An Explanation of the Business/Consumer Cycle

WaMu Execs dragged before Congress today

There will be excitement in Washington today as former WaMu Execs are dragged before Congress kicking and screaming. Now that a Senate panel has had over 18 months to gather information, hopefully some sharp questions will be asked about Washington Mutual's abusive and illegal practices.

Allow me to urge the Congressional panel headed by Senator Carl Levin to refer the entire situation to the Justice Department for criminal prosecution.

'Washington Mutual "was one of the worst," Levin told reporters Monday. "This was a Main Street bank that got taken in by these Wall Street profits that were offered to it."'

Top ex-WaMu executives come before Congress
http://news.yahoo.com/s/ap/20100413/ap_on_bi_ge/us_washington_mutual_investigation

Bank Safety Ratings on the Web

Bankrate now offers bank safety ratings for free on the web. See the Safe and Sound page of the Bankrate website - http://www.bankrate.com/brm/safesound/ss_home.asp

You can search using many different criteria to find the banks you are interested in. Bankrate provides the following summary to describe the service.

"Bankrate.com's Safe & Sound® service is a proprietary system designed to provide information on the relative financial strength and stability of U.S. commercial banks, savings institutions and credit unions. The system employs a series of twenty-two tests to measure the capital adequacy, asset quality, profitability, and liquidity (CAEL) of each rated financial institution. Individual performance levels are determined from publicly available regulatory filings and are compared to asset-size peer norms, industry standards and key absolute benchmarks. Combined results form the basis for our Composite CAEL and Star Ratings, which are described below. When possible, the system also produces a report that provides a detailed explanation of our findings, for each rated financial institution."

Earlier we had warned everyone to get their money over the FDIC limit out of Washington Mutual. It is interesting to note that WaMu recieved the lowest possible ratings, for both the Bankrate star rating and CAEL rating. - http://www.bankrate.com/brm/safesound/thrftmm.asp?fedid=1000508551

Gas at the Pump

A HingeFire survey early this summer asked readers about the projected price of gas at the pump on August 1st. The results showed the following:

Over $4.50 23%
Between $4.00 and $4.50 43%
Between $3.50 and $4.00 17%
Between $3.00 and $3.50 13%
Below $3.00 2%

The actual nationwide average price was $3.84 at the beginning of August. Congrats to the 17% who selected the $3.50 to $4.00 price range (I actually believed it would be above $4.00).

The good news for consumers at the pump is that it appears that the short term speculative bubble associated with oil has burst over the past couple of weeks. This will help both the market and your wallet when filling up the tank. As a note, 68% of readers in the most recent HingeFire survey believed that oil was in a speculative bubble. At this point, many analysts would say this perspective is correct.

Crushing the American Family

Once in a while a cartoon comes along which really drives home a point. Despite political pundits waving their arms and claiming that we are not technically in a recession, the circumstances facing American families are so dire these proclamations are nearly meaningless.

The credit crunch, housing market, gas prices, job losses, and rising food costs have left consumers in a tough position. Families are having to cut back many activities and purchases simply to cover necessities - this is not good news for the two-thirds of the economy dependent on consumer spending.

Well for the good news - At least we are not technically in a recession!

Saving on Food: Avoiding the checkout coronary

The cost of food keeps going up. Most customers cringe when going through the checkout line at their local grocery store these days. Coupons are back in vogue, and many people are comparison shopping between brands and stores to save money.

One problem is that the most standard items like milk, eggs, and bread that have risen in price significantly don’t normally have coupon discounts. One way our family is saving is by going to big wholesale discount centers such as Sam’s to buy these items. Milk at Sam’s is cheaper than any of the local groceries. Until recently we were not focused on using discount centers for food purchased; when I used to think of Sam’s it was for cheap electronics, office supplies, and other stuff. Times have changed – thanks to the rapid inflation in food prices.

On an interesting financial note, regulators are proposing to increase the margins for agricultural products in the commodities markets to curb speculation. This step was recently enacted for energy futures to reduce volatility, apparently it has not worked out very well – Oil jumped $10 today.

One recent article outlined “How to Save $400 a Month on Groceries”. The piece outlines some of the websites and strategies for finding coupons that will help you save in the checkout line.

