Category Archives: The World

The truth about Millionaires.

Everyone wants to be a millionaire.  I always had it as a goal, a first step.  First I wanted to do it by the time I was 25, then I set it for 30.  Now I have a goal of doing it while I am 35.  But this time I have a firm plan to get there.

First off most people think that if you are one you will be set for life.  In many cases that is correct, but in most cases it took risk to get the million and most people who have it take those same risks and lose it.  There are ways to earn without too much risk, but mostly that is very slow.  Other people simply go crazy, they get the money too easily and spend it all.  Over 80% of lottery winners have a negative net worth just 5 years after they win.  They get this huge lifestyle, and then spend spend spend, and when the money runs out they borrow like crazy.

I personally know a lot of millionaires.  I don’t know of any who made the money trading time for money or having a job.  I know a few who won it, but the VAST majority worked hard, ran a business and invested the profits.  Some are in farming, some are in insurance, other have a business in one form or another but most are in real estate.  And all of the millionaires that I have asked about this invest heavily in real estate.  Time and time I hear that no matter how you make your millions that real estate is the best place to store the money.  Another common factor among those that have made and kept millions is that they live WAY below what you expect.  They drive older cars, they don’t shop at the fancy shops.  Most of them live on less than 60k per year.  That is still 5,000 per month.  While they were making their money they lived on much less.  Those people you see shopping at all the ritzy malls and spending thousands of dollars are usually people who earn a lot, and spend even more and have a negative net worth.

So what does it take to have a net worth over a million dollars.  I define it as all assets, at the price you could sell it for today minus all debt.  It is hard to value a business so I usually set that as valued as 8 times last years earnings as long as you project those earnings to go on.  Using that measure I actually was a millionaire once during the years that my business was really profitable, but I could not project that computers would become a commodity and that my business would start to lose money at huge rates until I was in the hole.

Also you can only grow your net worth from your personal profits each month.  If you have $3,000 in monthly expenses you need to deduct that from your income before you see if you have enough.  For me I have about $3,000 that I must spend each month to stay current.  About half of that is servicing debt, and could be gone if the interest rates were not so low.  If I am starting with a net worth of zero and I want to be a millionaire in 2 years I need to pack away about $42k per MONTH.  That is a crazy number, and that is why people with jobs don’t hit it.  Even if you had 8% interest on your side and you wanted to do it in 10 long years you would need to save over $7,000 per MONTH.  This is why less than 1% of the people are millionaires.  Even if you earned $120k per year and spent only $3k per month it would take you 10 years of constant effort.  The biggest problem is that when you earn that much, you usually hang out with other people who earn that much, and they start talking about their new cars, second homes and their vacations, and you feel “less than” for living on such a meager $3k per month and you can not maintain it.  It is like a bucket with a ton of holes in it, the more water you pour in the faster the holes take it out, and it never really gets full.  So the answer is clearly not a job, even a high paying one.  You have the limit of how much you can earn because of who you work for and with.  So a business is really the only answer, but to have a good business you need to be as good or better than all of the other businesses out there, or you need to have an idea that really sets you apart.  If you have a really great idea that can duplicate all over the world you can even become an instant billionaire.  This is what they folks at YouTube, Facebook and Twitter have done.  The first ones cashed out when the company was only 7 months old.  The second two have yet to cash out, though twitter just sold 2% of the company for $200 million, making the company worth over $10 billion.  But it is hard to come up with such an idea, most usually stumble upon it early.

So now we all have an up hill battle to climb.  So if you want to be a millionaire in 2 years from today you need to come up with an idea that makes you $50k per month on a constant basis.  Or if you want to build and sell a business you need make one that earns $125k-$150k next year, and that number is AFTER your take from the company because the company will need your or someone like you after you sell it.  The way you design a million dollar company is much different than the way you design a company that just pays your bills.

When you are looking for a large net worth you need to keep in mind the laws of large numbers.  One of the easiest ways to get there is to sell a product over and over.  Even if you only make $10 each time you do it, that means that you need to sell 100,000 items.  So plan your business accordingly.  If you need to sell 100,000 items that means that about only one out of every 1,000 households needs to buy your product.  Depending on your product that may mean that only 1% of the population even needs to know about your product.  But to even get 1% penetration may be a hard thing to do.  But one good viral video could do it for you, or one good endorsement.  Thousands have made it rich this way.

You can also get there by helping others reach for their dreams.  Imagine if you could help people earn a living and you got a cut of what they did.  For me this was always by hiring sales people.  I basically would set their wages to where they would get 40% of the profits that they generated.  I would pay for their phone, a place for them to work, I would help them close deals and I would design the products that they sold, I would even pay for them to have a base salary in case sales were slow that week.  The more successful they would be the more successful I would be.  If I have 3 or even 4 of these people it would keep me busy.  Imagine if I had 30 or 40, and if they averaged making $2000 for themselves per month, that means that each one would make me $3000 per month.  That alone is a million in a year!  Becoming a millionaire is REALLY a team sport.  I don’t know anyone who has worked to get a million who did not have a team behind them.  Most people I know help out people all of the time because the more people they help the more they make in the long run.

If you want to make it rich selling something, or helping other people get rich you need a system to manage the entire thing.  A system is really the key.  The good part is with a little math you can start to think about the system now, you can design the system now that will take you to the millions you want to have.  A good system with the right principles will take you there.  Run a simulation on your system, if it does average will it get you to where you want to be, is your system too small?  Is your system too hopeful, does it require that something unknown will happen to catapult you into your success, if that is the case it probably will not happen.  You can’t predict such things.

I really hope this helps you put your dreams in perspective.  And I hope you start to think how duplicating a successful system will get you there.  You need to focus on people, you need to focus on results.  Your plan must have the muscle to get you to your goals.

When you get your millions remember the little guys, remember to give back.  Millionaires are some of the nicest, most humble and most generous people I know.  Most millionaires are not they greedy people the movies and media make them out to be.  They usually are very humble because they know that peopled helped them along the way, and that being nice to people and helping others is the key to their success.  They feel lucky that they made it.

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The Generation Gap and the Church

That is a huge and growing Generation Gap in the United States.  They have been talking about this at church recently.  About how there is a “Missing” Generation in the churches of America.  How people from 19 years old until 35 are vastly underrepresented.  I am in that group, and I agree, we are vastly underrepresented.

A Quick Warning: This blog entry will be about averages and the groups as a whole, there will always be exceptions to every case but generally the following is true.  I deal with the general public all of the time and I have had friends of many different ages.  I will use the way a church operates during this entry to show the differences.   Watch this video to see facts about the world you may not know.  [youtube=http://www.youtube.com/watch?v=jpEnFwiqdx8]

The older generation simply does a poor job of relating to our generation.  There are some fundamental ways that we think differently, and these differences get in the way often.

Interactive vs Broadcast

To me the most profound difference is the way that we interact with other people and with the world.  For most of those over the age of 35 the world was mostly a broadcast world.  People made TV Shows, made newspapers, books, and gave sermons, and you sat there and watched or listened.  You appreciated what was going on and that was it.

