Don’t Feed the Alligators

A Personal Finance Blog from a Small-Scale Landlord’s Perspective

Archive for the 'Banking' Category

07.14.2009

A week or so ago I got an offer in my email inbox from the credit union where we have our car loan.  I glanced at it briefly — I wasn’t terribly interested in it since we’re only a few months away from paying off our current car loan, and we don’t have any plans to take out a new loan anytime soon.

However, before I clicked “delete” I noticed something interesting: Hybrid Vehicle loans enjoy a 0.25% lower interest rate than regular new or used cars.

It got me to thinking about why this could possibly be.  Are hybrid car owners actually a statistically lower credit risk?  Is the bank just trying to promote a “green friendly” image so that it can attract that demographic?

I don’t know what the answer is, and I’m sure that I’m not going to find out for sure any time soon, but I’m sure that this isn’t the last time that I will see Green based products get special incentives of some kind just for being green, even if it doesn’t actually make sense — like hybrid cars being allowed in the High Occupancy Vehicle lane with less than the minimum number of passengers.

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Flip Flops

Creative Commons License photo figure credit: rockstarassi

A couple of posts back I wrote about how my bank was implementing a fee for online bill payments.  Imagine my surprise when just a few days later I received this email:

You may have read in our recent Terms and Conditions update that on June 1, we will change the terms and conditions on our FreeNet® Checking and Yield PledgeSM Money Market Accounts. Because of your current relationship with EverBank®, the monthly account fee changes will not affect you at this time.1

1. We reserve the right to impose our most current terms and conditions without notice at any point in the account relationship.

Well, this certainly made my life easier and restored my faith in EverBank.  Although, I reserve the right to change my mind on this without notice.

ING Bus Advert

Creative Commons License photo figure credit: CarbonNYC

This week I received a letter from EverBank, which is where our checking, money market, and some CD accounts are held.  We’ve banked with EverBank for a while now and have been happy with its services.  Until now.  The letter that I received indicated that EverBank will now start charging $8.95 for BillPay, which used to be free.  The catch is that it’s free if our account balance (daily average) stays above $5,000 for the month.  The letter also indicated that an account maintenance fee of $8.95 will also apply to any money market accounts with daily average balances below $5,000.

I wrote previously about how bank fees are for poor people.  It seems that the definition of poor just broadened, at least according to my previous assessment.

We generally keep an average balance in our money market account of over $10,000, and previously we had been keeping a $1,500 balance or more in our checking account.  What this new fee means is that in order to keep BillPay free, we’ve got to forgo some increased interest rate on an additional $3,500 monthly.  Because of dismally low interest rates, the lost interest on that $3,500 amounts to just $1.87 per month.  But if when interest rates go back to where they were 2 years ago, this difference rises past $10 per month.

It looks to me like we have two options here: we can increase our balance in our checking account to meet the new minimum requirement — effectively costing us $1.87 per month at this point, or we can find a new bank to take care of our BillPay services.  I did some investigating for the latter option.  Rather than having to open a new bank account somewhere, I looked at banks where we are already customers.  The most appealing of these was our ING Electric Checking account.  By simply cancelling our BillPay service with EverBank, we will avoid the fee and be left with the ability to write checks on the account.  Our Electric Orange account will take care of paying all of our bills.  Since our EverBank accounts are already linked to our ING accounts, it will be trivial to switch our BillPay services over to ING.  All that will be required will be to replicate our Payee list and set up some automatic monthly transfers.

While $1.87 is not that much money, just over $22 per year, to me it represents a gradual erosion of my wallet.  We already pay so much money monthly for everything that we have.  If we simply accept EVERY $1.87 increase in cost for things, eventually it’s going to add up to a lot of money.  I’m inclined to stand on principle here and close our checking account with EverBank.  On the flip side, if I closed every account at a bank that irritated me somehow, all my money would be under my mattress (it’s not, by the way, so don’t look there…).

What do you think?  How far would you go to avoid a small fee?  What size fee is too big of a fee for you?

Risk Management

Creative Commons License photo figure credit: Cold Cut

A lot of Americans are mad right now.  They’re mad at bankers and CEOs for causing such a mess in the financial markets.  They’re mad at the government for seemingly throwing good money after bad in bailouts of all sorts.  Many are even mad at themselves for living large for so long on borrowed money or the equity in their homes.

I get that.

What’s been bugging me lately, however, is this notion that some of these large banks and financial institutions should be left to fail.  I’ve seen this idea repeated in newspapers, on TV news, on blogs.  I’ve heard it from my coworkers, on talk radio, and at the coffee shop.  Well, the truth of the matter is this: The banks in question here have failed.  They’ve failed spectacularly.  They’ve lost almost incomprehensible amounts of money. Their stock prices are worth next to nothing.

What they haven’t done, except for Lehman Brothers, is gone bankrupt.  We, the people, have been spending hundreds of billions of dollars to keep these institutions afloat.  And that’s a good thing.  Here’s why:

These institutions all have deposit accounts, brokerage accounts, and other types of custodial accounts.  They take your money, pool it together with other peoples’ money, and invest it in various vehicles according to your instructions.  People are always adding to the pool and taking away.  So normally the pool stays the same size or changes very slowly, and this keeps things on a pretty even keel.

If many people either want to put more money in or take their money out of the pool quickly, the pool is forced to buy or sell stock in large quantities, or to call in debt obligations from others.  Buying or selling in very large quantities is ultimately detrimental to customers because it causes the price of the underlying stock or mutual fund to rise or fall very quickly, meaning the you’re either overpaying when you buy in or not getting the full value when you cash out.

