Monday, March 30, 2009

The Geithner Plan: A 21st Century New Deal?

Is US Treasury Secretary Timothy Geithner’s plan to heal the ailing US economy by rescuing US banks this century’s New Deal or, as his critics attests, a road to hell?

By: Ringo Bones

It is now official, US Treasury Secretary Timothy Geithner’s plan to heal the ailing US economy by detoxifying American banks of their toxic assets is already underway. The plan primarily involves a public and private sector team-up investment program to buy toxic assets / financial products, the primary cause of the subprime mortgage crisis. The scheme will initially funded by the US Government with 500 billion dollars worth of funds to buy the toxic assets with the potential to expand to 1 trillion dollars - if needed - over time. While the US Federal Reserve and the FDIC will assist investors in buying assets, the private sector will share the risk with the US taxpayers. Though the creation of the “equitable” market price of these assets needs really diligent oversight, which could be a problem.

Now the downside, the overall risk exposure of the American taxpayer is still not well established by the “Geithner Plan”. Which is not exactly easy because most American banks are still vilified for their risky behavior that instigated the subprime mortgage crisis. Plus, there is that issue whether capital restrictions govern the pricing of the assets. In short, the “equitable” value of the toxic assets still needs evaluation. Worse still, the scheme can easily privatize the corporate gains while the losses are socialized – i.e. the American-taxpayer-as-investor can easily be left holding the bag if the scheme turns sour.

In spite of the plan’s caveats, world markets reacted positively to the Geithner Plan. The day after the plan’s inception, stock markets rallied. Not just in Wall Street but also in other parts of the world as well, especially in Asia. Although the Czech Prime Minister Mirek Topolanek – who is also currently the EU president under it’s rotating 6-month term - criticized the “Geithner Plan” as the “road to hell” for the global financial system. Maybe quantitative easing is too complex to be policed properly from PM Topolanek’s point of view?

The good thing about the “Geithner Plan” is that it renewed the sense of urgency to regulate financial companies who provide complex and exotic financial services and instruments. Like hedge funds and credit default swaps just to name a few. Plus, the renewed assessment of financial companies’ practice of keeping adequate credit reserves to back up their inherent operational risks (a localized Basel Accord?). The question now is whether governments around the world will become too obsessed with quantitative easing that they’ll forget there are other things to take care of during times of economic crisis like maintaining employment opportunities, the environment and other social concerns.

Monday, March 23, 2009

AIG: A Billion-Dollar Financial Black Hole?

Taking note of the TARP fund misappropriation via exorbitant executive bonuses, is the insurance and financial corporation AIG really too big to fail?

By: Ringo Bones

Many considered it as the battle that needs to be lost in order for the greater war against the on-going global economic downturn to be won. While others considered the company as too big to fail, but has the US Government made the right decision in spending their not-so-limitless billions of the Troubled Assets Relief Program or TARP funds on AIG? Or is AIG nothing more than an obsolete financial institution trapped in the REAGANOMICS euphoria of the 1980’s?

American Insurance Group Incorporated or AIG managed to get the ultimate PR free-ride during the Clinton Administration when the company’s frequent and highly visible adverts about their environmental coverage and their underwriting ability for environmental risks. During this period of “think locally, act globally” environmentalism of the 1990’s, AIG practically invented corporate social responsibility years before the term became popular in American Ivy league business-oriented colleges. Whether the company practiced corporate social responsibility at the time is another thing entirely, but it did bring them an aura of a corporate entity that’s accountable for the planet.

That was then, but in the era of Bush Administration-era tax cuts in with the promise of prosperity, AIG got too greedy for their own good. After being swept up in the subprime mortgage frenzy, the financial arm of AIG lost it’s better judgement after succumbing to the promise of fat profits of loaning money to persons who can’t afford to pat them back. Many financial pundits had now blamed the company as the ground zero of the global subprime mortgage crisis. When the toxic assets of the subprime mortgage debacle came in contact with their arcane credit derivatives of their credit insurance arm, this created a “perfect storm” that instigated our on-going global financial crisis.

Given that the proverbial Road to Hell is always paved with good intentions, the US Government got hoodwinked into giving AIG a few billion – 170 billion dollars more or less – of the somewhat limited TARP money. All in the hopes of propping up the company that’s supposedly too big to fail. A few months later, AIG misappropriated those billions by giving each of their top executives 165 million dollars in bonuses, which AIG CEO Edward Liddy says to the press fundamental mistakes were made in handling of the TARP funds – an excuse by any other name?