But the mindset of the people under the age of 35 is an interactive one.  We grew up with video games and soon after computers.  We decided what we would watch, what we would listen to, and when.  We want the world to work together.  In corporate America this has created the power of teams, almost every successful business puts people in my generation in teams, and empowers those teams to make some decisions.  This is why the most successful show on tv is American Idol, we want to vote to see who stays on.  We have YouTube and Video On Demand, so we can watch anything we want on out time table.

The successful church must realize that for people in this generation the Sermon is just the introduction to the conversation, and they must make ways for the conversation to go on and to get the input When they don’t we simply feel frustrated.  Our generation is very tech savvy so even if they brought the conversation online afterward it would much better than the way it is cut off now.   The older generation is done, and ready to move on.  The successful churches introduce the topic and start the discussion online days before the sermon on the pastors blog, and comments are posted and replied to, so when the sermon comes on sunday my generation is excited to go and see it to see if what we said made a difference, it makes us hunger for it and we are sure to attend. I am talking about much more than just saying Amen here and there.  Actually that looks kinda fake to us.  I often feel like a pastor is up there trying to answer all of the questions that he thinks that the audience may have but never bothers to ask them what their questions are.

Values

On Tuesday night on ABC they have a show called “What would you do”, it is basically a hidden camera show where they set up situations to test peoples ethics.  On the show they said that one of my generations main values is the Value of Tolerance.   Our generation is very diverse, and people often express their thoughts by how they dress.  I really don’t think that the older generations gets that we really don’t care that much on how you dress.  We will take how you look and make some preconceived notions but if your actions are different we quickly can change that.  Who cares how you look, it is about who you are.  I think that much of this comes from the fact that successful people in our generation come with all sorts of different looks and different backgrounds.  I basically will treat you the same if you wear a suit, or if you wear torn shorts and a old raged shirt as long as you act the same.  I think that much of this also comes from the fact that we carry on most of our relationships online or on the phone.  I have people I have talked to for hundreds of hours over a period of more than 5 years, who I have done business with, who I joke with and have tried to inspire and build a relationship, but whom I have NEVER met in person and never even seen a photo.  I think that concept is totally foreign to people in older generations.

Another main value of my generation is Truth.  Being real, being authentic.  I think that we are much harder to offend than people of older generations.  We want to get to the point, to get real.  The point where it starts to get good for us is well past the point where older people get offended.  One thing I find very lame in church is that pastors stop way too early, they stop before they get to the meat, or the truth because if they do keep going on someone may get offended and walk away, but in doing this they look weak to our generation, unwilling to be authentic for fear of what others may think.  Remember that our generation is the generation of tolerance, and because of that we are hard to offend, plus we have seen it all and heard it all on TV and on our computers.  For us it is about community, we know that no church is perfect, and no church leader is perfect, and that it is OK to have opinions that are different than the leaders.  Older people want to find the church leader that thinks exactly like them, and for this reason the leaders usually are reluctant to take a stand, this keeps the older generation from leaving but it looks completely fake to my generation and turns us off.

One huge value of older folks is that of Authority.  But to us we know that the world has become interactive, and that for many decades we have been betrayed by authority giving false information, and because of this we doubt everything.  For the boomers you just tell them that something is true and they run with it, but we research it, we have Goggle at our fingertips and we use it, 23 Billions times a month on average.   We know that big companies can have no web site at all and we know that a guy running a business in his underwear in his dining room can have an impressive and huge website.  We know that some crazy person can edit Wikipedia and change the information you are reading.  We also know that an unknown with a good idea can publish it and have a million readers in a few days.  For most of us there is no ultimate authority or truth, it is just millions of interpretations of truth.  This is the very reason that it so very hard for the church to reach us.  First there is only a broadcast, no conversation, and when they broadcast they tell us what is their truth, but their truth is different from what others have said and they do little to prove their truth.  They read something out of the bible to people who may not truly believe the bible is truth, they have heard so much that discredits it.  Again this is why a conversation works much better than a broadcast.

Another value of our generation is that of Equality and fairness.  Most of us believe that everyone should have an equal chance at success, that we should all have a say in things.  We all want a turn to share what we know, we want to be empowered.  In business school there were a lot of good lessons, and one that stuck with me the most is delegation.  First if you are a leader you need to delegate as much as you can, you cast the purpose and vision of the company and then delegate to smart people who have bought into that vision and give them the power and freedom to do what it takes to make you successful and the results will always be more than you ever thought it could be.  If we don’t know the WHY to a task, and how our efforts fit into the big picture than we feel like what we do is not so important so we just don’t do it.

[youtube=http://www.youtube.com/watch?v=ODQ4WiDsEBQ]  Another virtue of our generation, and one that has caused some of the largest generation conflicts is the Ubuntu concept.  People in my generation see the world as one huge mass of humanity.  We should be helpful to others, we should share with others, we should build a community of caring, trust and unselfishness.  An African word has been used for many decades to express this concept, that word is Ubuntu.  Recently a group of programmers took this concept and named their operating system after it, because they built their entire OS on this concept of community.   They call the OS Ubuntu, in a few short years it is already better than windows, and as more things work with it it is gaining market share, recently passing the Mac OS as the second most used OS, and I think that it will overtake Windows as the most popular OS in the world in the next decade.   People in my generation make stuff so that it can be useful to others, and we don’t care if they use those things, and for the same reason we don’t ask if we can use what you made, we download your music, and your movies and use them however we see fit.  An open society is in direct conflict with the current system of copyrights.  Some smart companies are releasing their content to the web, and letting people change it and build on it, making those companies totally hip and cool.  While other go after and sue people who do the exact same thing, GM recently after people liked one of their commercials so much that it was posted on youtube and 3 million people viewed it, then they sued to take it down, are they that dumb.  (Well I did see their stock price recently so I guess that is my answer.)

We are used to information on demand.  I can access more information from my desk in 20 minutes than what would take a whole day in the library of congress just 20 years ago.  We are a generation that is flooded with information and rich content, but at the same time we yearn for a real human connection.  We don’t just want to sit in a lecture but we want to be part of the conversation and push it forward.

Final Thoughts

There is a verse in the bible that goes “Teach a child in the way he should go and he will not depart.”  By the time someone turns 21 they have formed 95% of their habits, and generally decided where their life is going.  For 100’s of years church was the center of society, but in the 1960’s it started to fade, there was a leadership crisis and for the first time the population as a whole doubted if we would be involved in a war.  Until the 1950’s most expression was banned, and by the 1960’s it was unleashed, and there was a new culture that was raised up, one without God at the center.  The people who were teens during this time did not go to church much and did not make it important to their kids.  The concept of church lost critical mass, it was very uncool to go to church.  Almost everyone that I know under the age of 35 is in church because they grew up in church, very few found church later on.  Now we have millions of “Unchurched” in our generation, many have never been to church or when they did they felt like they went to a lecture, they made no connection, they felt like they had no say in anything so they just never went back, and they took that opinion with them.

