Monday, September 29, 2008

I reiterate, this is not a bailout...

I said this to a friend today, and I repeat myself here: Today, I felt like the man holding the "World is Ending" sign while the world ended around me, feeling vindicated but just as dead as everyone else.

Today's massive stock market sell off is the reason we need the liquidity injection: there is no other sane solution.

Complain all you will about "your money" or "tax payer" money, but when 50% of the population is invested in one way or another, when the market tanks 10%, you will definitely be hit.

And think, that was just one day without a bailout plan. Imagine days upon days.

The longer we go without a bailout, the longer the recession will be and the costlier the bailout will be.

Remember, when Wall Street fails, the first to get fired is Main Street. Don't believe me? Consider all the ibankers that were kept by Barclays. Now point out to me the Lehman Brothers janitor that kept his job?

Inject liquidity now or risk full economic collapse. To all the "Capitalism" screamers, remember what pure capitalism requires: a stable economic environment.

And to all of you screaming "The public doesn't want it", I have two things to say:

1) As I said already, Main Street and Wall Street are the same street, only that Main Street people have significantly less money. If Wall Street gets hit, Main Street gets fired first

2) Financial policy should never be left in the hands of people who don't know economics or finance. Just like you leave surgery to doctors, you should leave financial policy to financial professionals.

Wednesday, September 24, 2008

Understanding the $700B "Bailout"

Thanks to Les for bringing this subject up...

I have been thinking about this for a few days, but since I'm surrounded by finance people, there has been very little debate, since we all pretty much agree on its necessity. However, after reading what's out there in the mass media and debating with non-finance people, I have realized there is a significant gap in understanding.

First out, the $700B is not:

1) A blank check
2) An one-time authorization
3) A bailout

The $700B being proposed has a specific purpose: it is designed to add "liquidity". It will add money into markets that are currently skittish. Primarily, it will focus on the distressed mortgage-backed securities. The principle reason for many write-downs and the failure of multiple financial institutions is because there is little to no money currently wishing to buy them. When a market has all sellers and no buyers, its no market at all. When there is no market, there is no price, and assets without price immediately have no paper value.

The amount of the "bailout" is a subject of debate, but a rather moot one, since the plans call for up to $700B in securities to be sitting on the government's balance sheet at any time. These securities can be bought and sold constantly, as long as the total is never over $700B.

Finally, the notion of bailout provides the idea that the government is lending help to "Wall Street fat cats" who couldn't properly manage risk. It is not a bailout. The government is merely providing liquidity at a time when assets are severely distressed. The term distressed means the asset is very cheaply priced, perhaps below intrinsic value. Since the government has the ability to borrow large amounts of money and is very patient, allowing the government to buy cheap assets and hold over the long term not only provides liquidity, but it will make money in the long run as the market for these securities come back.

This situation has happened once before. I link to the Wiki entry here.

Currently, most of the sane Senators have also realized the need for this "bailout". The real discussion is over minor, what I refer to as punitive, details, such as CEO compensation, mortgage foreclosure help, and the use of equity warrants whenever the government helps with a distressed asset.

Hopefully, these issues will get hashed out soon, since the financial stability of the US depends heavily on a stabilized market for these assets.

Monday, September 22, 2008

Markets in Turmoil

Man, what a crazy week its been.

Beginning with the liquidity crisis at AIG, the markets went on a roller coaster ride of epic proportions. Hourly, the potential for AIG's demise created more fear in the markets. Finally, when AIG had fallen below $2 a share, the government reacted and initiated one of the largest public bailout deals.

However, the days after were not much rosier, with Lehman Brothers filing for bankruptcy, Merill Lynch merging with Bank of America, and both Goldman Sachs and Morgan Stanley filing for bank holding company status.

Tonight, all of the world awaits a decision by the US Congress to enact a bill that will not only save the US financial markets, but the worlds.

Melodramatic as that last statement may be, it is really the ultimate effect of globalization. Nothing happens in the US that doesn't affect the world... and vice versa.

