Subprime Mortgage Meltdown Has Far Reaching Effects

Lending money to high risk borrowers then packaging and re-selling the debt in ways that were supposed to reduce the risk didn’t turn out so well for the financial markets.  A recent article in Business Week takes a look at these risky investments and Matthew Goldstein put together a list of the different areas affected by the subprime problem.

Housing
-Surging mortgage defaults
-Dropping home prices

Rating Agencies
-Criticized for not downgrading the risky investments backed by subprime mortgages

Consumers
-Adjustable rate mortgages are coming due
-Ripple effect of subprime shockwave has hurt the whole stock market

Commercial Paper
-$1.2 trillion asset-backed market is drying up

Investment Banks
-Brokerage stocks have taken a hit since investors are worried about their bond underwriting

Private Equity
-Risk-averse investors have created a credit crunch
-Banks have a $300 billion backlog of deals

Hedge Funds
-Funds backed by pools of subprime mortgages have lost tremendous value, for example the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund has gone into bankruptcy

I think this ripple effect caused by problems in the mortgage market reinforces the importance of diversifying your investments. If your money is spread over many different types of asset classes and industries it can help soften the blow of a far reaching investment crisis.


Personal Finance Review – Macintosh Frustration Edition

I’ll keep this Labor Day weekend review short. I’m out of town and trying to write on an Apple laptop and it’s driving me crazy! None of the keyboard shortcuts I usually use work and I don’t know how to navigate around the operating system. Now I know how a brand new computer user must feel, frustraed! Here are some interesting articles from this week:

-17 Cheap Ways To Keep Cool And Survive A Heat Wave @ The Digerati Life

-A Good Example Why You Shouldn’t Put Too Much Stock Into Investing Newsletters @ Generation X Finance

-What Are Your Money Leaks? @ Money, Matter, & More

-The Credit Card Arbitrage Game: Making Money from Balance Transfer @ Suns Financial Diary

- Save Money on Movies, Music, Television, & Books @ Lazy Man & Money

-10 Easy Ways for Single Parents to Save Money @ Free Money Finance

-Online Banking Roundup: WT Direct vs. HSBC, ING, and Emigrant @ Five Cent Nickel

-5 Ways Paperless Personal Finance Saves You Money @ Blueprint for Financial Prosperity

-Reduce your debt with person to person loans? @ Mighty Bargain Hunter


eBay Domain Trademark Mistake

About a year ago, I registered a domain with the word ebay in the name. Just this week I received the email below from their legal department informing me I was violating their trademark. Luckily, I haven’t developed the site yet so no big loss to me.

At the end of the email they ask that I contact them in writing but don’t give any address. I replied to the email saying that I would comply and asked how to send my in-writing request but haven’t gotten a response yet. I hope I hear back soon, according to their email, if they don’t get a response they “will have no choice but to pursue all available remedies” against me. Here is the email from eBay:

We are writing concerning your registration of ebayxx.com which contains the famous eBay trademark.

eBay has made a substantial investment in developing and providing its services. As a result of eBay’s pioneering efforts and its devoting substantial effort and resources to providing only high quality services, the eBay name and trademarks are widely known among the consuming public worldwide, and the name and trademarks embody substantial and valuable goodwill.

Accordingly, we were concerned when we learned of your registration of the domain ebayxx.com. As we hope you can understand, protection of its trademarks is very important to eBay. We have filed several successful federal court actions in the United States against companies and individuals employing the famous eBaytrademark in their domain names, as well as more than six proceedings before the United Nation’s World Intellectual Property Organization’s arbitration panel. eBay prevailed in each case and the domain names at issue were all ordered to be transferred to eBay.

We understand that you may have registered ebayxx.com without full knowledge of the law in this area. The Anticybersquatting Consumer Protection Act (http://www.patents.com/acpa.htm) provides for serious penalties (up to $100,000 per domain name) against persons who, without authorization, use, sell, or offer for sale a domain name that infringes another’s trademark.

While eBay respects your right of expression and your desire to conduct business on the Internet, eBay must enforce its own rights in order to protect its valuable and famous trademark. For these reasons, and to avoid consumer confusion, eBay must insist that you not use the domain name for any purpose, do not sell, offer to sell or transfer the domain name to a third party, and instead simply let the domain registration expire.

Please confirm in writing that you will agree to resolve this matter as requested. If we do not receive confirmation from you that you will comply with our request, we will have no choice but to pursue all available remedies against you.

Sincerely,

eBay Legal Department


Are Credit Repair Companies Worth the Fees They Charge?