To reach these people is a very hard task now, because they feel that they are doing fine now, and that they don’t need God.  Many churches express God like a Magic Gene who solves all of your problems.  My current church is not like this but many churches I have visited basically have the same theme over and over, “Life is hard, life is tough, the world is unfair and against you and you need to make God part of your life so he can fix it.”  I hate it when I hear people say this.  To my generation life is awesome and great, we have more at our finger tips now than even existed for our parents, we are generally happy with out lot in life.  The message that would work for us is this “God can be your best friend, he will help you when you need it and celebrate with you when you do good, he has great plans for your future, full of hope and success.  The better you follow His advice the closer you will get to His vision for you life.  Join us and you will have an entire community at your side working to make God will happen in your life.”  Too bad few churches today are preaching this.  I love how we say in our church “Success to you and Success to the kingdom of God”  Because that is really what it is all about, lining up our definition of success with that of what will create success in the kingdom and then going for it.

The church that successfully reaches my generation will be the one that speaks the truth holding nothing back, allows us to participate in the conversation, allows us to discover what is truth, and allows us to all work together to build a community, getting rid of the idea of leaders and followers.

My very steep mountain I plan to climb. (My Mission in life)

This entry is about my mission in life, and my mindset right now.

My goal, is to be very wealthy.  I don’t really have a personal need to be wealthy but I have felt for a long time now that it is my calling in life to be so.  The reason for this is that I can help many people out, so that I can leave a legacy for my children and their children and to help the Kingdom of God in all of this.  I want to be the one who builds schools, churches, community housing projects and so on.  I have had a desire for this for many years but have gotten distracted a few time.  Now I feel like I am behind schedule, I have this huge goal and to accomplish it I need to act now and act aggressively.  I need to have a very steep slope to my net worth mountain.

The good news is that in times like this, with economic turmoil and such it is actually easier for a smart person who sees the trends to gain massive wealth.  I can buy stocks in good companies for huge discounts.  I can buy houses for cents on the dollar.  These things will always rebound, they may take some time but they will.  I can take advantage of the huge wave of people who are eager to snatch onto the dream of finally being their own boss, I can consult with them and make tools for them to get there easier, because I have been there my whole life.  Of course I will charge for this service.

My goal is to have a net worth of $5 million dollars by the time I am 40 years old, and $10m by the time I am 45.  (I am 33 now)  I will consider any donations I have made to be part of my net worth.  To get there I would need to earn a huge amount of money.  I will invest most of that money until I get to my goal.  This is a very steep mountain to climb.  I have made money at this rate in the past buy I grew my company too fast and trusted people who screwed me and soon I was bleeding 10k+ per month.  I have learned that lesson but I do know that I can not do all of this myself.  I need to use other peoples money and other peoples time to get to where I need to be.  If I do everything that needs to be done I will never make it, never even get close, I have to hire others to join me.  For over 10 years now I have always had at least a few people who work for me, people who I can call when I make a sale.

So to make this goal I need to really start to climb, to earn huge amounts of money.  Well that is actually much easier than you may think it is.  There is more opportunity now simply because the market is totally inefficient right now.  This means that prices are all over the place for the same item, mostly caused by crazy desperate people who are selling things at fire sale prices.  This lets us take advantage of research and work to find the best price on something and sell it to someone who does not do the research.  This can be done on houses, cars, computers, information, labor, and almost anything else that can be bought and sold.   You can buy cars for $5k that sell for $10k the next week.  You can buy houses for 20k that were once worth 200k and sell them for 80k with ease.   I just bought over $1500 in computer parts from a guy for $100 simply because he got them from a guy who went out of business and had no idea what they were worth.  Money is just sitting there everywhere waiting for someone to pick it up.

Right now is the best time I have ever seen in my life to buy Real Estate, and probably the best time there will be.  You can buy a house now for such a low price that you can rent it out and have the rental payments cover the entire cost in under 5 years.  You can then hold on to these houses for 10 years and sell it for many times the purchase price.  This is the main way I plan to make my long term money, but I need to fund this with short term money.  My plan for this is to sell websites, sell business opportunities, such as this one or this one.  I have another huge idea in the works that I think will make a million dollars in the next 3 years as long as it is done right.  I need all of this because I have a high goal.

Mindset is Key.  mindset

Less than half of a percent of the population in the US has a net worth over $1 million dollars, and with the current market that number is falling.  Most of the population is deep in debt and the ones that are not don’t have a huge net worth.  Most people simply do not posses the entrepreneurial spirit, they do not have the mindsets required.  They do not even have this as a goal.  There is probably less than 2% of the population that is serious about being an entrepreneur, about being truly wealthy and free.  For me and these others like me we must have a different mindset from the rest of the world.  What works for the normal, happy to have a job, people in this world actually hurts us.  And what works for us does not work for them.

There is about 10% of the population that thinks that they are an entrepreneur, people who have gone out and created for themselves a business, or they dabble on the side trying to run a small home based business but most of these do not have the correct mindset.  They simply do not see it.  For years many of my friends have fallen into this group, and for years I have talked to them, tried to show them the way.  Given them books on the subject like the awesome E-Myth by Michael Gerber.  All with very little result, they almost never get it, and they just can’t figure out why even when I tell them directly, so for the most part I have stopped.  I love to deal with the people who have the right mindset already.  You can tell someone simply does not get it when they keep saying “You can’t do that” but in reality there is very little we can not do.  We can buy houses for 10 cents on the dollar and not use one cent of our own money, we can sell a service to a client for one price and then hire someone else to perform that service for a much lower, yet still fair price.  We can do something once and get paid for that work for a long time to come.

entrepreneurTo have the correct mindset you must realize that there are different rules for us.  I have found that people like Donald Trump, Robert Kiyosaki, Ric Edelman, Dean Graziosi and Adrian Cartwood can equip you with the correct mindset.   For the other people who are not entrepreneurial they can listen to people like Suzy Orman, Clark Howard and David Ramsey but for us much of the information they say is toxic to our mindset.  They focus on what to do with the money that you earn, how to divide it, how to save it and such, and they focus very LITTLE on simply making more.   They focus on how you should not used debt at all.  I agree with all of this for “normal” people.  I think that normal people should only take on debt to go to college and buy a meager house, and maybe to buy a first car.   They should save their money for retirement and live a very frugal life.  They should max out their 401k and invest in mutual funds.  (For all people even these I strongly suggest that they separate their home equity from their home, it make much more sense.)

But for us E-Type people this is crazy talk.  I know I can do much better in life than that sort of existence.  If we have a good idea we should borrow to make it happen if we don’t have the resources ourselves.  We should keep an eye out for the needs of others and look for ways to fill those needs.  We should delegate anything that we can to free up our time to focus on growing our business.   We should focus on increasing our income 10 times as much as we focus on where it all goes.

E-Type people should give away money with abandon to worth causes.  I personally believe in Christian education and I help out many children go to private Christian schools, third world children who would not have a good education if I did not help out, now they have a chance to be something great in the future.  Almost every millionaire I know gives away more money per year that most people earn.  I remember a few years ago my Grandfather walked into his local church and gave them $100,000, just a few months before he died.  I remember growing up with my uncle and seeing him write checks for $5,000 when a missionary came to his local church.  I remember he would always give us $10 or so every time the offering came by and we would dump it in, teaching us to give.  I have a good friend locally who makes over $50k a month and gives over $10k of that away each month.    We are blessed to be a blessing, the more you send out the more you will get — people just don’t get it.

Final Thoughts

I really hope that you have gotten inspired by all of this.  I was inspired by the 7m7y project recently.  And just this week by two other great guys.  We really

Some prespective for your life…

One of my friends posted a blog the other day.  Here is his blog entry.

