2008 october mike on markets by karen bosso

Mike on the Markets Vol 2 - Iss 2

Oc t-Nov 2008

The Meltdown When our son lets his blood sugar drop too low and to our congressman I used a different analogy: Tryhe‘s behaving in that certain way that makes us want ing to solve an addict‘s problem by providing his to kill him, we affectionately say he‘s ―having a meltdrug of choice (see p. 2). down.‖ When the boy was small and didn‘t Just as I‘m sure our son will grow into a know any better, it was easier to forgive fine young man, I feel sure the economy this ―bad‖ behavior. But as he got older, will recover. Someday. Meanwhile, it‘s and should‘ve known better about how to just hard to watch. keep himself in balance, it got much harder It‘s been several months since the last to be patient with him when he was lying newsletter came out. The markets were in a puddle on the floor. so mushy over the summer, I didn‘t feel I see parallels there to what‘s happening there was much to say; now I find I can‘t in the markets. It‘s not as if the American shut up! While I‘d love it if you just economy hasn‘t suffered meltdowns in the dove in headfirst, read it from cover to past—mostly from the same causes. We cover, and gave it to all your friends, should‘ve learned. Sure, when our son that‘s a lot to ask. Just read a little bit starts to get shaky, human compassion says every day; even I can only take me in he gets a shot of Pepsi to bail him out in small doses. the short term. But then he needs real food You won‘t find as much as usual and a real plan so he doesn‘t keep harming about specific investments in this issue. himself. He also needs interim parental What I hope you will find is useful inforoversight so his issues don‘t keep becommation which I believe alleviates anxiety. ing an issue for the entire family. Sound But perhaps most importantly, I hope Tempting... familiar? you‘ll find some perspective. And oh, Throwing big dollars and new debt at a yeah, humor too. Where would we be if crisis like our economy is facing is like the aforemenwe couldn‘t laugh? Laughter‘s just like what tioned Pepsi— a quick, dirty, short term solution. they kept telling us about the bailout: It‘s betWith our son, we call it gasoline on a fire. In a letter ter than the alternative!

2

Congress Falls Short of Low Expectations headline seen on The Motley Fool website ―Establishment of the policies and procedures and other similar administrative requirements imposed on the Secretary by this Act are not intended to delay the commencement of the TARP.”

Which could mean: A) Don‘t be lettin‘ any old rules slow you down, –or— B) spend it quick before: 1) any rules do get imposed, —or— 2) the next Secretary of the Treasury gets to touch it….

ROLL CALL OREGON

Democrat Blumenauer, N; DeFazio, N; Hooley, Y; Wu, Y. Wyden, N Republican Smith, Y Walden, Y.

Senate Amendment 5685 to House Resolution 1424

Democrat Cantwell, N Baird, Y, Dicks, Y Inslee, N; Larsen, Y McDermott, N Murray, N Smith, Y.

Republican Hastings, N; McMorris-Rodgers, N Reichert, N.

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5 6 7 8 9 10 12

How they voted on the bailout bill

WASHINGTON

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NEVADA

Democrat Berkley, Y. Reid, Y Republican Ensign, Y Heller, N Porter, Y

Mike Bosso Financial Advisor

FBR Wealth Management One Lincoln ~ Ste. 375 10300 Greenburg Road Portland, OR 97223 Office 503-595-1662 Toll Free 877-421-9991 Fax 503-595-1666 Cell 971-212-9464

Inside Credit junkies, Relax and Unwind What I’d say if you called Jackson veto, name’s bond, cd bond index linked CD’s FDIC Insurance change caveman theory And mad dow disease Trick or treat? R.I.P. B.O.L. corner Portfolio Rx Caving in; it beggars…; So easy….

Just for fun trading card-JP Morgan History of banking

MINNESOTA Democrat Ellison, Y Klobuchar, Y McCollum, Y Oberstar, Y Peterson, N Walz, N.

Republican Bachmann, N Coleman, Y Kline, Y Ramstad, Y

NATIONAL Democrat Obama, Y Republican McCain, Y

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Credit Junkies…and Mike’s Real Plan to Save the Economy This is the letter I sent to my Congressman. Including Relax and Unwind below.

Hey, My Guy didn’t vote for it...☺ Spending all day long watching the congressional hearings on the Paulson Plan is like being on the outside of an intervention meeting for a credit junkie. The overwhelming reason we‘re bailing out the US banking system, and make no mistake, because that‘s what we‘re doing, is they‘re tapped out and can‘t keep up with their obligations. In terms we can understand, their ―credit cards‖ are over-limit.

When I hear scare tactics like ―the alternative to spending $700 Billion is much worse‖ or ―credit is the lifeblood of our nation and the circulatory system isn‘t working,‖ it‘s a lot like hearing an addict beg for money from someone who highly suspects it will just be dumped into drugs, alcohol, or slot machines.

Further, buying this so-called ―toxic‖ debt which banks have on their balance sheets, is like taking an IOU from that addict. Maybe he‘ll pay you someday. Maybe he‘ll repay it $50 here, $20 there until the addict has nothing left to pay with. And when the $700 Billion is gone, and the now reinforced addiction is still present, he will be back for more. This, at least, could be the perception of the American Taxpayer, Mr. Main Street, the ―guy on the couch.‖ I don‘t want to see a recession. I certainly don‘t want to see a depression. But you know what? I really don‘t want to see my children, and their children paying for the sins of their fathers. In so many ways, it would be better to take the crushing blow now so we can rebuild.

How can I say this? Any financial advisor worth his salt avoids recommending bankruptcy at almost any cost. However, if we were to think of the current financial system the same way we look at individuals or small businesses, we probably would tell them—albeit sadly and gently—that…it…is…time. The banks probably have some assets of value. But those assets are worth less than what is owed and the banks don‘t have the cash flow to service debt and expenses. That is essentially the crux of the problem.

The financial industry asked for a $700 billion gift from the taxpayer—asked us to take one for the team. Realizing the gravity of the situation, and wanting to help, Congress asked, ―Why can‘t we loan the money and take an equity position for first payback of assets which might prove viable.‖ But loaning money to the banking system would just exacerbate the whole mess--unless and until the underlying problem of national debt addiction is fixed. More debt, more interest payments, less cash flow, and lower net worth isn‘t going to solve anything.

You can‘t borrow your way out of debt.

So the American Taxpayer is being asked to buy the ―toxic‖ debt from the banks that issued it. To be crystal clear: We‘d be taking the banks‘ debts and applying them to our own

balance sheets. We are being asked to swallow the poison, absorb it into our system, and hope we survive. We are being told that we might make a profit when all is said and done. But if that is true, then why isn‘t it already being purchased left and right by groups not subject to short term profit goals? Groups like University Trusts, Government Pension Plans, International Sovereign funds, etc., who can afford a good long wait for their profits? The reason is pretty straightforward: It may not ever have any value.

There are always two sides to a story.

