A Nice Gesture from Wall Street

You will all be happy to know that the top seven executives at Goldman Sachs will fore go their 2008 bonuses. There you go, a gesture of magnificence in unparalleled proportions. They have each agreed to muddle by on their base salaries of $600,000.

Don't' get me wrong, I am all for paying people what they are worth and based on the value they create even if it is millions, but before you cry a tear for these guys you should also know that last year the CEOs bonus was $68.5 million (but hey since a big part was in stock, he lost money like the rest of us).

This gesture was made to make you feel better, to boost confidence in Wall Street. Do you feel better? Just think of all the GM stock you could buy with $600,000.

Just to give you a frame of reference, after taxes he netted only about $29.61 million last year which if invested in a tax free municipal bond fund would yield about $1,110,375 a year or $21,353 a week in tax free income

And you thought it would help the economy to raise taxes on the wealthy.

And it is not just the Wall Street people who are smart; during the year he was running for President, John Kerry's wife earned $500,000 in tax free income from her municipal bond funds, small time stuff.

Help Me Stay In My Home

The deed is done, the Congress failed to pass the “bailout” legislation. Brilliant move, but the irony is that the defeat was not so much against the government being involved in financial markets, but rather that people were upset they were not getting more for themselves or as we euphemistically call it help staying in their home. The vast majority of the Congressional Black Caucus voted the bill down for that reason as did others. And the cowards in Washington were more focused on keeping their seat in Congress than in doing the right thing for the entire Country.

Interestingly, all this bad debt on the books of the Wachovia’s, AIGs and others is “bad” because Americans are not paying their bills, and keep in mind this all started before the economy started to seriously slump and jobs were lost.

If you want to know the problem, here it is. I just went on the Wachovia Bank website and used their mortgage calculator to determine how much of a mortgage I was eligible for. I entered an income of $5,000 per month, said I had no other debt and was buying a home for $400,000. The result said I could get a $380,000, 30 year fixed rate mortgage with a monthly payment of $2,128 (and closing costs of $13,722). If I was a stupid consumed (apparently the majority these days) I conclude that if the bank is willing to lend me this money I must be able to afford it, right? WRONG $2,128 is 42.5% of my gross income. To the mortgage I must add taxes, and insurance so let’s be conservative and say that adds an additional $300 per month.

My payment is now $2,428 or a whopping 64.7% of my take home pay (assume that income and other payroll taxes combined are about 25% of my pay).

I now have $3,750 (75% of $5,000) less $2,428 or $1,322 a month to live on, that’s food, clothing, a car and its expenses, insurance and heaven forbid savings.

In summary if I take this mortgage, I’m screwed and I may not be able to make the payments, but wait, the bank said I could afford it so don’t I deserve to be bailed out by the rest of you?

Won’t you help keep me in my home?

Who Caused the Current Economic Crisis?

Is it the greedy investment bankers, the creators of highly leveraged and esoteric investments that nobody understood, speculators, disreputable mortgage companies, just who do we blame?

To be sure there is enough blame to go around and those fellows driving off from a failed company in a limo are easy targets and many certainly deserve what they get (or don’t get as the case may be), but if you want to see the real culprit

Americans should collectively look in the mirror.

Let’s go back to the late1960s and early 70’s when things started to change. We began to think we deserved it all and could have it all, we were told women were unfulfilled and should seek careers and many did. For those who were married it meant more money for the family to spend, bigger houses with all the accoutrements. Because this created more demand, the working wife went from an individual choice to a necessity for many families and they too demanded more and bigger of everything, they drove the economy for years and years, the snowball was rolling.

To keep the momentum going, to keep up with the Joneses if you will, families began to buy houses that stretched their budgets (I remember going to a friend’s large luxurious house…with no furniture, a dining table would come next year we were told. A house was no longer a home and some people thought it a necessity to buy a bigger one every few years, after all the value kept rising.

Because we needed ever more stuff to put in the larger home and to play with, we began to tap our home equity and instead of paying down a mortgage, we added to it. Our house was no longer a home but an ATM.

When that didn’t work sufficiently we used credit cards to maintain our standard of living, the snowball kept rolling. Our idea of living within our means meant meeting the monthly minimum payment on our Visa card. Today the average American debt is $120,000 and the average savings rate is zero. Household wealth and net worth are dropping.

With the ever growing value of homes generated by ever growing demand, there appeared no reason to not buy a house whether one could afford it or not, a worse case scenario would mean we still make a few bucks if we had to sell, right?

Certainly all this buying and accumulation of stuff with someone elses money kept the economy humming, creating jobs and more demand, but it was a house of cards that has now come tumbling down. In other words, we were living beyond our means, not an especially complicated concept.

Have we learned our lesson, probably not, but that may not matter because the price of getting us out of the mess we are in will require massive higher taxes of all kinds for years to come and that will hit the middle class regardless of what a politician tells you.

It’s time to stop crying about the people who took advantage of us and start owning up the fact that we created this mess with our own brand of personal greed. X-boxes, 200 CDs, cable TV and a cell phone are not necessities and neither is granite counter tops and leased cars you could not afford to buy.

