Trying to Refi!

Tomorrow, I am sending in my proof of income to my bank for my attempted refinancing of my house. If things work out according to plan, the refinancing will:

1. Leave my Heloc in place;
   
2. Replace my 5/1 ARM (with one year to go) with a 30 year fixed loan.
   
   1. By locking in my rate, my interest rate is going up to 5.25%. While still a good rate, I am going to miss the stellar adjustable rate that I have been enjoying. The upside – less worry.
      
   2. No closing costs or expenses – nice;
      
   3. No appraisal – I don't even want to know.
      
   4. Because the refinancing will extend my loan term by 5 years, my "mandatory" payment will go down slightly. In a pince, that my help. Nevertheless, I will use excel to determine the appropriate payment to keep the actual loan term constant.
      
   5. With the loan fixed, I will begin paying down the Heloc with a goal of paying it off in 5 years.
      

Frankly, my bank has been awesome to deal with (so far). If it works out, I will make sure to name them by name.

$7,500 Houses – Detroit’s Pain

According to a story in the Chicago Tribune, the median price for homes sold in Detroit was a whopping $7,500. For that amount of money, one would have a hard time purchasing a small travel trailer. If true, it is hard to imagine Detroit rebounding in the next 50 years. With property prices in the tank, they will not be able to generate tax revenues to support their population's needs.

 

 

Source: http://www.chicagotribune.com/news/nationworld/chi-detroit-housingjan29,0,5435392.story

ING Rate Drops Again – 1.65%

I just received an e-mail from ING stating the rate on savings would be dropping to 1.65%. And so the drops continue.

Saving v. Debt Reduction in Current Environment

While Dave Ramsey advises everyone to have zero debts, the reality is almost everyone has "some debt." Mortgages, student loans, car loans, etc. Even people who are living within their means have some or all of these payments.

If you have your emergency fund fully funded, what should you do with extra cash flow in today's environment?

1. Savings – Current high interest savings accounts pay less than 2%. For people living in states with income taxes, the after tax yield is in the neighborhood of 1%.
   
2. Investing – in today's investment climate, stocks and real estate investments are likely to face a short-term decline before they rebound. With very few exceptions, I do not think is the time to put long-term money "at risk" with the possible exception of new 401k contributions.
   

My Conclusion:

Simply put, debt is expensive in this deflationary market and extra funds should be allocated towards debt reduction – wherever we can.

Our Loans:

1. Mortgage - trying to refinance into a fixed loan. We are leaving this alone for now.
   
2. Student Loans – paid off the smallest loan last month. Using the snowball approach, the old "payment" has now been added to the next smallest loan. We should be down to two loans by the end of the 2009.
   
3. Car Loan – one car is paid off. The other loan is a zero percent loan with three years to go. Obviously, we are not rushing to pay off this loan. We are making a "payment" to ourselves (i.e. – savings) for an eventual replacement to our high mileage vehicle.
   
4. Credit Car – we have a $10K balance on a Discover card at a 0% rate due in July. Although we have set aside $10K at ING to pay off this balance, I have decided to send much of our monthly savings to Discover. Why? The after-tax income earned on the money is not worth much. Since I do not like having any balance on my credit cards, the "cost" to send the money to Discover is almost zero.

Teacher Salary Envy – Part II

Much to my surprise, my post on teacher salaries attracted a large number of viewers and comments. Rather than respond to the comments and questions individually, I have drafted this follow up post.

• How much should teachers be paid? In my opinion, teachers should be paid a wage similar to the private sector wage for professionals with similar education, experience, and expertise. If we do not pay a reasonably competitive wage to our teachers, we will be unable to attract good people into the field.
  

  
   

  Entry-level salaries should be similar to entry- level salaries for college graduates. In my town, starting teachers fresh out of school are paid $33,000 per year. In our state, the average entry-level finance positions pays $40-50K per year.
  

  Until I see evidence people are rushing into the teaching field for the big paychecks, I will not consider them "overpaid."
  

• In our state, teacher salaries increase based upon service length and educational advancement. Although teachers can get a provisional certificate after college and student teaching, they must complete a Masters Degree to keep their job. (In the business sector, employees reimbursed for some or all educational expenses. Teachers are not.) The maximum teaching salary in our town is $66,000. To get that salary, a teacher must have 14 years experience, a Masters Degree and enough hours for a PhD.
  

  In judging the salaries our teachers are paid, one should consider the cost of living in our state. When I lived in Texas, I rented a nice apartment for $600 per month. A similar (but not as nice) apartment in my area would have been $1,000+ per month.
  

  Note – I understand many college graduates get stuck in "McJobs" after graduation. These (hopefully) temporary positions involve low pay and no benefits. Nevertheless, these jobs are not meant to be careers and should not be considered comparable (for salary comparison purposes) to a fulltime professional job. When I finished college, I had a "McJob" until I found a permanent position. My first real job (a long time ago) paid $28,000 + benefits.
  

  
   

• Pay for Performance: While it would be nice to pay "good" teachers more than "bad" teachers, nobody has developed an effective means of identifying top, individual performers. With respect to group performance, our state is consistently ranked in the top five in the United States.
  

  
   

• "They only work 9 months per year": (In our state, it is 10 months per year).
  

  
   

  Frankly, the 2 months "off" is an unpaid furlough. With only 8 weeks available to work a summer job, getting a summer job making decent money is difficult. Almost every teacher I know would love to give up the vacation for 2 months of additional pay.
  

  
   

  By any measure, the teachers I know work hard. Each day, my wife gets to school around 7am and leaves after 5pm (often close to 6pm). Most nights, she spends time grading papers and/or working on lesson plans. Growing up, I distinctly remember my mom working almost every Sunday. Years later, my wife does the same thing. Week in week out, my wife spends significantly more time working than just about anyone I know (including me).
  

  
   

• Envy of what Teachers make: If you think they are overpaid, I suggest you do what is necessary to become a teacher. Invest the money in a degree. Invest the money in a Masters degree. Go after that starting salary. If they are truly overpaid, you will feel like you have won the lottery.
  

 

Teacher Pay and Envy

When my wife and I got serious, I eventually learned how much she made. Because my mother was a teacher, I knew they didn't make the "big bucks." Nevertheless, it seemed smaller than I expected. I know my old employer paid more to recent graduates for entry level positions than experienced teachers seemed to make.

Years later, teacher pay is a big issue in her school district. It is semi-rural and many of the residents are opposed to spending much on education. Indeed, her district spends less per pupil per year than similar districts and the town has a very low tax rate. Nevertheless, the economic crisis has given anti-education zealots the excuse to try to break open the union contract. Simply put, unless the teachers agree to reduce their pay (despite a contract), the district will lay off a number of teachers. Furthermore, they are making comments that it is criminal for teachers to allow the layoffs to occur.

Watching this drama unfold, I have been struck by the venom of people who want teachers to make as little as possible. If you read their comments in the papers, you would think teachers make CEO salaries with enormous bonuses. While I do not know the exact number, I would guestimate the average teacher in the district makes $50K per year + benefits.

Good News – Friend Hired

A few days ago, I posted about dealing with friends who get Rif'd in downsizing. Today, I got the good news that one of them landed a job with a good company. It is nice to know some people are landing on their feet.

IHOP Blows – Horrible Experience

Looking for "Breakfast for Dinner" after a hard day at work, we decided to meet at IHOP for dinner. Much to our surprise, it was National Pancake Day. Because we weren't in the mood for a two order of pancakes, we even cut our order to one "free" shortstack. It should have been free because we never got it. Simply put, the service was tragic.

Examples:

1. The couple next to us was seated after us. They got their food, ate it, and left before we got our food. When we asked the waitress about it, she said she would not check with the cook because he was a "jerk" who didn't like to be questioned.
   
2. After we got most of our food, we tried twice to get our pancakes without success. Eventually, my wife left while I waited for the check which never came.
   
3. Finally, I got up and went to the desk to pay. When I explained to the manager why we didn't have a check, he could have given a flip. He volunteered that "he" (I assume the head manager) failed to schedule enough people. I asked if I could get a coupon for our pancakes that we never got, he said it was a one time deal and he couldn't help us.
   

Guess what moron – our visit to your store was a last time deal. Good luck with no customers.

When Co-Workers/Friends get Rif’d?

For the second time this year, I received an e-mail from a current or former co-worker indicating their position had been eliminated. In the first case, the person was a good friend and I offered to be a reference in her next job search. In today's incident, the person was someone from another office who provided me with information. Although I did not know her, I still felt great sadness for her.

When this happens, what is the appropriate thing to do/say?

 

Fixed Expenses – Recipe for Bankruptcy

Although people know the auto industry is in serious trouble, they do not understand the main reason so many of them are in danger of bankruptcy. Simply put, automobile companies face enormous fixed costs. Why?

