Author: Christopher S Penn

Scratch troubled, we are screwed as a country

I read with great alarm on CFO.com that as the housing and mortgage crisis deepens, people are dipping into or even cashing out retirement funds.

“In the last four or five months we have seen an absolute onslaught of people trying to do hardship withdrawals and loans out of 401(k)s,” Mark Anderson, CFO of Granite City Electric, told CFO magazine in October. “What has happened with housing and the economy has really blown up for people at the lower end of the spectrum.”

When you cash out a retirement fund to pay down a mortgage, you take a double hit. First, you lose the money itself in a market that is declining rapidly, dumping good money after bad. Second, and most perilously, you create an enormous opportunity cost for yourself that you will in all likelihood never recoup in your lifetime.

Let’s do the math. Let’s say you are an eager 21 year old college graduate, with a great outlook on life, a job that pays a salary of 2,000 a month before taxes, and 45 years in the workforce ahead of you. If you start saving today, 3% of your income with employers that match with a 3% contribution, and your investments give a safe return of 6% over your working lifetime, you’ll retire at the age of 66 with roughly330,000, give or take.

Now, let’s say you, at the age of 50, make some bad choices and consider bailing yourself out of a mortgage problem with the 110,000 you’ve accrued so far in life. Boom, problem solved, right? Wrong. You’re now in incredible trouble. You will retire in 15 years with a grand total of only35,000 in the bank (at the same savings rate). To retire with the same amount of money as you would have had, you would need to save 30% of your income instead of 3%, have an employer that matched 6%, and hope for an 11% return over those 15 years. Otherwise, you have to depend on the government and HOPE that Social Security is still solvent when you retire – otherwise, you will not retire.

What SHOULD you do if you find yourself in super-serious, no end in sight mortgage trouble? Walk away. Mail in the keys to your lender, declare bankruptcy, rent a nice apartment somewhere, and work off the bankruptcy. Does foreclosure look bad? Yes. Foreclosure and bankruptcy means you’ll be paying cash for a lot of things for a while. But it lasts 7 or 10 years at the most. 7 to 10 years of bad credit is easily survivable, and you may even develop good personal spending habits by only being able to spend what you have. Compare 7 to 10 years of conservative living with 30 years as an elderly man or woman trying to make ends meet with meager savings. Can’t declare bankruptcy? Leave the country. As long as you have useful skills, there are PLENTY of nations on this planet that are all very nice, and very few of them have credit bureaus connected to the United States.

Truth: the United States is NOT the best country in the world. It’s one of many very good countries, and any flag-waving moron who blindly believes that one country is the best has probably never traveled more than 20 miles past his doorstep. LOTS of good countries in the world.

Unfortunately, for a lot of people, they’ve already dived off the cliff, and that means a certain percentage of the population in the years to come will be gambling that social services and the government can assist them in their “golden years”.

Is that a gamble you’d take?

Like the old Willie Nelson song goes, know when to hold ’em, know when to fold ’em, know when to walk away, know when to RUN.

Could you use an extra 45,000 per week?

If so, you might want to consider having a subscription object written for you in Second Life.

A “bonus” called an allowance is issued in Second Life every week to residents. It’s L50, or roughly US0.18 per avatar.

18 cents doesn’t sound like much, but hire a developer to create a script for your cause and ask people to donate their L50 every week to your cause. A quarter million Second Life residents would be US$45,000 per week. Not too shabby!

Dear music industry,

Please make it easier to be legally compliant.

Thanks.

—

I had an unpleasant experience this morning in the iTunes Store. I mentioned on Twitter to my friend, Bronwen Clune, that Josh Groban’s new album, Noel, had a very good version of Little Drummer Boy on it. I figured, heck, it’s only 99 cents, I’d send her a copy of it legally through the iTunes Store, make a nice Christmas gift, right?

Apple apparently had a different idea:

“An email you’ve specified to receive a Gift is set up for an account in a different country’s iTunes Store (Australian). Gift recipients may only redeem their gift in this iTunes Store (United States).”

Apple, did it ever occur to you that I might have friends outside the country I live in? This is, after all, the Internet, where borders are crossed with the click of a mouse. I checked other digital stores that have a pay per download, and no luck on Amazon or CD Baby. Everyone loses. The musician doesn’t get paid, the label doesn’t get paid, Apple and other providers don’t get paid.

Instead of buying and sharing the music legally, I had to go dig up a YouTube video that someone else had posted with the track as its soundtrack. I’m not willing to break the law by ripping the track myself but if someone else has already done the work and stuck their neck out publicly, I’m not opposed to sending a link.

Here’s the thing. Apple – you missed a revenue opportunity. Please let me BUY music for friends internationally. I realize the US dollar is close to worthless overseas, but still. How many musicians in iTunes miss out on revenues and sales every day because of this e-commerce paywall between nations?