Where there‘s an addict, there‘s typically an enabler. During the boom years, most advisors recommended investments and investors accepted their profits without questioning exactly where it all came from. Continuing the analogy, not knowing the source or ultimate effect of the problem doesn‘t miraculously excuse the victims of it. As much as I hate to say it, from that perspective, we all share in the responsibility for this mess. In the last year or so we‘ve seen portfolio values drop, on national average, about 25 percent. Haven‘t average investors already paid back their share?

I wish I had the solution.

Wait, maybe I do…

One thought would be to take the money being asked for and actually creating a Social Security net with a tighter, finer mesh. Because when this all unwinds, a lot of folks are going to need someplace to fall. It would take only a fraction of those $700 billion dollars to create a more privatized system of Social Security invested in the growth of solid American businesses, nothing too tricky. Stock-issuing businesses of a predetermined size, shape, flavor.

Ones with a greater than average likelihood of long-term success. A system where the money managers are yes, remunerated according to how well their investments perform, but with an ultimate cap on personal compensation of say, $500,000 or even $1 million. It‘s a big job and we want to attract professionals with the skills and motivation to run it. In other words, create a viable system with abuse preventions built right in before it‘s allowed to run amok.

I don‘t believe that an idea like this is some new evil brand of socialism. Including the employer‘s contribution, we already contribute (not by choice, I might add) 15% of our production to a ―program‖ which is essentially no more than a mandate anyway. There is no Social Security fund. There is no plan to keep Social Security alive and ticking over time. Our 15% goes into the general coffers and is paid out as needed. The Boomer Gen. will be making huge withdrawals—no way around it—

leaving anyone under 50-60 yrs. of age today paying and paying with less and less hope of collecting.

In the spirit of taking responsibility and at the risk of talking myself out of a job, maybe we increase private SSA contribution percentages to 10 and 10, safer in the knowledge that Social Security investors would get exposure to capitalist markets. Note the difference in terminology: Social Security Investors rather than recipients. Has a nicer ring, don‘t you think?

People who want a better retirement can always choose to invest more on their own with people like me. Just like they do now if they‘re looking for something beyond the ordinary. No matter how it shakes out, it sounds more like a Win-Win-WIN scenario than the current selfbankrupting Social Security system with an added payback of $700 billion in debt on top of it.

If we allow this plan to pass, the American people are taking IOU‘s from credit junkies promising to try rehab—next week. It‘s time for a little tough love.

Relax and Unwind [ed. note: This article has been revised since I sent it as an addendum to my congressman— hey, they do it!]

So what exactly will happen if the system is allowed to unwind on its own? What are the underlying fears? Aside from the ―credit will be tighter‖ mantra we keep hearing? Well, it‘s anybody‘s guess and I have my suspicions there‘s plenty we don‘t know about, because those in the know aren‘t talking about it. Yet. But logically, based on past crises and how the Federal Reserve operates within our economic system, this is what we could expect to happen. [ed. note: This was written before the failures and it‘s just what did happen].

Let‘s say that ABC Bank, is allowed to fail over the weekend. The average Depositor might feel panicked, but he doesn‘t need to. If he feels it‘s worth taking off work Monday morning, he could line up C ONTINUED ON P. 11

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What I would tell you if you called IT’S BEEN A LONG YEAR and an even longer summer for anyone who had money in the stock market. Even for those who didn’t, the news reports alone are brain-numbing.

What follows is a recap. or composite of conversations I’ve had here lately with some of my clients.

What to Do Next first, know thyself.

f you are going to need your money within the next year, keep your investments short term, low risk, and moderately liquid: Short term CDs, Money Markets, and basic cash holdings. Volatility will eat you alive if you try to find a ―safe‖ investment vehicle in this market.

If you‘re more in the 5 or 10 year range, and it‘s the rare individual who truly is not, we may soon be looking at one of the greatest buying opportunities Where We’re At since the S&L crisis of the ‗80s and ‗90s. & it’s not too pretty.

I‘m not saying the markets won‘t go down farther, because they very well may. The economy n old saw tells us the most dangerous words in investing are, ―but this time it‘s really does have a boatload of problems right now, different.‖ My regular readers have seen it in (probably all of) my newsletters. I was and we probably haven‘t even scratched the surface. wrong. And since I hate that word as much as my nine-year old does, I‘m going If you stop to think about it, most people pay their on record as saying I was only partially wrong! I‘m also as good at justification as mortgage before they pay their car loans, visa cards, my 16 yr. old. cable bills, etc… but what we‘re hearing is all about The basic mechanics of economics (correlations—see my last newsletter for more) are mortgage defaults. What‘s the status of all of the working as they should, as they always have; it‘s a type of physics other deb t out there? after all. Production is still production and a stock is still a stock.

Hmmmm….

What‘s not working are some of the formerly time-honored Today you can buy GE for We may soon be techniques I would‘ve used last year (or this last summer even) if under $18 a share, Citigroup for faced with this kind of a market. Right now, value investing and looking at one of the under $13. Bank of America is momentum investing just aren‘t working. Buying on market dips is becoming a juggernaut of financial greatest buying working just fantastically if you‘re willing to sell the market pop services as they scoop up instituthat happens 10 minutes later, before it drops again 15 minutes opportunities since the tion after institution, but is tradafter that (deep breathing helps). Diversification isn‘t working ing at less than half their all time since nearly every market segment is down significantly. Interna‘80s and ‘90s. high. Boeing has over five years tional investing is as bad or worse than the US—global economy of backlogged orders, but has lost and all that. Cash isn‘t working since money market rates are low over 50% of their value in the last and inflation is eating away purchasing power faster than it has in years. Anyone who‘s esyear. Apple, Microsoft, Intel, BHP Billiton, Target, poused buy-and-hold lately knows where that has gotten them (also see last newsletter).

Safeway, and many more companies you would have Do we need to discuss the current real estate market? paid a premium to own a year ago are now at exSure, similarities to prior crises exist. But this time, government intervention is not altremely low valuations. Sure, they might have a lowing free-market forces to do their job, which is why I say we‘re in uncharted territory. ways yet to fall, but eventually, they‘re likely to go By placing an ―artificial floor‖ under the price of securities (or houses, or bonds, etc.) much higher. It just might take five years. they‘re effectively boarding up the door to the bargain basement. Prices don‘t fall to where If we were talking on the phone, I‘d say, ‖It‘s they should, which is to the point where value investors and private money would jump more important now than ever to know what you heavily into the game and cause a rebound. And by picking and choosing which companies to want and where you want to be with what portions rescue, they create a whole new level of uncertainty. For example, who wants to buy Citi{CONTINUED ON PAGE 11} bank if they could wake up tomorrow and discover it was ―given away for cheap‖ to a Bank of America or a J.P. Morgan.

I

A

“Experience

should teach us wisdom.

