Remember CDOs? Of course, you do...although no one is trading these monsters anymore they continue to wreak havoc to the global economy.
We still teach about them on the CQF. Why? Maybe they'll come back one day, maybe with a different acronym, or if they don't then they are at least a fantastic teaching aid for showing how not to model and how not to risk manage.
Hang on a second. Have they really disappeared? I'm not so sure they have. What's that recent deal that the UK Treasury has just done with RBS? It looks scarily familiar...something to do with $325 billion of toxic assets (no doubt including a few CDOs and CDO^2s) and divvying up different levels of risk?
The balance sheet of RBS is £2.3 trillion. In return for £6.5 billion in some dodgy non-voting shares the UK Treasury is going to be insuring some of that £2.3 trillion. The first £19.5 billion is RBS's responsibility, after that the taxpayer takes care of 90% of the rest of the $325 billion.
Sound familiar? Yes, the UK Treasury has just got itself the mezzanine tranche of a CDO!
Observations:
1. This "Mother Of All CDOs" that the Treasury owns is mezzanine tranche, the hardest tranche to value and risk manage.
2. Assuming there are CDO^2s in the portfolio this is now officially a CDO^3.
3. Worst of all, the premium paid to the UK Taxpayer is £6.5 billion in RBS shares. Of course, if things go wrong, as they probably will, then that premium will plummet as the RBS share price plummets. Note to Lord Myners, Alistair Darling and Gordon Brown: When you buy insurance on company X, buy it from company Y, not company X itself.
4. A fall of a mere 8.2% in the value of the toxic assets will wipe out the £6.5 billion. And that's best-case scenario in which the RBS share price doesn't fall!
5. Finally, the shares are non voting so as to give the impression, albeit rather feebly, that RBS has not been nationalized. Look, the Taxpayer owns 90% of RBS, and can vote on 75% of the shares. Why keep up the charade? Nationalize all dangerous banks, across the globe, immediately. Guarantee the deposits of the man in the street. And clean up the mess in an atmosphere of relative stability.
The UK Treasury is being advised by a bunch of dodgy Sirs and Lords, none of whom have a clue about what is going on or what to do, none of whom have any qualifications in risk control. But I'm sure all of them are jolly good chaps to have a glass of port with in the clubs of St James's.
Saturday, February 21, 2009
Thursday, February 12, 2009
12 Steps to Financial Health
With all of the recent doom and gloom in the financial markets, it’s easy to get discouraged about your own financial situation. But here’s some good news for a change. While personal finance may seem complicated, it really boils down to 4 good habits that can make the difference between going broke or building up your net worth each month.
1. Save money
2. Avoid debt
3. Invest
4. Don’t lose it
Just as with achieving a balanced diet or maintaining a regular exercise regimen, getting your financial house in order is easier said than done. What’s that they say about the best laid plans? A 12 step program can get you on the road to financial recovery.
Save money
1. Know what you spend
The first step to growing your money is knowing your money. Just by seeing that you spent $432 one month dining out with your friends, or that you went to Starbucks 37 times, you’ll change your spending habits for the better.
2. Stick to a budget
Most of us really only have 1-2 “problem” areas. Maybe it’s shopping, maybe its electronics. Once you know how much you typically spend, set a budget 15-25% lower. If you try to cut too hard too fast, you’ll never be able to stick to it.
3. Find a checking account that pays interest
“Free” checking isn’t exactly free. Sure you get free checks and no account fees, but most checking accounts pay no interest - zero, nothing. Meanwhile, the banks are loaning your money out in the form of mortgages or business loans at 7-8% interest. That’s how banks work. If you don’t have a checking account that pays interest, you’re being ripped off. Consider switching your account to one of the many that allow your money to work for you such as an E*Trade Max-Rate Checking Account (2.9% APY on accounts over $5K) or an HSBC Online Payment Account (2.25% APY, open an account with as little as $1).
