My Good Friend Burdett Streeter said it very well in one of his very recent articles:

From the Desk of:
Burdett Streeter, CFP, CEP, CPhD, MCEP (ret)
(10-01-2008)
Melt Down on Wall Street …. How did we get here? The real story is not what you have been hearing. Herein are some of the salient events and facts that tell the real story and identify the primary culprits who added and abetted to create this current disaster. “This story is an example of perception (run amuck) v.s. reality”.

There is an old, but true saying that Thomas Jefferson and others warned about. It goes like this; “Perception is more powerful than reality. Keep telling a lie and eventually people will believe it.”

Will Rogers said; “You can be on the right track but if you’re not moving in the right direction you can still get run over.” Now, with these two concepts sited let me share some timely input.

Contrary to the majority publicized stories, President George W. Bush was NOT the primary source of this credit and lending problem. There are many things that the Bush administration has mismanaged, but this current credit problem is not one of them.

Here are salient events and facts that primarily contributed to our melt-down;

1 President Jimmy Carter signed into law the Community Reinvestment Act, which allowed Freddie-Mac to expand their funds to lenders making loans to low income applicants. This was in aligns with his Habitat for Humanity thinking.

2 President Clinton, expanded Carter’s original bill with the passage of the Senate’s new banking provisions.

3 By 2001 lenders were now expanding their Sub Prime Mortgage loans to questionable applicants. Few lenders keep their own mortgages, as it restricts their new lending ability so, they regularly sell their loans to other institutions and that is where additional abuses take place.

4 Now enters ACORN (Association of Community Organizations of Reform Now), which sues lenders in Illinois and forces lenders around the US to issue the NINJA loans. (No Income, No Job, and no Asset verification loan). Those in the know, refer to Presidential candidate Barack Hussein Obama as “an organizer” because it was he who orchestrated the intimidation efforts perpetrated by ACORN.

5 On Sept. 10th 2003 Mr. Snow made a speech to Congress suggesting that Fannie and Freddie need more oversight and regulation. Republicans attempt to raise the concerns of Freddie and Fanny but ran into a wall of resistance as demonstrated by Barney Frank, (Dem) and head of the banking committee, during a televised broadcast, whereby he strongly opposes any actions that would interfere and restrict these institutions. Later it’s learned that Senators Frank, Dodd and Obama were the largest recipient of campaign funds from Freddie and Fanny.

6 During 2005 President Bush and his administration pushes for a reform bill that again addresses concerns of the two firms (Freddie and Fanny). When asked about the concerns of these two institutions, Charlie Schumer (Dem), states in his speech on April, 7th 2005 that “things are all good with Fanny and Freddie”. As a result of these inaccurate claims ….100% of the Democrats voted to kill this bill while 100% of Republicans voted to approve it. The Bill does not pass…. And the NINJA loans roll on.

7 During these years (2001-2008) the lenders are making and then selling these faulty loans to other buyers. Wall Street makes money re-packaging these loans to domestic and foreign buyers and eventually these overvalued securities end up in the hands of some of largest institutions as well as many foreign institutions.

8 During recent years Fanny and Freddie begin to feel the effects of all the bad loans and start “cooking the books”. They do this because if they properly value these assets then the law (called Mark-to-Market) requires them to revalue these securities down to zero (0)! Top management is directly at fault because they knowingly mis-valued these assets so as to continue to receive the outrageous bonuses that are paid for these loan assets.

Now things get interesting and a bit more complicated. During these last few years gas prices sky rocket; causing a strain on the low income homeowners, which cause the first wave of the housing defaults. Then we have the largest real estate devaluation in decades which causes the second wave of housing defaults. Remember too, that most of the homeowners that were given these NINJA and subprime loans have little or no money at risk so they easily walk away from their mortgages having nothing vested in the real estate. This problem is epitomized when the Governor’s office of Colorado recently disclosed that they have over 10,000 mortgage defaults …… which all were given to illegal aliens! “No wonder they want to move to the USA … free medical, free income, free food and other services …. and lately …. NINJA lending!!”

In 2008 everything comes to a head! During this year the first of the big institutions begin to fall, like CountryWide. Then there were Bear Sterns, Indy Bank, then Freddie and Fanny were taken over by the Federal Reserve Bank (a private institution). Following these there were Merrill Lynch, Lehman Brothers, then AIG, Morgan Stanley and others. These are all core institutions that have for decades represented stability and financial strength. With Americans and foreign investor’s confidence badly shaken people begin to remove their money from these and similar institutions which add to the credit shortage and the stock market spiral.

“REMEMBER, THAT WHICH PEOPLE ARDENTLY BELIEVE IN,
WILL OCCUR AS A SELF-PROVING PROPHESY.”

Keep in mind how we got here …… Government stepping into the free enterprise system to encourage, then forcing banks and lending institutions to lend more, lend often and lend to anyone, ignoring sound business practices. Now, we are to believe that same Senators (Government) are going to fix the problem by even more involvement and allow the 700 billion dollar package to be managed by the same bureaucrats and the same CEOs who didn’t want to fix the problem in the first place because, they were all getting rich from the salaries, bonuses and the kick backs. “Can’t wait. Socialism here we come!”