Most of the difficulties our Government now encounters and

most of the dangers which impend over our Union have sprung from an abandonment of the legitimate objects of Government by our national legislation, and the adoption of such principles as are embodied in this act. Many of our rich men have not been content with equal protection and equal benefits, but have besought us to make them richer by act of Congress. By attempting to gratify their desires we have in the results of our legislation arrayed section against section, interest against interest, and man against man, in a fearful commotion which threatens to shake the foundations of our Union. It is time to pause in our career to review our principles, and if possible revive that devoted patriotism and spirit of compromise which distinguished the sages of the Revolution and the fathers of our Union. If we can not at once, in justice to interests vested under improvident legislation, make our Government what it ought to be, we can at least take a stand against all new grants of monopolies and exclusive privileges, against any prostitution of our Government to the advancement of the few at the expense of the many, and in favor of compromise and gradual reform in our code of laws and system of political economy.”

excerpted from: President Jackson's Veto Message Regarding the Bank of the United States; July 10, 1832. http://avalon.law.yale.edu/19th_century/ajveto01.asp

©

Images from: The syndicated cartoons The Flintstones and Captain Caveman, and the movies 10,000 B.C. and Ice Age 2: The Meltdown are the property of Warner Bros. Pictures. All other images are believed to be in the public domain.

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The Name’s Bond. CD Bond.

I‘ve been calling clients recently about some high yield brokerage CD‘s and many of you have taken advantage of them. They‘re slightly different from bank CD‘s and here are some things you should know.

First and foremost: Every Brokerage CD trades like a bond, a bond that in most cases has FDIC Insurance, but a bond nevertheless. You‘re loaning the

Understanding an important part of your statement

Brokerage CD/Bond-issuer your money, for a preset pedemption, they just don‘t promise to return full riod of time, in exchange for a preset amount of money to face value until maturity. So when your statebe paid back to you while they‘re using it. Or when ment shows a current market value which is they‘re done with it. Or however they said they‘d pay usually less than face value, you could call that you. The money you get from them is called the the ―penalty‖ for early redempyield or the coupon or the interest. Whatever You still get tion if you choose to do so. The they feel like calling it that day. Banks like interreality, however, is that the est. Bond guys still like coupon. Brokers like full face value value on your statement is the yield. Don‘t ask... amount someone would be willof the CD Bank CDs do not trade on the open market; to buy the CD from you at at maturity. ing their face value always remains the same. So the date the statement was when you open your bank statement that‘s what you see-printed if you chose to sell it before maturity. full face value--- $5000, $20,000, whatever. And we all This is not necessarily a bad thing as long as you know about the penalty banks charge for early redemption. are being paid a higher yield than an average You can‘t have the full amount including interest prior to CD, or you are not planning on selling the CD maturity no matter how nicely you ask. prior to maturity.

Brokerage CD‘s do trade on the open market; their face Your statement is just being picky enough to value fluctuates. So when you open your brokerage statetell you what your account was exactly worth ment that‘s what you see---current market value. Broon the day it was cut kerages don‘t charge a penalty, per se, for early reNow here‘s the upside: Because of way this works, it‘s theoretically possible that someday COUPON you could open your statement and see your The interest or yield on a bond is sometimes called the brokerage CD was actually worth more at the “coupon” because back in the day, you actually tore a moment the statement was cut. Demand on coupon off your bond to collect your interest payments. the secondary market was high enough for that Just like those lawn mowing notices at the grocery store!

CD that investors were willing to pay greater than face value for it. Meaning that, yes, you could choose to sell it at a profit, if someone was still willing to buy it.



real advice—index linked CD’s I‘ve complained, whined, griped and preached enough elsewhere in this issue. Now here‘s some solid advice. If you can stash some money away and basically ignore it for 5 to 7 years, now is a phenomenal time to pick up some index linked CD‘s. Why? Isn‘t the market a miserable place to be right now? Isn‘t it just as dangerous this month as it was last? Yes, but as I‘ve also said many times in this issue---markets recover. And if it doesn‘t recover, unlike other common investment vehicles, an index linked CD guarantees return of your principal upon maturity. If the markets rise you make money; if they don‘t, you break even. How fantastic is that?

Although I think I have written about index linked CD‘s in every newsletter since the incep-

tion of Mike on the Markets, here is a brief refresher. These are Brokerage CD‘s (see The Name’s Bond above) with returns linked in some way to stocks. For instance, they could follow: an underlying index such as the S&P 500, or currency, or even commodities. ―Returns‖ means the average gains in that group of stocks over the life of your CD. Some of these CD‘s offer a guaranteed minimum return, others do not, but at bare minimum, all guarantee return of your original investment. Even if the market is down at maturity. And being CD‘s, they‘re also FDIC insured.

One of their main differences from bank CDs is that these do not pay anything until maturity--until that date they fluctuate with whatever stocks they follow. So generally, redeeming them early

is not beneficial. Buy-and Ignore is usually the order of the day for this investment. There‘s always exceptions—see above article for more.

These are a structured investment, I recommend you read about them before buying one, but it is their structured nature which lets them fulfill kind of the best of both worlds. These CDs have been a good way for many of my clients to maintain cautious market exposure over the last six mo. to one year and meet diversification needs.

Like regular CDs they fall under the category of cash and cash equivalents. If you don‘t already have these in your portfolio, they‘re worth looking into. Solid investments for unsure times.

For more Reading :: http://www.sec.gov/answers/equitylinkedcds.htm - or- http://www.structuredinvestments.com/index.cfm?fa=indInvestor.main

New Deposit Insurance Limits Congress has temporarily increased FDIC deposit insurance from $100,000 to $250,000 per depositor through December 31, 2009. Changes have also been made to other account types. For more info. visit: http://www.fdic.gov/ news/news/financial/2008/fil08102a.html [accessed oct 21, 2008] Taken from the FDIC web link referenced above. Much, much more info. can be found there. “On January 1, 2010, the standard coverage limit will return to $100,000 for all deposit categories except IRAs and Certain Retirement Accounts, which will continue to be insured up to $250,000 per owner. If you have questions about FDIC coverage limits and requirements, visit www.myFDICinsurance.gov, call toll-free 1-877-ASK-FDIC or ask a representative at your bank.” [ ed. Note: for your brokerage CD’s—call Mike]

Plain English If you buy an Index-Linked CD, any amount over $100,000 will not be covered after the end of next year. Please see the disclaimer at the bottom of p. 9 and disclosure on p. 10.

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Caveman Theory and Mad Dow Disease A strange infection that has been building for years is bringing hale and venerable institutions to their knees.

Some are so sick, the government is embarking on a program of selective euthanization to keep the menace from spreading to the general population. Tune in at eleven for more on: Mad-Dow-Disease.