1. Debt – all the automakers have a relatively high amount of debt on their books. No matter how many cars they sell, or don't sell, they must pay a pretty big nut.
   
2. Plants and Equipment – if a plant makes 100 cars or 10,000 cars, the cost of "owning" the plant and equipment does not change.
   
3. Union Costs – the biggest mistake the automakers made over the years was allowing the UAW to force them into contracts that force them to pay workers to stay home and to pay high retiree costs – even if cars are not being made.
   

Bottom Line – unless they can bring down their fixed cost to reflect the lower demand for cars, they are doomed to bankruptcy.

This lesson applies to personal finance. They higher your fixed costs (in real dollars), the greater the chance you will face bankruptcy. Our fixed costs are:

1. Debt payments – mortgage, car payments, student loans, and credit card payments can add up to a big number. While I don't believe everything Dave Ramsey says, lower debt can free most of us from financial ruin.
   
2. Honestly, nothing else matters. Almost nobody goes bankrupt from rent payments, food bills, or clothing. Other than debt, the other big driver of bankruptcy is unexpected expenses that drive up debt – car and house repairs and medical expenses being the major causes.
   

$925 hour – Bankruptcy is Expensive

A few weeks ago, I had to hire a bankruptcy attorney for a matter at work. After I heard his rate, I decided I should have taken bankruptcy law during law school. Frankly, all he had to do was present a relatively simple motion.

After reading this story, I think bankruptcy law might be the best racket going.

 

In Tribune Bankruptcy, Judge Caps Sidley's Fees at $925/hr

Posted by Dan Slater

In a tough economy, rife with bankruptcies and bailouts, fee applications may not be sliding by judges the way they used to.

Bloomberg reports that U.S. Bankruptcy Court Judge Kevin Carey has ruled that Sidley Austin's lawyers may collect a maximum of $925 an hour for bankruptcy work on Tribune Co., instead of the $1,100 the firm originally requested.

Judge Carey reportedly said in a hearing today that any bankruptcy lawyer who tries to charge $1,000 an hour will need to prove he or she is worth that much. "To the extent that this applicant or any other hits that mark I will require evidence in support of that rate," Carey said.

The decision by Carey to lower the maximum fee Sidley can charge is unusual, Lynn LoPucki, who teaches bankruptcy law at the University of California at Los Angeles, said in an interview. "I never saw any of these fee applications not get approved," LoPucki said.

LoPucki maintains a database with samples of high bankruptcy fees. The $1,100 Sidley requested for its top lawyers on the case was higher than any fee in that database, LoPucki said, adding that the $925/hr fee that was approved is still higher than all but a handful of rates in bankruptcy.

A call to Sidley Austin was not immediately returned.

1.75% CD – 1yr??

As per my prior post, my wife and I are building a 1 year CD ladder ($500 per month) as part of our cash holdings. Unfortunately, ING Direct lowered the interest rate on a 1 year CD to a whopping 1.75%. I considered skipping this month's contribution (month 5 in the 12 month plan) because of the dismal return.

Nevertheless, the low interest rate reflects the fact lenders and borrowers think interest rates will continue to fall or remain flat. For that reason, we made our contribution. The upside of laddering CD's is the opportunity to profit from higher interest rates. Some of my older CD's are paying in excess of 4%. Our blended rate on all our CD's is in excess of what we would earn in a high interest savings account or a money market account.

Currently, we have accounts at ING and Emigrant Direct. In all likelihood, I am going to find another bank to protect against low rates by ING. As for Emigrant, they seem to favor longer term CD's that I don't want.

Obama’s Mortgage Plan - Thoughts

1. The plan to allow borrowers, who are current on their mortgages that are insured by Fannie/Freddie, refinance their loans provided their loan is within 105% of the current home value is a no brainer. Although these loans are a little "high risk," allowing borrowers to convert their loans to lower, fixed rates should make them less likely to default. The fact I hope to qualify for a refi under this plan is a pleasant bonus.
   
2. Subsidized Cram-Downs – The conservative in me views this as a government giveaway to borrowers who should never have been given the loans. I find it hard to justify paying my taxes to pay someone else's mortgage. I like my plan (voluntary cram down by lenders in return for government floor) better. Everyone benefits and the government subsidy is spread out more evenly.

My Mortgage Crisis Solution

 

Rather than buy "toxic assets," I suggest the government adopt the following plan for banks and mortgage trusts that voluntarily agree to participate.

All banks and mortgage trusts (the things that issued the CDO's) that want some relief from troubled loans would be offered the opportunity to convert existing loans into federally guaranteed loans. This program would be limited to mortgages issued during the problem years (2004-2007).

If they say yes, the lenders would:

1. Agree to write down the principal balance by X% (probably 20%) for every loan they have issued. Subprime, prime, alt A, the whole kit and caboodle.
   
2. Agree to offer EVERY SINGLE borrower the option to convert their loan into a fixed, 30 year loan. The interest rate would be based upon credit scores and would be competitive with current rates.
   
3. The Federal Government would agree to insure the remaining loan balance (thus capping the lender's losses).
   

The Upside:

1. Lender balance sheets would stabilize.
   
2. At a 20% discount to current value, the "new" loans would more accurately reflect the value of the collateral. As a result, borrowers would have an incentive to fight for their properties. With a reasonable fixed rate interest rate in place, people would eliminate the risk of having their mortgage payments spike on them.
   

Our Loan Profile

With my tax refund in hand, I paid off one of my student loans. By redirecting the payment on my loan to my wife's smallest loan, we will have the loan paid off by next year at the latest. With a little luck and frugality, we may be able to pay it off by December.

Remaining Debt:

1. Mortgage and Heloc – the combined payment is 12.5% of our combined gross income.
   
2. Car Loan – my wife's vehicle is paid off and my payment is 2.2% of our combined gross income. Because the car loan is at zero percent interest, we are not paying anything "extra." Next year, we are planning on buying my wife a new car. In the meantime, we are setting aside $400 per month in a "car fund" at Emigrant Direct.
   
3. Student Loans – combined MANDATORY payments are approximately 4.5% of our combined gross income. After we pay off my wife's loan, we will redirect the extra amount towards her Stafford Loans. Because they are not deductible or dischargeable, they are the "worst" loans in our portfolio. As a result, they are the priority.
   
4. Credit Card Debt – Net Debt = Zero. Our credit card debt is paid off in full each month.

Stanford Financial – Fraud Warning!!!

If you have invested with Stanford Financial, particularly in offshore "CD's," I strongly recommend moving your money to safer waters. According to this story in Businessweek, they have placed a large portion of their client's money in CD's issued by a "bank" in Aruba. This "bank" pays rates that are significantly higher than rates offered by traditional (and regulated and insured) banks.

As a golf fan, I noticed Stanford Financial moved big in sports marketing a few years ago. Curious, I googled them and discovered the are run by a Texan who goes by the name "Sir Allen Stanford." They don't appear to have any special skills and they spend a ton of money on marketing. I don't have enough money to call him the next Madoff; however, I would not want be his client if he is.

Congress grills the CEO’s – Grade F

While stuck in traffic, I got to listen to about 1 hour of the CNBC coverage (on Sirius) of the congressional hearings involving the bank CEO's. While the CEO's did not come off smelling like a rose, our congressmen (and women) managed to make themselves look like complete morons.

My favorite part involved a congressman asking one of the CEO's why other banks turned down the TARP money. Although he politely answered "to avoid government interference in their business," one could hear him thinking "to avoid BS like this hearing."

Musak – RIP!!!

According to news reports, the Musak (aka Elevator Music) Inc. has filed for bankruptcy. The twisted side of me thinks its funny how the recession could kill of elevator music?

The financial analyst in me wonders how they could have become leveraged enough to make bankruptcy a reality. It could not have been a "growth" company and I cannot imagine it would need financing for capital expenditures.

PS – I wish the best for their employees.

Testing for Dollars

Yesterday, I completed the 2^nd of a series tests necessary to obtain a professional designation relevant to my field. If you work for a large company, make sure you check your HR website for information on professional designation/testing. In addition to paying for the course materials and/or the class, many companies will pay a bonus for completion of each test and a bonus for completion of the designation.

In addition to making you more marketable with your current employer, a professional designation can open doors to networking opportunities outside your company should you need (or have) to make a change.

$11 from Fidelity Credit Card

Today, I noticed a surprise $11 addition to our Fidelity brokerage account. When I looked into it, I realized it was "Cash Back" from my Fidelity Amex Cash Back card. At 2%, it pays a very fair rebate. Unlike most cash back cards, they pay the rebate monthly instead of annually. If only they used a better card servicer (FIA Card Services is aweful and doesn't direct feed into Quicken), it would become our primary card.

