Count Down from Y2K – A Decade in Review

In researching the top ten financial news events of this decade, I came across a great list by Rosemary Peavler from About.com

Rosemary Carlson Peavler has been a college professor of Business Finance. She is a freelance writer in finance and a small business consultant. She taught at Morehead State University for 26 years. She has written for academic journals in finance for 26 years and about business and personal finance in the popular press for more than 10 years.

Her entire piece can be read here, but listed below are excerpts listing chronologically (sort of): I thought I would also insert my opinion of the result from each event – please feel free to agree or disagree!

Year 2000: Bursting of the dot.com, or technology, bubble
The Internet kicked into gear and so did online commerce and not surprisingly, a huge uptick in credit card usage. Entrepreneurs saw potential in online business. However, online business was really in its infancy. Everyone was talking about a "new economy" which referred to an Internet-driven economy.

Much of the economy was restructured as a result of this bubble, the then new-age Internet company AOL, acquired old-world media conglomerate Time Warner, to form AOL Time Warner, before removing the “AOL” from their name after the collapse. Dozens of companies filed for bankruptcy, hundreds of dot-com companies simply disappeared, and widespread collapse in the communication industry, where funds were promised for massive growth projects, resulted in the collapse of Nortel, Worldcom, and a number of other major companies.

Result: Young adult workers got a rude awakening on the loyalty relationship between companies & employees. They are looking out for themselves a wee bit more.

Year 2001: September 11 Terrorist Attacks
The 9/11 terrorist attacks were the events that helped shape other financial events of the decade. After that terrible day in September 2001, our economic climate was never to be the same again. It was only the third time in history that the New York Stock Exchange was shut down for a period of time. In this case, it was closed from September 10 - 17. Besides the tragic human loss of that day, the economic loss cannot even be estimated.

Some estimate that there was over $60 billion in insurance losses alone. Approximately 18,000 small businesses were either displaced or destroyed in Lower Manhattan after the Twin Towers fell. There was a buildup in homeland security on all levels. 9/11 caused a catastrophic financial loss for the U.S.

Result: Americans became more patient and tolerant of each other. This treatment however, only lasted a couple of years

Year 2001: Enron, the Emergence of Corporate Fraud, and Corporate Governance
Enron, one of the top energy companies at this time, and Arthur Andersen, one of the top five public accounting firms, were caught in a corporate fraud scandal that led to the bankruptcy of Enron and dissolution of Arthur Andersen.

Enron hid billions of dollars of debt from its shareholders in failed deals and projects. Further, it pressured its auditors, Arthur Andersen, to ignore the issues. Shareholders lost more than $60 billion.

This led to the passage of the Sarbanes-Oxley Act of 2002 which expanded penalties for accounting fraud and instructed accounting firms to remain independent of their clients. Other firms such as Tyco and Worldcom experienced similar scandals. These scandals shook the securities markets and investor confidence.

Result: The idea of being responsible for your own retirement funds took center stage, however, financial education during this period never gained prominence and small investors continued to chase the fast money.

Year 2002: Stock Market Crash of 2002
After a brief slide post 9/11, the stock market rallied, but began to slide again in March 2002. The market reached lows not seen since 1997 and 1998 by July and September of 2002. The corporate fraud scandals, such as Enron, along with 9/11, were contributors to this loss of investor confidence in the stock market.

Result: The average investor, with little financial training, took this stride because after the emotional beating from 9/11, things seemed to be looking a lot better.

Years 2001 and 2003 - present: War on Terror and Iraq War
After the 9/11 terrorist attacks, the War on Terror was launched in Afghanistan and the Iraq War was launched in 2003. The cost of these wars is ongoing. To date, the Congressional Research Service has approved about $944 billion for the operations overseas. This has been an incredible financial drain on our economy and it is impossible to know what the final cost will be.

Result: The mere number size of the national debt is beyond most people’s comprehension. A sense of “it doesn’t affect my day-to-day” begins to develop.

Year 2005: The Growth of China and India as World Financial Powers
The rise of China and India as world financial powers is nothing short of amazing. Economists estimate that both nations can grow at the rate of 7-8% for decades to come. China, alone, has grow at about 9.6% for the past two decades. Together, the two countries account for one-third of the world's population.

Result: Our acceptance that the goods we purchase are manfucatured in China and customer service centers originate from India becomes more prevalent.

