• The European Problem

    Alan Greenspan sounds the alarms in this interview by Maria Bartiromo in the video above.  The former Chairman of the Federal Reserve describes the economy as a “leaking boat” that we are pleased to continue bailing.  But we have not yet fixed the holes.  He suggests that the only solution to the problem in Europe is political consolidation. 


    For discussion:

    ·        Do you think that political union in Europe is desirable or likely? 

    ·        How does the European financial crisis affect the U.S.?


  • Good News for Students

    Students are likely to be protected from higher interest rates on student loans after the new measure goes to the President for his signature.  According to CNBC today:


    The Senate approved the bill by a vote of 74-19. The House passed the bill earlier in the day and it now goes to the White House for President Barack Obama's expected signature.


    The measure would prevent a doubling of interest rates on new student loans scheduled to go into effect on Sunday. It also would spend more than $100 billion on highway and transit programs over two years. A requirement that the government approve the contentious Keystone XL pipeline was dropped from the measure.


    The rate on student loans will remain at 3.4% for another year rather than double as scheduled.  According to CNN, this is “good news for more than 7 million students taking out loans for the next school year.”  With unemployment a staggering 24% among young people, more are opting for higher education but struggling to repay their debts.  This bill gives them a much-needed break, but only for another year.


    The same vote will be come before Congress this time next year.



  • Interest Rate Manipulation Does Matter

    Is it a conflict of interest for banks to charge customers a floating rate of interest and then determine what that floating rate of interest is going to be at each future date?  Not if that rate is determined in a fair and impartial manner.  The London Interbank Offer Rate or LIBOR is an interest rate that many banks use to establish the rates they will charge their customers.  According to the British Bankers Association (BBA): http://www.bbalibor.com/


    It is calculated each day by Thomson Reuters, to whom major banks submit their cost of borrowing unsecured funds for 15 periods of time in 10 currencies. A trimmed average of the collected figures is then taken to create bbalibor…


    bbaalibor is a benchmark used by banks, securities houses and investors to gauge the cost of unsecured borrowing in the London interbank market.


    According to CNBC today, “Libor is supposed to be a collective representation of the interest rates on short-term loans that banks make to each other…. Eighteen banks currently supply data for setting dollar-denominated Libor. According to regulators, Barclays traders sought to skew Libor to benefit their bets. These trades were executed using financial contracts called derivatives that were linked to Libor.


    From the article:


    Given its extensive reach, it would seem critical that Libor be calculated in an impartial and transparent manner. But the opposite seems to have been the case. In a settlement announced Wednesday, regulators in the United States and Britain said that the British bank Barclays had manipulated Libor to increase its traders’ profits over several years. Barclays agreed to pay over $450 million to resolve the accusations; other large banks are expected to enter similar settlements.


    For discussion:


    ·        Go to http://www.bbalibor.com/bbalibor-explained. What are the factors that influence Libor?


    ·        How does Libor influence consumers and investors?


  • Money Market Funds are Not Bank Deposits

    SEC Chairman Mary Schapiro suggests that money market funds are “great investment tools” but they still pose risks that investors may not understand. 


    In this interview with CNBC, she explains that money market funds are not bank products but rather are investment vehicles.  Keeping the share value at $1 may mislead investors, so she suggests that the share value or “net asset value” (NAV) should be allowed to fluctuate.  However, since there are operational problems with a floating NAV, she suggests an alternative.  Money markets can maintain a small capital buffer to absorb daily fluctuations.  Furthermore, if they place some restrictions on investors who want to pull their money out of the fund, they may be able to further protect the smaller investors who are not as quick to move their money from fund to fund. 


    For discussion:


    What does it mean to “break the buck” when it comes to money market funds? How might breaking the buck lead to a “run” on the funds?


  • A New Financial Product: Securitized Rental Cash Flows

    What is an MBS? Or a CMO?  