Valentines Day – Best Tip Ever

NEVER EVER GO OUT ON VALENTINE'S DAY. A few years ago, a friend explained why he and his wife agreed to celebrate Valentines Day on the Saturday following. It was such a good idea, I adopted it for myself.

Why going out on V-Day is a nightmare?

1. If you have kids, getting a sitter is a nightmare and/or expensive;
   
2. It often falls in the middle of the week. You have to rush to dinner from work. Not exactly a recipe for romance.
   
3. Even if you get reservations, you are often forced into a rushed experience with a fixed price menu. Basically, they tell you what you are going to have after the jack up the prices.
   

If you wait until Saturday? All these problems go away. Whatever your budget, you will get more bang for your bucks.

Summary of Accounts

Checking Accounts:

1. ING Direct – Primary Account for payment of bills. Paychecks are direct deposited into this account and distributed as appropriate to other accounts.
   
2. Local Bank. Because it has free ATM transactions anywhere, we always get "cash" from this account. Although ING Direct is fantastic, it is impossible to send a check with an invoice or to write a check to a local merchant (typically a contractor). Generally, we keep a $500 cushion in the account + enough money for normal ATM transactions.
   

   
    

Savings Accounts:

1. ING Direct – Primary Savings Account. As per my prior posts, we are gradually moving some savings into a CD ladder at ING. Although it does not necessarily have the absolute best interest rates, they have great service and the convenience is worth keep most everything with one bank.
   
2. Local Bank – Bail Money Savings. Frankly, the bank pays a nominal interest rate, but it is better than nothing. We keep $1,000 in this account for any emergency that cannot wait a few days.
   
3. Emigrant Direct – Property Taxes. My mortgage company does not escrow my property taxes. To make sure we have enough money to pay them, we transfer 1/12 of our annual tax to the account every month.
   
4. Vanguard – Technically, this is a brokerage account; however, I treat it like a long-term savings account. All the money is invested in a tax-free money market mutual fund.
   

Two Americas – Not Paying Taxes

Another day, another Obama appointee has been caught not paying his/her taxes. On a day when I filed my taxes, I have realized John Edwards was right. There are Two Americas. Normal America where we pay our taxes and complain about it. Washington, where the entitled fail to pay taxes and claim we are not paying our fair shared.

Daschle – The Cheater

 

Great, we are going to have a tax cheater in charge of healthcare. Although he claims his corrections ($140, 000 in back taxes and interes) were to correct innocent oversights. Do these changes seem like an accident to you?

• Unreported income from the use of the car service valued at $255,256 for three years.
  
• He amended his returns to cover $83,333 in unreported consulting income for 2007.
  
• He reduced his charitable contributions by $14,963.
  

Source: WSJ.com, http://online.wsj.com/article/SB123335984751235247.html?mod=WSJ_myyahoo_module

$6,000 CD Ladder

As our plan to build our savings plan continues to make good progress, I am 1/3 of the way towards building a CD ladder built out of twelve, $500 CD's that expire each month. Using my ING Direct account, setting it up has been easy. As each CD matures, I plan on rolling over money (and interest) into a new 12 month CD.

Why? By agreeing to tie up my money for 12 months at a time, I get a slightly better interest rate on my money.

In an emergency? This money is not the "oh crap" emergency fund that would be tapped first. This money is the "worst case scenario" emergency fund. Should I need to tap it, I would have at least (remember it is growing) $500 available every month. It could go a long way towards paying monthly bills. Of course, there is always the option (a bad one) of taking all the money at the price of a penalty.

Ultimate Goal? Once I get the ladder set up, I plan on adding additional money each month until I eventually have a $12,000 ladder in place.

Community Garden

This year, my wife and I are planning to take advantage of the town's community garden system. Each year, the town plows up and divides a large parcel of town land into individual plots. The land in question is outstanding bottomland next to the river. They even turn over the land for everyone. Pesticides and herbicides are verboten.

If accepted into the program (first come, first serve), we will pay $15 for a 25x25 plot where we can grow veggies to our heart's content. While it probably will not save us much money, we hope to have some fun and end up with tasty veggies.

Bonus Pools – Explained and Thoughts

Right now, consumer advocates and government watchdogs are pounding Wall Street over huge bonus pools they have or plan to play employees. Frankly, bonus mania has gotten totally out of hand. For top executives, bonus payments (cash, stock and options) reached obscene numbers. Nevertheless, a huge number of workers in financial services firms have pay tied to performance and the anti-bonus mania can end up hurting the little (or middle guy). .

Example: Assume four classes of workers (analysts, directors, avp's, and VPs). Each Tier of workers a target annual bonus associated with it. (5, 10, 15, 20% of salary). Over, I know of business units that had bonus pools funded from 10% to 200% of target. Once the pool is set based upon, individual performance (often office politics) was used to divide the available pool.

While financial services firms (particularly banks) have lost enormous amounts of money, most of the losses have come from units with a relatively small number of employees. While the employees who were working in the "loser" units should expect lower bonuses ('unless you are the idiots who lost all of AIG's money), the employees in the "winner" units expect bigger bonuses because they had a good year.

Thus the problem for the firms, if they do not pay good bonuses to employees in "winner" units, they will leave for better opportunities. In a bad economy, you do not want to be losing employees who are making you money.

The Timing Problem:

Many financial services products have "long tails." In these products, you book the revenue immediately and wait (sometimes years) for the results to come in. In AIG's case, they paid big bonuses to the idiots in London before the devastating results came in.

Employees, however, fear getting screwed out of deferred bonuses by their employers. Let me count some ways:

• Your boss gave you a good bonus in 2008. In 2009, he left the firm and your new boss wants to bring in his own team. He forces you out and you end up forfeiting your "deferred bonus."
  
• Your bonus was determined based upon the performance of your unit. The company decides your unit is no longer "key" and decides to allocate additional "costs" to your unit. As a result of the "bad" performance, your deferred bonus is forfeited back to the company.
  
• After three years, you decide to leave for a less stressful job. You are forced to forfeit 2 years of the deferred bonus.
  

My Solution:

No cash bonus payments in excess of $100,000 to anyone. Any remaining bonus payments would be paid into an escrow account and paid out over 5 years. Employees would not have to stay employee with the company to obtain their deferred bonus; however, the numbers used to justify the bonus payments would need to "hold up" over time. In cases of dispute, an independent arbitration would be appointed to review the numbers.

Yes - Voluntary Company Match

My company has never had a defined benefit plan; however, we have a very generous 401k plan. In addition to the standard company match, they have a discretionary company match they "CAN" make each February. Because we are a financial services company and feeling pain like everyone else in our industry, we were concerned they might decide not make this year's discretionary match.

Thankfully, we learned today that we will be getting the match after all. While the last year has been brutal to my 401k balance, the company match has made my losses on 'my money' more tolerable.

Voting on the Budget

In Connecticut, many of us vote on the town's budget every year. Although our elected officials come up with the budget, they must put it to a vote of the people. After thinking about it, I wondered how much the United States government would save if voters had a chance to kick idiotic 'pork projects' to the curb. Wouldn't it be nice?

Non-Essential Personnel??

Yesterday, the northeast got pounded by another snowstorm. The day before, someone sent all of us an e-mail telling us our office would be open hell or highwater. One of my coworkers joked about how we didn't even have the non-essential personnel rule.

It reminded me of my time with my prior employer. We got an e-mail indicating that because of storms, non-essential employees could stay home for the day. After reading it, I decided I was going to work no matter what. The last thing I wanted was anyone thinking my job was not "essential."

Porn – Leading Economic Indicator

While on the way back from a meeting, I noticed a porn store had closed down and the space was available for rent. Have you ever seen a porn store closed (except by authorities), I have not. Thus, I must conclude the economy is near bottom.

When I see new porn stores opening, I will believe the recession is about to be over.

Financial Fraud – More or Less?

Every day it seems the feds are tracking down another financial fraudster. Does it indicate more fraud is being committed? No. Does it mean they are becoming more diligent in fighting fraud? No.

One of the dirty little secrets of a "bull" market is that it allows fraudsters to cover up their crimes. In the bull market, Madoff was able to draw more "new" money into his scheme year after year. After his clients were hit with other financial problems, they needed cash and Madoff's money was a good source to tap. Unable to keep bringing in "new" money to cover redemptions, he was forced to turn himself in.

Although other fraudsters haven't turned themselves in, the damages of the stock and bond market make it impossible to cover up their crimes.

Spending down 10% per Amex

As part of their earnings announcement (down 79%), Amex stated its customers spent an average of 10% less in the 4^th quarter of 2008 than they did in 2007.

In other news, companies are laying off people by the thousands every day.

