The future of Freddie Mac/Fannie Mae and CDO's

Hard to imagine how far the world of finance has come. 150 years ago, we had just established a national currency, and now we have thousands of securities and derivatives to select from. In particular, CDO's catch my eye and though they were at the helm of the most recent recession, the fall of Lehman Brothers and A.I.G., these mortgage backed securities can teach us where finance is heading next. The hardest part of the equation is factoring out Freddie Mac and Fannie Mae, who package the CDOs and sell to investors.

CDO's are investment vehicles that begin with banks, which encompass many asset-backed securities, but predominately Mortgage Backed securities (MBS). Banks provide a loan for the amount of a mortgage, and place an account receivable on the books. Fannie Mae and Freddie Mac buy the loans (including principal and interest) from the banks and package them to be sold to investment banks, typically to be pooled in a mutual fund. Now, the cash that the homeowner pays flows through to the investment bank and it's mutual fund owners. Additionally, credit default swaps, a derivative, were created as a way for speculators to bet against CDO's they didn't own (which defaulted AIG).

The problems occur where banks write the loan and also where the investment banks buy the MBS. Banks should ultimately review a credit score and only loan money if their risk is mitigated. Since they are immediately guaranteed a sale of the loan, no matter what quality, subprime lending can occur. After packaging, little controls are in place with ratings agencies like Moody's and S&P. Ideally, the ratings agencies will look at each case specifically and classify into multiple categories. This did not happen during our most recent recession and many investors were fooled into thinking they had quality investments. Another problem was the lack of regulation on derivatives, which meant that no reserves were required to back credit default swaps, and proceeds were taken as bonuses.

Recently, each bank has been sued and the government (i.e. taxpayers) bailed out Freddie Mac and Fannie Mae. Fannie and Freddie, like each and every other financial institution of the time, leveraged in excess of 20 times their capital, courtesy of the SEC's April 28, 2004 vote to lift leverage limits. If they lost capital, the entire portfolio of obligations would be lost (i.e. investors lose money). 60% of the money lost came from risky investments, the remaining losses were mostly due to the lull in residential mortgages. Since many pensions and investments worldwide depend on Fannie Mae and Freddie Mac, their failure would paralyze much of the global economy.

Incredibly, Fannie and Freddie have come back in conservatorship from Sept. 2008 to now. Obama thinks the reliance on taxpayers has empowered these two to make poor judgments and have little consequence. These are For-Profit companies whose losses are repaid by the government. If backed privately, the mortgage industry would have free enterprise companies scrutinizing activities, making for an honest financial environment. In agreement with Obama, I believe more controls need to be in place. $10 Trillion in mortgages will take time to ease away from these two companies.

Currently, bi-partisan bills are being drawn for the 5 year depletion of Freddie and Fannie. Bank of America settled to pay Freddie 2.6 Billion, Citigroup settled at 400 Million, Suntrust settled at 65 Million, and Wells Fargo settled at 0.87 Billion. In any event, Dodd-Frank will keep the companies from walking the plank yet again.

The future of monetary policy

Interesting enough, as I study more and more of the economy, the only thing I seem to learn is how little I know. After the documentary, "Inequality for All" by Robert Reich, I realized a few striking phenomenons in the economy and politics. In short, our country is becoming too disconnected.

The creation of paper money occurred during the Civil War and followed the Panic of 1857. When Europe enlisted farmers for wartime just 5 years prior to our widespread cash printing, two significant changes took place. Europeans imported agricultural products from American farmers which caused a boom, and when war subsided there, their workers went back and our products took a massive hit in value. The Ohio Life Insurance and Mutual company, at the time a huge investor in agriculture, failed and caused thousands to lose the money they had invested. This caused the panic of 1857 where citizens did not trust spending on items that would lose value, so they saved their gold and silver coins. Commerce was halted even though the country continued to grow.

Thus, many banks began issuing their own currencies, but made loans in good faith. Banks went broke in hard times because of defaulted loans. Fundamentally, there was no central bank; each bank had its own currency, and many consumers lost money because of the same substandard risks. Just prior to the Civil War, circulation of the gold and silver was paltry, so the government saw national currency was needed. July 17, 1861: paper was printed to pay the military, purchase supplies, and to altogether stimulate the economy. With little precious metals, the government circulated paper purely on faith that it would be good, giving the paper very little value. National income taxes, national debt, and this new money all were remedies to our lack of economy, but inflation gave another hurdle. Any denomination under $5 was useless. Central Banks were created in 1863 (Lincoln) to give more substance to the national currency, which had high default risks through private banks. Inflation gave the dollar less value and continues to weaken purchasing power by 2% on average each year, with the strength of the economy to counter. Today, $541 million is printed daily (95% goes to replace money already in circulation).