Vote Now: Gas Survey

Over the recent holiday weekend, millions of U.S. drivers fretted about the price of gasoline. There are two days left in the poll about gas. Take the survey now.

Where will Gas at the pump be on Aug 1st?

Found at the top left corner of the blog.

Get Coupons on the Web

With the prices of food and basic necessities rising weekly, the importance of saving money has risen to a new urgency in many families. Coupons – a normally ignored component of Sunday’s newspaper have now become an important part of the family budget.

Even so last year only 1% of coupons were redeemed. This rate is expected to rise this year. One issue with the low redemption rate is that many paper coupons are for articles not normally purchased by families. One bit of good news for consumers is that manufacturers are offering more coupons this year for commonly purchased items, even as they raise prices.

One resource for coupons is the web; there are a number of free and paid sites that offer coupons. It is no longer necessary to limit your search to the Sunday paper. A recent Wall Street Journal online article provides an overview of the “The Best Sites for Coupon Clipping”.

Find the cheapest Gas Prices online

Gasoline prices are rising several cents each week - very much socking it to everyone who drives an automobile.

A number of resources have popped up online that enable you to find the cheapest gas prices in your community. A recent article in the Wall Street Journal online (Services Help Drivers Find Cheapest Gas) outlines some of the best resources.

Quick Takes: Is the Financial Crunch over? More heads rolling

A slew of articles have appeared recently that the housing-driven credit crunch is over. Merrill Lynch’s Thain is the latest executive to make this claim. Are the financials about to recover or are these characters simply “talking their book” – to state it in Wall Street terms? Thain states that the upcoming losses at banks will be reduced moving forward even though the consumer will exert a drag on the U.S. economy over the next 6-12 months.

Coupled with the Wall Street Journal headline “The Housing Crisis Is Over” – it provides investors with hope that the worst may be in the rear view mirror. Housing may have hit the bottom according to some analysts. “A bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.”

Of course there are pundits who take the other side of the coin, presenting an outlook for housing that shows another 20-30% drop in prices nationwide. This will be coupled with a drop in consumer spending that drives the next wave of the credit crunch further causing chaos at the banks.

Most likely the reality over the next couple years will be situated between the two extremes of rosy forecasts and dismal down-siders. Despite the recent recovery of financial stocks, most investors do not feel confident buying into this sector – most believing that the bounce-back is temporary.

Heads Rolling

The boxes continue to be dropped off in corner offices. The president of bond-rating firm, Moodys, has been sent packing. Brian Clarkson, is viewed as a casualty in the complicity of credit-rating firms in the sub-prime meltdown.

“The resignation comes amid heightened scrutiny by investors, regulators and lawmakers into the role of Moody's and its rivals in the meltdown of complex mortgage-related securities, many of which received top triple-A ratings from the credit raters, only to be downgraded sharply in the past 12 months when the housing downturn worsened.”

Riots in the Streets: Food

Well not quite yet… however a number of media pundits are urging people to stockpile food in order to get the best return on their money. According the CNBC, the price of eggs has risen 45% in the past few months; milk is up 33%, and cheese up over 15%. Coupled with the rising cost of fuel at the pump, most families are facing a double wammy.

The trends in food pricing are not going to change, but are likely to get worse. Most analysts are expecting even steeper price increases over the remainder of 2008. Economists would classify the situation as stagflation despite the government claiming the official inflation rate is below 3%. The situation is reminiscent of some of the previous Western economic calamities where inflation spun out of control.

Obviously the Fed policy is focused on propping up the markets instead of controlling inflation. As the money supply is increased by billions of dollars per week, the door is left open to out-of-control inflationary pressure.

The average bank account is yielding under a 4% return. As food prices climb weekly, the obvious better return is to hold food instead of cash. This has created a situation where many smart consumers are stockpiling food from their local wholesale club (Sam’s etc.) to get ahead of the curve.

The Wall Street Journal outlines how consumers are stocking up the pantry.

Will Congress pay off Credit Card debt next?

In a shocking surprise, all of those people who could not pay-off their mortgages are also having problems with their credit card bills. Late payments on consumer loans have reached 16 year highs. This does not bode well for the financial sector.