Music industry – the lesson is not that free will always win. EASY will always win. I could rip this track for free by breaking the DRM and converting to an MP3, but that’s 10 minutes of my day I can spend doing something else (like blogging about it). That would be free, but I want easy. I value my time more than my money, because I can always make money, but my lifespan is finite and irreplaceable. Make it EASY for me to legally buy, share, and distribute the music I love, and I will. Yes, price is a consideration, but it’s not the ONLY factor.

Musicians – always have more than one e-commerce store distributing your stuff, because occasionally a customer will want to do something unexpected with your music, and if they can pay you for it easily, all the better. For example, I can imagine a tip jar being set out on a musician’s web site that says, “Feel free to rip my CD and if you want to send an MP3 to a friend, all I ask is that you drop 99 cents in the jar per track. Thanks.”

I’ve got an easy answer for that. Pick five Republican senators and five Democratic senators at random, wheel a kiddie pool into the Capitol Rotunda, strap them to a gurney, and have them try out the technique – no permanent physical harm, we promise! – for 60 seconds.

At the end of the 60 seconds for each of the 10 senators, poll them as to whether it was just “aggressive interrogation” or if they felt they were subjected to a torture technique.

This would accomplish two things. First, the people making the decisions should have first-hand experience of anything that might be done in the name of the people that could be called torture. Second, perhaps we’d have fewer used car salesmen running for office if they knew they might have to experience what they legislate.

“I have been saying for about two years we’re looking at a 1929 kind of event. I think that we are really in trouble in this country. And what you have seen in the last four months is just the beginning of it.”

-Patrick Byrne, Chairman and CEO of Overstock.com, December 2007

“If home prices decline by 30 percent, as one noted economist has said could happen, “We’re all going long apples and boxes to sell them in,” Syron said, invoking an image from the Great Depression.”

– Richard Syron, Freddie Mac CEO in today’s Washington Post

“The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis.”

– Alan Greenspan

The United States doesn’t -make- anything any more. For the last 5 years, our economy has been driven by increases in asset prices, namely housing. People cashed out equity and spent like crazy, driving the economy forward.

All good things must come to an end, and we’re seeing just the first inning of the housing bubble unwind in a game that’s going extra innings. As prices drop, equity vanishes, and mortgage owners owe more than the property is worth.

Next in line are consumer grade loans – auto defaults are already up, as are student loans, because when the choice is between a roof over your head or a student loan payment, you go with roof every time.

Housing equity can’t be used to pay down those loans any more, so they go red. The next wave after that is credit card defaults, because once you’ve maxed out, you’ve got nothing left and have no way to pay. Discretionary income? No such animal in a recession. Everyone’s paying just to stay afloat and with the basics.

All this plays out over the next 3 years. Mortgages are unwinding now, but subprime goes nuclear in March 2008 with the largest wave of rate resets yet, 65 billion worth, and stays at that level for 6 months. Defaults typically occur in 30 days of a rate reset; some borrowers don’t even make a payment.

Expect secondary loan (car, student loan, etc.) default rates to hit the wall shortly after the mortgage ones, and credit cards even sooner as the source of last resort financing, because the people who are in trouble are living lifestyles beyond their means.

Scared yet?

While I’m not a certified financial planner or anything, I’m going to give this piece of advice. If your money is in a place that is not insured, move it to an insured place. Insurance means FDIC coverage for up to100,000 of cash per account. Money market funds are discovering they’re tainted with bad mortgage debt. Municipal bonds are finding out their guarantors overextended.

Anyone who promises a fix for this situation that isn’t “we have to ride this out” either has something to sell you or is running for office. Don’t believe them. This financial crisis took years to make and it will take years to unmake.

Rogers Canada is modifying Web pages. Take a look at this Wired article.

Is this a marketing dream? A marketing nightmare? Bit of both.

If you searched for a student loan, I could buy a modification of the results you get from your ISP. Even if you wanted a loan from my competitor, if I paid enough, I could divert you instead.

If you searched for my company’s products, a competitor could do the same to me.

Expect this to become a hot button issue for net neutrality.  If this goes unopposed, just imagine what the political campaigns will do to every web site you visit. ISPs will be rewriting traffic all day based on bids. Rudy Giuliani needs a boost in Iowa, so he’ll pay Comcast to rewrite all requests for Mitt Romney’s web site to his. Someone might even play dirty and use soft money to redirect a candidate’s traffic to a Swift-boat style attack ad instead.

Stand up for net neutrality, or you won’t be able to trust a thing you see online – ever.

And if you use Rogers or any other ISP that uses these practices, drop ’em. Vote with your wallet, because that’s the only language some of these people will ever understand.