4. Find a savings account that pays 3%+ interest
The average US savings account only pays about 0.5% interest. With inflation at 2-3%, you’re actually losing purchasing power each year. Find a high-yield savings account, money market fund, or CD that pays more such as E*Trade Max-Rate Savings (3.3% APY, open with as little as $1).
Avoid debt
5. Know your credit score and correct your credit report
Your credit score determines the interest rate lenders will charge on your credit cards, mortgage, student loan, or car loan. That means any mistakes in your credit report can cost you tens of thousands of dollars over your lifetime. Unfortunately, 79% of all credit reports have an error, and 25% have an error serious enough to deny you access to credit. Take charge of your credit score at FreeCreditReport ($12.95/month for credit score and monitoring) or myFico (all three FICO scores and credit reports).
6. Eliminate late fees
About 35% of your credit score is determined by on-time payment. If you’re late on a credit card payment, it could cost you much, much more than the $29 late fee - if you let it go more than 60 days, it can affect your credit score and cost you thousands.
7. Don’t pay credit card finance charges
The average American carries $8,500 in credit card debt. At a minimum payment of $100 a month, it takes 6.7 years, and $4,257 in extra finance charges before you’re in the clear. If you carry a balance, one way to get some temporary relief is through a balance transfer. The best way out of this quagmire is to pay down your highest interest card first, or look for a balance transfer card such as the Citi® Diamond Preferred® Card (0% Balance Transfer APR for up to 12 months, no annual fee, 3% transfer fee) or the Chase Platinum Visa® Card (0% Balance Transfer APR for up to 12 months, no annual fee, 3% transfer fee but no more than $99).
8. Get a credit card that pays you
Visa and MasterCard typically charge retailers 2-3% of each purchase you make. As a consumer, you can get a cut of those fees in the form of cash back rewards. Don’t settle for a card that pays less than 1%. A typical household can get as much as $300 a year back just for buying what it was going to buy anyway. Examples of cash back cards include the Chase Freedom℠ Visa Signature® Card (3% cash back on gas and groceries) and Blue Cash® from American Express (up to 5% on gas, restaurants, and drugstores).
Invest
9. Contribute to an IRA or 401k
Invest $100 a month in a tax-deferred account like an IRA or 401k, and at a growth rate of 10%, in 30 years you’d have $380k. In a regular taxable account (assuming 20% annual taxes), you’d only have $229k. That’s a $151k difference. Companies such as Fidelity and E*Trade offer such accounts.
10. Start investing and keep investing
Two simple steps can put you ahead of 99% of your peers. First, have your employer automatically deduct $200-$300 a month from your paycheck to a brokerage or mutual fund account. Second, grow that money in an index fund like the S&P 500. By having the money automatically deducted, you won’t be as tempted to spend it. If $200 a month in the S&P behaves as it has in the past 20 years, two decades from now you would have around $170k in savings. Open a Scottrade Brokerage Account ($7.00 stock trades, $500 minimum deposit) or an E*Trade Financial Brokerage Account ($12.99 stock trades, $1,000 minimum deposit).
Don’t lose it
11. Create an Emergency Fund
An emergency fund helps protect you against all of life’s ups and downs, whether they be car repairs, job loss, or a leaky roof. If you’re young, single and have no mortgage, strive for about 3 months expenses, or ballpark around $10,000. If you have a house, kids, or both, strive for 6 months expenses, or around $20,000 - $30,000 for the average family. Be sure to keep your emergency fund in a high-yield savings account so that it continues to grow.
12. Protect yourself with insurance
The right insurance depends greatly on your age and whether you have a family. If you’re in your 20’s, you need renter’s insurance - it’s typically around $150 a year and covers theft and fire. If you have a family, you need life insurance, health insurance, and disability insurance.
1. Save money
2. Avoid debt
3. Invest
4. Don’t lose it
Just as with achieving a balanced diet or maintaining a regular exercise regimen, getting your financial house in order is easier said than done. What’s that they say about the best laid plans? A 12 step program can get you on the road to financial recovery.