There are now a slew of plans being put forward by Washington to bail out homeowners struggling with their mortgage payments. Most of these plans reward brainless homeowners for taking risky loans, buying at the peak of the market, purchasing more home than they could afford, and not having any financial discipline. Of course, the smart homeowners who only purchased what they could afford within traditional lending ratios and used common-sense are the suckers in the proposed Washington plans. The majority of these hard-working homeowners will be paying for this bail-out via higher taxes and bank fees for a long period of time.

The concept that the loan values for under-water home owners will be set to 90% of the current house value, and the loss to the existing loans be taken by the banks and tax-payers is obscene. Especially when the government (meaning the taxpayer) will be on the hook for any of the new loans that still default. While Congress is at it -- why don't they just pay off all the late credit card debt, surely this will be a popular earmark attached to some bill.

Socialize Loss, Privatize Gain – Welcome the new Wall Street motto

On the other hand, now that the Fed has seen it fit to socialize investment banking losses by allowing trading firms to borrow at the discount window, and bailing-out Wall Street institutions; most of main-street America sees nothing wrong with bailing out homeowners directly for their poor decision making to the tune of 400 billion dollars in government loan guarantees. The axioms that currently apply to Wall Street should equally pertain to the individual consumer according to most sentiment surveys.

The discount borrowing by investment companies from the Federal Reserve ‘Discount Window’ reached $38.1 billion in daily borrowing this week; much greater than $7 billion averaged by standard banks. Rather than using these funds to improve liquidity in the credit sector, most of these firms appear to be using the borrowed funds to implement more risky carry strategies to make money. Someone at the Fed needs to close the barn door. The intent of the Fed program was to ease a potential liquidity crisis; in reality the action is expanding the bubble. The Fed should have placed more conditions on these loans when it agreed, for the first time, to let big investment houses temporarily get emergency loans directly from the central bank.

Thanks to Washington, it appears that there is no longer any punishment for poor business practices. No harsh (and proper) lesson will be learned by either the financial markets or individual homeowners about risk control or avoiding excess greed. A significant educational opportunity is being missed, and unfortunately it badly needs to be taught. The recent actions by the government will only increase risky behavior by institutions and consumers in the future.

Quick Takes: Rising Taxes, Home Equity Crisis

Many people hold the misguided belief that their taxes will go down during a recession. If everyone is spending less then won’t the government need less? Unfortunately it never works out like this. During recessionary periods, government spending is normally in crisis as sales and income tax revenues drop, this leads to outsized tax increases to support rising spending as social program needs increase. The longer a recession lasts, the higher taxes tend to get.

MarketWatch outlines 9 reasons your taxes are going up. Facing a huge national debt load, it is unlikely that taxes will retreat. Irrespective of which party is in office, the entire situation will result in taxes being raised. There is no other possible real alternative to dig out from under the mountain of debt at the federal, state, and local levels of government – except for tax increases. (Nobody should be so naïve to believe that government spending will drop).

Taxes are not the only problem for consumers. The credit crisis is about to fold over to another sector, home equity loans are under pressure. Americans owe over $1.1 trillion on home equity loans. Many of these loans were unwritten during the bubble period with lax standards. Many home equity loans did not require income verification or were combined in “piggy-backing” deals for no cash down. All the questionable practices over the past few years in the mortgage market equally apply to the home equity loan sector.

A good portion of these home equity funds will not be repaid to the lending institutions. Especially in markets where housing prices have dropped significantly, second-lien holders are being left with nothing in short sale scenarios. The percentage of delinquent home equity loans was up to 5.7 percent in December, the figure is expected to be over 7% by the end of March.

Equity Loans as Next Round in Credit Crisis

Consumer Confidence Expectations hits the lowest level since 1973

The Consumer Confidence Expectations measure by the Conference Board dropped to 47.9 from 58.0. This is the lowest reading since 1973. Many will remember that 1974 was a very painful downside year for the U.S economy.

Consumer confidence crumpling proclaims the headlines in many papers across the U.S. today. The commentary from analysts adds a sense of despair to most of the press.

"Yes, weaker than in the last four downturns," BMO Capital Markets analyst Sal Guatieri said of the latest expectations number. "Ouch!"