The Manufactured Crisis

Gasoline in October 1990 was an average of 1.33 per gallon and adjusted for inflation that would be $2.28 today.  In 1981, the average price of gasoline hit $3.44, today the National average is $3.98 and it varies by state. For example today in Montana, you pay $3.75, but in New York $4.22, the difference is largely state taxes. Gasoline goes up and gasoline goes down (although at today’s world demand levels it is going down much). 

Let’s say you drive the average of 12,000 a year and have a car that gets 25 miles to the gallon, for every twenty-five cents that a gallon of gas goes up in price it will cost you $120 a year more or $.32 cents a day, less than the price of three cups of coffee with a bagel.  Of course, if you drive a gas-guzzler that gets say 16 miles to the gallon, it will cost you $187.50 a year.  Yet the news has a front-page story when gasoline goes up $.05 a gallon.  Why did you “need” that SUV or pick up in the first place (yes, I do know that there are some people who do need them for work, etc. but there are far more who do not…haulin bricks in that Escalade are you?  How many soccer balls can you get in a Yukon anyway?)

Let’s look at unemployment, in 1962 it was 5.5%, in 1982 it was 9.7%, in 1990 5.6% and in 1993 6.9%.  In June 2008, it was 5.5%.  A crisis you say, people can’t make it you say, living paycheck to paycheck.  Perhaps those who are actually unemployed are having a tough time just like in years past, but what about the 94.5% who are employed.  I know the wealthy make too much, right?  Nonsense, what the wealthy make has nothing to do with what the middle class does not make, in fact if it were not for many of today’s new wealthy many of the middle class would not have jobs.  The fundamental problem is adapting to the jobs of the 21^st century and to world competition and the solution is not strengthening unions or stopping trade, as are the objectives of many politicians.

Now for the horrible housing market, I was in my local bank yesterday and there was a big sign, 30 year fixed mortgages 6.5%, horrible you say.  I bought a house in 1987 and the rate was 9.75%. 

In May 1992 a 30 year fixed rate mortgage would cost you 8.26%, in March 1991, 9.24% and in June 1982 a whopping 15.57%. 

Yesterday July 26^th Congress passed a relief bill for the housing market included a way for people to renegotiate loans on better terms and have it secured by the federal government (that is you by the way).

In addition, for the next year first time homebuyers will get up to a $7,500 tax credit (not deduction, but credit) when the buy a new home.  Let’s hope you receive a large number of thank you notes for your generosity.  Who helped you pay for your first home?

It’s easy to be a smart ass with all of this and that is not the objective, what is the point is that the politicians and the media have manufactured a crisis that is no worse than many similar situations we have faced in years past.  What is different today is that government seems to think it can fix anything, and that accumulating more and more national debt does not matter.  

Well, we are seeing now that imprudent debt does create a crisis for some people, unfortunately today it also means that prudent people who did not abuse credit or use their house as an ATM are paying for those who did. 

I guess change really is coming to America.  Tell your grandchildren to lower their living standard expectations and get out the checkbook.

July 27, 2008

I am looking at the front page of USA Today June 18, 2008.  The story reads, “How rising home values placed your finances at risk”

The point of the story is that as home prices were rising banks raised credit card limits, banks plied customers with offers to open new accounts and then they guided card borrowers to home equity and thus put their homes at risk.

“Card issuers extended too much credit too quickly because of phantom equity,” we are told.  “This reckless extension of credit is contributing to the financial vulnerability that many families are facing.”  “As home equity and credit card limits rose in unison consumers overextended themselves”

Do ya think?

One couple featured in the article ran into trouble when they opened up new credit cards and withdrew home equity. Now they owe $30,000 on credit cards and $105,000 on a home worth $63,000. 

Americans now have nearly $1 trillion in unsecured debt, most of it on credit cards…and all this BEFORE the gas crisis.

If you buy all this, then you must admit that American are, in fact, financial morons.

So, we blame our financial stupidity on the banks, we blame the gas we use and its costs on the oil companies, not the SUV we drive.  Who do we blame our stupidity on, our parents?  Oh wait, I bet it is our teachers, who is that fool who did not include a course on common sense in the curriculum?

Credit was “way too loose” so people gorged themselves with no forethought as to the potential consequences?  They were incapable of saying, gee what if I can’t pay this, what if my spouse loses her job, do I really need that vacation or flat screen TV?

Should I save first and pay with cash for the things I want?  What a concept!

I was in a Costco last night; you know those gigantic warehouses where you can buy food and stuff cheap. People we in fact, buying up the place and as I stood there and watched for about 30 minutes I noticed the buying of a basket full of liquor, giant boxes of muffins, gallon jugs of pickles, huge boxes of goldfish crackers, a few CDs and books…all the necessities of life, real cheap.

