The Bottom Line
By Chad Wilson
January 30, 2009
Foundation Bank --
The Bottom Line
Skeletons for Everyone to See
Volume V Issue II – January 30, 2009
A monthly financial commentary for our friends, Clients and Advocates
Most people have heard of a Ponzi scheme, but do you know what it is? It is actually named after a man by the name of Charles Ponzi, known as one of the biggest swindlers in American history. The scheme pays investors outrageous rates of return with the principal dollars of new investors. This works, only so long as new money comes flowing in. But if investors want out, or if the new flow of money slows down, the pyramid comes crashing down. Not much has changed since 1920. Bernie Madoff is the latest person to employ this scheme on a grand scale. Mr. Madoff swindled an estimated 50 billion dollars from individuals and corporations alike in what may be the biggest fraud in history. It would not surprise me if Ponzi schemes a plenty come to light in the next few years. During good times, no one asks questions (in the 90’s as well as the roaring 20’s). But when times get tough, the skeletons begin to come out of the closet.
Our new treasury secretary, Tim Geithner, faces a host of challenges. Reporters speculate that one of the options on his table is the creation of a “Bad Bank.” Sheila Bair, current head of the FDIC, might be charged with its administration and oversight. What this “bad bank” would do is raise capital by the issuance of bonds backed by the government. They would then take those proceeds, and buy toxic assets from banks. These assets would be bought at pennies on the dollar. The “bad bank” would then go about collecting on these mortgages and other assets in the hopes that they would be able to collect more than they paid for them, thus giving them the ability to pay back the bonds and shore up some confidence in financial markets. The idea stems from criticism that the TARP money already given to publicly held banks has not had its desired effect. Of course, there are pro’s and con’s to a “bad bank” idea. This might be just one of the many ideas being floated by the new administration.
Layoffs abound. I’m sure that at this moment as you read this commentary, someone you know who has already lost a job has popped into your head. Caterpillar announced it will lay off 20,000. Pfizer will shed 19,000 jobs following its recent purchase of Wyeth. Alcoa will let 13,500 loose. Sprint will fire 8,000. Home Depot will let 7,000 people go. Starbucks will cut 6,700. Even mighty Microsoft will lay off 5,000. That’s just a partial list according to Challenger Gray. It appears that no sector is immune. From materials to healthcare, from homebuilding to technology, companies are feeling the hurt. This means it is likely that individuals will start feeling the hurt (if they haven’t already). It would be prudent for all of us reduce our lifestyles, shore up our savings, and pay down our debt. Your job may be as secure as the day is long, but it would be better to prepare for the worst, and hope for the best. It’s time to get back to basics. If we all took a good look at our spending, we would see that there are more places than we realize where we are enjoying luxuries rather than needs. It never hurt anyone to trim out some of these luxuries. It might even turn out to be good for us.
Is there anything to be excited about? It’s hard to say ‘yes’ when we are in the smack middle of a purging and cleansing process. It’s easy to forget that the economy is cyclical (whether times are good or bad). But that’s the good news. The economy will turn again. And for those who survive this financial crisis, there are solid profits and stable years to look toward in the future.
Chad P. Wilson, CFP
Foundation Bank – a division of McKenzie Banking Company - 731-554-2423
The above is strictly informational and does not constitute any sort of recommendation. Please consult your own financial advisor for specific tax, loan, or other investment advice.
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