If you think an education is expensive, try ignorance. This time, the educated have caused the problem. Wall Street has lost $250 billion at its mortgage casino. Main Street is asking, “How much did these Ph.D.s, M.B.A.s, and financiers cost us?”
Those at the top were well paid. The CEO of now-defunct Countrywide Financial averaged $84 million annually for nine years. The top three at Goldman Sachs, who are Wall Street advisors, each “earned” $67 million plus in 2007.
Incompetence is okay. Bear Stearns, the too-big-to-fail investment bank, will receive $55 billion in government loans to avoid collapse. The 2008 stimulus rebate is chump change compared to taxpayers’ share of the bailout.
Congress, master of irony, has made April “Financial Literacy Month.” It receives scant attention. Elected officials might be ignoring it, owing to their money shyness (save for campaign fundraising). As the mortgage industry melted, our leaders could only snuffle, “We didn’t understand these RMBS (residential mortgage-backed securities).” Neither, it seems, did rating agencies, who approved the toxic sludge for sale.
Too-low interest rates are not all to blame. Clueless regulators allowed mortgages to be converted into securities and wagered. Houses became collateral leveraged 30 times over, bets upon bets. Ask your bank to lend twice the value of your car.
There is a bright side. Those perplexed by Libor rates and ETFs (exchange-traded funds) share perverse camaraderie with in-the-dark CEOs, hedge fund operators, and assorted gurus. It is cool to confess, “I didn’t really ‘get’ those CMOs (collateralized mortgage obligations).”
Gambling never pays the bills. And complex financial instruments, however artfully structured in tranches (layers), are never sure things.
In 2000, the Internet bubble pop hurt mostly rich investors. The burst housing bubble of 2007 will sting everyone. The poor will bear the backlash of tightened credit. Rents will rise, as will down payments on houses. The rich will not lose homes, especially in Florida, absent a scandalous divorce or criminal indictment.
Real estate was still king in 2007 among New York’s banking elite, with many sales at $20 million plus. In 2008, Goldman Sachs’ chief bought a $26 million condominium. And James Cayne, chairman of Bear Stearns, treated himself to a $28 million condo only weeks before his firm’s demise.
During Financial Literacy Month, average hardworking citizens bear a double burden. They must pay for the folly of the naïve rich, and also commit to improving their own knowledge. Uncle Sam needs honest folk to help it mop up the mess of Wall Street’s geniuses and flummoxed government Ph.D. economists.
Do your part. Learn how to use credit to buy assets that appreciate—houses and education – and to limit debt for autos and consumer goods. Contact consumer credit agencies offering no-charge counseling. Go online: www.bankrate.com ; www.analyzenow.com ; www.dinkytown.com (for financial calculators). Avoid the penalty exacted by financial ignorance.
During tax season, use returns to teach children the financial facts of life. Show them how to write a check, to open a savings account, to forego using credit for disposable items, and that saving is the new “in” skill. Establish banking relationships.
The statement that “a banker will only lend you an umbrella when the sun is shining” is truer than ever.
If Americans can’t reverse the trend of consuming, borrowing, and accumulating trade IOUs, the U.S. will be in peril. Other nations have long focused upon saving, exporting, investing, and lending (to the debt-ridden U.S.)
Don’t let index and mutual funds, and stocks and bonds, remain mysteries. Information is everywhere. Steer clear of Wall Street’s confusing lingo; ask advisors for plain-language explanations.
If you are asked to commit financially, inquire about – and use—that nasty, four-letter word: risk. The smartest guys/gals in the room failed to recognize it.
J.R. Rosskamp is an investor, entrepreneur, and managing director of Veritas Partners, Inc., a business consulting firm.
J.R. Rosskamp, M.B.A. • JRRosskamp@Aol.com