Please read that before you move on…..

After reading that I had to make a reply, and I thought that it was important for everyone to read it so I posted it here also.

Anyway it is so true.    I lived in the Philippines for a year and a half and I was very much in the elite, I was able to get the best service and best of everything when I was there and I lived on less than $2000 a month.

Most of the people we know there made less than $100 per month for their entire family.   We have chosen to give to pay for 4 kids to have a full ride at one of the nicest private high schools, with tuition, transportation, food and extras we send them a total of $150 a month, and that covers all of it with some left over.

If I was a millionaire I would have a very hard time buying this really expensive things, knowing that for the price of this Rolex I could send 10 kids to school for a full 12 years and dramatically change their life, after thinking about that there is no way I could buy the watch, the $80 watch I have now works great, looks great and is enough for me.

While I was there I was at a church and they had a video, it basically showed some stats, that if you slept in a bed, had a shower in your house and kept your food in a refrigerator you were better off than 85% of the world population.  If you had a computer in your house, now you were in the top 9% and if you had a car that put you in the top 5%.   I am sure that almost everyone that reads this falls in that top 5% and most of you also feel poor, and depressed about it, so feel blessed for what you have and move forward in life.

One Simple Change that will rock your world.

I am sure that you have noticed that the media, and what people talk about has really become a bummer recently.  I mean all that I hear is doom and gloom.  It is a fact that the economy is slowing down and things ARE going to be much different in many different areas in the future.  Two main areas will be the availability of credit and the profit margins that companies have.   Many companies simply are too inefficient to stay afloat in this time.  Many companies will close and make all their employees go home, others will cut costs by eliminating employees, both of these factors will result in much higher unemployment.    Bills will go unpaid, people will be evicted, and the masses will feel generally negative.

So what can you do about all of this, for yourself and for your business?  Well the truth is that you must change the way you think about all of this.  Here is the real situation, there has been a shift happening for a while in the way business is done, the way money is made.  Knowledge is the key, creating a better system to do something and then implementing that system is the road to wealth in America now.  It has been so for a long time but the majority still can not see it.  In a time of change, like the one we are going through, there is unprecedented opportunity everywhere.  The larger the crisis the larger the opportunity.  And we are in a huge crisis, it is most likely that the opportunity will never be larger in your lifetime to make serious money, have serious success or to change the world.

So here is the basic change that you need to make.  Every time you hear someone say “Challenge” or “Crisis” or “Recession” or any of the other negative things you hear every day, constantly think “OPPORTUNITY”. Think about how the change has displaced old players and has make openings for you and your business to move forward.  When you hear about how someone can’t get a new car because of the credit mess, think about how money can be made keeping their old car looking like new.  When people talk about going out of business or they are clearing out their inventory to make payroll think about what a good deal you can get, and how you can buy more than you need and then mark it up to others once the sale is over.  (I do this on Laptops, buy at the clearance sales, and sell after the sale is over, or online to those that don’t know about it.)  When a company goes out of business you can look at the strong companies in the same industry and you have just found a good investment.  Best Buy is going to do great in 2009 when Circuit City is gone, that was the thorn in their side and it is gone.  And what about all those people who are out of work?  Well MLM sign-ups are at record levels, everyone is looking for an opportunity to own their own business, and people are putting much more effort into building those business.  Because of this so many new MLM companies have popped up, but many of them are not very good, please read about what makes a good MLM here.  When you see the real estate market just think about the fact that in the long run housing always goes up, and many cities have already started to show signs of recovery.  You can easily find houses that are great deals, get a tenant in there, and have much larger positive cash flow than has been possible for over two decades.  I know people buying houses with 20% down for under $120k and having payments less than $600 a month, then they rent it out for $1,200 a month.  Rental prices have not seen the drop that ownership has had.

So in every area that I can think of there is huge opportunity for the person and company that can see what if going to happen, figure out the correct change to make and implement that change quickly.  During this time you will need to break some ties with your old cash cow that has been paying your bills for the last few years, and focus on what is going to make you money in the future.  Many people will never be able to do this.  I know a very rich and successful guy who has not changed the way he has done business in years, his company has recently had to move out of two of their buildings, fire half the people and make some other huge changes, but they did not change the core of their business, and their business focuses on Luxury Construction supplies in Arizona, and I fear that this is not a market that will come back before this company is out of business.

So look for the opportunity in every crisis, embrace change and reap the rewards.

Is it ok to steal?

I own a computer store.  It is fairly small and not so profitable recently.  In fact as our products have turned into a commodity it is very hard to make money any longer.  But there are other places that sell computers, CostCo, Dell, Best Buy. These companies are big, they make tons of money and are very rich.  They have tons of extra inventory just sitting there on their shelves.  Now if I went out and decided to take some of that inventory from their store and put it on my shelves, it would help my employees keep their jobs, it would help my store make more money this month and it would be totally illegal and immoral.  It is there stuff, I have no right to it.

But this is exactly what our government does but on a much grander scale.  In fact if you are the big store, and you don’t them steal from you Joe Biden calls you unPatriotic.  Yea if you are one of the people who will benifit from this plan I can see how you may support the Obama/Biden plan of taking more from the people who really make this economy work and giving it to the people who are middle class, or even those who choose not to work.

If you have any ethics you must see that this is simply another form of theft, the problem is that we have lived with it for about 63 years and people have become so used to it that they have become dependant on it.  If you make more than 120k per you, or maybe even less you should expect your taxes to quickly go up.  Obama says 250k in many speaches, 200k during his infomercial, and biden said 150k a few times last week, but now other written items from they say 120k.  Once he takes office, if he wins, I think it will quick drop to 100k or 75k.

On a side note Bush made some tempoary tax cuts that were fairly large and they expire in 2010.  When Obama says that he will not raise taxes to the middle and lower class he simply means that he will not add any new taxes BUT he is fully intending for the Bush tax cuts to be allowed to expire, in effect raising taxes, but HE did not do it….it has long been set in motion.   This slick concept is not caught by most people.

Social Security is the worst kind of theft.  It is a huge program that simply will NOT keep working much longer.  Basically you have a shrinking group of hard working young people who are mostly working pay check to pay check hardly getting by.  Then you have a growning group of older people who have had 40 years of high income earning, they mostly own a house and they have on average 10 times the assests of the first group.  Who should give who money.   Well, you guessed it, our government has it backwards, the hard working poorer working people give their money to the retired people who sit around and lead a life of leasure for the most part.  The worst part is that they feel entitled to this life because that is what they have been told for decades, it is illogical and is the main cause to our problems but there is little that can be done to fix it.

14 Choices

My Choices and Why.

You have the freedom of choice, you can choose who you do business with, where you shop and what you think and believe.  Every dollar you spend is a vote for the way that company does business, are you rewarding a company for having good prices or good policies.  The choice is yours.  The important part is the WHY, why do you choose to do these things.  It is very interesting to see what people pick and why they pick it.

Please post your what who and why on these following subjects.  If you pick more than one please state them.  Some are very important and some are trivial but will shine insight on how you think.

