SubscribeJargon, People and Company Update – 2008
March 1, 2008
Jargon and other interesting phrases that we may soon find showing up in conversations … Don’t 
laugh because it really isn’t funny !
Terms
- Pizza Inflation
Single-Family Refrigerator Box
Extended Family Dwellings
Right-Wing Terrorism
Florida Condo Swamps
ARM-LEG-BODY Mortgage
No-Fault Foreclosures
Darwin’s Theory of Econolution
Maximum Wage
Crash Landing
The Oil-Standard
Mandatory Population Thinning
“I Will Work for Euros…”
BalmerGate
Multi-Generational Mortgages
The November Poll Panic
The Stupidity Tax
Commodity Hoarding
In-Sourcing
Living Room Vacations
Write-In-Ballot-Craze
The Great Alaskan Migration
Section-8 Bankruptcies
WikiGovernment
Carpartments
Companies
- Lunar Development Corp.
FBMRA - The Federal Banking and Mortgage Rollup Agency
Macbook Airlines
Lehman, Citi, Goldman Brothers et al
Google 4 for 1 Reverse-Split
The MBIA/Nielson Merger
The Arson Training Institute
Yahoo?
iFlix
MyFace
People
- Vice-President Winfrey
Suze-Ramsey Visa Card
Governor Cramer
Senator Spears
Treasury Secretary, Sheikh Mohammad bin Zayed Al Nahyan
Regis and Hillary LIVE!
Friends of Limbaugh W.
Chairman Greenspan
What did I miss ?
(in no particular order)
On Lust and Trust
January 25, 2008
Over the past few days I have received a good amount of mail from blog subscribers, podcast listeners and clients. Many have mentioned that they are disillusioned. Some are horrified. Others are fed up (no pun intended)! Come to think of it, I do not think that there were any that were, even in the least, happy with the markets even though they gained. It is rather obvious that there is a great deal of confusion out there.
On average, investors are looking for answers while they are having a hard time envisioning the future. For sure, there are a few that think this is just a quick correction and nothing to worry about. There are even those that are all for blame, such as the curmudgeons that frequently come up with a good bashing of the Fed, the media and hedge funds. But when we really look at the situation that is developing, we need not blame. Rather, we need to find long term solutions. The crap layered on top of crud within the financial sector is nothing new, nor will it ever stop without significant intervention.
As we have been busy recalling the Savings and Loan Crisis, we seemed to have forgotten about the CMO meltdown two decades ago and the “rouge broker” fiasco’s we have witnessed during the past many years/months. Lest not we even bring up the forever banished names of Long Term Capital Management or Enron!
One particular email that caught my attention from a loyal podcast listener hit the proverbial nail on the head. It talked directly to the point that it is not only the current administration’s or even the old-guard’s fault that we are in such a disarray. The truth is that out of all of the current politicians vying for the coveted position of Commander and Chief, there is no particular name that brings any feeling of comfort. No one that is seemingly able to come up with anything more than political rhetoric and snippets in an effort to win over votes.
I think that what is happening in the financial arena is immoral. The lust for profit above all else has gone too far. Capitalism succeeds only when trust, and the spirit of fair play is maintained. We are at a critical inflection point and I do not see any existing governmental authority figure who can inspire.
Greenspan left quite a mess in his wake. Now he is off to the hedge fund which is exploiting the downside of the easy credit conditions he himself enabled. This scenario is a microcosm of the morally bankrupt behavior that is commonplace.
..Fred S.
Once more, we are in a crisis of confidence. One that will take time to heal. Be sure that once we are back and fully trusting those individuals and companies that help us “create wealth,” they will assuredly cook up another scheme that brings on another financial implosion. Then, the cycle will continue on again and again and again. Feel better?