If a large financial institution is unable to meet its debt obligations and has to declare bankruptcy, the first thing that is going to happen is that most, if not all, of its customers are going to want to get their money back.  This will trigger a run on the money causing a massive drop in share prices for the underlying securities.  If this price drop is big enough, the rest of the market could react at the same time, causing the whole market to drop.  This is bad news for everyone who has money in the market, not just those who have money in the pool.

This is why it has been necessary for the government to step in to reassure customers of many troubled financial institutions that their money is secure.  By keeping the institutions solvent, the government is preventing a massive run on money that could have far reaching effects on the whole economy.  This is why some of the largest institutions are being called “too big to fail.”

While I certainly worry about what the long term implications will be with respect to taxes to pay for these bailouts, I don’t see any way around propping up these companies by partially or fully nationalizing them until things calm down for a while.  What I would like to see implemented immediately, however, is a plan to put regulations in place to:

  1. make sure that companies that are “too big to fail” are accountable for their business practices to be sure that they don’t fail
  2. make sure that companies going forward can never become “too big to fail”
  3. or some combination of these two.

What are your thoughts?  Are you angry about the bailouts?  Do you see them as necessary or a waste of taxpayer resources?  Do you think we need more or less regulation to prevent these circumstances in the future?

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Killington

Creative Commons License photo figure credit: Derek Purdy

This past Friday I used some comp time at work to take advantage of some non-weekend skiing at Killington Mountain in Vermont.  My host for the day was an old friend who sold a company during the Dot-Com boom and has been, for the most part, living off of the interest and dividends provided by his investment of the proceeds of the sale.  We talked about a lot of things while riding the ski lift, from parenting philosophy to Wall Street bailouts to the whereabouts of our mutual friends.

My friend challenged me in many ways, not the least of which was in trying to keep up with him on the slopes.  But as the memories of freshly groomed courderoy fade away, I’ve been chewing on a number of the things I learned or relearned in our ski lift discussions.  Please excuse the fact that some of these are broad, and some are narrow, but that’s how the conversation went.

  1. Citigroup is not going back to $45 - Throughout most of the 2000s, Citigroup’s stock price was in the $40 to $50 range.  It closed at $1.03 on Friday.  There are two important lessons here: A. You should not own individual stocks unless you own enough and varied stock to be able to weather problems in one particular market segment, like banking or energy — in other words you should be diversified enough to mitigate non-systemic losses.  B. Even if you believe that the market will bounce back, it will have to do so without Citigroup, GM, and any number of other well established, large companies whose stock is now all but worthless.  Money invested in Citi at $45 is gone.
  2. Koreans make bad pilots – There’s a book out now by Malcolm Gladwell called Outliers.  In it, there is a story about the problems that Korea Air had keeping their planes in the sky in the 80s and 90s.  Apparently the problem stemmed from a cultural requirement for co-pilots and other crew members to respect their elders by not questioning their authority and decisions in the cockpit.  It seems to me that a lot of the financial mess we’re in today stems from people not asking enough questions when they didn’t understand the terms of a deal, be it a mortgage or a credit default swap.
  3. This is not the first time the government has bailed out a “too big to fail” company – Do you remember a company called Long-Term Capital Management?  I didn’t either.  But I learned that this was a hedge fund that failed “spectacularly” in 1998 and was bailed out by a consortium of banks.  This fund was “too big to fail” in that its quick liquidation would have led to a collapse of financial markets.  You can’t sell large stock positions all at once since it causes the price to fall sharply, and you certainly can’t do so for many stocks all at once since it causes entire markets to fall sharply.  My ski buddy wonders why we put ourselves into a position again in which unregulated entities were allowed to become too big to fail.
  4. When you can’t find value in something that you need, you can always go for cheap – I was eyeing the sushi bar at lunch time, but a $15+ dollar lunch was not worth it to me.  Instead I went with a $4 hot dog.  This is similar to why I choose index funds instead of managed mutual funds.
  5. Giving up a little can be worth a lot – A season pass at Killington cost $999.  A season pass with 14 blackout days costs $650.  By giving up less than 10% of the available days during the ski season — which also happen to be the days with the longest lift lines — you save 35% on the pass.  This works the opposite way as well.  I’m reminded of the fact that most of the gains in the stock market happen on VERY few days.  If you had invested $10,000 in 1996 in an S&P 500 Index Fund, you’d have $17,280 in 2008.  If you had missed the 10 best days during that period, you would have just $10,748.  If you had missed the 20 best days, you’d have lost money and be left with just $7,360.  (Source)
  6. The government should not have let Lehman Brothers fail – It was distasteful to the American people that the government bailed out Bear Sterns, so it let Lehman Brothers fail to appease the taxpayer rather than do what was right with respect to fiscal policy.  In all likelyhood this has cost the taxpayers far more than it would have otherwise in the form of bailout after bailout.  The failure of Lehman Brothers began a downward spiral which seemingly has not yet found it’s floor.
  7. Don’t take the experts at their word without doing your due diligence – The weather.com “ski index” for Killington on Friday was a 1 out of 10, with 1 being the worst.  I decided to make the 3+ hour drive and see for myself.  At the very worst case it would be a long way to go for a couple of beers.  My friend says that he would have given the day a 4.5 overall (5 in the morning, 4 in the afternoon).  I would give it a 7, since my bias is towards smaller, less challenging mountains with generally worse conditions.  Check out this clip from The Daily Show which features a great quote from Jon Stewart: “If I’d only followed CNBC’s advice I’d have a million dollars today…provided I’d started with $100 million.” (Thanks to David at My Two Dollars for posting the link earlier this week.)

I had a great time skiing, and a great time chatting on Friday.  I like to think they were both somehow good for my soul.  I like to hear your opinion on any of these points.  Leave a Comment below.