My Choice of Political Party (If none state why)
My Choice of Operating System
My Choice of Religion
My Choice of Grocery Store
My Choice of General Merchandise Store
My Choice of Vehicle
My Choice of Housing Type
My Choice of Primary Bank
My Choice of Brokerage Account
My Choice of Gas Station
My Choice of ISP
My Choice of TV Service (Bonus Entry)
My Choice of Wireless service
My Choice of Cell phone
My Choice of Drinking Water
My Choice of Browser (Bonus Entry)

If you fill this out and make a post with your answers please post a comment on the blog where this all started, at http://capitalactive.wordpress.com/2008/10/13/14-choices/ so that everyone can read it, if you don’t have a blog of your own then put your whole answer as a comment on that blog.  Simply copy and paste the above section to start your blog, then copy the subjects again and answer them.  Also use the tag “14 Choices”.

My Choice of Political Party (If none state why)
Republican.  I generally think that government should be smaller.  I think that the republican party still stands for smaller government.  Democrats stand for more services but more taxes, which is why people who need more services often vote democrat.  In general both parties mostly are the same on most issues.

My Choice of Operating System
I choose Windows Vista.  If you asked me a year ago it was Ubuntu, and before than windows xp.  The reason I use vista is because it is more stable than XP, able to run more things than XP, and simply works better than XP.  The reason I don’t use Ubuntu any longer is because I needed to be compatible with windows to run all the software I need for my business, and the games I like.  Too many things still did not run with Ubuntu, but as an OS for stability, and fun/ease of use Ubuntu was by far the best OS.  If I was making a computer to for office us and the internet I would go with Ubuntu for sure.

My Choice of Religion
I am a Christian. I have been my whole life, I grew up in it.  Mostly I still choose to be because I think it is the right choice for my life.  I think that it is true, and that Jesus actually did die for my sins.  It also gives a good way to live and a great community to be a part of.

My Choice of Grocery Store
This is complex for me, I choose different stores for different reasons.  I like a local store called LeeLee’s for asian food.  I also shop often at Fry’s (Owned by Kroger) for the sales, but the stuff that is not on sale is often too much money.  I also buy some items from walmart but often they are not a good deal on food.  My favorite store recently is Fresh and Easy.  They have great quality and they make home made meals you can just microwave, and if you use the coupons they always give out they really are cheap.

My Choice of General Merchandise Store
Well we find ourselves at Walmart at least 4 times a week.  The main reason is that they are only 200 yards away from our house.  I like target a bit more but they are simply too far, and they have too small of a food section, there is no super target near where I live.  Walmart seems to have at least 80% of the items I am looking for and usually at a good price.  They also usually have a good amount of stuff on clearance, I have noticed that prices change a lot there and there are a lot of things that are usually too much.

My Choice of Vehicle
The Vehicle I drive is a Pontaic Aztek.  It is an odd vehicle.  It is what is called a cross over.   I originally bought it because it had huge cargo space, good gas milage and it was high profile so I could see over all the cars out there.  I also really liked how unique it was and it was very comfortable for me to drive.  It has been, by far, the best vehicle I have ever owned, but it is getting older and I should replace it soon.

My Choice of Housing Type
I live in a nice large house, in the suburb of a Major US city.  I love close enough that I can go downtown is under 15 minutes yet far enough that it is nice and yuppie.  I bought a house larger than I needed so that I could rent rooms out if I wanted, and also have room for a large office and a workshop.  I don’t really care for houses too much because there is no community, no one here talks to each and I have only talked with my neighbors a few times.

My Choice of Primary Bank
My primary bank is really a Credit Union.  They are cheap, no fees and such, and they usually have no line or a very small line.  I also banks with Wells Fargo, US Bank and B of A just to have flexibility but none of them are my main bank.

My Choice of Brokerage Account
I have tried a few out there but I have stuck with eTrade for quite a while.  They have great software that gives you a ton of information.  Some other places out there have been advertising better prices for trade, and also have built great software tools so I may try them.

My Choice of Gas Station
By far I like QT (QuickTrip) the best.  They usually have good gas prices but the reason I like them is that their gas seems to work better in my Aztek.  I get better mileage when I use their fuel vs most other brands. I also really like their drinks, they have a ton of unique and very good drinks, including a Horchata shake, and a Hot Milk drink, both only $1.09 for a very large cup.

My Choice of ISP
Again the choice is clear, I choose Cox, they have the best service, best uptime and best prices.  Internet over Cable is always much better than DSL.

My Choice of TV Service
For this I also use Cox, they have a fairly good Digital Converter with a nice list of HD channels.  I have been looking into Dish Network recently, they have even more HD, and more channels for an even better price, the problem is that I have three other TV’s on analog that may not work, I will find out soon.

My Choice of Wireless service
I use T-mobile. They have far and wide coverage, great customer service and a plan that perfectly fits my lifestyle.  I have a family plan with 4 phones, that has unlimited texting, unlimited nights, unlimited weekends, unlimited in network calling, and each phone can pick their 5 favorites and call for free but the killer feature is that when I am near a hotspot (such as at home) my phone will connect using the Wi-Fi and all those minutes are free.  Because of so many free minutes I am on a plan with only 700 any time minutes, and we have never used more than 400 of them.  I get all of this for only $140 including taxes, and I have sub leased two of my phones for a total of $80 per month so my out of pocket cost is only $60 per month.   Quite nice.

My Choice of Cell phone
I have chosen the Samsung Katalyst, I have been a huge fan of Samsung phones for a few years now, they simply are much easier for me to understand.  I also love the slide feature, and the Wi-Fi compatibility that is a must for my service.  It has a nice crisp 2.1 inch screen, and has a great camera and a great music player with good sound.  Call quality and battery life is also excellent.

My Choice of Drinking Water
I choose Reverse Osmosis Water.  I like the clean taste.  I also like the fact that there is no fluoride in it.  I think fluoride is really a bad thing.  I get it from the local water store down the road and they charge only $1 for a 5 Gallon refill.  They have filters that are larger than my car and the taste is great.  I often fill up bottles with it and take it while I drive.

My Choice of Browser
I have chosen Firefox, it works great, and is much more stable than IE.  It also shows the websites better.  It has a ton of features I can set and generally work well.

Thanks for reading, be sure to post your answers also.

Freedom of speech and religion in the US.

I often post long comments on a variety of subjects on other blogs.  Today one of my good friends Matthew posted a very good blog entry.  (See the photo to the right, taken on one of the few days when I had more hair them him.)  Here is his blog entry, if you could read that first it will make mine more logical. I mostly agreed with him and the subject of business came up in my answer so I will repost my reply here for all my business readers.

I once heard a quote that one who believes in freedom of speech “Will defend someone who is yelling at the top of their lungs their ideals in a public place, ideals which you would yell at the top of your lungs to oppose.”  I have thought about this often.  We live in a nation where we should have freedom of speech, and even if that speech is against what I say and think I will support that freedom.

Now it comes to appropriateness of the time and place it is a whole different mater.  I think that there is a huge difference between public and private events.  I thought it was shameful for those few democratic protestors to sneak into the republic convention and protest during the peaks of the speeches.  It was NOT their place.  I also think that if someone goes through all the trouble and expense to put on a parade (Such as a famous church does each St Patricks day.) they own that parade and they should be able to pick and choose who is allowed to be in their parade, not forced to allow a group of Homosexual rights people to basically have a protest in the middle of the parade as a court recently forced them to do.  If the Gays want to have their own parade, I have no problem with that, they can pick a different time or place.   Also if a pastor wants to say something to his church about who to vote for, he should be allowed, unlike todays laws.