Keynes said that when people hoard, terrible things happen, including depressions and wars. The Great Depression stemmed largely from an outdated inflexible currency. Hoarding also took place, since while investing was highest in the roaring 20s, consumption was low. Loans were taken out to invest in businesses at 10% down. Soon the banks ran out of money and normal accounts could not be withdrawn from. Panic ensues and everyone simultaneously makes a bank run to get cash out. Banks subsequently defaulted and spending was nonexistent. Deflation occurred because the economy suffered, which led to a higher need to save, since money was appreciating by being kept under the bed. GDP fell. Disparity of wealth is also believed to have caused the Great Depression, which is seen on a larger magnitude today.

Never a democracy before, people are in it for themselves, that's our gift and curse
Lobbyists
Internet causes laziness and disconnect
Inflation is increasing, but wages aren't
Human nature to hoard
Value is worthless and they should give back
Pay taxes on all money, not 11% on investments.

Life Insurance Strategy

Life insurance comes down to Term, whole, universal, or Endowments. Annuities have no protection, only cash value, but are long-term investments that you contribute to monthly or according to a schedule of your choosing. You can serve two needs at once, since you can take loans out along the way to retirement completely at your discretion! Always go for the higher number in the range, because the difference is worth the extra leverage. Sell Packages. Merchandise. Never policies.

Term:

• Good for any amount of years
• Can have increasing or decreasing premium, but always a level premium
• Pure protection like auto insurance: Pay for protection without getting your investment (CSV) back.
• Pay each month, 6 months, year; different grace periods apply
• Renewable or convertible at the expiration date
• Higher premium since the new policy is issued at your new current age
• No insurability required (aka Medical tests)
• Can get more term or convert to whole life
• Investments are not tax deductible
• Can be a rider that offers pure protection on other life policies
• Highest death benefit (DB) per dollar paid
• No proof of insurability at renewal or conversion (outside of extenuating circumstances)
• Conversion has a deadline and must be a convertible policy
• Again, the new policies are based on your age at renewal/conversion

Whole:

• Premiums paid:
• For the rest of your life
• Once up front
• In 10, 20, or 30 years
• Until age 65
• Graded or modified
• Modified has 50% discount for first 5 years then level
• Multiple increases and then level
• Current Assumption (Interest rates affect premium) Has max premium built-in
• Indexed premium (based on CPI)
• Indeterminate 
• 3 years fixed then you choose to a max threshold
• Nonparticipating (no dividends), but premiums are discounted based on company performance.
• Difference in premiums will:
• Increase CSV or DB if you pay prior premium though it asks lower premium
• Decrease CSV or DB if required to pay higher but pay prior premium
• May be required to pay premiums after income earning days (retirement)
• Not tax deductible, and any growth is taxed when you surrender
• Cash value must equal death benefit at age 121
• Can get a policy loan, which is reflected at death or surrendervand requires a small fee
• Death proceeds are only taxed as part of an estate if estate is in excess of $5 Million
• Cash Value built in:
• 6-7% interest tax deferred
• Insurance aspect is Death benefit minus Cash Value

Universal:

• Pay how much you want each month (no tresholds)
• After a few premiums, you can skip payments
• If CSV=0, contract expires.
• Based on Current Assumption and Market Conditions
• Used most for buy/sell and other business policies.
• Includes mortality charges and interest debits at each payment date.
• Higher DB would require proof of insurability
• Can make a withdraw or a loan, withdraws have penalties in first 10 years.
• Can get Death benefit = Face amount (more premium for CSV)
• Can get Death benefit = Face amount + Cash Value (more premium for protection)
• Includes a balance statement at year end

Variable Universal:

• You buy units with different investment objectives (asset classes)
• Can Allocate premium to several different units
• Can switch money to other units 1-4 times per year
• 45 day money back period
• Have voting rights (one vote for each $100)
• Can convert to whole life within 24 months
• Fixed premium
• Guaranteed Minimum Benefit, but no CSV guarantee

When taking a loan out, the money is taken from your death benefit, not your cash value. The money accrues the same interest but the loan (which is taken from reserves) also accrues negative interest. The interest, if unpaid, will also be taken from your DB. When you make payments to the loan, you are replenishing money that you withdrew from the reserves. This loan, then is the same as paying with cash: if you pay with cash, you lose the interest that you could have earned on that cash until you get the cash back. If you pay with a loan, you lose interest that you had to pay on that loan. In the end, you finance in both cases, but be smart and mitigate the loss of capital where possible. The money is taken from your primary fund and placed into the guaranteed fund, which earns a lower interest. The loan accrues interest also. The interest must be paid off or your policy can lapse, which isn't terrible and doesn't affect your credit, but defeats the purpose of the insurance. The dividends your policy accrues can cover some or all of your interest payment, which is ideal, since dividends are pre-tax dollars.