In trying to find a framework to help explain what‘s going on in the markets, I tried ―The Extinct Bull‖ in memory of Merrill Lynch, or ―Lehman on Me When You‘re Not Strong‖ or perhaps ―The End of an AIG‖ (say: age). I really liked, ―Freddie‘s Fannie Uncovered,‖ but it just didn‘t click for me quite like the Caveman Theory. You won‘t find it in the popular money magazines yet, because I just made it up. I was sitting at my desk (OK, on the couch) trying to figure out how in the world we got to this point and it just came to me--my first named theory. Goes something like this….

Every caveman who wants to survive learns how to hunt and bring home the bacon to his tribe. If he‘s still alive after a few years, chances are he‘s learned the law of the food chain: You‘re better off stalking the game that‘s least likely to turn on you. The greedy caveman on the other hand, actively seeks the biggest, gnarliest, woolliest mammoths he can find. He might even be hailed a hero while he‘s bringing home so much meat, but eventually he‘s gonna get squashed.

Now you might say, ―Mike, what‘s your point?‖ and I wouldn‘t blame you one bit.

Here‘s the connection: Many of our greatest financial minds and institutions acted like greedy cavemen and got squashed under a mammoth amount of leverage and debt.

Too simplistic? Carry the analogy further by looking at saber-toothed tigers. A caveman probably felt he‘d really arrived when the largest tiger tooth on the block was hanging on the wall of his cave Yet in order to get that tooth, he needed to take the incredible life or death risk of hunting an animal that was stronger and faster than him, possibly hungrier. Over the last few years, most of America was looking to grab that tooth. From homeowners that wanted bigger and better houses than their neighbors, to house flippers that wanted to turn larger profits than their fellow flippers, to mortgage lenders that wanted to have larger companies than their competitors, all the way to Government Sponsored Enterprises (Fannie Mae/Freddie Mac) that wanted to show bigger increases in home ownership than their predecessors. But look at what happened: Foreclosures at a record high, flippers still trying to unload houses at a loss, lenders out of business completely, and GSE‘s taken over by the American Taxpayer.

This is classic chicken-and-egg. Whether it‘s the sharp tooth of greed or mammoth overreaching that comes first doesn‘t matter: One lays us flat and the other one bites us in the b*tt. Every time.

Party like it’s 1999 But let‘s not forget another animal in our prehistoric ecosystem: Those funny little, dare I say, parasitic birdlike creatures hitching a ride on the shoulders of the lumbering giants. I‘m referring to the Business of Politics and so-called special interests. According to the Center for Responsive Politics, since 1998, the GSE‘s (Fannie and Freddie) collectively spent $ 174.4 million on Congressional lobbying. The National Association of Realtors (NAR) spent almost $108 million. From 1989 through 2008, Freddie spent an additional $9.8 million and the NAR a whopping $33.3 million in campaign contributions1. To be fair, it‘s impossible to know what topics were furthered by what dollars given to exactly which legislators. It merely paints a picture.

I have a NY Times article from 1999 predicting exactly the fallout we‘re seeing right now from a politically motivated policy of promoting homeownership through increased GSE subprime lending2. The writing was on the cave wall, so to speak. In a round of other NY Times articles published this month, a much clearer picture emerges of the pressure Fannie and Freddie faced from Congress, regulators, and competitors to purchase/insure more and more of these increasingly riskier loans.3 Only this time it‘s chicken-andegg-and-chicken: Politics says it‘s prudent to increase home ownership---Industry is only too happy to oblige ----Govt. says, Red-billed Oxpecker ―Home prices are up, (Buphagus erythrorhynchus) we‘re not doing also called Tickbird enoug h,‖----Wall Street competition enters the fray----Govt. says, ―Keep on buying Fannie, we‘ve got your back‖---Freddie frets, ―But we don‘t want what‘s left.‖---Market chokes out, ―Wait a tic…‖----Fed whispers, ―Just hold onto it and don’t go askin’ too many questions‖----Wall Street cringes, ―Wait for it….waaaiiittt for it…..‖----Uncle Hank says, ―Here we come to save the day!‖----Wall Street says, ―Yaah baby‖----Main Street says, ―Wha‘ happen?‖----Everyone points in two different directions and says, ―It‘s his fault.‖ That‘s it in a real nutshell.

Very important point here: I‘m not trying to make out evil empires or point the finger of blame. I believe the only good reason to look at the past is to prevent us from making the same

mistakes again and I believe that blame is about finding fault rather than solutions. Drawing together themes from other articles in this newsletter: This current crisis may be a real beast which has mutated into a different breed, but its root causes are the same as in previous crises: Relatively narrow industry sectors (typically real estate and finance which go hand in hand) bubbling out of all reasonable proportion, creating unsustainable market highs, which then fall back to reality and eventually recover. It happened in the 1870s and –‘90s, it happened in the 1930s, it happened in the early ‗70s, ‗80s, and ‗90s, and in the 2001 dotcom/tech. boom and bust. (See p. 12 to understand it‘s been going on ever since mankind gave up the barter system) Unfortunately, a lot of innocent investors get sucked down the drain if their advisors don‘t understand these things and work like crazy to get them out of the tub when it‘s time to dry off and think things over.

The Last Caveman and the dawning of the age…

Like other mass extinctions, this financial meltdown should help kill-off some of the foolish cavemen or at least put them in cold storage so they can‘t cause any more harm. Wall Street as we‘ve known it of late is in its death throes. Because the greed gene is a dominant one, we will probably see genetic throwbacks in the future, but we‘ll be more prepared. At the risk of sending strains of Aquarius running through your head (oh--helllp), I‘d like to think a new and more enlightened Wall Street will emerge from the wreckage caused by these cavemen and their clubs (pun intended).

I‘m hoping intelligent oversight insures that greedy cavemen never return to hunt things too large or too fast to control. I‘m hoping this new breed will tell campfire stories to their cavekids about how every reward equates to risk and what happens when you overreach. Then maybe we can keep this Mad Dow Disease from ever getting a foothold again.

It‘s my theory and I‘m sticking to it. Thoughts? http://www.opensecrets.org/influence/index.php http://query.nytimes.com/gst/fullpage.html? res=9C0DE7DB153EF933A0575AC0A96F958260 3http://topics.nytimes.com/top/news/ business/series/the_reckoning/ index.html 1 2

5

Trick? or Treat?

Bear Stearns 1923-2008

Fortune Magazine’s Most Admired Securities Firm 2005-2007 Sold to JP Morgan Chase.

Washington Mutual

Hope you had a Happy Hallowe’en!

Countrywide Financial 1969-2008 Once the largest Mortgage company in America. Through 2007 returned investors over 23,000% since 1969. Sold to Bank of America for around $5.50 per share.

AIG 1919-2008 Largest insurance corporation in the world. Not technically dead, but flat lined when the US Govt. gave them $85 Billion and assumed the rights to 80% of the once great company.

1889-2008

Seattle based bank and the largest Saving and Loan in the nation, now the largest bank failure in the history of the world.

Sold to J.P. Morgan Chase for $1.9 Billion after the FDIC took receivership wiping out all shareholder equity.

