• Should Car Title Loans Be Outlawed?

    Car title loans are often listed among predatory loans. According to the Consumer Federal Protection Bureau (CFPB):

    Vehicle title loans typically are expensive credit, backed by a security interest in a car. They may be short-term or longer-term and allow the lender to repossess the consumer’s vehicle if the consumer defaults.

    Title loans are a bad idea as they typically use a paid-for car as collateral for a short-term loan. Some of the problems associated with these loans include:

    1. High interest rates. Though the rate may sound reasonable on a short-term basis, once annualized, borrowers discover they may be paying through the nose.

    2. Short time to repayment. These loans are normally 30 days, which doesn't give the borrower time to accumulate funds.

    3. Easy repossession of the car by the lender. One of the terms to the loan is to turn over a copy of the car keys to the lender, making repossession a serious threat.

    4. Increase in debt trap. When borrowers fail to repay the loan, some lenders automatically extend the loan leading the borrower into a cycle of debt that can never be escaped.

    [read more from CNN here]

    This infographic below describes some of the characteristics of title loans across the U.S.

    For discussion:

    Should title loans be outlawed or should they be allowed to continue? Why?

    source: http://loans.org/auto/infographics/car-title-regulation-united-states

  • How To Retire Well

    "Most Americans spend more time planning their vacation than planning their retirement." This quote from the video above tells us how little we think about retirement.

    How much do you need to retire well? According to this video, you should have eight times your ending salary set aside to retire for 25 years. As a starting place, try to have at least one times your salary by age 35.

    For discussion:

    How much do you need to set aside to retire properly? What monthly plan do you have to achieve this goal?

  • How To Value Superman

    The value of a comic book is difficult to determine. A comic book generates no specific revenues for the holder. The risk associated with investing in comic books is difficult to determine, and who knows how long the investment time horizon actually is? 

    Comic books are not listed on an exchange. Collectors have different emotional attachments to the various characters. And scarcity plays a large role in the price that the market will bear.

    For discussion:

    What factors determine the value of a comic book? Are there more factors beyond those mentioned in the video above?

  • Valeant: Corporate Governance Matters

    Canada-based Valeant is the maker of prescription drug Wellbutrin LX for the treatment of depression and over-the-counter ReNu and Boston for contact lenses. The company grew by "serial acquisitions" combined with limited research and development spending, but has recently been criticized for its pricing strategy (aka price-gouging) and for its relationship with mail-order pharmacy Philidor [read more from Bloomberg here]. 

    Recently investigated by the SEC, the company reported setbacks in its Feb 23 press release:

    The Company currently believes that approximately $58 million of net revenues previously recognized in the second half of 2014 should not have been recognized upon delivery of product to Philidor.  Correcting the misstatements is expected to reduce reported 2014 GAAP EPS by approximately $0.10 and increase 2015 GAAP EPS by approximately $0.09.  Following entry into the option to acquire Philidor in December 2014, the Company began to consolidate Philidor's accounts and began to recognize sales to Philidor only when dispensed to patients, and no similar adjustments would be necessary for sales after that date.

    The Company expects to delay filing its 2015 10-K pending completion of the review of related accounting matters by the Ad Hoc Committee, with the assistance of its independent advisors, and the Company's ongoing assessment of the impact on financial reporting and internal controls. 

    "This determination and the need to delay our 10-K filing are very disappointing but necessary," stated Howard Schiller, interim chief executive officer.  "We remain committed to improving reporting procedures, internal controls and transparency for our investors."

    The history of Valeant is a tale of corporate governance gone awry. This all happened on CEO Michael Pearson's watch. From The Economist (19 Mar 2016), here's the rest of the story:

    The facts that have emerged in March suggest that Mr Pearson should have been fired. Profit targets have been cut by 24% compared with October’s. The accounts will be restated and the filing of an annual report delayed. The results released on March 15th contain neither a full cash-flow statement nor a balance-sheet, but it appears that Valeant has been generating only just enough cash to pay its $1.6 billion interest bill this year. As suppliers and customers get wary, its cashflow may fall, leading to a default.

    There are three lessons. First, boards matter: the managers should have been removed in October. Second, disasters happen in plain sight. Valeant issued $1.45 billion of shares in March 2015, when 90% of Wall Street analysts covering its shares rated them a “buy”. Yet as early as 2014 a rival firm, Allergan, had made an outspoken attack on Valeant’s finances, the thrust of which has been proved correct.