Are people wasting their money when they pay a company to repair their credit?  This question came up today when I discovered a coworker had previously worked at a credit repair company.

Credit Repair Services Provided
Based on what my co-worker learned in his time with the credit restoration company they did not provide a service that an individual with credit troubles could not do themselves. Here is the process they went through on behalf of a customer.

The first step was for a person with bad credit to request a copy of their credit report from the three major credit bureaus, TransUnion, Experian, and Equifax.  The company then opened a dispute with the credit bureaus on several negative items from the report.  The credit bureaus then had 30 days to contact the creditors and investigate the disputed items. Typically one or two of the negative items would be dropped from the credit report after this process.  The credit restoration company would wait a period of time and then try again.

Waste of Money?
The fees for this service varied from $300 – $600 depending on the branch that did the work.  From what I understand, the customers are basically just paying the credit restoration companies to do the legwork, there doesn’t seem to be a lot of added value other than having someone else go through the motions.  It seems likely that if someone has credit problems, they’re probably not flush with money and they’d be better off doing the work themselves and using the fee they paid the credit restoration company to pay down their debts. 

Am I off base?  Do credit repair companies add more value than I just described for the money they charge?


Retirement Advice from Corporate Executives

If a wealthy retired corporate executive gave you retirement advice would be thankful or feel like they were rubbing your nose it in?

Executive Privilege
Our most recent company newsletter featured several former corporate executives that have retired from the business to pursue their life’s ambitions.  I had mixed feelings as I read the article in my worker-drone cubicle.  They all gave good advice on preparing for retirement but they also had much larger salaries than most people in the company.  I understand that the corporate benefits office was trying to promote 401k investing and good money management with the article but it didn’t sit quite right reading about these executives living their dreams while we slave away in our cubes.

Money Management
These executives worked long and hard to get to the top but they didn’t achieve early retirement simply by earning a lot of money.  They were smart and managed their money well.  The article started off by explaining they had all set their retirement goals when they were young and managed their lifestyles and finances around the goals.  It also mentioned that the booming market of the 1990’s had a part in helping them retire early.

Retirement Advice
Here are some of the actions and philosophies the executives follwed that allowed them to retire early:

– maximized participation in the company 401k, invested in non-company plans like a Roth IRA, and worked there long enough to become fully vested in the profit sharing plan

– lived a conservative life style, tried to manage their money to stay out of debt and that left more money to invest for retirement

– "When I got extra money it went into investments; I didn’t drive big fancy cars and I didn’t buy big fancy houses.  You have to put aside to take care of yourself, and if a company hands you money, you have to manage what they hand you"

– Started planning for retirement as soon as they joined the workforce, first thing they did was start a savings account

– Remained debt-free

– "It’s all about choices: if you choose to spend, you choose to work until you pass away; and if you choose to save, you leave when you want"

Article Reactions
I’m glad that our company is trying to promote planning and saving for retirement, I just wish they had used some role models that more of us workers could relate to.  I’m afraid that since only executives were interviewed people may miss some of the message on money management and focus on the fact they need to become corporate big shots to make enough money to retire.  What do you think?  Did the executives inspire our workforce to save?  Will people be able to see beyond the big salaries to the wise retirement preparaton advice?


Warning, Loaning Out Your Identity May Be Harzardous to Your Wallet

Having someone steal your identity is bad enough, it really sucks when you loan it out to someone else and they do something stupid with it. A username and password are often all that’s needed to assume someone’s identity on the Internet, lending yours out can turn out to be an expensive or embarrassing mistake.

Rouge eBay Shopper
Have you ever told a friend or family member the username and password to an account of yours so they could use it “just this once”?  Just yesterday, I had a customer’s relative spend almost $150 in my eBay store then decide minutes later it wasn’t what they wanted.  That left the eBay user to try and reclaim her $150 without getting negative feedback. Here is her email:

“I have been a positive ebayer for over 2 years now.  I am very conscientious about keeping 100% positive feedback. I am sorry about the purchase. My sister in law asked to use my account because she couldn’t find the backpack anywhere else and needed them for her soccer team.  I explained to her the process and to read everything carefully.  I am a very good ebayer and read everything completely so none of this happens.  I guess it teaches me a lesson.  I am really sorry.”

Of course I’m refunding her money and canceling the sale, I’m not going to ship her something she can’t use.  But what if I was a jerk and refused to work with her?  Or what if I returned her money but left her negative feedback? She’d either be out $150 or have ruined a perfect feedback rating because she loaned out her eBay and Pay Pal identity.