Amex Blue v. Fidelity Amex Cash Card Review

Using my annual statement, I was able to compare the actual Amex Blue Cash rewards against what my Fidelity Retirement American Express Card is promising.

Fidelity Amex promises 2% cash back on all purchases.

• No trying to pick the best card for each purchase.
  
• Unfortunately, they are run by FIA card services. From prior experience with FIA, they are not easy to deal with and their website is 2-3 years behind Amex's.
  
• Charges do not download into Quicken until the monthly statement is ready and I do it manually from FIA's website. Truly, this is a hassle.
  
• They will automatically transfer $50 into my brokerage account every time I hit the $2,500 spending threshold.
  

Amex Blue Cash has a complicated formula for determining cash back.

• I have access to the fantastic Amex website.
  
• In addition to nice features such as an annual summary, they have historically had great customer service.
  
• Charges download automatically into Quicken.
  
• You get the cash back in a lump sum one time per year.
  

Results: After crunching the numbers, I determined Amex Blue returned a net 1.86% of total spending to me.

Conclusion: For .14%, my family will continue to use the Amex Blue as our primary card. Over a year, the additional interest from the Fidelity card would not likely exceed $25. For that amount, the service and ease of use of the Amex Blue card makes it a winner.

Waiting for Tax forms

ING Direct customers – our tax forms are online a few days earlier than the promised Jan 31, 2009 date. Now, if I can just get my employer and my wife's employer to send us our W2, I will have a good idea of our tax situation for 2008. Based upon my Quicken data, we should be getting a refund. Nevertheless, the change in tax status (married from single) has me worried. A few years ago, I expected a $2,000 refund and ended up owing $1,000 in additional taxes. It was not a good time.

Amex Blue – Year End Summary

One of the things I like about using American Express is the year-end summary they provide. Unfortunately, for 2008, we managed to charge north of $20K during the year. Although we charge everything, this amount was larger than normal due to charging significant wedding/honeymoon expenses.

 

HR Block Emerald Card – The Fee Machine

After watching many ads touting HR Block's Emerald Card, I decided to check it out. Originally, I thought this prepaid Mastercard was just a way for them to tack on an enormous fee for a refund anticipation loan. Reviewing their website, I learned it has some value, but it is an enormous fee machine for HR Block. They even charge a $2.50 per month monthly maintenance fee on inactive cards. I expect the managers at HR Block will be happy to take your money.

The Benefits: for people who cannot get traditional bank accounts, it does have some value. Rather than carrying around cash (and risking getting robbed), they do provide "somewhere" to deposit funds. Nevertheless, I suspect anyone who qualifies for this card will qualify for a low-cost checking account.

• Payroll Service - Payroll can be deposited directly by employers to the card.
  
• Cash Access: The fee is $1.95 per transaction when using certain ATMs in the U.S. and $2.50 per transaction when traveling abroad.
  
• Cash Back with Purchase: By using it as a traditional debit card, users can withdraw cash from your prepaid card when shopping, with no need to make a special trip to the ATM. Usually, this will be a no cost transaction.
  

The Enormous Costs:

• ATM: Cash Withdrawal Fee $1.95
  
• Domestic ATM Balance Inquiry Fee $1
  
• International ATM Cash Withdrawal Fee $2.50
  
• International ATM Balance Inquiry Fee $1.50
  
• ATM Denial $0.50
  
• Over Limit Fee No fee
  
• Additional Card Fee $10
  
• Replacement Card Fee $10
  
• Express Delivery Fee for Replacement Card $35
  
• Check Request or Outgoing ACH Fee $20
  
• Paper Statement Fee $1
  
• Duplicate Paper Statement Fee $2.50
  

Monthly Maintenance Fees Monthly Maintenance Fee $2.50 (per month — begins the fourth month following 3 months of no activity on the card account)

$862k per year – treatment?

The Hartford Courant reports the state is considering shutting down a children's psychiatric hospital because it costs a mind-boggling $862,000 per child per year to treat the patient. Literally, they can ship the patient to Yale (Yale-New Haven Hospital) and actually save money.

If they do not fix this idiocy, heads need to role.

Blaming TurboTax - WTF

The Obama government got off to a funny start today. It seems, Obama's nominee for Treasury Secretary (that would be the guy who collects taxes and is in charge of the economy) failed to pay taxes on his self-employed earnings. Testifying before Congress, he blamed ------ TURBOTAX.

1. One would hope the guy in charge of collecting taxes would have made sure he paid his taxes correctly;
   
2. Who makes a $34,000 mistake with TurboTax? If an error of that size is possible, he should have had the brains to hire an accountant to get it right.

Insurance – Affinity Marketing Explained

In terms of insurance, AARP has one of the largest affinity marketing programs in the United States. Indeed, if you read their literature, access to their insurance programs is one of the "benefits" they brag about when they try to get people to join. It has P&C programs through The Hartford, life insurance programs through New York Life, health plans, and long-term care insurance. Not a senior citizen? You probably qualify for an affinity insurance product from your church, university, professional association, union, and so on and so on. They are everywhere.

With this post, I will provide simplified information on how affinity marketing works and how it benefits/harms consumers.

1. The Sponsor Organization: The foundation of any affinity marketing insurance program is the sponsoring organization. The Sponsor Organization provides the insurance company with access to its membership base. The larger the membership, the more value the sponsoring organization brings to the table.
   
2. The Pitch: through the sponsoring organization, the insurance company will pitch the benefit of coming to them for insurance products. Typically, they will pitch a combination of discounted premium, special coverage terms, or guaranteed issue.
   
3. What the Sponsor Organization Gets: MONEY. The sponsor gets a royalty/commission for bringing the consumer to the insurance company. In return for the royalty/commission, the insurer will get some combination of 1) the membership list, 2) inclusion on the website, 3) inclusion in written materials (ex. Newsletter, the bill), and 4) access to the sponsor's logo. Think about it, AARP is not going to let NY Life use their logo for free. If the sponsor organization uses this money to benefit members, it is certainly understandable.
   
4. Do you get a discount? Probably Not. The fundamental basis behind insurance rates is loss ratio (how much do they pay in claims) + expense ratio (policy acquisition costs and overhead). Unless the relationship between the insurer and the sponsor organization reduces costs, there will be no discount.
   
5. What do you get?
   
   1. If the sponsor organization does a good job, they will select a good carrier with good customer services.
      
   2. Products: Good sponsor organizations will make sure its members have access to good products that meet its members' needs.
      
   3. For groups with special underwriting problems, the Sponsor Organization can really provide value. Example: you are a member of the American Skydiver's Association. If they find a life insurance company that will write members at reasonable rates, they have done a good job for their members.
      

 

Bottom Line: Affinity marketing is not a panacea for consumers. Although Affinity Marketing does not offer huge discounts, good programs do exist. You just need to be careful when you choose one. Some are good, some are bad, and some are an abomination.

 

$122.36 iTunes Fee – DRM Fee

While loading some podcasts onto my iPod, I noticed a link for DRM-Free songs on iTunes. According to the link, Apple wants to charge me an additional $122.26 to drop the DRM from 492 songs on my iPod.

Not going to happen.

Obama Rally – Not Really!!

 

First day of the Obama government and we get a 5% drop. Financials get crushed. It is going to be a long four years.

Rebates – Illegal?

Yesterday, we purchased a new laptop for my wife. We got a good deal and my wife is very happy with it. Nevertheless, I have been annoyed trying to decode the instructions to get the $100 mail-in rebate. It turns out the $100 rebate was actually two - $50 rebates.

Thinking about it, I have decided mail-in rebates should be illegal.

Free Credit Monitoring – AGAIN!

WTF? BONY-Mellon sent me a letter indicating they had a records breach and they were providing me 2 years free credit monitoring from Experion. Combined with the 2 years that my employer game me – through Kroll, I have the entire belt and suspenders.

Although I am not terribly worried, I would have preferred they had not lost my information.

Circuit City – False Sales

The bride and I went to Circuit City looking for speakers for an iPod. On the road outside the store, they had a guy standing (in 10 degree weather) holding a sign promising big savings. From what I saw, almost nothing was on sale. Since you aren't going to be able to take anything back, I would not recommend buying anything more complicated than a DVD.

10% Lowes Coupon

If you are at the post office, check out the packet they have for people changing address. There is a 10% off coupon good a Lowes for up to $500.

Coach v. First Class - Humor

Thankfully (and miraculously), everyone survived the crash of the US Air flight into the Hudson. From the fantastic website, http://www.dealbreaker.com/, I found the following post. It is sick and twisted, but downright funny.

Cash Stashing – Saving Strategy

Each week, I take out the same amount of cash from the ATM. Whatever I have not spent from the prior week goes in an envelope in the fire safe. This money helps feed the cash emergency fund. Should there be a natural disaster, my wife and I have some ready cash available to get out of town.