Year 2005: Hurricanes Katrina and Rita
On August 25, 2005, Hurricane Katrina hit the Gulf Coast of the U.S. as a strong Category 3 or low Category 4 storm. It quickly became the biggest natural disaster in U.S. history, almost destroying New Orleans due to severe flooding.

Hurricane Rita quickly followed Katrina only to make matters worse. Between the two, more than $200 billion in damage was done. 400,000 jobs were lost and 275,000 homes were destroyed. Many of the jobs and homes were never to be recovered. Hundreds of thousands of people were displaced and over 1,000 were killed and more are missing. The effect on oil and gasoline prices was long-lasting.

Result: Charitable contributions for relief organizations rise and a growing skepticism that our government can react to our needs begins to take hold.

Years 2007 and 2008: Sub-prime Housing Crisis and the Housing Bubble
In the early part of the 21st century, the U.S. housing market was booming. Housing values were high. Just about anyone who wanted to buy a home could buy a home. A phenomenon called sub-prime lending arose. Individuals and families who, in the past, could not have qualified for a mortgage were able to qualify for adjustable-rate mortgages with low or no down payments and low initial interest rates.

Banks made mortgage loans to these individuals for houses with inflated values. As the interest rates rose and their adjustable rate loans got more expensive, they couldn't make their mortgage payments. Soon, large financial institutions were holding portfolios of loans that were worthless. The "credit crunch" ensued.

Result: Now it’s personal – the level of greed and sense of entitlement ranging from the individual to Wall Street becomes evident. The “buy-now-pay-later” mentality of the decade begins to yield consequences.

Year 2008: Bernard Madoff and the Biggest Ponzi Scheme in History
Bernard Madoff, who owned his own investment advisory firm, was a former chairman of the NASDAQ. In 2008, he admitted to running a huge Ponzi scheme where he paid his investors with proceeds from the investments of other clients. Finally, it all unraveled and he could not meet his obligations. In one of the largest investment fraud schemes in Wall Street history, he defrauded his investors of around $18 billion. He was subsequently sentenced to 150 years in prison.

Result: Few people could define a Ponzi scheme before – now variations of the Madoff math continue to unravel.

Years 2007 - 2009: The Global Recession and the Collapse of Wall Street
In September of 2008, a seemingly perfect storm of factors came together to precipitate the deepest economic downturn in not only the U.S., but across the globe, since the Great Depression. The great investment banks that had stood on Wall Street began to collapse due to the sub-prime mortgage crisis and serious corporate fraud. During the last months of the Bush Administration, the federal government stepped in to bail out some of these institutions in order to keep the U.S. financial system afloat.

Result: Credit card usage is down, personal savings is up, and the projected slow return of a stabilized job market makes us all think that we need to slow our consumer spending down in preparation of an unknown future.

It’s time to rip off the rear-view mirror from this decade and look ahead to the challenges and promises of a new decade. Will we be more financially literate in 10 years?

A Year of Reflection

Another year is coming to an end. Gadzooks! Another decade is also coming to an end. When did THAT happen?

I always liked this time of year – I like those news reports and articles that look back at the year’s events. I’m always struck by the number of famous people who passed away and how for many of them, they fade away from our consciousness. That part saddens me a little, but it also gives me pause to appreciate and embrace every moment we have.

I like turning off the cruise control of today’s treadmill and appreciate the blessings I’ve been given. My resolution each year is to keep trying to help those less fortunate in whatever way I can. In our “I Can Save!” campaign we offer to second graders, we outline the importance of “spending, saving & sharing.” By any measure, the “sharing” is always the best and fun part.

I’m also very tired of the gloom and doom of the Great Recession. I know jobs and the unemployment rate is going to be our greatest challenge next year. The sooner we get more people back to work the better. The sooner we can convince lenders to begin lending again the better as well.

So for at least the remaining moments of 2009, I’m going to focus on the positive stuff:

• A lot of 401K and retirement money has been recovered from the 2008 losses
  
• Personal savings rate for Americans is reported to be the highest in a number of years
  
• Housing numbers in certain parts of the country seem to be stabilizing
  
• Consumer debt is on a downward trend (though I’m always suspicious of the math)
  
• Credit card usage is on the decline – might it be possible we are developing a “save to buy” mentality rather than the previous “buy now, pay later” approach?
  
• Financial literacy is real hot topic these days – can we now convince the masses that this has to be a required topic for our children to learn?

So here’s my holiday wish and new year’s toast all rolled up – May we apply what we’ve learned from these difficult times, prepare our children so future choices are made with understanding and knowledge, and welcome the new decade with confidence, hope, and a positive sense of community spirit.