Consumer confidence, he said, is "now buried deep in recession territory" and it is now "only a matter of time before personal consumption follows suit."

Of all the headwinds facing the economy -- faltering consumer confidence, which will drive a drop in retail sales representing two-thirds of the overall economy, is the largest threat. This has driven the federal government to take tax rebate measures to boost the consumer. However in an environment with a credit crunch, falling home prices, rising unemployment, high fuel prices, and increasing necessity costs --- it is not likely the government action can stop the downward spiral.

Quick Takes: Tax Season Scams, Rogue Traders

Once again, April 15th is showing up quickly. Many folks are busy getting their taxes filed. This is also the season where all the scammers show up once again. A recent Bankrate.com article (Don't Fall for IRS-Related Scams) discusses four of the major scams making their rounds this season.

The rebate phone call, tax refund email, audit email, and check verification phone call scams are simply re-packaged traditional scams taking advantage of modern technology using the tax season as a vehicle. Unfortunately a large number of consumers are falling for these frauds.

Tax payers should also watch out for all the fees associated with refund anticipation loans or deals that put your refund on a debit card. All these type of offers from tax preparation services carry fees that would make most loan sharks blush… or turn green with envy.

There are also traditional frauds circulating on how to avoid taxes. Attempts to declare yourself a church, state that you are not subject to taxes on vague legal principles, or other mechanisms to avoid taxes will only lead to two things --- a huge tax bill with penalties and possible jail time. Stay away from promoters of these types of shenanigans.

As outlined in the article, I would urge everyone to report unsolicited phone calls and emails to the IRS.

While on the subject of swindles, Advanced Trading came out with a recent set of articles about Rogue Trading. The entire set includes an interview with Nick Leeson who brought down Barings, perspectives on improving institutional controls, and an outline of the Société Générale fiasco. The entire set of articles is a worthwhile read.

Student Loan Consolidation

The majority of personal finance articles are either light-weight “press fluffs“ or hidden pitches from companies for their financial products packaged by a reporter. Once in a while a very solid personal finance article makes an appearance.

Many consumers carry college loans as a portion of their debt. A recent article from SmartMoney.com outlines some important thoughts regarding the consolidation of student loans.

One of the key points made in the article is that it will be best to hold off on consolidating loans until July 1st. Interest rates have been dropping over the past year with the Fed rate cuts. If you consolidate before July 1st, you will be paying the higher rates from last year. Those who consolidate after this date can take advantage of the new lower interest rates.

Another important point is that it is not advisable to consolidate existing fixed-rate student loans. Only variable rate loans should be consolidated.

There are also issues regarding standard repayment periods and extended repayment that consumers should consider for these loans. Many financial institutions market student loan consolidation as a product to generate fees. It is important that consumers recognize what is in their best interest when contemplating consolidation as an option.

The article provides some solid detail about the various considerations consumers encounter with student loan consolidation.

Consolidating Student Loans Not Always Best Option

Warning: Reverse Mortgages

The financial industry made a killing in fees by marketing annuities to senior citizens. These products were not usually appropriate for the people who were urged to buy them, and now many are stuck with them while the financial firm agents padded their bank accounts. Many firms such as MetLife and Prudential were slapped by regulators for their sleazy practices in selling annuities.

What is the new sleaze that is replacing the annuities? – Reverse Mortgages. Even in the down real estate market, the financial industry has found they can make a killing by selling reverse mortgages to senior citizens. Reverse mortgages have high fees, many times well over 7% of the home’s value – making this a very lucrative business for agents on commission.

FINRA (the Financial Industry Regulatory Authority) issued a warning this week about reserve mortgage products, urging senior citizens to carefully weigh their options before using reverse mortgages to tap their home equity for additional retirement income.

Warning: Debt Settlement Firms are Simply a Scam

With an increasing number of consumers under stress with high debt levels amidst a deteriorating economy, many are turning to Debt Settlement firms with hopes of salvaging their financial situation. By having you pay monthly sums to them while withholding payment from creditors, these debt settlement firms claim to have the power to negotiate a lump sum settlement with the creditors. BusinessWeek outlined the problems with these firms in a recent Look Out for That Lifeline article.