Email Slander
It can take a long time to build trust with others and only a few minutes to ruin that trust; I’ll give you an example. I went to school with a guy named Niraj that let a friend use his email account to send an urgent email.  Later that day I was shocked to find a very rude email from Niraj that had been sent to the whole computer science department. 

It turns out that his friend had sent the email from Niraj’s account in jest but it didn’t much matter.  The damage had been done; Niraj’s credibility had been tainted.  He was able to work things out with the administration but the email could have ended up losing Niraj his job with the school. 

Guard Your Offline Information
Loaning out your identity isn’t just a mistake online; it can cost you a lot of money in the non-virtual world as well.  Another episode I witnessed back in school had to do with telephone access codes in dorm rooms.  One guy loaned out his authentication code for the phone service to several people and one of them used it to access adult phone content and ran up a bill for hundreds of dollars.  Of course he didn’t know who it was and couldn’t prove he didn’t make the calls so he was stuck with the bill.

Careful Who You Trust


Protect your Identity with LifeLock!

It’s hard enough protecting your information and identity from people you don’t know. If you don’t want to end up out a big chunk of change, majorly embarrassed, or in trouble its safest not to loan out your identity to friends or family, as harmless as it may seem at the time.


Investing in High Yield Corporate Bonds

We have some junk in our portfolio, junk bonds that is.  About 5% of our portfolio is invested in junk bonds and today I’m taking a closer look at them due to their poor performance this year.

What Makes Them Junky?
When a company wants to sell bonds to raise money but their debt isn’t deemed “investment-grade” by credit rating companies the bond is rated as a lower quality. Companies like S&P and Moody’s look at things such as cash flows and debt on the balance sheet when rating a company’s potential ability to pay its debts. Junk bond is the term used to refer to bonds rated BBB by S&P or Baa by Moody’s.

Who Are These Junky Companies?
The companies that are looking to raise capital with less than stellar debt ratings are often either new enterprises in the beginning stages of development or established companies that have struggled financially.  The newer companies don’t have much of a financial history to base an analysis on so they’re deemed less likely to be able to make interest and principal payments until proven otherwise.

In addition, some established companies that used to have an investment-grade rating have been downgraded to junk bond status.  Since the risk of lending to companies with worse credit is higher, they have to pay higher interest rates to entice investors to loan them money, hence the name high yield corporate bonds.

Why Invest in Junk?
One role that junk bonds play in a portfolio is that their returns and risk profile tend to fall between those of stocks and investment grade bonds.  According to Fidelity:

“high yield bonds tend to be less sensitive to interest-rate movements than investment-grade bonds, and are more sensitive to the factors that influence stock prices, such as a company’s business prospects, cash flow, and debt level, as well as industry fundamentals and the overall health of the economy….


At the same time, high yield bonds are fixed-income securities that derive the bulk of their return from coupon payments (income), which makes them less volatile than stocks and provides downside protection.”

Hard Times for Junk Bonds?
An article in the Chicago Tribune warns of tough going for junk bonds in the near future.  Slower profit growth and rising debt levels could lead to higher volatility. Scott Berry of Morningstar Inc., warns “keep reasonable expectations for the [high-yield] asset class. It’s not offering a lot of yield for the risk, and double-digit returns are going to be difficult to get.”

Junk bonds have definitely taken a hit recently.  Our investment in Vanguard High-Yield Corporate fund (VWEHX) dropped in value for all of June and July to prices it hadn’t reached since December of 2002. Although the fund has a 5 year annualized return of 8.16%, the year to date return has been not so good, -1.58%.  Things have improved some with an upward trend over the last month but it could be rough going for a while for junk bonds.

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Which is a Better Gamble, Playing the Lottery or Starting a Business?

Have you ever heard a co-worker complain about their job then follow it up with something about quitting once they win the lottery?  I feel bad for these people and would love to crawl into their head to read their thoughts. Do they really think they’ll win the lottery? If their life plan is based on winning the lottery someday, odds are they’re in for disappointment.

Playing the Odds
If you are going to play the odds for income outside of your job, you might as well try starting some venture of your own.  The historical statistics aren’t so good for the success of a new small business.  However, even though many fail in the first few years, your odds of making a small-business work are definitely higher than winning the lottery.

Building Value
Of course offering your own product or service is a lot more work than buying a lottery ticket but statistically it is a much smarter move. A lottery ticket doesn’t hold any long-term value unless it is the winning number. The experience and connections you build when starting your own venture will be of value for years to come, even if the first business doesn’t work out.

Mental Rewards
Running your own enterprise, regardless of size, can be more psychologically rewarding than trying to guess the winning numbers.  When you play the lottery it’s pretty much up to chance, you don’t have control over whether your number is picked.  It can be frustrating when you don’t win time, after time, after time. All you can do to try again is buy another long-shot ticket.