On Friday I went to the state fair, there were two different church groups who rented a space there, they decided that they would try to tell people about God.  I also have no problem with this, they used their money, and they were following the rules.  Now was this the best place, I think not, will they actually do any good for the Kingdom of God, maybe they will make a few people think.  For years I have thought that relationships were the best way to win people to Christ.  You simply invite them to events, show them the community and tell them the Gospel and let them decide.  But any decision that is forced is NOT lasting or sincere, and so many Christians like to force such decisions.

If you notice in the quote you have from Thomas Jefferson he says sect.  As you know this is a difference within the same religion.  He could not imagine that our nation would be anything but Christian.  He just did not want one denomination to be favored over another.

I do totally agree that we should not force our Christian ideals on non Christians as a form of law.  There are too many laws in our nation.  We are NOT a free nation.  Anyone who leaves for a year or more and comes back will tell you that.  There are others that are less free but also others that are far more free.

You also had the point of the “Merry Christmas” greeting.  I have found that it is used far less.  The other day I went to Costco they had two isles of “Christmas” stuff, so I decided to look really closely, there was not one item that was Christian based, and not one location did it say the word Christmas.  They are a business, they can choose what to put on their shelves, but me, as a Christian can choose where I will buy my decorations, and even if they have the best price it will NOT be from them.  Two years ago I heard that Macy’s decided to make bring back Christmas and in all of their ads they stopped all of the holiday stuff that others do and actually, to the shock of the left, mentioned Christmas.  And you know what, their sales went way up and they had their best season ever.  These are all private originations, they can choose what they want to say, they will be held accountable by the general public for what they do and say though.

To me the fundamental thing is that we have LOST the conversation in this nation.  People are divided and in most ways very close minded.  The force of the debate on both sides has caused people to become callous to the point that they are stuck in what they think.  A hard attack will just cause people to put the shields up and resist, only a slow, over time conversation based on logic will ever convert most people in this climate.  (This is for every issue, religious, political and even for choice of OS.)

New Nigerian Scam method.

I thought I have seen or heard of all the nigerian scams.  To protect myself I always use PayPal or else I deal in person with the customer.  Basically PayPal is a good company for running transactions because they are really focused on security, it is fairly hard to scam someone on paypal.  But today I posted something on craigslist, I specifically stated that I will only ship my item to people who pay with PayPal.  Craigslist is a huge target for bad people and almost all checks are fraud.

So a few minutes after I posted the item I got emails from two people who were interested.  They were both from free accounts.  (Red Flag)   Both were eager to buy at the full price with out asking for anything (Bigger Red Flag)  Next they wanted it shipped to Africa (100% Fraud massive red flag).   But I wanted to see how they would scam paypal.  Paypal is very secure.  So I told them to send me the money.  This is how stupid they are, they just spoffed some emails from paypal.  They took the normal one and made it seem that it came from paypal but when I logged in there was no money in my account.   The email really came from  paypalverifyingagent@mail2consultant.com but they made the name say service@paypal.com the real address paypal sends from.   They did a decent job of spoofing the email, it looked just like a real one if you did not look at the header.    But then to try to ease any subspisions they sent a second email saying this.

This e-mail is sent to you as a confirmation of payment made to your PayPal account.We have rigorously examined the payment for Your Laptop by PayPal Member(monica0002) and the amount to be credited to your account by  PayPal is $800.00 USD 
       This transaction is in order and legal.This fund will be credited to your paypal account once the shipment tracking number is sent to our verifying team
      We encourage you to ship the item immediately (due to Paypal's policy) as your payment has been confirmed by us.Security is of critical importance to us at PayPal.
      We use proprietary technology and constantly innovate to help ensure your transactions are safe. In addition,  PayPal has over 20,000 staffs worldwide dedicated to keeping  PayPal accounts safe, and stopping online criminals. And we work with Internet Service Providers (ISPs) worldwide to shut off fraudulent websites as soon as possible.

PayPal‘s Fraud Investigation Team is highly experienced in fraud prevention. Several members of the team were former law enforcement officials with extensive experience in fighting online fraud. PayPal‘s fraud investigation team focuses on: Identifying and preventing fraud before it occurs, Detecting fraud in process Mitigating loss, if fraud does occur, Delivering information to law enforcement around the world to help stop those committing online fraud.

I sent a message saying that I had not received the money when I checked my account. Of course cause it is totally fake.  Four minutes later they sent another that was almost the same, but this time it said that my account would only be credited once they confirmed the tracking number with UPS (A total lie, PayPal never does this.) After 10 minutes I receive 5 more emails from the buyer who really wanted me to contact them ASAP (I guess their time at the Nigerian Cyber Cafe was almost up.)

I also receive another fake paypal message that is much more desperate



Dear  Jason Dragon (dragon@capitalactive.com),
                        This is to notify you regarding Payment made by "Monica0002" to your  account. The payment has been successfully made but on escrow due to security reasons we have to receive the shipment tracking number before your account will be credited.
                        This a new measure we are taking in order to protect both  sellers and buyers against fraudulent activities. Immediately the Item has been ship, send the shipment tracking number to PayPal Customer Service Department: paypalverifyingagent@mail2consultant.com composeto=shippment_proof@consultant.com&composecc=&subject=&body=" target="_blank" rel="nofollow">and immediately the shipment tracking number is CONFIRMED. Your account will be credited immeditely.

PayPal, and Craigslist company Copyright 1999-2008 PayPal. All rights reserved.
PayPal (Europe)  is authorised and regulated by the Financial Services Authority in the United state as an electronic money institution.

PayPal FSA Register Number: 226056

I simply sent an email back saying I don’t ship to scammers.  I wonder if that FSA number means anything?  I also noted how they misspelled, and why would a PayPal message mention Craigslist?   All odd.

Of course the reason that they do this is because it DOES WORK on some people who are too naive.  I am sure they have received tons of free stuff.  I bet at least one person who reads this blog has shipped an item out.  If this is you, or if you even were sent this scam I would love to see a comment from you.

The Mortgage Crisis in Plain English

Hello, my name is Jason Dragon.  You may be a long time reader of my blog, or like many people you may have found this simply by doing a search, if that is the case then welcome.  I plan for this blog entry to be one of the largest in scope of any entry that I have every done.  We are going to talk about the current Mortgage Crisis.  I will talk about it in 4 areas.

  1. The Boom
  2. The Bust
  3. The Current Situation
  4. The Way Forward

If you are wondering, I do have a degree in Business and I spent a lot of time studying economics. For a short time I even sold mortgages.  I will try to keep the text as simple as I can, I want you to not get bored and to read the entire things. Some of this will be my educated opinion, but most is simply fact.

The Boom

At the start of 2000 there was a bust in the stock market, millions of people pulled out a total of billions of dollars.  When 9/11 came they did so even more.  All of these people needed a place to put the money and the new trend was to put it into Real Estate, housing prices started to rise.  By 2003 and 2004 many real estate gurus arrived on the scene, showing common people how to make money in real estate.  It was a great time.  Prices were going up each month.