The reality is that most of these firms simply collect the money and never contact the creditors. Usually the debtor is left in worse shape with daily collection agency calls, additional fees, penalties, higher interest rates, and bad marks on their credit reports.

Most debt holders on these plans also don’t recognize that most of these firms collect 30% or more of the money as fees for their “settlement activities”. ‘The programs typically require financially strapped consumers to pay fees up front, so they make money whether or not any useful services are performed," says Philip Lehman, an assistant attorney general in North Carolina.’

Most banks including Bank of America and Discover Financial Services refuse to negotiate with settlement firms; this means that in many cases that these firms are promising to deliver a “service” that is not viable. The State AGs in half-a-dozen states are currently investigating a significant number of these debt settlement companies due to the high levels of complaints.

Currently seven states have banned settlement activities; it would be wise to urge your state politicians that these debt-settlement scams be banned in all states. The firms are nothing more than the latest incarnation of predators on stressed consumers.

For those who need financial help, it is better to turn to a credit-counseling agency rather than a debt-settlement firm. Most communities have non-profit credit counseling resources available.

SunCom customers can breathe a sigh of relief

SunCom customers can stop living in fear that their cell service would be cut off any day. T-Mobile acquired the train-wreck known as SunCom; salvaging the wireless firm from its certain demise.

Prior the purchase, SunCom had huge debt, regulatory problems, a very dissatisfied customer base racking up record complaints to state authorities, and was primarily recognized for their abusive treatment of customers. The list of hurdles facing the company was almost endless, and self-inflicted. Unable to find refinancing, the only alternative was to sell the company… for pennies on the dollar.

The benefits of this acquisition for T-Mobile are very strong. “Through this acquisition, T-Mobile USA expects to significantly expand its national network to cover 259 million Americans, an increase from 244 million. T-Mobile USA also expects to realize synergies with a net present value (NPV) of approximately $1 billion through reduced roaming and operating expenses. Plus, the company anticipates further upside growth opportunities through the addition of the new markets.”

Inversely, it is not really possible to find any benefits for SunCom in the press release. “These factors also include risks that the acquisition disrupts current plans and operations; the potential difficulties in employee retention as a result of the acquisition; and the ability to recognize the benefits of the acquisition.”

Well at minimum, the good news is that SunCom customers don’t have to worry about their phones going dead.

Banks Behaving Badly: Wachovia

Wachovia has always had the reputation locally of treating customers badly; most people in the area have labeled the bank “Walk-all-over-you”. However it appears that Wachovia has even sunk beyond the low expectations of the community in its latest fiasco – which involved actively participating in the defrauding of its own customers in order to generate fees. This may be the event which sinks the reputation of consumer banking to a new low.

Wachovia allowed fraudulent telemarketers to use the bank’s accounts to steal millions of dollars from unsuspecting victims – in many cases the victims were their own customers. Furthermore the complaints state that the bank even possibly went further in providing account information to questionable telemarketers which allowed these scam artists direct access to customers’ accounts for fraudulent purposes.

Even worse, many of the victims were elderly. Wachovia accepted fraudulent, unsigned checks that withdrew funds from the accounts of victims. “Wachovia forwarded those checks to other banks that were unaware of the frauds, which in turn sent money to the swindlers.”

Why did Wachovia support these scams - because they were making a ton of money in fees. The bank charged fraud artists a large fee every time a victim spotted a bogus transaction and demanded their money back. “One company alone paid Wachovia about $1.5 million over 11 months, according to investigators.” In fact records demonstrate that the bank actively recruited telemarketing companies it knew had been accused of fraud. Wachovia was not only aware of these crimes but actively supported them as a string of internal emails demonstrate.

Sadly, Wachovia and most other banks accused of involvement in similar frauds have never been publicly fined or prosecuted by federal regulators for aiding telemarketing criminals. Well hopefully the civil lawsuits will at least recover some of the money for victims, and make banks aware that these types of abusive practices are unacceptable. Maybe is it time for the State Attorney Generals to step up and prosecute the offending banks, seeing how the federal government has been ineffective in stopping this fraud.

Papers Show Wachovia Knew of Thefts