Lehman brothers 1850-2008 One of the oldest and Largest Bond Brokerage firms in America. Assets were purchased by European banking powerhouse Barclays after the collapse and bankruptcy eliminating shareholder equity.

6

BOL* Corner

Portfolio Rx

don’t worry, be healthy

By Karen Bosso

Mike and I were married 19 years on October 21st and money has always been big on our list of things to think about—be it personally, parentally, or professionally. Since he moved his office home when he went independent a year ago last March, I can tell you his phone‘s been ringing more in the last few weeks or so than it ever has. And this is in an office where clients are generally pleased and haven‘t experienced the level of losses we keep hearing about.

This call volume is mostly driven, we think, by fear—some of it arising from the huge amount of news coverage of the current crisis.

Since money is something we‘ve always had to pay attention to one way or another, it gives us a different perspective. It‘s sort of like when you take your kids for their shots—they get a good dose of the bug and several boosters which immunize them against that bug should they be infected with it in the future. Because the kid‘s system has been exposed to it in doses over time—it knows better how to handle it if and when the real disease strikes. The same goes for money worries. I‘m not going to say we‘re immune, but it makes us look at things through a different lens.

Mike spends hours and hours studying the economy—he likes that type of thing—go figure... So when a crisis like this happens, he‘s better prepared to react and work appropriately with your accounts. He‘s able to use plain old information, most of which is free for the asking, to help keep fears at bay.

So take that shifted perception based on lots of practice, combine it with personal experience to know that worrying never got us anywhere in the past, and it makes for a pretty potent combination.

One of my hopes as I help him put together these newsletters, is that providing solid information that‘s easy to understand, that you can read at your own pace and refer back to if you want, will help to keep down some of the anxiety.

I pulled article after article off the internet recently about how Americans are turning up in droves at their psychologist‘s offices. Poll after poll shows that people are anxious, aggravated, or downright angry. It sounds almost epidemic.

Psychologists are notoriously reluctant to talk to their clients about money issues.* And television news is actually designed to create anxiety so you‘ll keep coming back to their channel to save your life.** Case in point: The Tuesday before Thanksgiving you hear, ―Is your turkey safe? Tune in for more on this potential killer at eleven. Fox Out.‖ Now Fox is not the only culprit. Local shows have become much worse in that regard, and frankly more biased, since the days when Uncle Walt came into our

living rooms every night plainly and simply telling us what was going on— that‘s journalism‘s job. In my humble opinion, if it makes your blood boil, remember who‘s holding the remote—use it. It is important to stay informed, and you can find plenty of other good information sources that don‘t extract that kind of price from your health and well -being.

So I guess I‘m saying a couple of things.

First: When it comes to your physical health, you choose a doctor for a variety of reasons— his or her expertise, bedside manner, willingness to partner with you in your healthcare, whatever is comforting to you. You could think about a financial advisor the same way. And just think about it—Mike actually answers his own phone and still makes house calls. How cool is that?

Second, if you‘re feeling anxious about the current situation, you‘re not alone. The most important thing you can do is to take care of yourself so you can keep a clear head.

Every day when the market closes, Mike makes a peanut butter sandwich and takes a little rest. When he comes to, he watches the money guy‘s version of Mr. Rogers on the TV, then goes outside and plays (he‘s always coaching something). After dinner he does his homework (research), reads a little, then goes to bed at exactly ten-sixteen, he wasn’t kidding about that. Maybe that author was right about learning everything he needed to know in kindergarten. We should all sleep so good as Mike…..

While I don‘t believe anyone can become totally immune to worry while they walk this earth, I do think it‘s something to work toward.

If there‘s something you don‘t understand— call. If you‘re concerned about something— call. If you just want to chat—he likes that too.

On behalf of Mike, I want to personally thank all those clients who‘ve called in the last weeks asking how he was doing; it really meant a lot to him. We‘re all going to get through this. We‘re here to help.

References and Further Reading *Mellan, Olivia, PhD. Advisor‘s Guide to Money Psychology. Investment Advisor Press, 2004.

Also see: http://www.moneyharmony.com/ online.html for info. on money psychology— check out the ―Gems‖ section under ―Online Resources‖ **DeBecker, Gavin. The Gift of Fear. Dell, 1999, p.311. Or read about it here: https://www.gavindebecker.com/ media_fear_tactics.cfm this guy knows his fear factors.

No matter what happens with financial institutions, or the economy as a whole, one thing seems to be agreed on by most economists and analysts. Inflation is coming, and coming fast. Since we‘ve borrowed billions and more cash is being printed, eventually our dollar will go weaker and inflation will pick up. So when that happens, here are some realistic options that should help out your investment choices. At a bare minimum, they just shouldn‘t hurt.

 TIPS (Treasury Inflation Protected Securities) These Treasury bonds pay a set interest rate, but the value of the bond increases with the rate of inflation. As the value of the bond goes up, the coupon rate stays the same, but pays on a higher value.

 TIP Exchange Traded Fund:

Very similar to above, but can be traded like a stock during the day and tracks the Lehman Brothers TIPS exchange.

 Inflation Linked CDs and Notes:

Similar to above options, but the CDs offer FDIC insurance and have much shorter maturities than the standard Treasury version. These CDs do not increase in value, but the coupon increases or decreases based upon the rate of inflation.

 Index linked CD‘s: FDIC insured CD‘s linked to an underlying index. If the stock market goes up, then you win, if the stock market goes down, your principal is protected (see p. 4 for more on these).

 Leveraged

CD‘s: Many of these are yielding over 9% and are linked to various interest rate factors. FDIC insurance protects your principal, and the coupon is high enough that if for some reason a quarterly coupon does not qualify for a payout, you should still be significantly above market rates.

These may be incredibly boring investments, but I think we‘re all a little overloaded on excitement lately…. Aren‘t we?

*

The old firm called their assistants BOA’s for “Branch Office Administrator.”

BOL stands for Broker’s Old Lady.

7

Caving in As you can tell from my writings, I am not a fan of this bailout. In fact it disturbs me on a level I can‘t really describe.

If we can all agree on a few basic facts, then you will be able to understand where my vitriol is coming from. First, this is not the only time in our history that we have had an economic problem. Second, this is not the first time we have had a crisis involving the banking system. Third, this is not the first time we have experienced a real estate bubble.

Finally, we are not in the middle of a depression, Great or otherwise. Technically, we‘ve not even hit official recession territory although it sure feels like it.

In previous economic crises, a leader has come to the forefront to remind us of who we are and where we came from. FDR‘s ―nothing to fear but fear itself‖ or Reagan‘s classic series of speeches letting Americans and the world know that America was not going to lay down and die and that our future was bright. Or Clinton‘s first inaugural speech when he reminded us, ―There is nothing wrong with America that can‘t be cured by what is right with America‖. Three separate

Presidents, both loved and hated, with three very different agendas. Yet all three had one thing in common. They knew how to make you feel it was going to be alright. The future was ahead, not behind.

