The Common Sense Fix

A friend forwarded a common sense plan aggregated by Dave Ramsey, a Tennessee based nationally syndicated radio talk show host. Ramsey is also the author of a best selling book called Financial Peace, a book I have read more than twice personally and have handed out on more than one occasion.

To be transparent, he and I don't see perfectly eye to eye on everything from a personal finance perspective which many of you have heard me say, but 90% of the time we are in step with each other. On the issue of this $700 Billion bail out plan, I agree with him.

Many of you have asked me what I think should happen. This is along the lines of my thinking.

The Common Sense Fix:

Years of bad decisions and stupid mistakes have created an economic nightmare in this country, but $700 billion in new debt is not the answer. As a tax-paying American citizen, I will not support any congressperson who votes to implement such a policy. Instead, I submit the following threestep Common Sense Plan.

I. INSURANCE

a. Insure the subprime bonds/mortgages with an underlying FHA-type insurance. Government-insured and backed loans would have an instant market all over the world, creating immediate and needed liquidity.

b. In order for a company to accept the government-backed insurance, they must do two things:

1. Rewrite any mortgage that is more than three months delinquent to a 6% fixed-rate mortgage.

a. Roll all back payments with no late fees or legal costs into the balance. This brings homeowners current and allows them a chance to keep their homes.

b. Cancel all prepayment penalties to encourage refinancing or the sale of the property to pay off the bad loan. In the event of foreclosure or short sale, the borrower will not be held liable for any deficit balance. FHA does this now, and that
encourages mortgage companies to go the extra mile while working with the borrower—again limiting foreclosures and ruined lives.

2. Cancel ALL golden parachutes of EXISTING and FUTURE CEOs and executive team members as long as the company holds these government-insured bonds/mortgages. This keeps underperforming executives from being paid when they don’t do their jobs.

c. This backstop will cost less than $50 billion—a small fraction of the current
proposal.

II. MARK TO MARKET

a. Remove mark to market accounting rules for two years on only subprime Tier III
bonds/mortgages. This keeps companies from being forced to artificially mark down
bonds/mortgages below the value of the underlying mortgages and real estate.

b. This move creates patience in the market and has an immediate stabilizing effect on failing and ailing banks—and it costs the taxpayer nothing.

III. CAPITAL GAINS TAX

a. Remove the capital gains tax completely. Investors will flood the real estate and stock market in search of tax-free profits, creating tremendous—and immediate—liquidity in the markets. Again, this costs the taxpayer nothing.

b. This move will be seen as a lightning rod politically because many will say it is helping the rich. The truth is the rich will benefit, but it will be their money that stimulates the economy. This will enable all Americans to have more stable jobs and
retirement investments that go up instead of down.

This is not a time for envy, and it’s not a time for politics. It’s time for all of us, as
Americans, to stand up, speak out, and fix this mess.

Are You Diversified

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Book recommendation:

How to measure Bear Market benefit to YOUR savings

Is the Bear Market good for me?

We've been talking about the advantages of the Bear market in our web seminars. You may have read the quotes by Warren Buffet about how he looks forward to declining stock prices. The 24/7 financial news channels are working hard to spin the Bear Market as, “not so bad” for investors. Why then, are folks still not comfortable seeing their 401k and other savings dropping 5%, 15% and 25%? Why are large investors pulling billions of dollars out of the stock markets? How come you don’t feel love for the Bear??

The reason is uncertainty! How much real risk is there? “What does the worst case look like?” “What if everyone else bounces back but I don’t?!” “How can I be sure I am not being played for a fool?”

There is a way to measure risk in your investment strategy. Harry Markowitz developed a theory in the 1950’s that he won a Nobel Prize for in 1990. We can apply his formula to your current investment strategy. We can calculate an expected return for different levels of volatility that you accept for your investments.

Learn how to build Peace of Mind into your investments. Depending on your tolerance for risk, you will still see ups and downs in your invested savings. Learn what acceptable volatility looks like for your investments. What potential is there for volatility next year?

Sign up for one of our informational web seminars and attend our next educational event in October. Register on line at www.vanderwey.com or simply choose the 'workshops' tab to the right and select the seminar tab at the bottom of the page.

Love The Bear

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The Market Has Always Recovered, Mutual Funds Have Not!

How many times have you heard “The market will recover, don’t panic, keep your money invested!” I confidently say it myself, BUT this statement may not be true for you!