Tuesday, September 9, 2008

Current Outstanding Debt

I finally put together all my current outstanding debt obligations.

While a significant portion of my debt has already been budgeted for, previously, I did not have a good handle on how much to pay on the credit cards or what to sock away to pay back my parents.

Taking the remaining portion of my monthly income, I have written in red the expected monthly payments, which still allows for a small portion to of my income to be saved for a rainy day.

Obviously, my credit card debt will not be paid in full by the the time their respective 0% offers expire, but I hope to roll the remaining debt to one more year of 0% interest, while also planning to plow a significant portion of my year end bonus into them.

Thursday, September 4, 2008

Day 3 - Understanding by Total Income

I went back to my financial planning sheets and reworked my income estimator. Before I figure out how much money I need to save additionally to pay down my debt, I first needed to know how much I had to play with.

To the left is the percentile breakdown of my salary into each expense category. At the end, I realized that I had been underestimating how much I had left over each month by 50%.

Rather than the 6.68% left, I had though I was at 3% and so I had been constantly worried about my bank account emptying. This is one positive piece of news.

Every day I will continue to revamp my sheets to become more and more accurate. While the preliminary debt figures are ready, I will wait until this weekend to post them so that I will have some time to also provide a plan to pay it down at the same time.

Tuesday, September 2, 2008

Day 1 - Formulating the Plan

While a full account of my current financial standing is forthcoming, looking in my fridge suggested to me my first easy and obvious budget planning measure: cooking more meals at home rather than eating out.

I went to BJ's today and bought a full stock of pasta, deli meats, and other basic salad and lunch combination items and then spent the next 3 hours preparing different choices for the next week. Lunch typically averages about $7.50 a pop, while the food I bought will probably be about $4 a pop, saving about $14 a week. While small, this also has an immense health benefit.

In addition, I had already embarked on my coffee savings plan by grinding and brewing my own morning coffee, but I have now also decided, for both health and economic reasons, to forgo my afternoon cup of joe. The afternoon coffee alone will save me about $11.25 a week.

By tomorrow, I should have a full financial picture and better Excel accounting sheets to track my expenses and then budget out each of my bills. But already, with these two measures, I can save an extra $100 and put it toward paying down my debt.

Monday, September 1, 2008

Rock Bottom

For anyone with an addiction, rock bottom is that point where the addiction has forced upon them a situation of utter nothingness. A sense of dismay with life. While I haven't actually reached that point, I see it coming in the future, and rather than waiting for it, I am going to address it now.

For the past month, I have found it difficult to blog about my financial life. As anonymous has pointed out in comments, things have very much taken a turn for the worse. My investments, while left ignored, have dwindled to nothing. My bank account continues to be drawn down due to constant trips to the casino. Sure there are times that I win, but I find myself losing more and more. In addition, I have been using credit to finance some of life's unavoidables, such as work clothes or a flight to a friend's wedding.

While none of these items have forced me anywhere near bankruptcy, nor am I near any kind of debt held by the average American, I know this is not responsible fiduciary behavior.

Ironically, I have often complained to myself that I had little to offer the world, since my finances are so different from average. But now I find myself in a situation that anyone could relate.

From hereon forward, I will be changing my goal. My near term (1-yr) goal is get rid of my credit card debt. My long term debt with my car and student loans are still on track and will continue to be paid down in regular installments.

This blog will then be about how I balance my new focus on decreasing debt, while trying to maintain a similar (but not the same) lifestyle.

Moving forward, my daily posts will be about my plans, my progression, and little things I'm doing to turn around my financial situation.

PS - I have not turned off the anonymous commenting. While to the point and typically stinging, I feel that posters should take some responsibility in what they write. After all, it is my life. While I open it up for debate and advice, I am not inviting you to be my mother. I already have a mother for that.

PPS - It will take me a little time to update the blog with my new debt figures and to formulate a plan. Give me some time.