Adsense Earnings $54.30

Well, my one year of blogging has earned me a whopping $54.30 from adsense. Needless to say, I will not be retiring on my blog money. Indeed, until I hit $100, I cannot even cash out my current earnings. At my current pace, I am hoping to use the money next Christmas.

When will it end?

Today, we watched the market drop as Citibank continues to falter. While they are not the be all and end all, they are a symptom of things to come. Until people are confident they will not face financial ruin, they will not spend again. Until companies are confident they will hit profit targets, they will continue to lay people off.

Fidelity 2% Cash Back Card Review

In an era a frugality, getting the most of one's credit card reward programs is an important way to save revenues. As a Fidelity Brokerage customer, their new 2% cash back program seemed like a good idea and I signed up.

 

The Amex branded card is actually a card offered by FIA Card Services. Although FIA Card Services is one of the largest credit card issuers in the country, their website is a travesty.

1. They do not offer the ability to download transactions directly to Quicken (automatically or manually).
   
2. They do not offer any way to contact them electronically.
   

 

Otherwise, the product does offer what it promises. For every $2,500 spent, they will deposit $50 in my brokerage account.

 

Nevertheless, I think I am going to use my Amex Blue for most spending. Because a large % of our monthly spending is Gas and Groceries, I end up earning 5% on most of my spending (after getting past the threshold).

Insurance Rates – How they are determined

As my prior posts explain, I was able to save $600 per year by moving my family's auto insurance from my old carrier to USAA. While it might be tempting to say my prior carrier was trying to gouge me, the reality is their pricing for "my family" just was not as competitive as USAA's. To explain how this occurred, I have written a simplified explanation of how insurance companies determine their rates.

All insurance companies have teams of employees who work as actuaries. They are the bean counters who determine what the company will charge for each potential customer. Their goal is to predict, as accurately as possible, the expected losses the carrier will face from each customer. Once loss costs are estimated, the company will build out its rate quote based upon expected loss costs, expense load, and cost of capital. Obviously, companies with lower cost structures will have a competitive advantage.

While some consumers think there is a grand conspiracy to "get it wrong" and quote the highest rate possible that is simply not the case. If a carrier systematically gets it wrong and quotes higher prices than are necessary, they will lose business to other carriers willing to charge lower rates. If a carrier systematically gets it wrong and quotes rates inadequate to provide a reasonable profit, they take heavy losses and go out of business.

How could USAA charge $600 less than my old carrier?

Simply put, their model predicted lower losses on Toyota Corollas than did my former carrier's model. Why? I have no idea. If USAA's actuaries built the best model for Corollas, they will make a profit off my business. If not, they will lose money on consumers who drive Corollas.

The Model's Change: As a consumer, our job is to get the best combination of price and service for our premium dollar. Good carriers are constantly tweaking their model's looking for better results. For that reason, USAA may not always be the lowest price carrier for my family. Every so often, consumers should shop their coverage to make sure they are getting the best price for them.

DO NOT GO WITH THE LOWEST COST CARRIER ALL THE TIME – SERVICE MATTERS

Although it is tempting to say they are "all the same," I can say with 100% confidence they are not. Before moving your policy to any carrier, research their claims handling and service reputation. Some smaller carriers are a nightmare to deal with. I would not wish them upon my worst enemy.

 

* Note – in many jurisdictions, insurance companies must have their rates "approved" by the state. Because the rate approval process can distort real economics in a myriad of ways, this post does not address the impact of regulation on rates. Having said that, years of working in the insurance industry tells me rate regulation leads to higher prices.

Free 411 – Thanks Google!

http://www.google.com/goog411/

With the demise of the phonebook, getting information often means booting up the computer or paying a fee to one's cellphone carrier. This service by Google promises to give us the information we need – free of charge.

% of Income/Car Costs – Guidelines?

Although there are well known guidelines for the appropriate percentage of income to spend on housing cost (one would have though banks would have consulted them before making bad loans – but I digress), I have not found any that apply to car payments.

Because my wife and I have paid off one of the cars, our current (car payment/take home income) percentage is about 4%. If I figure in insurance, taxes and maintenance (but not depreciation), it comes in at 6.7%. To calculate take home pay for this exercise, I added my wife's paychecks to mine.

25% Discount on TurboTax – USAA Members

While I will not benefit from it this year, I just learned that USAA members can get a 25% discount on TurboTax products. I just finished moving my auto policies to USAA and will save almost $50 per month for the same coverage. If you are a member, I recommend surfing their site. They have discounts on unexpected items.

USAA – Saved me $600

Full Disclosure – I have worked in the insurance industry (claims and underwriting) for 15 years in personal, commercial and specialty lines. In terms of saving yourself money, you should understand pricing models can vary dramatically from carrier to carrier. The company offering best price/coverage for senior citizens might be totally non-competitive for someone with young drivers.

Since I was 16 years old, I had my coverage with carrier A. Because they offer good service and I liked having an agent, I have been very satisfied. When I obtained competitive quotes, carrier A's pricing was competitive and I never seriously considered moving coverage.

When I got married, I moved my wife onto my policy. For reasons that continue to baffle me, carrier A charged more to insure her '04 Corolla than my '07 Highlander.

Annoyed by this pricing oddity, I obtained a quote from USAA for matching coverage that will save us $600 per year.

 

 

iTunes Pricing Changes

Apple iTunes Pricing Changes

According to the Wall Street Journal, Apple has decided to make some major changes to its pricing of music on iTunes.

1. Three tiered pricing: instead of a flat 99 cents per song, songs will be 69/99/1.29. Apple claims most songs will be 69 cents.
   
2. They are going to eliminate copy protection for all songs in their digital store.
   

 

Personally, I love iTunes. In all but a few cases, I do not want to pay for a entire CD and I certainly do not want to store anymore of them. By offering songs for $.99, iTunes allowed me to legally purchase music at a price I feel is reasonable.

Google Chrome Brief Review

For the past two weeks, I have been testing Google's new browser – Chrome. Simply put, it blows Internet Explorer out of the water.

1. It loads 90+% of web pages faster.
   
2. Unlike IE, it doesn't crash all the time.
   

The only negative is it doesn't have an easily accessible "zoom" feature.

Best of all, I am not doing business with a company that believes it is acceptable to release programs with code that has not been properly debugged.

Madoff Investor’s Bailout – NO!!

Although I feel a great deal of sympathy for the investors who lost money investing with Bernard Madoff, I am outraged by their desire for the US Government to pay for their loses. In many cases, they want to be compensated for amounts in excess of the SIPC limits. While their losses are tragic, a bailout for them would signal that there is no risk with investments.

Sadly, fraud is a legitimate investment risk. From the Madoff fraud, we have learned the importance of due diligence, skepticism and diversification. An SIPC bailout would wipe away what we have learned.

Amish Heaters – Scam?

Do any of my readers have any good information on the "Amish Heaters" offered on TV? Although I talked someone I know out of getting one, I want to have more information to share with her.

$100+ saved with Online Bill Payment

A few days ago, I posted about the interest earned on my ING Savings accounts in 2008. On a lark, I calculated the savings from using online bill payments (ING Electric Orange) to pay most of my bills. Last year, I made 166 payments. At 42 cents postage per bill, the minimum amount I saved was $69.72. If you add in the cost of a box of envelopes ($7 for a box of 50) and gasoline to deliver some of the bills to the post office, I probably saved $100.

Furthermore, I could confidently schedule the payment of bills close to the due date without fear of incurring late fees or interest charges.

2008 Late Fees Paid = $0

2008 Credit Card Interest Paid = $0.

 

My 2009 Predictions

1. S&P 500 up 5%
   
2. Ford survives
   
3. GM and Chrysler survive after the US Government agrees to pay excessive wages and benefits to UAW workers.
   
4. Bank of America and Wells Fargo begin to profit from their huge market positions.
   
5. Interest rates remain low.
   
6. Gas prices are below $2.00 per gallon all year.

1st Stock Purchases – 2009

Today, I decided to move 2% of my IRA back into the stock market. To do it, I purchased equal amounts of Altria and ExxonMobil. Although I believe both stocks have the possibility to move lower in the short term, I think they are great long-term investments.

Rationale:

1. Altria – great dividend and margins. Low p/e.
   
2. Exxon – when gas prices get close to $1 per gallon, I start to look at moving money into oil stocks. At today's price, I am probably a little "early" to the trade. Nevertheless, lower interest rates make this a risk I was willing to take.
   
3. I don't have the time or skill to evaluate individual bonds with credit risk. As a result, I don't think individual municipal bonds or corporate bonds are a wise investment for me.
   