Loans from 401K are tough; highly regulated since they are qualified investments and controlled by your employer. You must liquidate your other investments before you will be allowed to take a loan from your account, which sometimes defeats the purpose of 401K since it is to increase investments. 401K has been described as a jail for your money! Get life insurance so you can die without regret and rest in peace.

Quotes to sell by:

• The best investment in the world is the one that pays the most when you need it the most, and that's life insurance. BF
• Life insurance is important but not urgent. When it becomes urgent, it's too late. MF
• People don't care how much you know until they know how much you care. TM
• The stock market is where money makes money, but life insurance creates cash where none had existed. A piece of paper, drop of ink, and a few pennies on the dollar... and we can create more than most people can accumulate. BF
• Anyone can accumulate the money life insurance promises, you have the ability. What you don't have is time. Life insurance underwrites time. If I could guarantee that you live 10, 20, 10 years more, how much would you be willing to pay for that time? If you need time, you need life insurance. BF
• Life insurance costs pennies and guarantees dollars. Hedge your estate against taxes at death by buying life insurance. There is no substitute for the certainty of life insurance.
• What would you say if I told you I want 30 percent of everything you have in this world, and I want it now, in cash?" Tax burden in an estate pass. BF
• The price you pay not to do something is usually greater than the price you pay to do it. BF
• No one has a lease on life. BF
• The mechanics are simple. You set up a special account and put in $800 per month. My company sets up a special account and puts $578,000 in it. Should something happen to you tomorrow, next week, next year, we simply trade accounts. And mine will always be worth more than yours. [accompany with two actual checks and ask him to sign] BF
• When you walk out of this company, I'll walk in to buy it, and I'll buy for cash. You set your own price (since you are the majority investor), and we'll promise to pay it. I'll give your company a guaranteed market. Insuring key people insures profits. BF
• You insure your machines, but Key people are machines- money making machines. No one is indispensable and neither is your equipment, but it's all insured. Could you get a loan without insuring it? The banks feel the same way about your key people. The day your key people walk out, the lenders do too. The value of a key person is 5-8 times more than money's interest value. BF
• Ben doesn't put his hand down the prospect's pocket, he puts it in the tax-collector's pocket. Legitimately. BF
• He left unfinished business for his family to solve. He bought a new car with the money. There's nothing wrong with a new car, but it shouldn't come first. What should come first? I say your family has a right to go on living. That comes first. Saving money for retirement & purchases comes 2nd. BF
• Let me pay your tax for you. It'll be easier to pay out of income than principal. Principal is another way of saying liquidation. The first thing they take will be cash.
• I want to leave something to take care of your family, not something they must take care of. Make you worth the most when you should be worth the least.
• He was a one-man company, and he found that creditors began to worry what would happen when he was gone. The policy creates its own credit.
• Your estate is simply time. Time you have traded for assets. Would you be willing to give the government almost half your time?
• How much time would it take to repay everything you owe?
• Do you have a loan? You pay 9% for a debt. Pay us 3% for an asset!

Quantitative Easing, A Summary

Quantitative Easing is both the dread and savior of the economy as of late. I personally will never understand the far reach of this policy, and I'm sure 99% of Americans are in the same boat. From my standpoint, I want you all to know that right now is a terrible time to save money in cash; you must invest because a dollar today may be $0.90 in a couple of years. Quantitative Easing (QE) has a history as long as civilization, with effects seen in CPI (inflation), banking, global economy, and finally consumers. While this policy is ubiquitous and effective, many economists have alternatives more effective in theory.

The easiest way to begin would be a description of the policy. The goal of an economy is to control inflation by any means (normally by manipulating short term interest rates). QE attempts to control high borrowing rates and inflation by creating new money for the central banks. This is carried out by purchase of assets, whether it be municipal bonds, T-bonds, or other low risk assets. Such assets are purchased with freshly printed money in large quantity. Money and interest rates typically have an inverse correlation. More money begets a lower interest rate and thus more economical growth and employment.

In the beginning of 2009, banks lowered rates nearly to the zero lower bound to entice growth, which still eluded our economy, as did employment. Our economy faced the real possibility of deflation. We soon began QE and the Fed is currently printing $85 Billion each month, which will diversify bank portfolios with various investments, increasing the worth therein, thereby causing lower interest rates. QE also forecasts inflations, since, all other things being equal, more money will lower its value. The effect would be that consumers spend more now in anticipation of the same money being worth less in the near future. Occasionally this guidance does not involve any new money printing at all, but is simply an affront to consumer psychology. The effects are either caused by consumers believing that short-term rates are lower and then rates will fall (good effect), or if consumers read between the lines and see a weak economy that can't stand for new loans or investments and the rates fall temporarily (poor effect).