My 2 Cents About Credit Card Balances

I’ve kept quiet during the recent news releases from TransUnion and Credit Cards.com who were making a big deal about credit card balances coming down and citing Federal Reserve Statistical Releases as the reference source.

Essentially, their reporting is accurate – credit card balances are indeed coming down. What I can’t buy into is the assertion that consumers are managing their credit card balances better.

Nope – for me the only statistical release I pay attention to is the delinquency and charge off reports from the Federal Reserve. The most recent third quarter report shows credit card delinquency of 6.58% slightly down from the previous month and a charge off percentage at a historical high of 10.24%. The slight drop in delinquency make perfect sense because the charged off balances are no longer on the books.

As an old credit card guy, I played this game many times. And in order to play the game here’s what you use – simple math. Here’s the game:

1. PROBLEM: Delinquency percentages are going up – SOLUTION: Increase portfolio balances. The higher the credit card balances, the lower the delinquency percentage. Offer incentives to borrowers to transfer balances and charge more.

2. PROBLEM: Charge off percentages are going up - SOLUTION: Increase portfolio balances. The higher the credit card balances, the lower the charge off percentages.

3. ANOTHER SOLUTION: Charge off the delinquent balances sooner than the require 180 days past due (that 6 months by the way...) required by most regulators. Sure the charge off percentages will look ugly this month, but the delinquency percentage will show tremendous improvement in the next few months – and hopefully credit card balances will increase significantly, so it will all be masked anyway.

Simple math – the problem is it only works when credit card issuers are aggressively targeting customers to increase their credit card balances. It doesn’t work so great (like now) when card issuers are cutting credit lines and increasing credit score thresholds so they can prove to whomever that they are serious about reducing credit risk. You can’t hide the delinquency and charge offs behind portfolio balances in this scenario.

More simple math – with 10% in charge offs, along with cost of funds around .05%, operational costs around 5%, and now loan loss reserves probably around 7% (if you’re lucky), card issuers would need to increase interest rates to around 24% to be profitable.

Credit card interest rates aren’t going up in anticipation of the Credit Card Accountability Act kicking into gear in February – they’re going up because the math isn’t working.

And you might just see some issuers getting out of the business altogether in 2010...

The New Definition of Cash

I have to admit, I’m having a hard time believing this one.

According to a recent Western Union survey, 69 percent of American consumers are planning to give the gift of cash, check or a gift card to friends and family this holiday season. Furthermore, the survey revealed that 79 percent of consumers would prefer to receive a gift card this holiday season that could be used anywhere traditional credit cards are accepted.

Here’s what their press release said:

“Cash as a gift isn’t just practical; it’s an on-trend gift as well. According to the same Western Union survey, consumers are utilizing cash more often in their day-to-day finances, where in the past they may have relied on credit cards. Seventy eight percent of consumers find cash a smarter way to spend money. And, seventy seven percent of consumers also reported that using cash helps them stick to their budget, particularly useful when every penny counts.”

“Consumers are rediscovering the practicality and convenience of cash, and so it’s logical for an increased acceptance of cash as a gift during the holidays as well. And when it comes to sending cash, Western Union is the ‘gold’ standard,” said Jorge Consuegra, senior vice president U.S. product management for Western Union.

This sounds like a corporate attempt to create a self-fulfilling prophesy to me.

I also think we’re headed down a path where the use of debit cards and gift cards will be considered the same as “cash”, because it won’t carry the bad-boy reputation of credit cards. But it’s still plastic, and plastic is still different from cash. I’m willing to bet that a percentage of the respondents who plan to give someone a gift card this year feel that they are giving that someone “cash.” This might sound like I’m splitting hairs, but a swipe is still different that a clink. These cards are simply a tool being used to access cash – and they have associated fees attached to them that cost – yeah, cash.

On the other hand, a recent Boston Globe article indicated that a growing number of people are opening deposit accounts on behalf of others. Apparently, hundreds of consumers have already taken advantage of Citizens Bank on its “Gift of Savings’’ offer launched just a week ago, which features an extra $10 to people who open an account with at least $100 on behalf of a loved one. Service Credit Union here in New Hampshire opened at 5 a.m. on Black Friday with special deals like a three-month CD with 10% interest. The bank sold 2,224 CDs in three hours, about 20 times the normal daily volume.

So maybe Santa has an ATM on the North Pole after all….