From HillaryClinton.com:

I will consider legislation that enables lenders to convert unworkable mortgages into stable, affordable loans without the permission of investors. Protection from lawsuits will remove the obstacle that keeps lenders, servicers and others from turning mortgages that were designed to fail into mortgages families can afford. Right now, servicers who process monthly loan payments and interface with homeowners have flexibility to modify loans. However, they are reluctant to fully exercise this discretion in part because they fear investor lawsuits. Investors who own the securities into which the mortgages have been packaged may assert that they are harmed when servicers help at-risk borrowers. Protection from lawsuits could enable the servicers to help homeowners avoid foreclosures, help investors avoid the losses they would otherwise suffer, and help the economy.

Servicers aren’t afraid of lawsuits. They’re BOUND by the law to honor the contracts signed as part of the securitization of loans.

Refresher. Securitization is what lets the majority of people get loans. Period. If I loan you 100, I can’t use that money until you pay it back. If 20 investors get together and invest5 in me plus a finder’s fee, they own the loan now, and I have $100 I can loan again.

Guess what, Hillary? The lenders and servicers DO NOT OWN THE LOANS that you’re referring to. It’s not a question of permission of the investors. They OWN the loans. Except as defined in the contracts, lenders and servicers cannot legally make changes to the mortgages they originated.

More importantly, reread:

I will consider legislation that enables lenders to convert unworkable mortgages into stable, affordable loans without the permission of investors.

Translation: I’m going to try to make it legal for a third party to monkey around with someone else’s property without their permission.

What you’re proposing is no different that George Bush’s foreign policy. Arbitrary decisions made without respect for the law – however flawed you think it might be – are what got us into a bunch of very sandy places. Now you’re publicly posting on your own web site that you’re willing and eager to ignore laws as it suits you politically? Sounds awfully familiar to me. Apparently your time at Yale taught you the same respect for the law as your classmate, Mr. Bush.

Whatever meager chance you might have had for my vote just evaporated.

The Contagion Spreads

If you want to talk viral, let’s talk about the disease of debt that’s spreading. What started out as a portfolio of subprime mortgages going bad is rapidly spreading to any financial sector that touches any form of credit or debt.

Last week, First Marblehead (ticker: FMD), one of my company’s partners, registered a half price haircut on its stock as their student loan portfolio was downgraded. Turns out that defaults may be higher than thought, and FMD might be forced to buy back bad loans.

What does this have to do with the mortgage crisis? Two things. First, securitization depends on available credit and liquidity, and the markets have neither in great supply right now. Second, on the consumer side, my gut instinct tells me a lot of people were paying their student loan bills with home equity. Now that the housing ATM is closed for business for the foreseeable near-term future, expect credit card and student loan defaults to rise precipitously. We’re going to do our best to help people avoid default, but there’s only so much you can do.

It’s getting ugly out there, folks. Cash is king now and will reign supreme in 2008.

If you have debt, and you have the capacity to eliminate it, eliminate it as soon as you can.

Debt is your enemy in uncertain economic times.

A Ninja Perspective on Racism

I had an amusing experience on Friday as I was bringing my lunch – Chinese food from the place on the first floor – back up to my office. On the elevator ride up, the guy in the elevator commented, “Man, that smells good. Where ya delivering to?”

He had mistaken me for a delivery service, simply because I was an Asian guy carrying Chinese food.

What I found more interesting was the reaction of folks on Twitter when I made mention of the incident. Seems they were a lot more offended than I was.

Racism, whether explicit or implicit, is harmful, but from my perspective, it’s an important insight into a person, and a very public display of their weakness. Racism is a weakness, a character flaw that a skillful practitioner of ninjutsu can take advantage of. We have an expression – kyojitsu tenkan ho – which roughly translates as “truth as a lie, lie as truth”. Any character weakness can be turned against you, any preconceived notion about a person can be used to distract and divert your mind away from the reality of a situation, ultimately to your detriment.

In the case of this guy, his remarks told me that if I ever needed to infiltrate his office, say as a competitor to steal some confidential information off his computer network, I could show up with a bag of Chinese food and if I ran into him, he’d make a false assumption that I was working as a delivery boy.

If you find yourself the subject of false assumptions – blondes are airheads, blacks are criminals, Jews are stingy, anyone Muslim is a terrorist – ask how you can turn those assumptions to your advantage.

I have to hand it to Symantec for perfectly cloning Japanese kids’ shows with this ad series for Norton Antivirus.

Part 1:

[youtube]https://www.youtube.com/watch?v=6XLPZSHkFjA[/youtube]

Part 2:

[youtube]https://www.youtube.com/watch?v=qXWGDS3hoNM[/youtube]

More cheese than all of Paris. Hat tip to Erik Carlsson for these absolute gems.