Frolicking at Hell’s Gate - Mortgage Mayhem
November 21, 2007
The only thing worse than running out of Turkey on Thanksgiving is talk about cutting dividends on stocks. This is nothing to take lightly. It ranks up there with yelling fire in a theatre and is almost as bad as telling investors that they cannot withdraw money from their accounts. The recent flurry of negative news concentrating on the financial sector has investors running for cover, as they are apprehensive about what else could lurk beneath the surface. Of course, that point is relatively clear to most. What may not be so apparent is what financial firms will do in their desperation to help defray costs associated with their frolic through Hell’s Gate, now better known as the mortgage business.
It is very troubling to find that the “shoes dropping” are not showing any signs of abating. In fact, it seems that the number of shoes related to the problems in the financial sector can only be matched in quantity to those found in the closets of Imelda Markos. The truth is that this recent announcement by Federal Home Loan Corporation, aka Freddie Mac (FRE) a traditional and conforming lender is much more significant as now, it is known that the spread of the sub-prime problem has seeped into areas which were not anticipated by most analysts.
Direct from the pages of the Freddie Mac website: “as of September 30, 2006 held a $3 billion cushion over the OFHEO mandatory target surplus.
This is real, permanent, at-risk capital that provides the first line of defense in the unlikely event of a financial catastrophe at Freddie Mac. Since shareholders are the ones providing the capital, they – and not the taxpayers – will be the ones to bear the losses. Shareholders expect an adequate return on their investments in exchange for putting their money on the line, but like any other investor, they buy our stock at their own risk.”
According to reports by the company, Freddie Mac saw the fair value of its net assets decreased by about $8.1 billion in the third quarter. Freddie Mac has also hinted at the possibility of the cutting their dividend in a defensive move to protect the required level of capital surplus requirement imposed by regulators. A cut to their dividend would immediately help to stem the reduction of assets due to their ailing portfolio; but whether it is significant enough is yet to be seen. Read more
The Coming Death of the Insurance Industry
September 17, 2007
This is frank discussion about growing epidemic that is set to become one of this countries biggest scams. It is so monumental that it has the potential of bringing down the entire insurance industry… Seriously. If you scare easily, stop reading now. (Note: Podcast 28 has an amazing interview with Steven Leimberg on this subject, subscribe via iTunes to ensure delivery on Sept 19th)
Never before has the insurance industry faced such a cataclysmic onslaught of potential claims than they will begin to see in only a few decades from now. This is a crisis, which was set in motion by a rather innocent idea and has now turned into a greed-infested scheme. If left alone with no intervention, it will have us all looking back in 20-30 years wondering how and why we could of let this happen.
The financial media is finally picking this up as a front-page concern (Business Week Story) and we are seeing something new just recently with shares of Life Partners Holdings (LPHI) that is beginning to look rather ugly. But why is this coming to their attention just now? It is because for years now, the insurance industry has been systematically pilfered and companies are starting to worry about their future. What started out as a small crack, has now become a major crevasse. Is it will be a wonder if some of the companies will actually survive. No, No, No, not because of a hurricane or tornado. Not even from massive fires or devastating floods or the threat of global warming. Nothing natural can come close to how this is going to affect the industry. This is purely man-made.
It started with an idea from Prudential around 1988. At the time, it was innovative and extremely beneficial to policyholders. You see, back then; AIDS was causing a terrible problem as experimental treatments were very costly. When a patient’s money ran out – they had few alternatives. Prudential devised a way for those who were afflicted to sell their life policies for a substantial amount in return for assigning the death benefit back.
This was the incarnation of what was to become known as Viatical Settlements. The original plan quickly morphed into an investment scheme for many unscrupulous companies who realized that those that were in need of funds would sell their policies for almost any amount. Fair or not. Investors poured in with the promise that within a short time (as AIDS patients had limited life expectancies) they would profit by 15%-25% on their investment. Even as concern was raised about the morals of such a plan, Viatical Settlement companies were popping up in record numbers. It was on later that investors learned that this no-risk plan had many problems and their easy profit wound up turning into ugly losses.
Along the way, the greedy got rich by setting up phony guarantees and investors were fleeced of millions of dollars.
This was just the beginning. These days everyone profits from this (except the insurance industry) and it is finally becoming topic in focus. It can be said that the plan has morphed into a win-win-win-lose scheme.