Today, we have a president who looks beaten down and tired, a treasury secretary who appears scared and reactionary, and a Fed Chairman that seems to go along for the ride. We have politicians who come out and say economic Armageddon is coming if we don‘t make changes and the only answer they can come up with is to borrow massive sums of money and socialize our nation. We are now, as a nation, in the business of redoing mortgage loans by reducing the sale price after the fact.

We are giving thousands of dollars in equity to homeowners that overspent. Those who remained conservative and paid their bills won‘t receive such largesse. We are now in the business of loaning money to corporations that find themselves in need of capital because they weren‘t smart enough to keep cash on hand. The government is now in the business of deciding which financial institutions get to exist and which don‘t. And further deciding, which shareholders get to keep equity in their investments and which don‘t.

Many of you know that I coach kids in various sports almost year ‗round. I love it, because I love kids. I get the opportunity to teach them that competition is a good thing when kept in perspective.

That you learn more from failure than from success. We never get any better unless we fail every once in awhile and learn what we did wrong. And when the inevitable losses come, we pick ourselves up, don‘t make excuses, and come back to compete again. What would happen if at the end of every game, the officials were to step in and change the score so the team they wanted to win walked away with the victory?

That type of caving in is the equivalent of what‘s happening to the American economic system. If a company or large group of individuals fails, takes on too much risk, or has a product that nobody really wants, our referee is willing to step in and choose who the actual winner is after the fact. To my way of thinking, and my strong independent spirit, I would rather let the excesses work themselves out (and they would have), than leave my children with less of a free America than I was given. What we have done, in the heat of the moment, is something we will be dealing with for generations to come. I truly hope we have created a better world for our children, but strangely I doubt it.

It Beggars the Imagination …and so many other things as well The latest bailout is estimated to cost $700 billion dollars. It sounds like so much Monopoly money, but it isn‘t. It is real and has true value, so here is what you could‘ve bought with it. [ed. note: as of 08 Oct. we‘re at $833 billion and counting. Revise upwards accordingly]







 

700 billion cheeseburgers off the dollar menu or about 10 cheeseburgers for every man women and child on earth. You could also buy 10 versions of the McDonalds Corporation.

3.5 billion copies of Microsoft Vista to use in a skeet shooting competition or approximately three companies the size of Microsoft.

1.75 billion gallons of gasoline or enough to drive 5.25 trillion miles at 30 mpg. Or enough to drive the circumference of the earth approximately 208 million times.

So easy a caveman could do it….

Wed, 8:34 am

Mon., 7am

I love my job!

I hate being right...

Think...Gold.

Cuervo Gold



  

Based on 2006 total consumption, enough beer to supply Germany for almost 40 years.

You could give $1000 a day to 700 people for 2,737.85 years before you ran out. However if you had the same 700 people and gave them $1 per second it would only take you 30 years.

You could pay the average income tax for 74 million Americans for a year.

You could fund all cancer research in America for the next 160 years based on current expenditures.

You could send 356 million Americans to college on the five-year plan.

If you placed the dollar bills end to end they would Fri, 5:30 pm stretch to the moon and back about 160 times.

After hrs, shafter hrs— Fri, 12:39 weekends pm were made Thu, 10:01 What’s for… am my all the wrong name Could I again? people. be right?

Thu, 11:14 am

Yup.

Mon, 12:15

rehearse: you want fries with that?

Tue, 10:17am

I love being right!

What’s that company that makes Valium ???

Smith & Wesson’s looking good...

8

Just for Fun Mike’s Payback Plan (the fun one) The silence is deafening as to how this bailout will be financed. Suffice it to say, the money will have to be borrowed and taxation will make the interest payments. The U.S. (us) will likely end up owing even more to nations we are already indebted to. How do we as a nation repay 700++ billion dollars? I have some thoughts. Knowing that our currency is linked to our gross national product, productivity, and general confidence in the economy means we can use good, old-fashioned American ingenuity instead of dirty, boring money to dig ourselves out of this mess.

We could:

$

$

Offer China 100 million iPods and 35 million free downloads. The Chinese people would finally have access to rap music and episodes of Friends , and at $1.99 each, they‘d be getting the iPod (that they assembled) for free, becoming more like Americans in the bargain.

Give all of our creditors 3.5 billion copies of Windows Vista with free upgrades for a year. Alternatively, we could just license the copies already stamped, including the bootlegs. We might also get the European Union off Microsoft‘s back on that anti-trust deal.

$

Send the oil producing nations of the world the Ford and GM trucks we have lying around in inventory. They aren‘t going to sell anyway until gas prices drop.

$

Open our Universities to them, offer scholarships, give them the finest educations, and allow them to go home and use their knowledge to compete directly with American workers.

$

Deduct the cost of counterfeit goods sold on the internet from our balance and save money on the patent/copyright lawsuits which aren‘t enforced anyway.

$

Agree to buy military equipment from foreign companies that are subsidized by their nations‘ governments and allow our manufacturers to cut production and therefore employee costs.

$

Reduce the unsold housing inventory by deeding them to random foreigners. Then send out property tax bills. Some of them may even visit and spend some money in our casinos.

$

$

Have a winner-take-all poker tournament between Dick Cheney, European Union Leaders, OPEC, and Hu Jintao (China‘s president). I‘d recommend Texas Hold ‗Em. I don‘t actually know how to play Texas Hold‘Em, but with a name like that, Dick should have the edge.

Go on Ebay and auction off the secrets of Area 51, the JFK assassination, and the hidden files of Martin Luther King Jr. Oh, and while we are at it, let‘s finally put to rest that rumor about the moon landing being a Hollywood stunt.

Any one of those ought to get us a nice little cushion so we can prepare for the next crisis.

Wait a tic….I‘m afraid there‘s more truth in humor than I want to admit.

There really ARE only two positions out there...

Cash…...and fetal.

Jeff Macke—CNBC’s—Fast Money

Troubled Asset Relief Program (T.A.R.P.) As in... …throw a tarp over it so we don’t have to look at it… …tarp it over instead of properly repairing it…a redneck solution… …throw a tarp over it to keep out the rain…it ain’t holdin’ out water as it is… …what you put up after a hurricane where your windows used to be… …what you put underneath your tent so you wake up dry in the morning… …what they put over the ball field so it doesn’t get so muddy and gross the boys can’t play… …what you build an emergency shelter out of when you’re lost in the woods after dark…it’s not cozy, but it just might keep you alive…maybe… …what you put over your leaky boat to slow the rate at which you have to BAIL… What they all have in common? The holes never actually get fixed; they just get TARPed over.

