that I bring out a large box wrapped in brown paper and I tell you there is a new car inside and ask you to bid on it. What is the first question you are going to ask?

Health care

I have been forced to reconsider my solution to rising health cost. My plan A was to get rid of the third party payer system. Recall that this is where the consumer doesn’t care about cost since the insurance company pays. This is so ingrained by the vested interest, that the country is unable to change. The only way out is using a single payer national health plan and this is because the only answer available at this time, to reduce cost, is to ration benefits. Private companies cannot do this because the free market competition will always offer more for those who are willing to pay more. If company X says they will no longer pay for heart transplants of those over 80, the people will just move to company Y and thus companies will not go this route. The government on the other hand, being the only option, can ration. Medical technology has advanced so far ahead of our ability to pay that we are forced to ration. This is what western European countries, that have national health care, are doing. No one likes the R word but it is a fact that we cannot afford to provide unlimited care for all of our citizens. Will those who are wealthy get better care by paying extra by using their own funds? The answer is yes. The only other alternative would be to tell the rich that they cannot buy extra care and that would not work since they could travel to other countries. I believe national health care is coming soon.

Christianity

The foundation of Christianity is the belief that Jesus is both God and man and I firmly believe that but I would go further. I believe that human beings are physical, mental, emotional and spiritual and the first three of these are the human part but the forth is divine. This is blasphemous to many and so one might ask how it is that I came to this conclusion. It was the inevitable result of the meeting of two of my favorite subjects. The first is the psychology proposed by Carl Jung and the second is the strange concepts embodied in the study of particle physics. Jung believed like most of his contemporaries that we have a conscious mind and a sub-conscious mind but he added a third area which he named the collective unconscious. While the first two are personal to each of us the third is a group thing where all of our minds come together. Because it involves the spiritual it is not easily understood using worldly words and ideas so Jung created something he call arch-types. These are represented in the folklore that have survived the test of time. Stories that involve fairy tales blended in with real life to illustrate the mystical side of human behavior and then swallowed up in mythology. The story of Hansel and Gretel gives an insight to this spiritual side of human nature. The purpose of the tale could be the rather mundane instructions regarding forest safety or secondarily a cautionary note about the dangers of famine to large families, but its hidden meaning may evoke a strong emotional response due to the widely understood themes and motifs such as “The Terrible Mother”, “Death” and “Atonement with the Father”. The point I learned from Jung is that we do not have the vocabulary needed to deal with the spiritual side so we resort to stories that have a child like quality. From particle physics I learned that we cannot understand the subject even when we have the vocabulary. Concepts like the same thing being in two or more places at the same time confound our logical minds. The idea that cause and effect can become effect followed by cause make no sense to us. If I try to describe God in one word I say God is love. God used a part of this love to create my immortal soul and that is the part of me called the spiritual side. When I die, this side will return to its source. My spiritual side came from God and returns to God and from that I conclude it remains as God during my life. I am not equal to God when I am burdened with my human side but once free from that I return to be a part of God. It is not my purpose to convince anyone to think as I do but rather just to offer my opinion on a most complicated subject. I hope that this will encourage others to delve into their beliefs about the spiritual side of our nature.

Health care

It was about five years ago that I sat in my kitchen with a mortgage broker who told me I could borrow $300,000 to build a house with no money down and no proof that I could repay the loan. He said at 6% on a 30 year fixed my monthly principal and interest payment would be $1,800. He said it that was too much I could get an interest only loan for $1,500 and if that was too much I could get a negative amortization loan for $1,200. All this with no documentation as to my income or even if I was employed at all. What I didn’t realize at the time was that this same conversation was going on in millions of kitchens across the country and within a few short years this mortgage crisis had the whole world in recession and millions of people lost their homes. While I was still recovering from this free lunch scheme the President told me he was going to insure 31 million new people and it would save the country a trillion dollars over the next ten years. When I asked how, I was told to pass the bill and then we would figure it out. Well we did that and now the details are leaking out and the savings is disappearing like smoke in the wind. The latest blow to this Obamacare has not yet hit the news but it will shortly. Cities, counties and states are faced with something called legacy benefits. These are payments they have promised their employees to cover things like health care, including dental and prescription drugs after retirement. These entities do not set aside money for future payments as is required by law to cover pensions so they have to pay for these out of current income. Since most of these entities have defined benefit pension plans most employees retire at age 62 and for many much younger. As the population ages these cost rise and there is no money to pay the piper. But not to worry! Just at the darkest hour to the rescue comes Obamacare. All they have to do is to transfer their health care over to the federal government. Walla, problem solved! The answer is simple because the federal government can just print up money. Next in line, of course are all of the private companies who are saddled with the high cost of health care and they will soon be lining up at the trough. Now what will this cost? The IRS estimates that the cheapest Obamacare plan for an average family of five will cost $20,000. This, the cheapest plan is called the bronze. There are three others called silver, gold and platinum and each is more costly than the other. How much more we have yet to find out. As a financial advisor I would like to tell my grandchildren to save a third of their income to take care of their future needs but that would be folly since I believe that inflation will eat up their savings. Perhaps there will be some innovative concept that will save the day but I don’t see it at this point. The US has always survived by finding a Bill Gates or a Steve Jobs. I’m counting on the new generation to produce a miracle.

Now and then

The President then and now “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. government can’t pay its own bills. ... I therefore intend to oppose the effort to increase America’s debt limit.” — Then-Sen. Barack Obama, floor speech in the Senate, March 16, 2006 To even entertain the idea of the United States of America not paying our bills is irresponsible. It's absurd," Obama said in a press conference. This is not just an Obama problem, it represents politics in general. Its Party trumps Country. There are many such examples with many politicians. Seasoned politicians have learned to tell people what they want to hear.