Some final thoughts before my recommendations: The Federal Reserve bank months ago released billions into the credit markets to ease the credit crunch but it takes several months for these funds to trickle down to the public lenders. Hopefully these actions and others to follow will ease the credit restrictions, which in my opinion is the worst problem of the above mentioned real causes. The big question on everyone’s mind now is …. Will the bail-out package solve our credit, financial and market problems?

Eventually the Market will rebound and eventually banking (as we need it) will recover. Question is; when. I believe that the recovery will not be as quick as we have experienced in prior decades. It is important to note also that, the US has experienced this same financial/credit crisis six (6) times before, following the civil war. History does repeat itself and yet we continue to ignore it … and thus are bound to re-live it!

For those of my friends and clients who took my advice and got out of the equities market two months ago you may want to consider picking up some great buys that will present themselves now that the market has pulled back. But, be cautious, as I believe the down hill slide is not over. For those that rode the coaster down hill, using dollar-cost-averaging techniques will help you to recover your losses faster as the market recovers.

For real estate investors; homeowners are still selling in record numbers or have already been abandoned their homes leaving lots of inventory to choose from. Consequently, rents will rise and 2-3 bedroom rental units will be in demand. With new government programs on the horizon and the Federal Reserve likely to cut interest rates once again, long term homeowners/buyers will have some great opportunities to buy in this market, but keep in mind that those with good credit scores will be the big winners. Bone up on your credit score improvement knowledge now and take the appropriate actions to enhance it.

Regarding the political landscape: forget for a moment whether you are Independent, Libertarian, Republican or Democrat or whether you’re Liberal or Conservative minded and focus for just a moment on the following tangible geo-economical and historical observations; (i) the further we get from our country’s fundamental financial, political and spiritual principals … the worse off we will become as a nation, and (ii) when you add gasoline to a fire you get a bigger fire, and (iii) study the components which led to the fall of Rome and the fall of Russia. Now, you figure out the meaning of this riddle. And vote wisely.

Some buying and investing and tax planning considerations:

For your ultra to generally safe money – there are always the usual options i.e. Govt. T-Bills and Notes, Money Market Funds, Certificate of Deposits, Guaranteed Investment Contracts, etc. However, you have to pay attention to the financial ratings of your chosen institutions. One source to do that is www.bankrate.com , which provides lots of useful information.

Don’t overlook the many excellent fixed, variable and indexed annuity products that can offer better that competing market rates as well as many unique features and guarantees that other safe-money or investment options cannot offer.

For Real Estate – you can take advantage of this current RE market in several ways. If you want diversification and limited marketability, you may want to consider the many REITS (Real Estate Investment Trusts) that provide very competitive current returns and can provide a stable and diverse portfolio of asset mix. Pay attention to the management, the current mix of holdings, the amount of leverage used or allowed and the track record.

For the entrepreneur, there are great buying opportunities in almost every RE sector around the country. Again, buyers with excellent credit are in the best position to negotiate for the current deals with banks and sellers. Pay attention to the areas you know best and always beware of partnership structures which add another substantial element of risk to your transaction. I refer this as the “People Factor”.

“REMEMBER, THERE ARE TWO TYPES OF PEOPLE YOU WILL MEET …. ONE HAS CHARACTER …. THE OTHER IS A CHARACTER … BEWARE OF THE LATER”

My experience concludes that 8 out of 10 partnerships are not structured properly or provide insufficient accountability of the General Partner. Rentals are still good buys for long term income holds if you can find them without the seller wanting to price them as a condo conversion.

Trust Deeds – TDs can be great income assets however, I have a BIG warning. Never buy trust deeds through a partnership or syndicated structure. I have observed over numerous years that even the big money deals have a high degree failure rate. There are many reasons for this and too many to list them now. If you want to buy trust deeds make sure you (i) own it outright, (ii) properly value the property, (iii) never loan on values greater than 60% (unless special circumstances may dictate otherwise) and (iv) whenever possible, always perfect additional personal guarantees and/or collateral. Lenders right now are in the driver’s seat so you can pretty much dictate your terms.

Stock Markets – Buy low and sell high …. of course that’s the goal. But don’t feel bad if you didn’t get out 60 days ago, you’re in good company with many experts. For those of you that rode the market down ~30% already this year, again, you may want to examine dollar-cost averaging to aid in a faster recovery. For those that are waiting to buy back in pay close attention to your chosen sector indicators and or your company picks because this market could either linger for months or it could begin its rebound prior to year-end. In any case, unless you are a short term trader you should consider these markets as a long term hold (10-20 years).

For the philanthropic investor – you may want to consider looking into a church bond pool that has a proven track record. The two I like are yielding about a 6% annual rate and pays dividends quarterly. In today’s low interest rate environment that’s a competitive yield.

Tax Planning – Be prepared !! If you need to do some tax planning, now is the time to meet with your CPA and CFP to plan ahead. Some of you may have already missed some opportunities as some of your retirement options just expired on October 1st. If taxes go up next year with a certain new President and Congress what you do now to plan ahead could make a huge difference in your bottom line both this year and the next few years …... don’t delay.

Estate Planning – Here again, 2010 is just around the corner and for those of you who have not updated your estate planning in the last few years now is the time to do so. This is especially true for those that want a current Health Care Power document. Make sure yours contains the corrective provisions to offset the draconian provisions of HIPPA.

Well, that’s all for now …. my computer monitor has given me a 5 minute warning!

“God bless America.”