Sorry, no quarter given by me in all this.  When my wife and I were struggling to pay the mortgage and raise four children many years back, we didn’t have credit cards, we saved for a year drive on a three day vacation and we drove there in a bare bones Plymouth Duster that we kept for ten years, we lived in a very modest house and we needed 10% down to buy it. And I worked two jobs while going to college for nine years at night.

Criticize me if you will, but tough luck, that’s what you get for not paying attention in common sense class 101.

June 18, 2008

Doubts

April 25, 2008

Executive Pay, Your Pay and the Working Americans Who Don’t Pay Taxes…Oh Yes, And the Politicians

Politicians see a big issue in executive pay.  In fact, it is none of their business, or the governments, or even me or you.

It very much is the business of the Boards of Directors of companies, of shareholders and all investors in that company, perhaps even large customers of a company.

Supposedly there is this thing called pay for performance, but in all too many cases an employment contract takes precedence.  Incentives are not well measured and more often equity compensation is a give away so yes, there is a lot wrong with executive compensation at some organization, but that does not make it the business of government.

On the other hand these high paid folks are very visible, everyone knows what they make including the IRS and while they take every advantage of the Internal Revenue Code to pay as little as possible in taxes as we all do, they pay their taxes and a lot of them.

Compare that with the estimated hundreds of billions of dollars in lost federal revenue from unreported income, especially from small businesses, self-employed,  tips (estimate at $10 billion a year ten years ago), and those people who simply believe that if you are paid in cash the money is “tax free.”  Did you ever have a contractor tell you if you paid in cash you didn’t have to worry about the sales tax?  Well guess what the contractor doesn’t worry about.

In reality it is not what the wealthy make that should concern politicians and Congress but rather what the average guy makes…and keeps a secret.

Those of us who have good jobs, perhaps earn in the upper income levels and receive all of our income on a W-2 or 1099 are the good guys after all, but as we all know those who earn more than $150,000 a year don’t work hard and are not among the “working Americans” who have become adroit at shifting some of their tax responsibility to the wealthy.

A simplified tax system won’t fix this although I am all for you earn $x, you pay $y and no deductions, credits, rebates, or allowances.  Sounds rather simple when you consider the complete Internal Revenue Code is more than 24 megabytes in length, and contains more than 3.4 million words; printed 60 lines to the page, it would fill more than 7500 letter-size pages.  On the other hand this is a little like free trade, if we made progress and had a simple (more competitive) tax code, think of the jobs of accountants, tax lawyers, and those H&R Block and Jackson Hewitt folks, what if they formed a union?

But do we really want to collect that lost revenue?  Yes, it would be nice so that those who do pay taxes on all their income get a better deal, but we all know that the same politicians who complain about what some people make would find new ways to spend the federal income on the money other people make the politicians didn’t know about.   Does an ex president count as an overly compensated executive?

April 14, 2008

A couple of years ago I was in Las Vegas and my wife and I wanted to see a show, Celine Dion seemed like a winner until we found out the tickets were $250 a piece.  My wife’s expectations were dashed because she knows that I view no singer of songs worth $500 for a couple of hours, free drinks or not.  I even think $16.00 for one of their CDs is outrageous, so I don’t buy those either (but I accept gifts).

Recently I was at a meeting on health care and a union leader took the mike and spent ten minutes blaming the high pay of health insurance company executives for the health care crisis.  Her solution was to cut their pay and solve the problem.  No doubt the pay of 200 or so executives will reduce the cost of health care representing 15% of the GDP of America.  Those greedy executives are an easy target after all and I suppose even I have to admit that twenty or thirty million a year is a bit much…unless of course, one of them can really solve the health care crisis.

On the other hand, lot’s of people make that kind of money and because they are not executives (at least what we commonly know as executives) we seem to pay little attention to them, yet these people add little value to society other than entertainment, they build nothing, create no lasting value, don’t establish new industries and are quite unrestrained when it comes to conspicuous consumption.  And, of course, their pay drives up the cost of tickets to see them if one is so inclined.

There is an old adage in the compensation profession, nobody complains about his or her pay, they only complain about someone elses pay.  Oprah, Katie, Rudy, you are on my for shame list.  But of course, none of these people would be making this kind of money if us little folk were not dumb enough to buy what they are selling, Rosie and Howard should be especially grateful.  Is Katie underpaid?

December 11, 2007

Living pay check to pay check, you hear that phrase a lot these days and one can easily get the impression that many, even most Americans are bordering on being poor.  Andy Stern, President of the Service Employees International Union said in a recent WSJ article that 7 out of 10 Americans are living pay check to pay check.  To me living pay check to pay check was what my parents did.  They paid their basic bills like rent, bought food and clothes, saved virtually nothing, had no debt, didn’t own a car for most of their marriage and couldn’t afford to pay for college or weddings. Notice I didn’t mention vacations or trips and certainly no purchases beyond the necessities, only small gifts at Christmas and for birthdays.  To do this my father worked six days a week (seven until the law barred sales on Sunday). Today with an average credit card debt of about $9,000 it appears that the pay check to pay check thing includes a lot more than the bare necessities.