“Facing Down Imminent Catastrophe ...since 1933” Filling Director’s Individual Coffers Finally Disclosing Insider Corruption Finally Deciding It’s a Crisis Fundamentally Depleted In Credit Fed Decided It’s Closed Fortune Down Insurance Cra**er Feds Discount Insider Culpability Furnished Disclosure is Cra* Funds Diverted Into Compensation Foreign Deal Isn’t Coming Founder Didn’t Invest Cash Felons Defy Imminent Consequences Fiduciary Duties Ignored Completely Fed Delivers. Investments Ceded.

Disclaimer and Information: The presence of the FDIC logo above does not imply coverage of investment products mentioned in this newsletter by the FDIC or any specific culpability of the organization, but merely a chance to have some fun. Also, do check out their website: http://www.fdic.gov/index.html for quite a lot of very good information. Seriously.

9

J.P. Morgan

―This is the place to stop this trouble!‖

John Pierpont (J.P.) Morgan, the iconic financier, is credited with at least twice saving the American economy. The first time during the Depression of 1893 by singlehandedly acting as central bankers do today, selling stocks and bonds mostly to Europe and mostly for gold. He aided in refinancing much Civil War debt this way. Perhaps more famously, during the Panic of 1907, he raised $25 million in 20 minutes, making loans to many banks on the verge of collapse and keeping the New York Stock Exchange from shutting its doors. He issued the statement in the title above, locked the doors to his library, and refused to let anyone leave until tragedy was averted.

The economic strength of the House of Morgan, as it was called, muscled the mergers of banks, railroads, and electric companies (he formed GE), and the acquisition from Andrew Carnegie which became the behemoth US Steel—the world‘s first billion dollar corporation. Pundits of the day called his methods ―Morganization,‖ a term I‘d be proud to coin myself.

It has been suggested that a certain board game and its mascot ―Rich Uncle Pennybags‖ was inspired by JP and his business activities. It is this editor‘s suspicion that the term ―fat cat‖ had some of its origins here as well, although J.P. kept his figure until relatively late in life.

Even though, (or maybe because?) his great wealth bailed out the United States more than once, he was under frequent government scrutiny . It was shortly after one such investigation in 1913, that he passed away in his sleep at the Grand Hotel in Rome after sinking into a state described with the word nervous and the word depression.

You can't pick cherries with your back to the tree.

October 23, 1907

Trading Cards

J.P was an avid yachtsman who competed in the America‘s Cup and his company actually owned the parent corporation of the White Star Line.

Morgan was scheduled on the Titanic’s maiden voyage where he had his own private suite and promenade deck, but he declined to sail at the last minute.

He was a voracious collector of art, books, manuscripts, and gems; a very rare stone also called ―pink emerald‖ bears the name Morganite. It is estimated that at his death, two-thirds or more of his $60 mil. fortune ($900 mil. today) was wrapped up in his vast collections, much of which was donated, loaned, or sold to the NY Metropolitan Museum of Art.

Morganite

Note the signature: Charles M. Schwab was President of Carnegie Corp., and the first President of US Steel.

"If you have to ask the price, you can't afford it.” (on yachts) When you expect things to happen - strangely enough - they do happen.

Go as far as you can see; when you get there, you'll be able to see farther.

A man always has two reasons for doing anything: a good reason and the real reason.

http:// www.biography.co m/search/ article.do? id=9414735 http:// www.themorgan.o rg/about/ historyMore.asp? id=4 http:// en.wikipedia.org/ wiki/JP_Morgan

Securities offered through Pacific West Securities, Inc., Member FINRA/SIPC Advisory Services offered through Pacific West Financial Advisors, Inc., a Registered Investment Advisor Clearing services offered through Pershing, LLC, a subsidiary of the Bank of New York Mellon Please note that the mention of stocks in this publication is a not recommendation to buy or sell those stocks. Indexes are unmanaged groupings of stocks used to approximate general stock market performance. You cannot invest directly into any of these indexes.

Certificates of deposit offered subject to change and availability. FDIC insured up to $250,000 through Dec. 31, 2009 and $100,000 thereafter. Minimum deposit required. Periodic interest payments may not be reinvested in the certificate of deposit. Certificates of deposit sold prior to maturity may result in an uninsured capital loss.

The comments contained herein are for general educational purposes only, do not address the entire topic, and should not be considered investment advice, a solicitation, or a recommendation. All investments involve risk, including the possible loss of invested principal. Past performance is NOT a guarantee of future results. Security transactions involve trade costs. For more specific information on investment risks, you should consult the offering‘s prospectus. Prior to implementing any strategy, taxpayers are urged to seek the advice of their tax advisors.

10

Dear Friends, What began as the typical four page Mike on the Markets has morphed into Mike‘s Monster Money Magazine. Since many of you print out the PDF copy I generally send via email, I decided to send it out on paper so you don‘t go broke running your printer.

Adding this final page as a supplement was also a fast and lazy alternative to redesigning the whole thing each day as the economy burped up another change. Or as I kept adding more words to the articles I thought were finished.

It is an awful lot to digest, so take it as slowly as you need, share it with your friends, and call me if you have any questions or ~Mike

just want to kibbitz.

RELAX AND UNWIND CONTINUED FROM PAGE 2 outside his bank‘s door with the FDIC sticker on it. The only reason there‘d even be a line is if everyone doesn‘t fit inside the building. The vision we have of a closed bank with desperate patrons comes from Hollywood memories of the preFDIC Great Depression era. It‘s true that doors can get closed temporarily, but all it means is that more cash is on the way—they can only keep so much on hand at any given time.

Banks today don‘t actually close, it‘s more like they get absorbed. Over the weekend, our example entity ―ABC Bank‖ ceased to exist. It is said to have been ―taken over by the Office of Thrift Supervision‖ or synonymously to be ―in receivership.‖ It is then placed under the auspices of the FDIC who proceeds with its liquidation and/or eventual buyout. The sign outside, if they took the time to change it, would just read, ―Federal Depository Bank.‖ Chances are, you‘d experience nothing more than a 24-hour delay before your ATM card was up and running again.

That FDIC sticker on the door means the government has assured that the customers of failed

banks will be paid back what they had on deposit up to $100,000 for cash and up to $250,000 for certain retirement accounts (per owner, per insured bank—see p. 4 for info. on increased limits).

The FDIC may or may not have enough immediate cash on hand to cover the massive payouts that would result if say, 3 or 4 good-sized banks failed all at once--which is not likely. Yet the guarantee stands; the Fed just has to print more money to make it happen. If they can ―find‖ $700 billion in one week to give to the banks for toxic debt to avoid a perceived panic, then how much more motivated would they be to get those dollars into the hands of their actual owners after a closure? Account holders would probably be out using their debit cards before the kids ask to go to Burger King again. Definitely before any major bills are due.

Banks have failed before. Easily 15,000 banks failed from the early ‗20s through 1934—many were very small, relatively new, and it could be argued that they should never have been chartered in the first place.* But we‘ve all heard about those closures. Less well known is that since the FDIC was formed and recordkeeping began in

1934, another 3,567 failed. An additional 381 in the run up to the war and a staggering 3,000 from 1979 to 1994 alone. That leaves 180+ closures which probably barely hit their hometown papers.** - Yes, printing money will create more inflation.