4. In a low interest rate environment, bond funds are a nightmare. In the short term, the "interest" return is minimal. In the long terms, the principal gets hammered when interest rates go up. Finally, there is ZERO UPSIDE as interest rates cannot go lower. As a result, gains on principle are out.
   

Next Major Investment: I will probably add to my TIPS holdings at the next auction. Through Fidelity, I can pick them up without paying any commissions.

$300 in ING Interest

By getting rid of the dismal interest rates offered by my local bank, I managed to earn $300 in interest on my various ING accounts (Electric Orange, Savings, & CD Ladder). With my emergency fund coming around, I was hoping to hit $500 in 2009; however, I expect lower interest rates will make $300 a more reasonable goal.

Christmas “Mis-” Gifting Dilemma

In many ways, I hate the "gift" experience that Christmas brings. Basically, my friends and family spends money on things I do not want and I spend money on things they may not want. For example, I have one relative who keeps giving me decorative items for my home. Simply put, I cannot stand her taste and do not want any of her gifts on display in my home.

Property Tax - Reduce Income Taxes

If you don't have your property taxes escrowed as part of your house payment, make sure you pay your property tax bill before January 1, 2009. Even if it isn't due yet, you can often write of the taxes as "paid" in 2008.

Credit Card - Tipping?

For those people who work as waiters/waitresses, do you "know" how much in tips you get from each customer. After leaving a good tip for outstanding service, I noticed the receipt seemed to disappear and I don't know when the server would have been able to notice: Hey, that guy gave me a good tip.

Thoughts?

Post-Christmas Spending

The day after Christmas and the spending continues. Between gift cards, gifts I have to take back, and other money I set aside to buy clothes, it is off to the malls and stores.

Peace to you all.

Ponzi – Crime of Violence!

It is easy to categorize crimes like murder and rape as violent crimes. With the first documented death related to Madoff yesterday, we have proof of the violence inherent in a Ponzi scheme. While a burglar/robber is likely to take some of what you own, the con man can and will take everything you own. According to news reports, many of his victims have been relatively well-off retirees in places like Long Island and Florida. Now, many of them are not just broke, they are too old to have any hope of earning enough money to restore their lifestyle.

Although I believe in bail until someone is convicted, Madoff's confessions make me feel he should be in jail right now. With a sentence likely to exceed his remaining lifespan, it is time for him to start paying his debt to society.

Madoff Acted Alone!!!

If you believe Madoff's "I acted alone" story, I would like to offer you a chance to invest your money with an investment advisor known for consistently providing 1-2% monthly returns in good times and bad. Could he run a $1m ponzi scheme by himself? Yes. Could he run a $50 BILLION ponzi scheme by himself? Not in a million years. Just to manage the money coming and going from the fund, he would have needed people to deal with the wire transfers and/or checks. He would have needed people to print and send to the fictitious investment statements.

When everything is said and done, I predict:

• 20-30 employees at Madoff's firm face criminal charges;
  
• The accounting firm (apparently one guy) who audited his accounts will go to jail for a LONG time; and
  
• His banks will face serious questions about allowing the money to flow out of his accounts.
  

Furthermore, the banks and hedge funds that steered clients into Madoff's clutches will face civil liability for the failures related to "due diligence." Simply appalling.

Plow Guy or Snow Blower

Given the amount of snow that can fall in my area, hand shoveling the driveway is not a viable option. Right now, I have a guy that comes to plow the driver. At about $200 per year, he does the driveway and leaves the porch and walkways to me. Looking to do more of my own work, I considered getting a snowblower. Frankly, it doesn't make much sense. In addition to the $600-1000 for the machine, you have gas, parts, and maintenance. Furthermore, a good machine will take up the limited space in my garage.

Bottom line – having someone do it for me is the best option.

    

Marry a Countess – Go Broke!!

According to news reports, the estranged wife (who claims to be a countess) of former UTC CEO George David is claiming she spends $53,000 per week. Included in her spending: $8,000 for travel and $4,500 for clothing.

Note to self, do not marry a countess!!

http://www.nypost.com/seven/12192008/photos/news003a.jpg

http://www.nypost.com/seven/12192008/news/nationalnews/really_high_maintenance_144934.htm

Bond Fund v. Actual Bonds

The one winning investment I made this year was the purchase of a few TIPS back in late October. Because interest rates have fallen, I have made over 8% on my money in less than two months. They mature in 2013. In addition to the individual TIPS securities, I own a similar sized position in a TIPS mutual fund.

In the short term (3-6months), I do not expect the interest rate environment will materially change. For that reason, I am going to hang on to both investments through Spring. Nevertheless, I cannot imagine low interest rates will hold indefinitely and I will sell the TIPS fund sometime next year.

With respect to the TIPS fund, the value can and will fluctuate as the value of the securities in the fund change with market conditions. As rates begin to rise, the fund will begin to lose value. As a result, I have no way to accurately project what they will be worth at any given time.

While the value of the TIPS securities I own will fluctuate from time to time, I know exactly what they will be worth in 2013.

My Strategy: I will favor individual treasuries over bond funds. For no transaction cost, Fidelity will allow me to buy treasuries at auction. By holding them to maturity, I don't have to worry about fluctuating values.

I do, however, think bond funds do have some value. For securities where there is default risk (munis and corporate), good bond funds allow investors to diversify so as to prevent a default event (GM Bonds anyone?) will not be crippling.

 

Buy a Car?

If you are considering buying a car, now is the time to close a deal. All of the manufacturers have excess inventory. All of the dealers need to move inventory. If you can pay cash, you are golden. Even if you cannot pay cash, good credit = rock bottom interest rates.

Shaving Comcast Bill

By getting rid of Shotime and the sports package, I am going to save $24 per month on my cable bill. By joining Blockbuster's Online Service (similar to Netflix), we are giving some of the savings back. BUT, with a trip to the movies costing $40 per couple (with popcorn and drinks), our Blockbuster membership is relatively cheap entertainment for two compared to the movies.

Student Loan Consolidation

Does anyone have any good information on student loan consolidation? I would like to move my wife's graduate student loans from Sallie Mae (aka – the spawn of satan) to someone with better service. Back when I consolidated my loans, the best time to do it was after they reset the rates in August.

Madoff and Mutual Funds

The WSJ has an excellent article stating that the Madoff fraud is a Walking Advertisement for Mutual Funds. Frankly, I have to agree. Mutual Funds are highly regulated. Even in the case of a large theft, the fund and/or the advisor is likely to have insurance coverage in place to protect most theft losses.

While they have had their issues (high fees, loads, market timing), there have not been many (if any) cases of outright fraud involving major US mutual funds.

Fed Moves against Savers

By pushing interest rates to historic lows in hopes of stopping the economic meltdown, the Fed has made in virtually idiotic to throw money in a savings account. Even online banks will have a hard time paying more than 2%.

What to do?

1. Spend money on depreciated assets: in particular land and beaten down stocks will seem more attractive.
   
2. Pay down any loan balance you have that is not at rock bottom rates. Having high interest loans in the coming year is going to be brutal.
   

What banks will do?

With free money from the fed to loan, they are going to throw money into loans like there is not tomorrow.

Ponzi Scheme - Fallout

The fallout from the $50B Made-Off Ponzi scheme is starting to become public. From rich socialites in Palm Beach to Long Island Hospital foundations, the losses are turning out to be huge. Sadly, it appears some people placed all their money under Made-Off's management and it appears they are totally wiped out.

As a risk management professional, anyone entrusting their money to an investment advisor needs, at minimum, to adopt the following risk controls:

1. Do not trust and always verify;
   
2. Do not allow the firm that manages your money to "hold" your money. Hire a separate firm to serve as "trustee" to hold the funds.
   
3. The trustee will send copies all account statements directly to your accountant (who has no ties to the investment advisor) or yourself. Using this information, you should be able to reconcile the trustee statements to the investment advisor "claims."
   

 

Dogbert the Financial Advisor

Dogbert the Financial Advisor is the perfect follow up to my post about fraud and investment advising. IMHO – Dilbert is the best writing on corporate life in America. Best of all, you can sign up for a free – daily e-mail.

Massive Ponzi Scheme – Fraud Warning

There is a saying that says you cannot cheat an honest man. While not totally true, the saying does reflect the fact that most fraud involves things that are "to good to be true." If you haven't seen the news, Wall St. legend Bernie Madoff has admitted to costing investors $50 BILLION (YES BILLION) in an enormous Ponzi scheme. In this case, enormous returns were not the red flag, consistent returns were. Year after year, month after month, Madoff's fund made consistent returns beyond what was reasonable. Chasing these "consistent" returns, investors piled in billions despite Madoff's inability to document his strategy or the inability of anyone to explain how he did it.

Moral to the story: If you do not understand how an investment earns money AND loses money, you should not invest in it.