On the other hand, building your own business is something you do have control over.  If something doesn’t work you have the power to make some changes and try something different.  Knowing that you’re in charge of the end result is more empowering than hopelessly wishing the numbers will finally fall your way.

Get Rich Slowly
The obvious draw to the lottery is the get rich quick appeal.  It’s easy to play and you can win a lot of money.  Not to say that I wouldn’t love to win the lottery but the odds are I won’t.  Rather than hold on to a slim hope of hitting it big so I can quit my job, I’d rather put my time & money into growing something that might actually let me quit my corporate job someday.  Not to say you should never play the lottery on a whim, just that you shouldn’t make winning the lottery be your life plan.


Personal Finance Review – Invasion of the Ants Edition

Our kitchen is being invaded by ants!  We’ve had a few ants here and there in summers past but over the last week they’ve shown up in full force.  Last weekend I bought some insect spray at Home Depot and sprayed around the outside of the house but it doesn’t seem like it’s done much good.

Rather than diminishing they seem to be spreading to more areas in the kitchen.  We’ve never had anyone come spray for bugs before but are going to look into it.  Any suggestions on how to handle the ants or some good companies to use?  Anyhow, while I’m fighting ants, you can enjoy some money articles from last week.

Start off by checking out the debate between Trent and JLP in the comments of this post on investing, then move on to the ones below.

-The (Lack Of) Relationship Between Intelligence And Wealth @ Money, Matter, & More

-Are You Ready To Be A Parent? Know The Cost Of Having Kids @ The Digerati Life

-Reader Question: Whole life insurance vs Term insurance? @ Generation X Finance

-Weather the Stormy Market with a (Re)Balanced Portfolio @ Suns Financial Diary

-Prosper Beats the S&P 500? @ Lazy Man & Money

-How to Make Money in the Stock Market @ Five Cent Nickel

-Leverage Your Contacts for Business Marketing Success @ Free Money Finance

-More On Why I Sold My Vanguard Target Retirement 2050 @ Blueprint for Financial Prosperity

-Money-making idea: Journaling while you’re learning a new skill @ Mighty Bargain Hunter

-10 Tips for Buying a Residential Rental Property, Part 1: Buy at the Right Price @ Consumerism Commentary

-8 Ideas for Saving Money on Books @ Plonkee Money

-Employer Disability Insurance @ The Financial Blogger

-Questions and Answers with Warren Buffett @ Get Rich Slowly

Thanks to The Simple Dollar for including the article Retailer’s Anger Reveals How You Can Make Money On eBay in last week’s Carnival of Personal Finance.


Why Do Car Dealers Have to Shout At Us to Sell Cars?

Why is it that car dealers think it’s necessary to yell at us in their radio ads? It seems like every car lot commercial I hear is the same.

“WE ARE LIQUIDATING OUR INVENTORY; EVERY CAR ON THE LOT MUST GO!! BAD CREDIT, NO CREDIT, NO PROBLEM! WE FINANCE EVERYONE!”

I have never gone to a car dealer because I heard them shouting at me on the radio. As a matter of fact I will try to avoid any business that screams about selling me a car.

Ridiculous Commercials
Is it just me or do these car commercials seem ridiculous? Is there any other type of business where they shout at potential customers in their advertising? Seriously, every commercial sounds exactly the same. What do they do, all hire the same guy with a booming voice to yell about liquidations and financing? And how many sales events can one dealership have in a year?  If you have “a spectacular sales event” every two weeks, are they really all spectacular or do they become just another excuse to shout about selling cars?

Junk Mail
If the annoying radio commercials weren’t enough to drive me away, the trick junk mail definitely is.  An official looking letter that read IRS NOTICE made my heart leap several months ago.  When I opened it up to discover that IRS stood for Inventory Reduction Sale at a local car dealer it certainly didn’t make me want to rush over and buy a car.

Cardealerad

Different Song, Same Dance
How many times have I heard that car dealers are “slashing prices” to sell as many cars as they can “regardless of loss of profit”?  If that were true, wouldn’t their cars be selling for better deals?  If you follow up on those ads, you still have to go through the whole salesman’s song and dance of running back to the sales manager to get prices approved and calculation after calculation to see how they can reduce your monthly payments instead of the price of the car.

I’m not arguing that car dealers should sell cars without making a profit, just wishing they’d change their selling tactics.  Their current approach must work on some people otherwise they wouldn’t keep doing it but one thing is for sure, it doesn’t work on me.



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