Broker Check

The Big Short Comes Up Short

It is hard to make an entertaining movie about complicated financial maneuverings and educate the movie going public at the same time.  The Big Short a movie starring Brad Pitt, Christian Bale, and Steve Carrell managed to do just that.  It explored the world of synthetic collateralized mortgage options, otherwise known as CMOs. 

The movie also left you with no one to blame for the financial collapse.  It showed some illegal acts but not much more than that.  It should have shown that where there was an incentive to create product, product will be financially created.  But it did not show the lack of oversight by those agencies whose job it was to monitor the actions of many in the industry.

The amount lost due to the activities shown in the film was no more than 1 days trading loss in the financial markets; so how come there was a financial collapse?  The answer is due to an arcane accounting rule called “mark to market.”  Since the Great Depression, banks have been able to leave mortgages on their books as capital at the value of the principal remaining to be paid back by the mortgagor.  Since banks, most often “sell” the mortgages on their books to intermediaries who package the mortgages with others and then sell the package to the public,  the mortgage has a ready “market value.”  In 2008, there was no ready buyer for these mortgages so the value was technically zero.  This would not have been a problem except for the fact that after 70 years, in 2005 the Accountants and Government regulation changed the rule and forced a change on the banks to “mark to market” the mortgages on a daily basis.  There was no problem as long as there was a functioning market since the market disappeared on 2008, the mortgages had no value so the banks capital became less than required and because of that they could no longer lend any money.  To make matters worse, they started to call in existing loans and did not rollover existing loans.  This “tightening” is what caused “The Great Recession” not the CMOs.

As a postscript, the accountants and government regulators saw their error and very quietly in 2010 rescinded the mark to market the value and banks started to lend money (even so slightly) again.

Most Important Event of 2015

Not an election.  Not Islamic State.  Not terrorism.  50 years from now when we look back on 2015 I believe the most significant event will be that two companies were able to have an upright landing of their space rockets and reverse them.  This event will dramatically reduce the cost of space travel making it more affordable and will increase its use.  The staggering cost of space flight has been the single greatest deterrent to a thriving space market.  This could reduce the cost of a launch from $100,000,000 to $6,000,000 opening up orbital space to a slew of new participants – research institutional companies and government.

A Good Read and View

After watching the series on the AMC channel called “TURN,” I was intrigued as to the extent the Culper Spy Ring helped Washington in the American Revolution.  I had never known about American spying activities other than the unsuccessful efforts of Nathan Hale.  I was also curious as to the extent of the dramatization of the events shown in the AMC series.

I just finished the book George Washington’s Secret Six, The Spy Ring That Saved The American Revolution by Brian Kilmeade and Don Yaeger.  It is a very good and easy read that discusses the efforts and successes of these twenty something year olds who are based out of Setauket Long Island and Manhattan who are the main spying operation for George Washington.  In the main, the TURN series incorporate the historical figures into the series but with much more dramatization than in reality.  Spouses are created as well as other family members that did not exist and some historical figures are added for effect.  But, in the main, Major John Andre, Peggy Shippen, Benedict Arnold, Major Tallmadge, John Simcoe, Caleb Brewster, Robert Townsend, and Abraham Woodhull are accurately portrayed.

What was most interesting was that the identities of all the spies are not yet known and the main spy was not known until 1929.  Also, the techniques created by this spy ring are taught in the CIA today.

 This was a New York Times best seller.  The book is accurate and an easy read; the TV series an easy view.

Costly College

 A child born in 2015 that begins kindergarten in the fall of 2020 would attend college between the years 2033 and 2037.  If that child attended an average private 4 year college and the annual price increases for private colleges experienced over the last 30 years (+5.5% per year) continued into the future, the aggregate 4 year cost of the child’s college education (including tuition, fees; room and board) would total $496,473 or $124,168 per year.  College Board.

You might want to increase the amount you are saving and investing for college.

Should 70 Be The New 65 With Retirement?

Life expectancies for Americans are increasing and 401(k) balances are woefully short to fund the average person’s retirement.  It is an accepted maxim that you need at least $1,000,000 in order to retire.  Charles Ellis, founder of the financial services consultancy Greenwich Associates and author of Falling Short: The Coming Retirement Crises and What To Do About It, says Seventy is the new 65.  He noted the retirement age was set at 65 in 1935 when Social Security was enacted and life expectancies were shorter.  Since people, on average, are living longer, he says the retirement age should go up as well to keep the retirement/working ratio constant.

He said people who stay in the work force until age 70 can significantly increase their 401(k) balances.  For many people, the period between the ages of 62 and 70 is often when they can save more because their children are likely grown and no longer need financial help.

According to the Society of Actuaries, a 65 year old man has a 30% chance of living until 90 and a 65 year old woman have a 41% chance.  Financial Advisor Magazine, November 2015 p. 17.

And don’t forget adding to other investment, either!

As always, if you have any questions about these or any other matters, do not hesitate to call us.

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