    As the CNBC video above shows, many people don't understand that securitized loans like MBS are simply investments where the investor gets paid when the underlying collateral generates cash flow.  If the underlying collateral is a home mortgage, then the investor gets paid when the homeowner makes a monthly mortgage payment.  Thus, a mortgage backed security or MBS.


    As the housing bubble progressed, MBS became more complicated, rating agencies blindly rated these complicated instruments, and ultimately we had a financial meltdown.  However, securitization—that is, the process of converting loans into tradable bonds or securities—serves a noble purpose.  Securitization allows lenders to sell their incoming cash flows and free up capital so that they can make new loans.  At the same time, securitization allows investors to buy cash flows that they otherwise wouldn't be able to access.  

    All kinds of cash flows have been securitized over the years.  Home equity loans, car loans, and credit card receivables have been securitized into so-called asset-backed securities (ABS).  Commercial mortgages have been securitized into commercial mortgage-backed securities (CMBS), and residential mortgages into residential mortgage-backed securities (RMBS) or MBS for short.  

    Now we face a new kind of cash flow to be securitized: rental income.  This video presents the pros and cons of banks selling a new securitized product based on the rents generated by bank-owned properties and the properties owned by large investors.  

    Is this a wise decision?  Some say it is too complicated and re-creates the financial mess we just faced.  Others say that these instruments may not be for everyone, but that doesn't make them inherently bad.  


    For discussion:

    1.      Define securitization and describe the process of creating a new MBS.  How might that process work for rental income?


    2.      What would investors need to examine before they invest in a security backed by rental income?


    3.      What are the arguments in favor of these new securitized instruments?  What are the arguments against?



  • Buying a New Car

    Both of my teenagers are learning to drive, so this CNN Money article, “Coolest cars under $18,000” caught my attention today.  We used to buy only new cars, but we’ve had good luck with used cars lately so I’m not sure we’ll buy a new car again.  Neither am I too comfortable putting my kids in such tiny cars.  I’d like a little more metal around my loved ones.  In any case, the list of cars is worth considering.


    According to the article, some of the favorites listed by Kelley Blue Book include:


    ·        Dodge Dart $15,995

    ·        Hyundai Veloster $17,300

    ·        Fiat 500 $15,500

    ·        Mazda 3 $15,200

    ·        Chevrolet Sonic $13,865

    ·        Ford Fiesta $13,200

    ·        Honda Fit $15,325

    ·        Kia Soul $13,900

    ·        Scion iQ $15,265

    ·        Volkswagen Jetta $15,515


    Of course, buying a car is not without its pitfalls.  You can probably find someone among your family and friends who felt scammed by a car salesman at one time.  The most likely complaint is getting talked into a car based on monthly payments and not paying enough attention to the total purchase price of the vehicle.  Other complaints may be associated with the trade-in value of your old car or hidden costs. 


    According to this Forbes article and the accompanying slide show of top car scams, the best defense is to be armed with information.  Know what your trade-in is worth.  Investigate car loans from sources other than the dealer, and know what interest rate you’ll receive based on your credit score.  Finally, like any good investor, know when to walk away.


    For discussion:

    For a $15,000 new car, what would be the monthly payment if you put down $2,000 and borrow the rest over 48 months at 3.5% per year?  What if you borrow the rest over 36 months at 2.75% per year?


  • States Compete for Movie Business

    What’s a state government to do?


    On one hand, budget deficits are forcing many states to tighten their belts, cut spending, layoff employees, and seek revenue.  On the other hand, hard times and unemployment are encouraging states to compete for businesses that will bring in revenue and jobs.  Businesses like new movie productions.


    How to compete? By offering tax credits, that’s how.  Hollywood is now competing with less likely movie filming locations because of California’s limited number of tax credits that are distributed by lottery each year. 


    For discussion:

    What are the costs and benefits to the state that offers incentives for movie producers to film locally?


  • The Battle for Video Rentals

    Although we have a Netflix account that we use regularly (we’re currently watching all Star Trek reruns in order, beginning with the pilot episode from 1966), we still resort to renting a movie from Redbox occasionally.   Especially when we’re on vacation and looking for a movie that is not available on streaming video from Netflix.