Now you have a basic background and the genesis of Viatical Settlements - though they are now referred to as Life Settlements amongst the politically-correct. (Think of Stewardess/Flight Attendants and Garbage Men/Sanitation Engineers)
Today, the players are many and the scheme is gaining popularity: It did not stop there; in fact it only gets worse. Presently, the numbers are a lot bigger as the schemes get more and more crafty. These days, seniors are the ones that are selling policies to investor groups – and why not? They too are in for a piece of the profit.
Here is how a typical plan works: First, an insurance agent approaches a senior (usually 75 years old or so) and sees if they are willing to have a life insurance policy bought on their life. Often times, the insured will be required to have a net worth well in excess of $1 million as this plan works much better with higher death benefits. A company, specializing in loans for this investment plan, will advance the annual premiums for 2 years. This is important, as there is no money actually changing hands or expended from the insured to the insurance company. When the policy is issued, the insured usually retains the rights for exactly two years, until the contestable period is over.
Contestable Period Definition - Life insurance policy clause that provides a time limit (usually two years) on the insurer’s right to dispute a policy’s validity based on material misstatements made in the application.
When the loan comes due at the end of the “contestabilty period” the agreement will usually stipulate that the policy will revert ownership to the company (depending on the exact terms of the arrangement) that provided the advance on the premium (premium plus interest of 10% plus annually). This is important, as this is where the profit potential is realized - For the second time! From this point they try to sell the policy to other investors looking to profit from the death of the original insured – the third profit potential.
We could stop there and say that there are several issues that stink to high hell:
- 1) Insureds are induced to do this, as there is BIG MONEY in it for them; assuming all goes well. I have personally seen insureds receive $100,000 PLUS for simply standing in for an insurance exam and signing policy paperwork. I know of several more who received much higher “inducements”.
2) Agents stand to make huge profits as they are usually paid anywhere from 50%-70% of the first years premium on these types of policies.
3) The loans for the premium are charged at a rate significantly above market
4) The higher the death benefit, the better the plan works for all involved
a. Higher Premiums equal higher agent commissions
b. The greater the financial worth of an insured, the higher the death benefit
c. The higher the death benefit, the higher the premium resulting in the more “inducement” the insured will be paid
Here is where it gets tricky. Since there is a significant financial incentive to showing a net worth as high as possible; financial creativity is key. Valuations can be “enhanced” on real estate and businesses rather easily as can the approximated value of other assets. This is a real conflict that should be (but isn’t) taken seriously. Unfortunately, I have also seen several occasions where agents show insureds how to “optimize” these values in order to qualify for a higher death benefit. Just to be clear, this is not just a friendly exaggeration of values that one may do on the golf course. This could be deemed FRAUD.
The risk is weighed against the potential for a nice payday if the plan is approved. The usual decision is no surprise. (Picture the three monkeys with their hands over their eyes, ears and mouth)
Now, here is the reveal of how the life insurance industry is facing potential extinction if nothing is done:
As a practical matter, insurance companies build assumptions as to the percentage of policies written that will lapse into their pricing models. Since policies purchased only to be sold to investors will never lapse, insurance companies will have to pay claims much greater than they paid for. To add insult to injury, rather than paying full premiums, investors usually pay in only the minimum necessary to keep the policy going, thereby depriving the carriers of the capital necessary to invest to pay interest or dividends and cover maturing claims.
As for the insurance industry: “Be careful what you ask for; you might get it….” To be fair, the insurance industry is not without blame. They welcomed the record breaking sales and have turned a blind eye to the potential abuses in pursuit of short term profits. As one described it, “they took a bite of the poison apple; and they liked it….” Now, they’re bailing water as fast as possible to avoid the pending actuarial disaster.
The concept of life insurance was born out of a notion of public trust and common good and special tax incentives were granted as an inducement for bread winners to buy insurance to protect their widows and orphans from becoming wards of the state. While the greedy modern day robber barons will argue that it’s property and you ought to be able to do what your want with it, we can not lose sight of the fact that it’s a very special type of property and different from stocks, bonds, real estate and other commodities.