    The final lesson is that “activist” investors, who aim to play a hands-on role at the firms that they invest in, have no monopoly on wisdom. Jeffrey Ubben of ValueAct and Bill Ackman of Pershing Square both own chunks of Valeant and have supported it. Mr Ackman is at present trying to consolidate America’s railway system. Mr Ubben is trying to shake up Rolls-Royce, a British aerospace firm. After Valeant, why should anyone listen to what they say?

    For discussion:

    What does "corporate governance" mean? How could better corporate governance have protected Valeant from the situation it now faces?

  • The Mission of the U.S. Secret Service

    From the U.S. Secret Service website:

    The threat of counterfeit U.S. currency to the financial system of the United States has grown in recent years. Advances in technology, the availability of scanning and printing devices and the adoption of the U.S. dollar by nations as their legal tender have exacerbated the threat. To counter these threats, the Secret Service focuses on strategic international investigations targeting counterfeiters and their distribution networks. The agency has also initiated a comprehensive international forensic counterfeit detection training program for bankers and law enforcement officers overseas.

    The U.S. Secret Service was established as a branch of the U.S. Treasury to fight counterfeit currency. Best known as the branch that provides protection for the President and other dignitaries, the U.S. Secret Service continues to fight counterfeiting today.

    For discussion:

    Why is counterfeit currency so dangerous?

  • The Cash Life Cycle

    We use cash everyday, but where does it come from?

    This video describes the function of the Federal Reserve and its responsibility for the cash that flows through our economy.

    For discussion:

    1. What is the Federal Reserve, and how is it organized? What purpose does the Federal Reserve serve?

    2. How are cash operations managed across the system?

    3. Who produces U.S. currency and coin? How do they know how much to produce each year?


    Watch live streaming video from frbsf at livestream.com
  • Movement of Cash

    Do you remember the 2008 movie, Mad Money, starring Queen Latifah, Diane Keaton, and Katie Holmes where three women stole cash headed for shredding from the Federal Reserve?

    The stuff of movies, the movement of cash through the financial system is described in the infographic below. 

    Infographic image available here from the Federal Reserve

  • Where's The Oil?

    This WSJ video reports that approximately 800,000 barrels of oil are unaccounted for. Is this an error? Or a conspiracy? Theft on an international grand scale?

    Probably not.

    As explained in the video, supply and demand are estimated values with 2 million barrels of oversupply estimated to exist. The number of barrels accounted for is 1.1 million leaving 800,000 missing. While this could mean that the barrels are truly missing, it could also mean that the supply and demand estimates are incorrect.

    For discussion:

    Why is it important to estimate the supply and demand of oil correctly? What is the potential impact of incorrect forecasts?

  • The Cost of Holding Currency

    In the face of negative interest rates--effectively a "rent" on money--banks can always choose to hold physical currency instead. But that has a cost too.

    From the European Central Bank:

    Banks can always choose to hold physical currency instead of electronic money in their accounts with the ECB. Since physical currency has a zero nominal rate of return, there is what I would call an “economic lower bound” for the rate on excess reserves. It is difficult to identify but it is not zero because the effective rate of return on currency is negative. One does not even need to impose a demurrage rate or regular stamping on banknotes, as Irving Fischer has proposed based on Gesell’s ideas. There is a cost of storing, holding, and more importantly, using physical currency. This involves the cost of renting, maintaining and securing storage facilities such as vaults as well as the cost of shipping currency around in a safe and timely manner. A recent ECB study estimated the private cost of cash payments to be 1.1% of GDP on average in the participating countries. The unit social cost was estimated at 2.3 cents per euro of transaction.

    [read the full speech by Benoit Coure, ECB member here]

    The question of whether negative rates are worthwhile is addressed in the video below.

    For discussion:

    Based on the ECB speech, how are negative rates put into practice?

    What are the costs of holding cash?

    In your opinion, should central banks institute negative rates to spur economic growth? Why or why not?

  • Price Discovery on a Metals Exchange

    How are prices on exchanges determined? Who determines where the delivery will take place? Why does it matter?

    These questions and more are answered in this video from the London Metals Exchange, or the LME.

    The price at which a commodity trades is not set but is "discovered" and is based on supply, demand, and costs.

    For discussion:

    What is arbitrage? What is price convergence?

    How are the prices discovered on the LME used?

  • How to Define Market Manipulation?