Sources: NY Post, WSJ.Com Madoff Stories

 

http://www.nypost.com/seven/12132008/business/madoffs_strategy_was_just_too_good_to_be_143973.htm

Apocalypse Now

With the impending demise of the big three, we know there will be thousands of new additions to the unemployment rolls. Not just with them, but their suppliers. Furthermore, the employees support thousands of additional jobs by spending their payroll dollars on things like food, cable, and even beer.

Within 3 months, we are going to have a brutal unemployment rate. Say a prayer for everyone on the unemployment list.

Auto Loans – Available?

Listening to the idiots argue about the auto bailout, they keep saying there is no credit to buy cars. Has anyone found this to be true? Toyota is running "Saved on Zero" commercials by the minute. Nissan not far behind.

Sirius - Dismal Customer Service

Once again, I had to deal with not one but two morons with respect to our Sirius Satellite Radio subscription. Simply put, their customer service staff seems trained to avoid answering what you ask. Furthermore, they tend to rush out sentences like "you want to buy …" when you have asked for the pricing.

My Problem: We have two receivers and I would consider adding the Best of XM to my subscription. Unfortunately, I was unable to get a straight answer from the CSR. Ultimately, I wanted two answers:

1. How much will the renewal of our services be? Two receivers with Sirius only.
   
2. How much will an annual subscription be if we add Best of XM?
   

 

For a company with no stock price, they do not seem to understand that adding customers should be easy for the customer.

How are Enzyte Commercials Running?

If you have not seen the news, the guy running Enzyte was sentenced to jail for running a fraudulent business. Nevertheless, Smiling Bob and his idiotic Natural Male Enhancement ads continue to run. How is that possible?

 

Source: http://cincinnati.fbi.gov/doj/pressrel/2008/ci022608.htm

STEVEN E. WARSHAK, age 42, president and owner of Berkeley, of five counts of conspiracy to commit money laundering and various types of fraud as well as conspiracy to obstruct proceedings before the U.S. Federal Trade Commission, 12 counts of mail fraud, three counts of bank fraud, and 73 counts of money laundering for a total of 93 counts.

Why? The company's scheme involved false advertising which included made-up claims about size increases, fake customer satisfaction ratings, and fictitious doctors who the ads falsely claimed collaborated for 13 years to develop Enzyte, the company's leading male enhancement product. The false ads also contained representations about money-back guarantees that the company as a matter of practice would not honor. As part of the scheme, the conspirators placed many consumers who responded to free-trial solicitations on an automatic shipment program without the customer's authorization, knowledge, or consent. Berkeley would then send the product to the consumer and bill the consumer's credit card regularly. When customers called to cancel, the conspirators employed various means to delay or hinder any returns or cancellations from occurring.

Toys R’us – Bad Customer Service

Any idiot knows the biggest season for toy stores is Christmas. One would think Toy R'us management would have the brains to offer some sort of "Christmas" packaging for customers shipping items purchased online. One would be wrong.

Thanks guys. My unwrapped present is now heading towards my mom's house. She will wrap it. Next year, I won't be using Toys R'us.com to purchase gifts.

Another reason Best Buy stinks!

Today, I bought something from Best Buy Online. By making the purchase (which was to be picked up at the store), I was entitled to a $10 gift card. Much to my surprise, I arrived at the store to learn that they were going to "ship" the gift card. Why would they want to spend money to ship the card? For the same reason people hate them, they are run by morons.

WeatherTech Floor Mats – Winter Clean

Thanks to my Citibank Driver's Edge card, I am going to pick up a full set of weathertech floor mats for my SUV. Although expensive, they work great for keeping the snow and junk off the floor. Makes it easy to keep the car clean (which is important to me).

Amex Card – Why? Green/Gold/Platinum

Membership has its privileges says the commercial. Really? Watching an American Express Card commercial, I got to wondering why anyone would pay for the privilege of having an Amex card.

In particular, the Green Card seems to offer no real benefit to justify the annual fee.

Plagiarism - NYT or WSJ

Reading the New York Times online, I was reminded about a story that I read in with Wall Street Journal. After rereading both stories, it appears one of the writers basically rewrote the other's "story" (without attribution) and added new information. Literal plagiarism – Not. Plagiarism of the thought behind the story – Yes.

Sadly – both stories are about people who think they have "Health Insurance" only to find out their employer had a "self insured" plan administered by a third party (like Blue Cross). Unfortunately, when an employer backing a self-insured plan goes under, Cobra benefits go out the window. Furthermore, people with existing bills end up as unsecured creditors of that company.

Cites:     When a Job Disappears, So Does the Health Care

    For Workers, Medical Bills Add to Pain as Firms Fail

Insurance Company Shame

As a member of the insurance industry, I am proud of what I do. Furthermore, I can say with complete confidence that most of the people in the industry are decent people. Nevertheless, decent people do make mistakes and do things that seem unbelievable. Recently, Specialty Risk Services (a third party administrator owned by The Hartford) made news with a decision that is simply mind-boggling. In all likelihood, there is a SRS employee who cannot see the forest for the trees.

Source: SF Gate.

 

Taneka Talley was stabbed to death in March 2006 while she was working as a clerk at a Dollar Tree store in Fairfield. Her killer's only motive, prosecutors say, is that she was African American.

That's also the reason the store's workers' compensation insurer is denying $250,000 in death benefits to Talley's 11-year-old son.

The boy's grandmother, the child's legal guardian, said Specialty Risk Services is taking the position that a racially motivated killing is personal, not work-related - even though the man charged with killing Talley had never met her before. The insurance company, Dollar Tree and their lawyers aren't talking publicly about the case but are defending their position before a state appeals board that hears workers' compensation disputes.

"I think it's unfair. It's discrimination," said Carol Frazier of Vallejo, who gained custody of her grandson, Larry Olden, after her daughter's death and is challenging the insurer's refusal to pay in a case that eventually could go to court.

"They're saying (the killing) didn't arise out of her employment, except that in this case she wouldn't have been killed if she hadn't been at work," said Frazier's attorney, Moira Stagliano. "This person didn't know her, just walked into the store and picked her out."

The opposition by Dollar Tree and its insurers to paying benefits to Talley's son represents an attempt to set new limits on California's workers' compensation system, under which a company provides benefits to employees or their survivors for work-related deaths or injuries regardless of whether the firm was at fault.

Businesses have long assailed the system as overly generous to employees and as expensive, complaints that led to passage of state laws in 2003 and 2004 tightening limits on what medical treatment is covered by compensation payments.

The man accused of stabbing Talley, Tommy Joe Thompson, 45, of West Sacramento, is tentatively scheduled to go to trial Dec. 10 in Solano County Superior Court on a charge of murder. If convicted, he could be sentenced to life in prison.

Talley, of Fairfield, was 26 and working full time at the Dollar Tree on North Texas Street to support herself and her young son. She was stocking shelves just after 9 a.m. on March 29, 2006, when a man walked in and stabbed her, authorities said. The killer fled.

Thompson was arrested that evening. He had previously served a prison sentence for beating his young son in 1994, records show.

At a hearing in March in which Thompson was found mentally competent to stand trial, a defense psychiatrist, Herb McGrew, testified that Thompson had told him he stabbed Talley because she was black. Thompson is white.

"You know that he got up that morning, and he said, 'I'm going to kill a black person,' " said Deputy District Attorney Dane Neilson, according to a transcript of the hearing. "She was, unfortunately, the first person he saw, correct?"

"Correct," McGrew replied.

An insurance company lawyer later cited that exchange in a letter to Stagliano defending the denial of benefits to Talley's son.

"The doctors testify that Mr. Thompson's motivation in stabbing Taneka Talley was purely race motivated," attorney Kelly Hamilton wrote. "As such, it is our belief that our denial in this matter is proper."

The compensation law doesn't consider an on-the-job injury to be work-related if the motives were entirely personal - for example, if an estranged lover or spouse comes to the workplace and attacks an employee because of a private grudge.

The line can be hard to draw when one worker assaults another for personal reasons or when the injured employee was on a personal errand or instigated the assault. But Stagliano said Talley's death was definitely job-related.

"Taneka Talley was at work, doing her job, when she was killed," the lawyer said. "If she had not been in that store, she would not have been available to (the killer), and she would still be alive.

"It's shocking that Dollar Tree and its insurance carrier are using the alleged racist motivation of a killer as an excuse to get out of paying benefits," Stagliano said.

Frazier, who works for the Richmond Parks and Recreation Department, said her daughter had a $15,000 life insurance policy. It covered burial expenses, she said, but is nowhere near enough to care for a growing boy who needs new clothes every six months.

"His mother worked hard on her job for him to get a good education, to go to college," Frazier said.