- No, it won‘t be pleasant.

- As shown above, this has happened before.

- We came through it.

- It took some time to do so, but...

- The economy recovered.

What I believe they‘re trying to do, what they honestly think they‘re accomplishing with this bailout, is to skip the unpleasant parts in between. And they want to accomplish it by removing that debt from the shoulders of those who took it on in the first place. *http://www.richmondfed.org/publications/ economic_research/economic_quarterly/pdfs/ winter2005/walter.pdf **http://www2.fdic.gov/hsob/ HSOBSummaryRpt.asp?EndYear=2008&State=1

WHAT I WOULD TELL YOU IF YOU WERE TO CALL CONTINUED FROM PAGE 3 of your money. To really get in touch with your time hori- It’s time to zons and your risk tolerance get in touch levels.‖ with what

And Then What?

your risk tolerance levels really are for which portions of your money.

Eventually this will all shake out. These problems will get solved, most likely at great cost to future generations, but in the meantime, the markets will recover. If you were to ask me, ―Exactly when Mike?‖ I‘d say, ―I don‘t know and neither does anybody else.‖ Even (or especially?) if Sec.

Paulson or Chair. Bernanke were saying they knew, I‘d probably be double-checking their story.

Fortunately that‘s what I do.

What I do know is that markets recover. It‘s called upward bias and it‘s probably more about physics than history. It‘s certainly not an official explanation, but you could think of economics as the ―physics of money‖ and not be far off at all.

The point...

  

This market is neither predictable nor forgiving--don‘t try to outguess it for quick profit.

Know your time horizons and use them to shield you from your (investing) emotions.

Don‘t risk money you can‘t tie up for 5 years.

 

Don‘t be afraid to invest now if you have time to wait.

You‘ll generally be in good shape if you are patient.

You can call me on my cell phone anytime.

On weekdays I‘m up before 6:30 and go to bed at ten-SIXteen; you can ask my wife.

And don‘t let a weekend stop you from calling me after 9 or 10am.

11

Lombards after the territory in northern Italy.

Funding by the Papacy, and most of the Christian world give phenomenal scope of power to Italian families such as the Medici. The concepts of bank branches and checks arise during this time. A second near annihilation occurs in 1345 when Kind Edward of England defaults on war debt he’d financed through the Italian Banking system.

13 century Italians known as

th

barred in Europe from most forms of employment, and obviously not Christian, keep banking alive. So successfully in fact, they are persecuted for it and replaced by …

12th century Jews,

under Holy Roman Emperor Maximillian, one of their own, keeps the system afloat. His son makes good use by borrowing a fortune to fund his campaign bid for next shot at emperor. He wins. Interest rates at that time range from 12-45% APR; no wonder it’s become less sinful. Banks eventually begin accepting payment in the form of businesses, mines, and land from kings and governments who find themselves short on gold. This is the origin of collateral.

15th century Germans

trade is done via commodities. Wheat, corn, cattle and sheep , foodstuffs, cloth— anything of value—is bartered. A caveman brings his own bison to BBQ at his neighbor’s fire.

Later in time, if you make use of the mill, you pay with some of your flour.

In the beginning…

th

cen-

ate banking as we know it, by taking deposits, making loans, financing business projects, and backing politicians. As the empire grows and trade flourishes, they begin to change currencies and allow for the withdrawal of coin in one country which had been deposited in another.

introduces the

The Iron Crown of Lombardy Bankers were known as ―Lombards‖ and London‘s version of Wall Street bears that name. In many major cities today you can find a Lombard Street where, typically, you can find the pawn shops.

Gold Standard in 1821.

having to return silver is such a hit that England

Eventually, an idea takes form that if the currency is actually backed by government banks instead of individual banks, restrictions could be put on redemption as needed and perhaps no real silver would ever need to leave government coffers. From the year 1797 through 1821, England places a restriction on redeeming notes into silver. The practice of not actually

the current crisis) tries paper money again. In less than a year…the French Government initiates the next crisis by declaring paper money to be worth half of its previous value.

1719—Paris Banque de Generale (we’ve actually heard this name during

course, causes the next large banking failure ……. in 1656 Sweden where the Bank of Stockholm issues the first of these notes. All goes swimmingly until more paper is issued than can be redeemed. In a solitary, blinding instance of justice, the responsible party receives a life sentence for fraud.

reserve-type) in response to catastrophe arising once again from taking on too much unsecure debt. Interestingly, one of the largest debtors is the same Venetian government. Are we beginning to see a pattern? They hatch a plan whereby their creditors must accept payment in the form of credit in an account at the Venetian Club Fed they’d just created. So in other words, if I owe you money and I don’t want to pay you in real cash, I just issue you credits on a piece of paper saying that I paid you. Perfect system, no?

So perfect, in fact we still use paper currency today.

Government banks create notes exchangeable for a set number of silver coins upon presentation at the issuing bank. These are backed by the credit of the issuer, useable as “currency” as long as enough people have confidence in the paper. This, of

1617 Venetians create the first central bank (ie: federal

make loans and create the first banking “system.”

tury BC, Babylonian Priests begin to

weigh less. Sometime around the 18

Early banking begins with the advent of pressed gold coins. People “deposit” their gold coins at the local Temple for safekeeping. Coins are not actually circulated (loaned out), but they’re safer and your pockets

The History of Banking

4th century BC Greeks really cre-

http://www.historyworld.net/ wrldhis/PlainTextHistories.asp? historyid=ac19

12

And why is it not complete? The answer is simple: Since the beginning, there have been bank failures, government bailouts, and questionable business practices and there likely will continue to be. But without these institutions, trade, innovation, and most of the conveniences we know today would not exist. Thousands of loans get made for businesses that fail, but every once-in-awhile, out pops something like a Ford or a GE, a cable TV or a Pfizer, a Microsoft or a Google. When the rest of the world was like, ―Who needs that stuff?‖ A banker would say, ―Let‘s give it a try.‖ Looking at the sordid history of banking, even without knowledge of what all came later (and it‘s plenty), one has to wonder how the industry survived at all.

It survived because we need them. We can get mad at the problems they cause, and we should, but let‘s also not forget how they have made our world a better place. I don‘t know if the good outweighs the bad. I don‘t know if there are more good bankers than bad bankers. But I do know that the vast majority of American homeowners didn‘t pay cash, aren‘t getting foreclosed on, and have a banker somewhere to thank for a place to call home. M

Why this history?

the system, create a method to charge interest on loans. and form a notary service to ensure payments are collected and discharged as necessary. The very first systemic banking collapse falls fast on the heels of the empire’s fall. The rising sect of Christianity is adamantly opposed to the charging of interest. The practice is known as usury and considered morally offensive. Banking nearly dies an unredeemed death.

2nd century BC Romans standardize