So, who is at fault? Substandard lending and low credit worthiness in our most recent recession of 2007-2009 is the main culprit. Banks became greedy, for lack of a better word, and investors saw junk bonds flood the market. Now, the banks that are left in the economy are finding renewed life because of QE. Some say it's a reward and a slippery slope leading toward the next recession.

Some economists believe that targeting Nominal (gross) GDP rather than future inflation will improve policy both in practice and in consumer confidence. I tend to agree but QE still must take place.

Many consumers wonder why have any monetary policy in the first place, because after all, this is free enterprise society. If the economy simply was let go, interest rates would sky rocket since the banks would have such a low money supply. Less money means a higher cost to obtain loans. The consumer has lost confidence in banks after the recession and banks were sliding into devastation before QE. America needs loans and the government needs banks to assign value to the dollar. What happens when the dollar is not responsible for value? That's another article you can see here: http://techjamesesler.blogspot.com/2013/06/digital-currencies-end-to-conspiracies.html

These days cash is argued as the best investment vehicle since the state of the economy has engendered fear and may confuse investors. This is not in your best interest, since guaranteed inflation will reduce the value of our dollar and thus you are losing money by saving rather than using investments to hedge inflation. Our Central Banks are approaching QE in the amount of $4 Trillion, which theoretically will reduce long-term interest rates almost 1.5%. The Central bank has almost $2 trillion currently in reserve. Since 2009, interest rates have been very near the zero lower bound and the S&P 500 has increased 150%.

The effect of avarice

Well, here it goes. I'm jumping in the flume. The days of stagnation are over. The people that I have met in the last 2 weeks have influenced me. It started August 7 with an innocent meeting with a financial planner, Rob Gascho. I had about $5K that I wanted to invest. I invested my first money in May (4 shares of Tesla @ $85) and was bitten by the bug of return rates. Through that meeting, and when I showed him my financial goals, he set me up with a recruiter, Francisco. It was basic, and a day later, he called me back and set up a meeting with Managing partner Tony Montalvo on August 16. Between August 7 and 16, Northwestern Mutual gave me 3 interviews. I leaned toward them until I met Tony. Organized, positive, and high-strung, I had never met anyone so fervent or precise. His words were calculated and even though he made mistakes, he was completely candid and honest. His experience absolutely glowed. Ben Miller was his partner, who met me after an hour and half with Tony. Ben was also calculating but in a very smart, relaxed way. They both had multiple children, happily married, worth millions. Where I'm from, noone is worth millions, so this was a first. I met responsible, organized, successful adults for the first time in my life that came to me for my abilities. Talk about validation. I signed the contract August 26, 2013. At that time, I knew that I wanted to reach their position, no matter what. That is the task, but how?

I talked to Gary Bleakley (NW Mutual) and he told me my contacts were horrible and said I would never get them to invest money responsibly into their products and I realized that there are thousands of people that want to invest, but they are indeed everyone I don't know. I have to cut the fat out of my life. No more meaningless parties that simply pass time. My new friends will have higher mental abilities, want to do business and teach me, travel, and own clever, useful investments. 9/7/13 came around and I volunteered through Michelangelo Venturella and Cruise 4 Kids. 200+ people with net worths creeping into the billions. I had done all of this myself, and they were all so happy and intelligent; I realized money isn't as bad as my parents taught me! If you are responsible and intelligent, money can make you rich in education and time. I have a lunch scheduled with Leo Hamel Friday, 9/20 and he saw the smile on my face at C4K, we talked about Dale Carnegie. I never thought these people were so smart. He saw something in me, he is worth billions. He owns a business, guns, more than 500, a 115 acre shooting range, and has 3 kids (4,6, and 8). Those are responsibilities, that is time management. Katy thinks I'm crazy for putting emphasis on money, but I am so intrigued that I am meeting these people, it's like studying aliens and finally being asked to visit their planet. And the most enriching part is that I can help them grow their wealth and learn from them and their lives in the process. I will learn what makes them great, what their values are, and what their dreams are. I want to build something like them, I want to develop my passions. The only way I can is to stop worrying about money and start going after it! This is an exciting new chapter of my life and in a year, my friends will all be the focused, driven people that I have craved to be around and that have escaped my grasp due to my lack of self-confidence.

I grew up stealing.. Getting government handouts all of my childhood, sneaking around rules and constantly being let down by not having money. I never had the confidence to talk to people who had money because we had this entitlement to things that didn't belong to us. Also my passions were left out because of this block that I don't deserve having money. We were scum. I despise my mother for taking and taking, but I love her for giving me the motivation and this absurd vision that I need money to overcome a struggle.