Save money
1. Know what you spend
The first step to growing your money is knowing your money. Just by seeing that you spent $432 one month dining out with your friends, or that you went to Starbucks 37 times, you’ll change your spending habits for the better.
2. Stick to a budget
Most of us really only have 1-2 “problem” areas. Maybe it’s shopping, maybe its electronics. Once you know how much you typically spend, set a budget 15-25% lower. If you try to cut too hard too fast, you’ll never be able to stick to it.
3. Find a checking account that pays interest
“Free” checking isn’t exactly free. Sure you get free checks and no account fees, but most checking accounts pay no interest - zero, nothing. Meanwhile, the banks are loaning your money out in the form of mortgages or business loans at 7-8% interest. That’s how banks work. If you don’t have a checking account that pays interest, you’re being ripped off. Consider switching your account to one of the many that allow your money to work for you such as an E*Trade Max-Rate Checking Account (2.9% APY on accounts over $5K) or an HSBC Online Payment Account (2.25% APY, open an account with as little as $1).
4. Find a savings account that pays 3%+ interest
The average US savings account only pays about 0.5% interest. With inflation at 2-3%, you’re actually losing purchasing power each year. Find a high-yield savings account, money market fund, or CD that pays more such as E*Trade Max-Rate Savings (3.3% APY, open with as little as $1).
Avoid debt
5. Know your credit score and correct your credit report
Your credit score determines the interest rate lenders will charge on your credit cards, mortgage, student loan, or car loan. That means any mistakes in your credit report can cost you tens of thousands of dollars over your lifetime. Unfortunately, 79% of all credit reports have an error, and 25% have an error serious enough to deny you access to credit. Take charge of your credit score at FreeCreditReport ($12.95/month for credit score and monitoring) or myFico (all three FICO scores and credit reports).
6. Eliminate late fees
About 35% of your credit score is determined by on-time payment. If you’re late on a credit card payment, it could cost you much, much more than the $29 late fee - if you let it go more than 60 days, it can affect your credit score and cost you thousands.
7. Don’t pay credit card finance charges
The average American carries $8,500 in credit card debt. At a minimum payment of $100 a month, it takes 6.7 years, and $4,257 in extra finance charges before you’re in the clear. If you carry a balance, one way to get some temporary relief is through a balance transfer. The best way out of this quagmire is to pay down your highest interest card first, or look for a balance transfer card such as the Citi® Diamond Preferred® Card (0% Balance Transfer APR for up to 12 months, no annual fee, 3% transfer fee) or the Chase Platinum Visa® Card (0% Balance Transfer APR for up to 12 months, no annual fee, 3% transfer fee but no more than $99).
8. Get a credit card that pays you
Visa and MasterCard typically charge retailers 2-3% of each purchase you make. As a consumer, you can get a cut of those fees in the form of cash back rewards. Don’t settle for a card that pays less than 1%. A typical household can get as much as $300 a year back just for buying what it was going to buy anyway. Examples of cash back cards include the Chase Freedom℠ Visa Signature® Card (3% cash back on gas and groceries) and Blue Cash® from American Express (up to 5% on gas, restaurants, and drugstores).
Invest
9. Contribute to an IRA or 401k
Invest $100 a month in a tax-deferred account like an IRA or 401k, and at a growth rate of 10%, in 30 years you’d have $380k. In a regular taxable account (assuming 20% annual taxes), you’d only have $229k. That’s a $151k difference. Companies such as Fidelity and E*Trade offer such accounts.
10. Start investing and keep investing
Two simple steps can put you ahead of 99% of your peers. First, have your employer automatically deduct $200-$300 a month from your paycheck to a brokerage or mutual fund account. Second, grow that money in an index fund like the S&P 500. By having the money automatically deducted, you won’t be as tempted to spend it. If $200 a month in the S&P behaves as it has in the past 20 years, two decades from now you would have around $170k in savings. Open a Scottrade Brokerage Account ($7.00 stock trades, $500 minimum deposit) or an E*Trade Financial Brokerage Account ($12.99 stock trades, $1,000 minimum deposit).