To purchase life insurance one must have an “insurable interest”- a risk of loss that would occur if the insured dies. Theoretically, one’s life and children are presumed to be better off if their husband or father stays alive. The purpose of the insurance is to replace some or all of the income the insured would have earned had he lived.
In these pre-sold, financial arrangements, it’s exactly the opposite. When outside investors are the beneficiaries, the sooner you die the better their internal rate of return. Life insurance is reduced to no more than a gambling contract which is against public policy.
With ever mounting deficits, it may only be a matter of time until congress strips life insurance of it’s favored tax treatment; thereby making it more costly for “Average Americans” to obtain the coverage they need and upholding a sadly ever-expanding phenomenon of the greedy few destroying an important family financial instrument for the masses.
Many carriers are now fighting back. Some send out investigators to interview insureds as to why they bought the insurance or what they expected would happen so they can rescind contracts. Others simply are refusing to accept collateral assignments and requests for change of ownership. Many have updated their applications to include questions that require disclosure of any financing arrangements, up front incentives or potential sales opportunities.
Even though promoters still tell prospects “not to worry about it” there’s Read more
Placations for a Financial Crisis - The Planner’s Playbook
August 30, 2007
There has been a series of financial planners on CNBC and other media outlets that have been discussing the recent market turmoil’s effect on clients. Specifically, there has been interest in whether or not clients have been calling and freaking out. This morning on CNBC, Alice Finn a financial planner from Ballentine, Finn & Company was interviewed. 
She commented (as has been the case with most planners), “Clients have not called, they are not as concerned and the phone has not been ringing. Clients are investing for the long haul and they are well diversified and have not called since they are comfortable…”.
She went on to discuss the difficulties of trying to time the market. Essentially, Ms. Finn contends that no one can time the market, as you will have to be right twice in order to succeed; when to get out and when to get back in. That seems to be a fair assessment.
Furthermore, she went on to talk about diversification and investing for the long haul and all of the other catch phrases that planners use. I too am fond of many of these. But, I contend that the reason clients have not been ringing the phone is twofold:
1) Summer Vacations
2) Statements have not gone out for August yet
These “phrases” are an excellent means to pacify clients during short corrections that bounce back quickly. If you read between the lines though, these are nothing more than standard comments by advisors that can be interpreted as; we are not doing anything to protect your account.
I am sorry to say that hollow phrases are not going to help if the market really declines. The truth is that diversification is fine through quick and shallow corrections, but when we see a protracted slide, there is nothing better than cash. Unfortunately, advisors who continue to believe that a “sit on the hands” mentality (albeit with crossed fingers) will allow for clients to weather major storms are plain ignorant. This is not to say that this is any time to panic. Nor is it a forecast that we are in for a major downturn. Rather, it is a lesson that we should all look forward to what is ahead in order to make appropriate investment decisions.
In this market condition, action is required to ensure that portfolios are allocation away from the areas that may be in for additional downside risk. Yet, time and time again we have seen comments from experts that look to provide comfort over action. Here are some of my favorite axioms that have been bantered around during market turmoil that are meant to mollify clients:
The Financial Planner’s “Placations for a Financial Crisis” :
- 1) Buy on the DIP
2) Diversification is key
3) We are in it for the long haul
4) Do not listen to the noise
5) There is plenty of liquidly in the markets
6) Great time to dollar cost average
7) The situation is contained
8 ) They’re not losses until you sell
9) Market Timing does not work
10) The 25 Year history of the S&P 500 shows….
11) Now is the time to buy, not sell
12) Only 5 days over the past 20 provided 80% of returns
13) This is healthy for the markets
14) Do not let emotions control your decisions
15) The S&P 500 has never had a negative 20 year return
Be smart, do what you know to be right from all of the information that is available and resist the urge to just sit and hope for the best. Re-evaluate your allocation, reassess the risk and act.
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