    Chicago trader Don Wilson will soon be defending his trading position that made him and his firm a bundle of money. A former pit trader, Wilson insists he was seeking to take advantage of mispricings in the derivatives markets, but his actions are being called into question:

    The CFTC sued Wilson and DRW in 2013, saying they broke the law by placing orders only to move prices in their favor. The trades were for a new type of interest-rate derivative offered by a futures exchange owned by Nasdaq Inc. The CFTC alleged that DRW bid on contracts during two daily 15-minute windows when prices are set but never intended to buy the assets. That benefited a $350 million position DRW had already established, according to the regulator.

    The crux of the civil case may come down to whether the CFTC can convince the court that Wilson and DRW took matters into their own hands, placing increasingly higher bids when the market didn’t move the way they wanted. Wilson has argued that he was trying to buy the contracts before prices moved to the correct level, not manipulate the market.

    [Read the full Bloomberg article here]

    For discussion:

    What is the definition of market manipulation?

    Why is it so difficult for the CFTC to win a case proving someone like Wilson manipulated markets?

  • Mid-Career Women in Finance

    The infographic below shows that the percentage of managers in finance that are women is about 25%. The financial services industry has long been understood to be a "boys club" but it doesn't have to be that way.

    According to this Huffington Post interview with Anne Finucane, vice chairwoman at Bank of America:

    Bank of America is better than most banks when it comes to gender diversity of its leaders--30 percent of the executive team members listed on its website are women. (The bank does less well when it comes to racial diversity, however.)

    Finucane said it's not just about getting women into internships and entry-level banking jobs, but convincing them to stay when they're mid-career.

    You will find more statistics at Statista

    For discussion:

    What reasons can you give for the relatively low number of women in leadership in finance?

  • Debit versus Credit Cards

    They look alike, and they buy the same stuff, but debit cards and credit cards are different in important ways.

    This video from Bank of America explains the benefits and limitations associated with each type of card. By the end of the video, you should be able to:

    1. describe a debit card and a credit card.

    2. list the pros and cons of debit cards.

    3. list the pros and cons of credit cards.

  • What Makes a Growth Rate?

    This video interview with Warren Buffett explains some of the reasons why the growth rate of Coca-Cola is declining. Not that Coca-Cola is performing poorly--it isn't. In fact, according to the New York Times this month,

    Revenue in the quarter that ended Dec. 31 fell to $10 billion, down 8 percent, compared with $10.9 billion in the same period a year earlier. The figures, though, exceeded analysts’ expectations.

    Profit rose to $1.24 billion, or 28 cents a share, up from $770 million, or 17 cents a share, in the year-ago period. Excluding one-time items, Coke’s earnings were 38 cents a share, a penny more than analysts had predicted.

    “Our fourth-quarter performance was a testament to the action we took as the company continued to deliver solid pricing and unit case volume growth,” Muhtar Kent, chief executive of Coca-Cola, said in a news release.


    For discussion:

    Based on what you can learn about Coca-Cola, what growth rate would you estimate? What would you consider as you try to determine the appropriate growth rate to use in your modeling of the stock price?

  • History of Mortgage Loans

    Mortgage loan rates have varied significantly over the years, and with them the condition of homeownership in the U.S. This infographic shows the history of mortgage loan rates over the years.

    For discussion:

    What is the mortgage payment on a $300,000 home with 20 percent downpayment, 30 years of monthly payments and a current fixed rate mortgage rate? What if the loan is a 15 year loan?

    If the homeowner makes one extra payment per year, how soon will he/she pay off the loan?

    Back to the Future of Mortgage Interest Rates

    Infographic courtesy of loans.org

  • First Time Homebuyers

    Buying your first home is daunting,  And depending on your creditworthiness, it can be nearly impossible.

    According to Bankrate.com, there are five ways to be ready when you decide to buy your first home:

    1. Check your credit to se where your credit shands
    2. Evaluate your assets and liabiliies
    3. Organize documents, including W-2s and tax returns.
    4. Qualify yourself to determine who much to borrow
    5. Figure out the downpayment on the house you can afford

    Embedded from MGIC Connects

  • What Is the Future of Negative Rates?

    We never thought it could happen. For years we thought the floor on interest rates was zero.

    Not so any longer.

    With central banks reducing rates to zero and now below zero. This begs the question, "How low can rates go?" Why stop at just a little below zero? Why not hundreds of basis points below zero?

    This video interview from the Financial Times discusses the impact of negative rates:

    For discussion:

    What are some of the possible impacts of negative rates?