The corporate excesses of AIG drove Treasury Secretary Timothy Geithner to explain himself to the press claiming that he is at fault. While President Barack Obama created another first as the first incumbent president to appear on the Tonight Show With Jay Leno in order to explain to the American people the on-going debacle at AIG. But whatever shenanigans AIG is doing, the US Government already had the upper hand. Since as majority shareholder of AIG, Uncle Sam can simply “claw back” those ill gotten millions of dollars misappropriated as executive bonuses by legislating tax laws aimed at AIG executives, which they are currently doing right now. If Uncle Sam can’t or won’t control AIG, it could become the financial black hole that will swallow Wall Street.

Is Our Financial and Economic System a Joke?

After the high-profile feud between Jim Cramer and Jon Stewart made the problems faced by our global economy “interesting” to primetime TV viewers, is our financial system nothing but a joke?

By: Ringo Bones

This probably all started when Jon Stewart of The Daily Show with Jon Stewart made a joke about Rick Santelli. A Wall Street pundit and staunchest critic of President Obama’s plan to bailout ailing American companies, calling the president’s action as socialism. The joke was even enhanced to us in the know by Rick Santelli’s inability to delineate a proper line across the sand between socialism and capitalism (or unbridled greed?). From this perspective, Jon Stewart’s indictment of CNBC’s Mad Money with Jim Cramer seems incidental. Until when the TV ratings between the two got affected.

Even though an overwhelming majority of people around the world would consider Jon Stewart in criticizing CNBC’s financial-themed programs like Jim Cramer’s Mad Money because they didn’t do their part of disclaiming the true extent of the risks involved in investing in the stock market. The feud between the two even ballooned to cartoonish proportions when Jon Stewart’s ratings shoot up while the ratings of CNBC’s financial-themed shows slightly slipped down. Even Jim Cramer resorted to appearing to the TV show of securities fraud ex-convict Martha Stewart – i.e. Better Living with Martha Stewart to plead his case - Irony of ironies indeed.

Even though the feud between Jim Cramer and Jon Stewart were now diffused after Jim Cramer appeared in Jon Stewart’s show. Looking beyond the debacle in terms of TV ratings cost and benefit, looks like the feud between the two finally brought into the spotlight the eternal struggle faced in maintaining the overly complex organism that we call the global economy.

When compared to other investment companies that provide service for the novice investor, the CNBC focus groups deciscion to chose to use “In Cramer We Trust” as the de facto legal and risk disclaimer for Mad Money with Jim Cramer. The show for all intents and purposes undoubtedly opens itself to all manner of ridicule. As a marketing and promotional ploy to make Mad Money with Jim Cramer appeal to middle-school aged demographic, the idea seems dubious to me.

When Jim Cramer first promoted Mad Money on The Tonight Show with Jay Leno a few years ago, the idea of persuading novice investors to invest in high-yield but riskier funds as a component to diversify their own portfolio is somewhat suspect. Given that majority of older viewers who have enough money to indulge in Jim Cramer’s financial adventurism are somewhat squeamish to invest in something riskier than bond funds and equity income funds, the showmanship behind Mad Money should concentrate more on investment risk disclaimers. Rather than the novelty bells and whistles that are de rigeur of the show. Remember when Jim Cramer told everyone to invest in Bear Stearns back in 2008, and a few months later the company had major financial troubles?

For those of us who had benefited from our money funds during the 1990’s and had now diversified our investment portfolios into something higher-yielding – but a little riskier – bond funds and equity income funds, Mad Money with Jim Cramer will always be viewed somewhat of a joke from our perspective. Prudence will always be a guiding force every time we invest our hard-earned money. It will surely take more than a TV showman armed with oversized novelty bells and whistles and other props that belong in Pee Wee’s Playhouse to convince us that investing in aggressive growth but high-risk derivative funds and specialist funds is the best thing for us since free money. Our investment portfolios probably can’t afford such jokes during these times of a worldwide economic downturn.

Friday, March 13, 2009

Managing Credit Card Debt

If the convenience of credit cards has got the better of your spending avarice necessitating the services of a debt counselor, is it still possible to manage one’s credit card debt?

By: Ringo Bones

Admit it, most of us has come to the point of availing ourselves the services provided by credit card companies after an acquaintance of ours started touting the life saving convenience of credit cards. Not to mention that obligatory first-hand testimonial of a harrowing life-saving payment usually involving a stay in the emergency room. Nonetheless, every one of us should remember that once and for all credit cards are not the best thing since free money they are touted to be.

Ask every financial consultant worth his or her own salt and they will more often than not tell you that high-interest credit cards can be the most expensive form of money you can have in your budget. Time and time again they will recommend that the most cost-effective way to use your own credit card is to pay off the balance each month. At the very least, protect your credit standing or your very own credit rating of the card-issuing bank that you signed-up with - which can “easily” done by making sure you don’t let the level of your outstanding balance run away with you by your monthly payments. Even though these are just your unseemly basic debt management procedures, they can be a beneficial guide for the frequent credit card user.