    Friends of ours have chosen to drop their Netflix subscription altogether and just use Redbox exclusively.  So I can understand why this article on CNNMoney is entitled, “Coinstar is Kicking Netflix’ Butt.” (Coinstar is the company that owns Redbox.)


    From the article:


    Coinstar and Redbox often get mocked for being so old-school, but not everybody wants to watch movies streaming on their smartphomes or iPad. Plus: Sometimes consumers actually have to leave their homes to shop for things. (Three cheers for analog retail! You go, Luddites!)


    Still, it's not as if Coinstar risks being lost in the online video revolution. Redbox inked a streaming/DVD joint venture with telecom giant Verizon (VZ) in February. The service is set to launch in the second half of the year.


    Netflix, on the other hand, continues to befuddle investors. While the worst appears to be over in terms of subscriber defections following last year's decision to charge people separately for DVDs and streaming and the ill-fated and short-lived decision to rebrand the DVD business Qwikster, Netflix is still a company faced with many challenges.


    According to the article, Netflix is expected to deliver a small profit this year while Coinstar’s earnings are expected to grow by 35%.  Meanwhile, Netflix is trading at 30 times earnings while Coinstar is trading at only 12 times earnings—a significant difference in valuation.


    And finally, there’s competition.  We’re recently borrowed shows and movies from Amazon.  Soon we may find we don’t really need Netflix any longer.  For now, though, we’ll stay calm and carry on with our Netflix subscription.


    For discussion:


    ·        What ratio is being described by the statement, “Netflix is trading at 30 times earnings?”  What does a high ratio indicate? What about a low one?


    ·        Do you agree or disagree with the “buy” rating on Coinstar and the “sell” rating on Netflix? Why?


  • The Rain in Spain

    The once booming housing market in Spain has since crashed taking with it the construction industry, jobs, and now Spanish banks.  With 24% unemployment and banks on the brink of bankruptcy, the Spanish economy is the next among the southern European countries to need a bailout.


    According to the prime minister, Spain needs two things:


    1.      A public administration that does not spend more than it has and can live within its means.


    2.      Healthy banks that can provide credit.


    For discussion:

    Read this Bloomberg article.  Why did the yields on Spanish bonds rise?  According to this article, what is the outlook for Spain and Italy?


  • Who's Lending the U.S. Money?

    Neither a borrower, nor a lender be;

    For lone [loan] oft loses both it selfe and friend:

    And borrowing duls the edge of Husbandry.


    ~William Shakespeare, Hamlet



    We talk a lot about the U.S. borrowing more and more money.  Have you ever wondered who is lending it?


    This CNBC slide show lists the top 15 holders of U.S. debt. 


    And the winners are:


    #15.    Taiwan ($184.4 billion)

    #14.    Caribbean banking centers ($224.8 billion)

    #13.    Brazil ($237.4 billion)

    #12.    Insurance companies ($253.7 billion)

    #11.    Oil exporters ($254.5 billion)

    #10.    Depository institutions ($286.3 billion)

    #9.      Medicare trust funds ($324.57 billion)

    #8.      State and local governments ($444.6 billion)

    #7.      Mutual funds ($797.9 billion)

    #6.      Pension funds ($903.4 billion)

    #5.      Japan ($1.083 trillion)

    #4.      Savings bonds and other investors ($1.102 trillion)

    #3.      China ($1.169 trillion)

    #2.      U.S. Federal Reserve ($1.659 trillion)


    And the top holder of U.S. debt…


    #1.      Social Security trust funds


  • The Example of the Ruble-Zone

    Before the Eurozone came the Ruble-zone.  Eventually it ended—the Ruble-zone that is.  As for the Eurozone, no one knows for sure but nearly everyone has an opinion.


    The Ruble-zone was the currency union in the early 1990s and included Russia and other members of the former Soviet Union.  According to Bloomberg (June 7, 2012):


    It was a currency union of 15 states in 1992. Two years later, as budget deficits spiraled out of control, hyperinflation reigned and economies shriveled, just two members of the Soviet Union’s ruble zone were left….