Don’t lose it
11. Create an Emergency Fund
An emergency fund helps protect you against all of life’s ups and downs, whether they be car repairs, job loss, or a leaky roof. If you’re young, single and have no mortgage, strive for about 3 months expenses, or ballpark around $10,000. If you have a house, kids, or both, strive for 6 months expenses, or around $20,000 - $30,000 for the average family. Be sure to keep your emergency fund in a high-yield savings account so that it continues to grow.
12. Protect yourself with insurance
The right insurance depends greatly on your age and whether you have a family. If you’re in your 20’s, you need renter’s insurance - it’s typically around $150 a year and covers theft and fire. If you have a family, you need life insurance, health insurance, and disability insurance.
Tuesday, February 3, 2009
The Evaluation Procedures Before Buying Gold Coins
As recently as the early twentieth century, the primary form of currency in circulation around the world were gold coins.
There are various reasons why an individual would select to start purchasing gold coins. Some may acquire it because it is a good investment while others see the potential for their profits to increase as gold value increases. Even today coin collectors have high demand for hard to find coins.
People who chose to buy gold coins know that doing so is one of the safest ways to invest their money. Plainly because they know over time these coins are unlikely to lose any value rather they are in reality going to be gain in worth.
Before acquiring any coins you need to find a honest dealer. If you are able, engage one who is a member of the Professional Coin Grading Service PCGS), or the Numismatic Guaranty Corporation. A coin dealer who is not a member of these associations will often sell you bogus coins.
After finding your dealer you will then need to decide just how much gold it is you want to purchase. Knowing the price of gold, which fluctuates constantly, will help you to buy at the best cost.
Not only do you must to know how much you plan to invest in gold coins but you also need to determine what is available and which coins make the best investments. Presently gold coins fall into three assorted categories. Some that are considered uncommon, are looked upon as collectible, and there are ones that are graded as regular gold bullion.
Gold bullion coins are dealt only for the quantity of gold contained within them. The worth of scarce and collectible coins changes quite often, so when placing a value on them, several factors need to be taken into consideration. Gold content is not the only essential factor in determining price - the age and rarity can also affect it.
Also , when you are going to be buying gold coins it is important that you understand a little bit about the ranking and evaluation procedure. Understanding the uncommon coin market is a crucial skill in helping to spot a possible bargain.
There are various reasons why an individual would select to start purchasing gold coins. Some may acquire it because it is a good investment while others see the potential for their profits to increase as gold value increases. Even today coin collectors have high demand for hard to find coins.
People who chose to buy gold coins know that doing so is one of the safest ways to invest their money. Plainly because they know over time these coins are unlikely to lose any value rather they are in reality going to be gain in worth.
Before acquiring any coins you need to find a honest dealer. If you are able, engage one who is a member of the Professional Coin Grading Service PCGS), or the Numismatic Guaranty Corporation. A coin dealer who is not a member of these associations will often sell you bogus coins.
After finding your dealer you will then need to decide just how much gold it is you want to purchase. Knowing the price of gold, which fluctuates constantly, will help you to buy at the best cost.
Not only do you must to know how much you plan to invest in gold coins but you also need to determine what is available and which coins make the best investments. Presently gold coins fall into three assorted categories. Some that are considered uncommon, are looked upon as collectible, and there are ones that are graded as regular gold bullion.
Gold bullion coins are dealt only for the quantity of gold contained within them. The worth of scarce and collectible coins changes quite often, so when placing a value on them, several factors need to be taken into consideration. Gold content is not the only essential factor in determining price - the age and rarity can also affect it.
Also , when you are going to be buying gold coins it is important that you understand a little bit about the ranking and evaluation procedure. Understanding the uncommon coin market is a crucial skill in helping to spot a possible bargain.
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