To add to this information, for the first time, was easy to get and compile.  It was easy to find a good deal on a house online, you could even find out the estimated value of your house or any other by going to sites like Zillow.  It was also easy to get a loan.  Because home values were expected to keep going up you could get a house for $150,000 and get 100% funding because by the time you get close to closing it was already worth $175,000.

The housing market was a great investment, it is one of the only investments that you can get almost total leverage in. Figure this, you buy a house for $150,000.  You only put $10,000 as your down payment, you get a tenant in the house and they pay for all the expenses giving you a zero cash flow but no expenses.  Now you sit, wait a year in this market and the price of the house goes up by 10%, BUT your return was not 10%, because the price goes up on the whole value of the home, not just your down payment.  You now have $25,000 equity in the house, a return of 150%.  This is the reason that investors flocked to houses, huge returns.

For many people, the more passive kind who usually invest in bonds and such this was way too risky for them, so they decided they would simply buy mortgage backed securities.  100’s of billions of dollars flew into these.  What these were was baskets of mortgages, and you could buy shares in this basket just like a stock, they had sold and predictable returns.  If you were used to getting 2% on your money in a CD or government bond, now you could get 5% on your money by buying one of these.  It was great for pension funds and foreign banks to sock away money because it had a higher yield and was still considered very safe.

The reason it was considered so safe was because of the very low default rate in mortgages caused by a booming housing market. Most people would simply sell their house for a nice profit before they went into foreclosure.  The investment banks reduced the risk even more by bunching 1000’s of mortgages together.  They would then break them up into different levels.  If there were any defaults the investors at the lowest level would be wiped out first, and the investors at the highest levels would still receive their full returns even if 20% of the mortgages defaulted.  It was a great system.  The investment banks bought up over a 100’s of billions of dollars worth of mortgages using this process, and they charges a hefty fee for all of it, making them some of the most profitable companies in the world.

For almost 70 years there was been a set of two companies, founded by the US government to facilitate the flow and resell of mortgages, these are Freddie Mac and Fanny Mae.  Basically these were huge companies that would buy mortgages from banks.  If a bank could not resell the mortgages they would need to get deposits to cover all the mortgages that they wrote and that would be nearly imposable.  About 92% of all mortgages are resold.  Freddie and Fanny purchased over half of them.  They would buy them from the bank, the price was set by the value of the house, Credit of the home owner, zip code of the house and a few other factors.

This created a great system for the banks.  They would sit there and advertise that they can get you a great deal on a mortgage, they would help you with all the paperwork, they would send your information to underwriting, where they would basically see what was needed to make your loan sell for the highest price to Freddie/Fanny.  They had some rules such as the first mortgage could only be 80% of the value of the house, or else the homeowner would need to buy PMI (Private Mortgage Insurance).  The bank would then take your entire mortgage packet and find out how much they could get.  On a $200,000 loan at 6% there is someone making $12,000 in interest every year.   The buyer of the mortgage would pay a premium for the loan, but they wanted to make sure they would get their money back.  So what the banks did was to get the home owner to sign a pre-payment penalty clause.  Basically this was a clause saying that the bank would get 2 years worth of interest from the customer, that the customer would still have to pay 2 years of interest even if they sold or refinance the house before 2 years was up.  So on that $200,000 mortgage at 6% interest the holder of the mortgage was guaranteed $24,000 in interest payments.  Because this $200,000 mortgage was really worth $224,000 for the first 2 years they would offer to buy it for $215,000 from the bank.  The bank where you got your mortgage made $15,000, paying some of that out as a commission to your mortgage broker.  They also usually would agree to service the loan, meaning they would send out statements and collect the money on behalf of those who owned the mortgage.  If a loan had a longer pre-payment penalty the bank would get more money, if they sold it for a higher interest rate they would also get more money.  The more income they could show for the client the more they would sell the loan for.  The interest of the bank and mortgage broker was to get as much from the client as they could so that the resell value would be as high as possible.  A few banks even started to lie about some of the details to drive up the price.

Mortgages were sold almost instantly.  This allowed banks to generate mortgages as fast as they could.  It was a great deal, get someone to come in and fill out some paperwork, show that paperwork to the mortgage buyer, get the buyer to agree to fund the deal and then you close on the whole deal and walk away with huge profits.  Do this a few times a day and a little office with a handful of people can make millions per year.  And that is exactly what happened. The banks had every incentive to get you into a mortgage, and they would do whatever was needed to do so.  It was easy to get a loan, even if you had no money to put into the deal, they simply would do a 20% second mortgages, or even if you really had no income, you could just do a stated income loan.  People were buying houses who could not pay for them.  Their main plan to pay as little as they could each month, and refinance when that 2 years was up and they would have a ton of money due to the value of the house going up.  It was a great system that worked for millions of people.

All of this easy money was causing housing prices to sky rocket.   I live in Phoenix Arizona and between 2003 and 2006 prices for most of the city doubled, people were bidding against each other in attempts to get houses, simply because the house was a good investment.

Where was this money coming from?  Well as I said much of it came from people who got out of the stock market, and needed a new place to keep their money, a large chunk came from foreign companies.  Remember we are buying at least 700 billion dollars more of stuff each year than we export.  So many nations, China, India, Saudi Arabia have billions of dollars that they need to invest somewhere.  They want us to keep buying to they make it easy for Americans to buy things on credit, then we buy more and they sell more.  It is a great spiral that put America in huge debt while at the same time sending millions of jobs all over the world.  The is the greatest transfer of wealth in the history of the world, but more on this in another blog.

The Bust

In mid to late 2006 the prices started to get very high, and there were signs of problems.  Some of these no money down investors who bought on stated income loans started to not pay their mortgages and the prices were not going up fast enough to still leave the buyer of the loan with a profit.  The buyers of these loans started to change their guidelines on who they would give money to, they started to make it harder.  This was a sign to many investors to start to sell, and the number of houses for sale started to go up.

Some of the hottest housing markets were Southern Ca, Phoenix Az, Vegas Nv , Atlanta Ga, and Miami, Fl.  These markets saw some of the largest gains, they were all nice warm places to live and people have been moving here for decades.  But they also had something else in common, they were all major places where Illegal immigrants would flock.  In late 2006 and early 2007 there was a huge national debate about Illegal Immigration,  and many of those here illegally owned houses but decided to simply leave, they dumped their houses, many others just borrowed as much as they could and walked away.  And the prices in these markets started to fall.

Once prices started to fall it changed all the numbers for the banks and the buyers of the mortgages.  If you get that same loan for $200,000 the buyers have more risk now, they don’t have a security of the house itself because the value will likely be less than $200,000 if the customer defaults.  So they said that they would only take the best and most qualified borrowers.  No more stated income loans, no more loans to people with sub-prime credit.  Suddenly most Americans could not qualify to buy a house.   All of these people were pushed out of the market, demand for houses plummeted, and when demand goes down price is soon to follow.

To make matters worse some of the Sub-Prime loans started to default.  Many were from investors who were upside down on the loan, they borrowed in a corporate name so there was no ill effects to them to simply walk away and give the house to the bank.  So thousands of them did just that, it was smart for them to do so.  The people who used the system the most were mostly the smartest and best at it, and when things started to go down they were the first to get out.