Larry, now in sixth grade, is "a very good student, he loves sports, really good in basketball - a normal little boy," she said. "He misses his mom."

E-mail Bob Egelko at begelko@sfchronicle.com.

 

The case for brick/mortar banking

This morning, I needed to make a deposit and headed over to TD Banknorth. While waiting for the teller to finish the transaction, I started looking at their hours. Most days, tellers are available from 8am to 8pm. On Saturdays, the bank is open until 3pm. Years ago, we had to get off early to go to the bank. Now, ATM's and online banking can take care of most transactions 24/7. When that fails, you are not out of luck.

Although I recommend and use ING Direct, they don't have local branches and sometimes you need a bricks and mortar bank. In our family, our banking situation looks like this:

ING Direct – Primary Savings and Checking Account, Certificates of Deposit

TD Banknorth – Backup Checking Accounts. Free ATMS anwhere and paper checks fill in the gaps ING doesn't do well. For example, ING Direct doesn't offer a safe deposit box. In addition, I think it is a good idea to have some "personal" relationship with a human banker.

Vanguard/Fidelity – brokerage services. IRA and longer term savings.

Emigrant Direct- Backup Online Savings Account

Your $110 gift to GM/Ford/Chrysler

Listening to the morons running to the Big Deadbeats (aka the automakers), I decided to a little math. Our $34 Billion auto bailout will cost approximately $110 per US resident. If you consider only taxpayers (eliminate children and others who do not pay taxes), it probably means closer to $250 per taxpayer.

Instead of gifting them the money, we could buy 1.7 million cars from them for $34 Billion at an average price of $20,000 per car. That would keep the plants churning out Malibus and Fusions.

Heating Oil – Charge It!!

Today, I discovered I could charge my heating oil bill to my Amex Blue Cash card. By doing so, my oil heat provider will give me a 10 cent per gallon discount. Combined with the 1% cash back I get from Amex, I end up with a nice little discount. Furthermore, I get rid of the hassle of send out another check.

Piracy Protection - a new business

Listening to the news on the radio in my card, I heard a story about how pirates tried to take over a huge cruise ship. When I thought about it, I could help but wonder why nobody was selling "protection" to ships in the area. By the time I got home, I could find a story about how a private security firm named Blackwater was pitching protection in London.

Moral to the Story: If there is a need, someone is willing to serve it for a price.

Pelosi’s Bold/Dumb Plans

Obama wasn't my pick for President; however, he appears to be very intelligent. Unfortunately, until he takes over next year, Nancy Pelosi is leading the charge on the auto bailout and a "new stimulus" plan. According to today's Wall Street Journal, she made the following determinations:

1. She determined bankruptcy was not a good option for the auto bailout. We are going to give the auto industry something like $50 billion and are not going to force them to fix their debt/retiree benefits problems.
   
2. She has determined the "new stimulus" plan needs to subsidize internet access. Can you say gift to the telecom industry?

EmigrantDirect v. ING Direct Review

Although I think ING Direct offers great service and I intend to keep using it for online savings, I have been disappointed by the fact the interest rate on savings has been consistently lower than available with other banks. As a result, I have started the process of opening 3-4 online savings accounts and plan on transferring my emergency fund to the one offering the best rate at any given time. Because it has consistently high rankings from other financial bloggers, I opened an account with EmigrantDirect.

Review: First of all, the signup process was relatively easy and the initial deposit, $100, was transferred quickly and without incident. Nevertheless, I am not happy with the overzealous online security they employ. Instead of ING's difficult number and moving cursor keypad, they force users to answer 2 personal questions before logging on. While not a problem when I am logging onto the site, it is an annoying process when I try to use Quicken's online update feature. Every time, it slows down the process. Although the site works well, it is poorly designed and makes it difficult to see the available rates in CD's and other products.

Bottom Line: I probably will disable the online update feature on Quicken and keep the account open. Compared to ING great experience, I give it an acceptable rating.

Building a CD Ladder

While online savings accounts offer good rates, we can boost returns (for very little risk) with a CD ladder.

Why it works: In return for locking up your money for a fixed amount of time, banks are willing to pay you a higher interest rate on your money. For example, ING Direct pays an APY 2.75% for money in its online savings accounts. In contrast, a 1 year CD at ING Direct pays 4.00%. As you can see, you are earning more interest on the same amount of money.

How it works: By investing your money in CD's that mature at regular intervals, you get the benefit of higher interest rates without having all your savings out of reach.

Example of Simple CD Ladder: You have $4,000 to invest and want to have a one year ladder. Buy four $1,000 CDs with terms of 3mo, 6mo, 9mo, and 1 year. When the 3,6,9 mo CDs mature, replace with a a new 1 year CD. Ultimately, you end up with four 1 year CD's. Should you need the money, one of them will be maturing every 3 months. My bank, ING Direct, will automatically reinvest maturing CD's for you.

Example of Complex Two Year Ladder: Let's say you have $24,000 to invest, you could set up a ladder of 2 year $1,000 CD's maturing every month. Ultimately, the complexity of your ladder is up to you as the combinations are virtually unlimited.

Risk: If you have an emergency and need to get your money early, you will get all of your principal back. You will, however, forfeit some of the interest earned. The money invested in a CD ladder should be money you do NOT expect to need in a "common" emergency (car breaks down, medical bill). The longer the term of your ladder, the more risk you have of having the dreaded "early withdrawal" penalty. In my case, I use a one year ladder because I like the idea of accessing 100% of the money within 12 months.

Bonuses to look for:

1. Size Matters: CD's have transaction costs for the bank. As a result, they are likely to incentivize, with higher interest rates, you to have fewer, bigger CD's. In the case of the 2 year ladder described above, it is likely you would be better off buying four large CD's instead of 24 small CD's. So-called "Jumbo CD's" may be a good idea for some investors.
   
2. Time Periods: Although banks often pay higher interest rates on longer term CD's, the "best" rate is not always the longest available.
   

NEVER, EVER DO THIS:     NOT EVER

1. Invest in CD's of foreign banks. Many an investor has been scammed by con artists promoting "guaranteed" CD's in banks domiciled outside the US.
   
2. The FDIC is your friend. Do not invest in CD's lacking FDIC insurance. In addition to making sure you do not invest in banks lacking insurance, make sure you do not invest money in excess of the FDIC limit (currently very high).
   

Thoughts on Muni Bonds

With respect to municipal securities, it is an "interesting" time. Unlike treasuries, muni's are not considered "risk free" and they have offered an after-tax yield (AT Yield) higher than available through treasuries. Compared to historical norms, the spread between the AT Yield and the yield on treasuries is high. Why? Many muni borrowers are faced with declining revenues (taxes and use fees) as the economy sours.

Before anyone invests in munis, they need to know there are two types of municipal bonds.

1. General Obligation Bonds – backed by the full faith and credit of the borrower, they are considered "safer" than revenue bonds. Bottom line, the creditworthiness of the critical to valuing GO Bonds.
   
2. Revenue Bonds – not backed by the full faith and credit, the "payback" of the bonds depends upon the revenue generated by the project backing the bonds. Common revenue bonds – infrastructure (sewers, toll roads, etc.) and special projects (stadiums). If the project fails to generate enough income to pay the interest and principal due on the bonds, the issuer is not legally responsible for making you whole.
   

Because I perceive the overall risk of munis as manageable, I have money invested in a tax free money market fund and think many of them offer a fair risk/reward at current pricing. Nevertheless, I would avoid a few issuers like the plague:

1. New York State and New York City. As Wall Street prospered, employers paid enormous bonuses to employees of investment banks, hedge funds, and other financial professionals. Eventually, both the city and the state became dependant on income taxes on these bonuses and taxes on things purchased with bonus dollars (real estate, sales, etc.). With "bonus" tax revenues gone for the short term (and probably the long term), both the city and state face enormous annual budget holes.
   
2. California: Enormous government spending and the implosion of the housing market is a bad combination.
   

 

 

Black Friday Purchases Report

Getting up early, the wife and I went out on a quest to spend our way into a economic recovery for the US. Starting at 6am at Target #1, we ended up going (in order) to Best Buy, Target #2 (to return a GPS), Home Depot, Staples, WalMart, BJ's, Michael's #1, Michaels#2, and BJ's.

Ultimately, we ended up purchasing three GPS units (returning two), two Blu-Ray DVD players, and a Christmas tree.

The GPS unit was the primary reason for a odyssey of shopping. For months, we have been planning to buy one as a gift to my mother in law.

The Blu-Ray was a splurge as we picked up a $300 unit on sale for $199. It will be our Christmas gift to ourselves.

Finally, the Christmas tree was at a great price and should last us for years.

What I saw: Flat screens were selling fast, Home Depot was empty, WalMart and Target were crowded and people were buying.