    While differences between the Soviet Union and the EU are greater than their similarities, there are parallels that may prove helpful in assessing the debt crisis, historians say. Both were postwar constructs set up in response to a collective trauma; in both cases, the founding generation was dying out as crisis hit and disintegration loomed.


    Some believe that the euro leads to unity among the nations in Europe.  Others suggest that unity is the missing ingredient; that is, the euro doesn’t lead to unity. Unity leads to the euro. 


    For discussion:


    What are the similarities and differences between the Soviet Union and the European Union?  Are there any parallels between the Ruble-zone and the Eurozone?



  • NYSE Says "No Fair" to Nasdaq

    Nasdaq is admitting it messed up during the Facebook IPO, and it wants to make good.  However, the  New York Stock Exchange is crying foul.


    According to Bloomberg (June 6, 2012)


    Delays and malfunctions on the Nasdaq Stock Market were the first signs of trouble in the May 18 Facebook IPO that burned investors, cost Wall Street market makers an estimated $120 million and prompted lawsuits against the company, its exchange and the underwriters. The stock is down 29 percent since the $16 billion offering, the biggest ever by a technology company.


    Nasdaq wants to compensate members who took losses by offering them lower trading fees.  NYSE argues that this is unfair as it forces members to trade on Nasdaq to access their compensation.


    From the article:


    “This is tantamount to forcing the industry to subsidize Nasdaq’s missteps and would establish a harmful precedent,” NYSE Euronext said in an e-mailed statement. “We intend to strongly press our views that Nasdaq’s proposal cannot be allowed to permit an unjust and anti-competitive situation.”


    For discussion:

    ·        What happened at the IPO to cause members to lose money?

    ·        What role did technology play in this snafu?


  • Credit Card Debt

    The thing about credit cards is that once you get hooked, it’s tough to get free.  This video by CNNMoney offers some common sense tips to getting out of credit card debt—tips like paying off credit cards one at a time, beginning with the one that charges the highest interest. 


    But the number one tip for getting out of credit card debt?  Avoid getting trapped by debt in the first place.


    The Frontline video “Secret History of the Credit Card” describes how credit card companies love the folks who live on credit each month but hate those who pay off their credit cards in full month after month.  From the move transcript (available online)

    BEN STEIN: The credit card companies hate people like me, who pay off our bills every month. And I know that because I ran into a fellow I went to high school with on the street, and he told me he worked for a credit card company. And I told him about how much I use credit cards and how I pay them off every month, and he said, "Oh, we hate you. We hate you guys. We call you deadbeats."

    NARRATOR: "Deadbeats," in the upside-down world of the credit card business, are the people like Ben Stein, who pay off their bills on time. The industry's best customers are the 90 million Americans who don't pay off their credit card debt. They're called the "revolvers."

    (Watch the one-hour video online here.) 


  • Eurozone Bonds: The Latest Controversy

    Photo of European Flags by Xavier Hape, licensed under Creative Commons and available at http://www.flickr.com/photos/85641110@N00/192493917



    The European financial crisis continues to plague policy makers.  Banks are under pressure as depositors flee.  Greece may be forced to leave the Eurozone. No one knows what to do.


    Robert Zoellick, President of the World Bank said in the Financial Times this week that they had better find a solution.  Fast.


    According to CNBC (Chua, 31 May 2012):


    In the editorial, Zoellick argues Europe needs to deploy euro zone bonds, recapitalize banks by using funds from the European Stability Mechanism (ESM) and provide medium-term funding assurance to countries such as Spain.


    The creation of euro zone bonds has been a controversial subject with France’s new President Francois Hollande calling for the currency bloc to issue common bonds and Germany rejecting such a move on the grounds it will weaken fiscal discipline.


    Is Zoellick correct in comparing the euro zone crisis with the Lehman crisis just a few years ago?  Read his Financial Times piece here and decide for yourself.