Most of these banks only put a 1-3% budget in for losses and some are getting much higher losses than that.  These foreclosed houses had to be sold so the banks simply dumped them on the market.  But banks are not in the business of selling houses, and they do a very poor job of selling houses.  They are risk adverse so they only want buyers who they feel will actually close the deal.  For the most part they sell the house as-is.  They do nothing to make the house look good and nothing to try to sell it.  For most buyers, buying a REO (Real Estate Owned)(Bank Owned) house is not appealing.  People with good credit who can buy a nice house want that house to be ready, and come with a warranty.  So these houses sat on the market for a while and the only choice for the banks was to keep slashing prices.  This was the main cause for housing prices to plummet.  This caused even more people to realize that they are upside down on their house and more of them simply walked away.  From the middle of 2007 until now this process has been happening, and it keeps getting worse.

These banks then saw their stock start to melt down.  Imagine a company that has 250 billion in mortgages but they owe 200 billion in debt on those mortgages, lets call them Mega Bank.  It was great for them in the boom time, they borrow money at 3% and loan it out at 7%, making 4% on 200 billion dollars, or 8 billion per year.  They had every inventive to do this as much as they could.  This company would have a value of 50 billion dollars or so in book value, the stock market almost always prices your stock well above book value so the Market Cap (The total value of all stock of the company) may be 100 billion or so.  With earnings of 10 billion or so it would be at a Price to Earnings ratio of 10, something that wall street loves to buy.   This company would be a star.  Now what happens if there is a ton of risk in the mortgages that the company owns, the company figures out that 5% of their loans are defaulting, but for one loan that is a total loss it wipes out the profits from 10 other loans.  So their accountants do figure out on average how much are all of the loans that they company owns worth.  If that number is lower than what they currently value the loans at they restate the value of these loans and do a write down of these impaired assets.  If you have 250 billion of loans on the books your accountants may feel that they are only worth 200 billion.  50 billions dollars, on paper, just disappeared.  Some companies bought insurance for such a thing to happen, the largest company that sold such insurance was AIG, they have as much as 300 billion dollars of insurance losses out there that may be paid.   So if you are Mega Bank the value of your company just went down by 50 billion dollars, but in reality all the rest of your assets you owe so your stock crashes, your market cap is no longer 100 billion but maybe more like 10 billion, or even 1 billion.  Investors on the stock market don’t know what to do, all they know is that they can’t value your stock.

The Current Situation

At the start of 2008 there were 5 major investment banks in the US, and three banks acting as mortgage clearing houses.  These were the banks that were selling mortgages to investors.  The investment banks took most of their profits by keeping some of the most high risk and high profit mortgages for themselves.   4 of the 5 investment banks saw huge losses, and all three mortgage clearing houses saw major losses.  1 of them went out of business, Indy Mac, they simply took so many losses that they could not pay depositors any longer.  Freddie Mac and Fanny Mae lost almost all of their stock value and had to be propped up by the government to stay alive.

Of the 5 investment banks Bear Sterns was the first to fall, they went from a 100 billion dollar company one week to being bought out by JP Morgan Chase for only 1.1billion the next.  The next to fall was Lehman Brothers.  They lost billions in sub-prime mortgages.  Their book value was negative.  They has a lot of really good assets though and tried to sell to a bank in Korea, but it did not work and in September of 2008 their stock went almost to zero.  They declared bankruptcy On Sept 13th, and are being sold in pieces to different companies, stock holders will probably get nothing.  On the same day the third Investment, Merrill Lynch was purchased by Bank of America for $50 billion.  Bank of America stock fell 15% that day because investors thought that they had over paid.   That only left two Investment banks,  Goldman Sachs and Morgan Stanley.  On September 22nd 2008 these two bank, under new government requirements converted to traditional banks.

None of this was helped by the hedge funds, these are basically large pools of money that often bet that something will fail.  These hedge funds helped drive the price down of many of the companies I wrote about today.  But many hedge funds also lost money on the mess.

The government has decided that for the most part they are going to bail out many of these companies, they are also considering a new govenment agency that will, for a short while, buy up this bad debt for pennies of the dollar, allowing the banks to write off these losses and move on.

During this whole time it has gotten harder and harder to get a loan, basically unless you put 30% down, have perfect credit and tons of income you are not getting a loan.  The government put in a program to help some home buyers which helped out a bit.

Even with all of this going on our economy is still fairly sound.  Employment levels have only gone down a bit, and many other parts of our economy are still stable.

The Way Forward

I have always been a free market guy, I think that the system works best when there is freedom to be successful and freedom to fail.  The government is really taking the failure and greed of these companies and helping them out.  They are doing this to save the normal people and the economy as a whole and to fix our broken mortgage system.  The government, and our President have seen how large this problem is and that they only way to fix it is a huge government bail out, and I AGREE with them.  The bail out will put stability into the system, it will prop up all the banks, and it will resolve the credit crisis allowing money to start flowing again.  They are looking at up to 1.5 TRILLION dollars in loans, and buy outs.

I think that we need to do this, if we don’t our economy is sunk, but this is NOT a progam that I think will cost the taxpayer any money, in fact I think it will make our government the highest profits that we have ever made.  Think of it this way, they are not just giving money away, they are going to be buying mortgages at the low of the market, the current talk is to buy them for 50-60 cents on the dollar.  If they do that they will set a low in the market, these mortgages are still backed by the actual real estate and the economy will turn around.  So one of three things will happen to each of these mortgages.  They will either get forclosed on and the government will sell off the house, most houses are still valued at over 60% of the value of the mortgage so they will still make a bit of money.  Option two is that later on they may sell back the mortgage for a profit, maybe 70-80 cents on the dollar.  The last thing that will happen to some of these loans is that the home owner may sell or refinance the house, and the government will get 100% of the value of the house, basically doubling their money.  I think that if the government does this that they will make at least a 20% profit on the money.  They are talking about buying 700 billion in mortgages, making them about $150 billion.

For AIG they are giving them a 2 year loan for $75 billion.  In the termns of the loan the government gets a 11.25% return each year AND they get stock options where they can buy 80% of the company at a very low price.  The company was worth over $200 billion last year.  If it goes back up to even 100 billion the government will make almost 80 billion from their stock options, and still make about $17 billion from the interest on the loan.  This bail out could make the government almost 100 billion dollars.  The owners of AIG see how much they will loose if the Government loans them the money so they are still looking for other lenders to help them out.

Almost everything that they are doing is set up in such a way, this whole bail out system as a whole, will probably cost out government nothing and make us at least half a TRILLION dollars in the next 2-3 years.  This could wipe out our deficit and radically change our government balance sheet.   It is not enought to totally wipe out our deficit but it will reduce it a lot.  If the economy really picks up so will taxes and the government has a good chance of being in the positive.  Of course this positive change will not happen until 2009 and if a democrat wins as president will probably say that it was them that made this change and that they are the reason that the government is suddenly so profitable, but we know the truth.

On a side note the President does very little to effect the economy.  Most of what is done is done by congress or the treasury department.  Also anything that the president does do takes 2-3 years before it really goes into effect.  Such as the losses in 2000 were not caused by Bush, he just took office.  All I know is that I would never vote for someone who thinks that raising taxes in a time like this is a good idea.

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