Another method of keeping high-interest credit card debt at bay – as recommended by most financial advisers – which is also works in avoiding lingering credit card debt is by converting the balance into a personal loan. Personal loans usually have a lower interest rate, but it will only work if you have the fiscal discipline to avoid running your credit card debt again. This can be relatively easy if you take the necessary steps in reviewing your pattern of expenses to get to the root of why you had incurred such high credit card debt in the first place. At least it is way less costly than asking for debt advice from a debt counselor paid by your very own money.

Credit Cards: Our Best Friends?

Given their convenience and pro-consumer advantages, are credit cards really the “Devil Incarnate” they are touted to be?

By: Ringo Bones

Despite of the latest high-level exposé of the predatory lending practices of some credit card companies, from a legal standpoint, majority of credit card company’s by-laws are actually pro-consumer. Even though – through varying degrees of factuality – all credit card use (spending?) problems can be “conveniently” blamed on cardholder’s inability to curb spending avarice. While the truth lies somewhere between your credit card being the closest thing of your money acting as your very own consumer advocate and credit rating agency, or just the best thing since free money.

If you are strong enough to resist the temptation of using cash on items that can be purchased by a credit card – in spite of the shopkeeper’s promise of an attractive discount via cash purchase – then be prepared to enjoy the penultimate benefit of using credit cards to buy stuff. The main – if not the overriding – advantage of paying with your credit card is that if you don’t receive what you were promised – very useful in mail order and on-line transactions – you, the customer, can always dispute the charge with the credit card company. All credit card companies have the legal right to temporarily withhold payment while it conducts its own investigation.

Although credit card companies usually protect you – their valued client – if you don’t get what you pay for, but not if you merely change your mind about a purchase. Credit card companies has the advantage of having the legal authority of doing this type of caveat emptor for you. Just be sure to pay your monthly obligations on time to keep interest rates of your charges low and please never forget to curb your spending avarice. Other than that, your credit card – as promised by your credit card company – could really open new doors of purchasing opportunity for you.

Tuesday, March 3, 2009

Microcredit Versus the Global Recession

As various financial institutions fall by the wayside, will Dr. Muhammad Yunus’ microcredit program hold its own against the onslaught of the on-going global economic turmoil?

By: Ringo Bones

Even though Dr. Muhammad Yunus’ Grameen Bank and the microcredit / microfinance program that it fostered could trace its beginnings back in 1982, it is only after Dr. Yunus won the 2006 Nobel Peace Prize that his poverty elimination scheme gained worldwide fame. He even gained fame as the “Banker to the Poor”. The underlying success of Grameen Bank’s microcredit / microfinance program has been – according to Dr. Yunus’ own words is that: “poor people can, and do, repay loans”. As a poverty elimination scheme that is congruent with the long established global financial system, Dr. Yunus is largely credited with making microfinance / microcredit a socially responsible and viable business model.

When the global credit crunch went full steam during the last quarter of 2008, many have wondered whether Dr. Muhammad Yunus’ novel poverty elimination “financial company” could become insolvent. After all, he conscientiously made his microfinance / microcredit program’s business model congruent with the established global financial system. But the program’s 98% payment / payback rate has been it’s saving grace during increasingly tough economic times. Even the fledgling Grameen Bank America that started serving the “financially depressed” parts of New York City back in January 2008 seems to be holding its own, despite of scores of banks teetering on the brink just a stone’s throw away from Grameen Bank America’s offices.

As the global credit market seems to be currently grinding to a halt, an overwhelming majority of microfinance / microcredit schemes modeled after the ones established by Dr. Yunus seem to be holding their own, which is very fortunate for the rest of us because financial companies that provide microfinance / microcredit loans are very vital in developing countries as they are – more often than not – the only source of small business loans and start-up capital loans. Surprisingly, it works even better than the dysfunctional foreign aid system whose own rigmarole is powerless against white-collar corruption. In the long-term, microfinance / microcredit schemes could be a more economically viable way out of poverty - even foreign aid dependency – in developing nations.

Dr. Muhammad Yunus’ Grameen Bank has even been wholeheartedly welcomed in the Islamic World due to its adherence of Sharia Banking Laws – i.e. the use of tangible / concrete assets as collateral. Plus, the money provided by these microfinance / microcredit schemes are used in bricks and mortar business establishments like fish and vegetable markets – even if the bricks and mortar more often than not are just twigs and thatched straws. Nonetheless, these are far more tangible than those overly complex credit derivatives designed by financial engineers in leading American Ivy League institutions.