While history shows that the broad index of companies that you can invest in have always recovered their value and provided a healthy return over time, individual mutual funds have not always recovered. In 2002 after the tech bubble burst and the market recovered there were thousands of mutual funds that were no longer around.

What happened to them?!? For many, the mutual fund companies quietly rolled these funds into other more successful funds and erased their awful track record! This is called Survivorship Bias. The dismal performance of the disappearing fund that you owned will not be included in the historical performance record of the fund that acquired it.

"Survivorship Bias. Fund companies statistics refer only to funds that currently exist. So when a fund has been performing poorly for several years, the mutual fund company simply terminates the fund or merges it with another. Either way, the offending fund's statistics are wiped away, as though the fund never existed. This misleads investors into believing that the company's overall performance is better than it really is.

Worse: When a fund terminates, it triggers tax liabilities you didn't want and forces you to find another investment. And when a fund is merged into another, you find yourself owning shares in a fund you might not want. In all of this, you have no advance warning and no say; the termination or merger will occur whether you like it or not."

--Ric Edelman: "The Continuing Evolution of Investment Management" 2007

This is legal but wrong. Track record investing not only does not work, the track record itself may be unreliable.

Stop letting active money managers play games with your hard earned savings! Learn how you can eliminate survivorship bias in your funds. Register for one of our Web Seminars this week or sign up and attend the next “Separating Myths” seminar at the Cornerstone Conference Center in Okemos on October 9 or at the Prince Conference Center in Grand Rapids on October 14. Register by clicking the "Workshops" Tab to the right.

Federal Housing Tax Credit

What is the first time homebuyers tax credit, who is it for and what are the benefits?

www.federalhousingtaxcredit.com

A History of Freddie Mac and Fannie Mae

1938 Fannie Mae created during the Great Depression as a government agency to ensure supply of mortgage funds. The aim was to boost banks’ capacity to offer home loans by buying up existing loans in exchange for cash

1968 Fannie Mae re-chartered by Congress as a shareholder-owned company, funded solely with private capital

1970 Freddie Mac created to provide competition in the secondary mortgage market and end Fannie Mae’s monopoly

1971 Freddie Mac introduces the first mortgage-related security

2003 US policy interest rates hit a low of 1%, further stoking the booming US housing market

2004 Following an accounting scandal, Fannie and Freddie’s regulator Ofheo requires the companies to raise their level of core capital 30 per cent above previous levels, in effect capping their ability to purchase mortgages

2006 A steep rise in the rate of subprime mortgage defaults and foreclosures lead a number of subprime mortgage lenders to fail. The failure of these companies causes prices in the mortgage-backed securities market to slip

August 2007 Rising defaults on subprime mortgages trigger a global credit crunch

March 2008 Ofheo gives both companies permission to add as much as $200bn financing into the mortgage markets by reducing their capital requirements

April 2008 Ofheo report reveals that Fannie and Freddie accounted for 75 per cent of new mortgages at the end of 2007 as other sources of financing pull back on lending

July 2008 Shares in Freddie Mac and Fannie Mae plummeted amid speculation that a bailout of the government-sponsored mortgage financiers may be required, and that such a bail-out would leave little if any value for current shareholders. Frantic trading on Thursday in New York dragged shares in both companies down to their lowest levels since 1991

September 2008 The US government seizes control of the troubled mortgage groups in what could become the world’s biggest financial bail-out. The government’s move, its most dramatic since the start of the credit crisis, is aimed at ensuring the two groups’ woes do not cripple the country’s housing market or worsen to the point that they fail and send shockwaves through global markets

Source: The Financial Times Limited 2008, A history of Freddie Mac and Fannie Mae

US Government Bails out Fannie and Freddie

$100 Billion, yes, with a "B". Over the weekend, the US government takes over the two huge mortgage guarantors. Until now, they were sanctioned by the government, but this morning, the language is much stronger. We own them now - you and me - and we'll vote for their new president on November 4th. And by the way, the $100 Billion is likely to be invested in each of the companies, not the two combined.

Notable Quotes from the Article:

"These necessary steps will help strengthen the U.S. housing market and promote stability in our financial markets. Bernanke said"

"James Lockhart, the head of Federal Housing Finance Agency which will now oversee Freddie and Fannie, said that the recession in the housing market ultimately ate away at the two firms' capital."