Advice on How to Manage a 401k in These Troubled Times

Dear TV Network News Financial Analyst,

I am a faithful watcher of your news network and I particularly enjoy hearing your analysis of the terrible events that are happening in our business markets. Because I have complete confidence in your views I wonder if you might answer just a couple of questions I have about my 401k portfolio?

1. I have really taken your message to heart about my 401k; you know, the one where you say “buy and hold”? I think that is really good advice because the worst thing to do is to panic and sell just because everyone else is. I am now in my “hunker down” mode, and I want you to know you can count on me – I won’t sell anything for years because I trust your judgment.  Here is a list of my current stock holdings, note that I have heavily favored financial stocks because they have out-performed so well in the past:

Lehman Brothers

Indymac Bank

Washington Mutual Bank

Wachovia Bank

Bear Stearns

Merrill Lynch

AIG

Fannie Mae

Freddie Mac

To tell you the truth, with all the bad financial news these days, I’ve been afraid to look at my 401k statements for the past few months, but I am sure we can ride this out with the buy and hold strategy you keep talking about. 🙂

2.  I do have just one other question. You know how you have that chart that shows how if you invested $1000 in the DOW thirty years ago you would have about a trillion dollars now if you just stayed invested? Well, I was wondering about one thing. I know that one of my favorite stocks, AIG, had been a part of the DOW, but just recently, after it’s unfortunate, but I’m sure temporary slip, it was removed from the DOW!!!

I noticed that during the last few weeks that AIG had been a part of the DOW the DOW average had been really dropping fast, but now that AIG is no longer part of the DOW it is doing a lot better.  I was just wondering if you thought that there was any relationship between the removal of tanking stocks from the DOW and then replacing them with stocks that are doing really well has any relationship to the way the DOW has historically done so well over the last thirty years?

Thanks for you help. I really appreciate your insights.

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U.S. Plans to Bail Out China with Credit Default Swaps

I’m pretty sure that if I crawled into the shiny-bright, luxurious offices of Goldman Sachs, Morgan Stanley, or any of the other big Wall Street banks on my hands and knees I wouldn’t have a chance in Hell of getting any of them to loan me a dime. Not this year or any other year; past, or future. That’s probably true for 90% of the U.S. population and for 99.9% of the world’s population.  Do you think these bankers suspect there might be a little resentment by the U.S. taxpayers about the bailout?  Probably not , or if they do have some inkling of this, they probably don’t care anyway. That’s because there is really only one constituency they, and our present government, care about anyway: the people of China.

At last count, the population of China was over 1.3 billion people, i.e. China outnumbers the U.S. four to one.  These Chinese resources, oops – I mean people, are as valuable to the U.S. businesses as Arab oil is to our “energy” companies.  Remember about twenty years ago how most U.S. businesses changed the name of their “personnel departments” to “human resources”?  A real change came over our nation some time ago, it’s hard to pinpoint exactly when, but it was reflected in our use of language.  Our businesses started feeling odd about having departments made up of “people”. It made them uncomfortable. Maybe it made everything too personal. So American employees changed from being people and became “resources”, like oil or money.  This depersonalization made it easier for Big Business to think of people as commodities that can be bought and sold, acquired and disposed of, without feeling guilt about actually affecting someone’s life.As they say, “it’s not personal, it’s business”.

The human resources of China are astounding. They are hardworking, they work very, very cheap, and they don’t complain. They don’t agitate for safer working conditions, they know their place in life, and they are conveniently far away and out of sight.  They are infinitely better than troublesome, noisy, complaining workers who are always asking for more benefits, like health insurance and time off to go to their kid’s baseball game.  The solution for American business, of course, in so many ways, was to outsource as many of our jobs to these unnamed resources in China. Our multinational companies have made billions by getting these resources to make all the things we buy with our credit cards.  Hell, they even make the credit cards.  We, of course, used our credit cards to buy everything because we didn’t have enough cash.  That’s  because we hardly made enough money to pay our adjustable rate mortgages, let alone our adjustable rate credit cards.

It all had to end sometime, I guess.  Eventually too many of us ran out of credit cards that still had an available credit balance on them that could be used to pay the minimum payments due on all the other credit cards.  Then the whole absurdity really started cascading downward with the collapse of the U.S. toxic housing market pyramid scheme.  It was about this time that the bankers of Wall Street, who wouldn’t normally give either you or me the snot from their noses, turned to their golf buddies in the insurance business. They told them that “now” would be a good time for them to pay off on the insurance policies they had purchased to cover the loans they had made to the ordinary, everyday, cutthroat banks who had made real estate loans to the American peasant masses.

Imagine the surprise on the faces of Messrs. Goldman, Sachs, Morgan, Stanley, and the other blue bloods of Wall Street when they learned, to their abject horror, that their insurance policies (also known as “credit default swaps” so no ordinary person could figure out what they were really for) didn’t actually cover all of their losses.  You see, the insurance companies are really the same thing as big time Las Vegas gamblers. They don’t really ever have enough money to cover everyone’s losses at the same time (just ask any homeowner who ever survived a big hurricane, like Hurricane Andrew), insurance companies, like AIG, plan on only a very small number of claims ever actually being filed. Guess what Wall Street nobility?? Ooopsie!!

Getting back to our unnamed, and barely human, resources in China, it turns out that the noblemen of Wall Street, the princes and earls of our elite society, didn’t actually have enough of their own money to lend to all the cutthroat banks either. They are, after all, not THAT rich.  So they borrowed a lot of that money. A lot of money, most of it came – at extremely low interest rates – from the top dogs who oversee the Chinese human resources.  It was a lot of money. Lots and lots of money.  More money than the mafia has.

These are the same Chinese top dogs the U.S. had to turn to in order to finance the Iraq War because we don’t have enough money ourselves to wage that kind of endless war either. The thing to take away from this is that we owe China one helluva lot of money.

And now, as the earls and princes of Wall Street stand by in abject horror and their golf buddies in the government cover their aghast mouths with hankies and make strange gurgling noises, they all know one thing: if these last two remaining financial institutions on Wall Street melt into cute little golden rivulets that flow softly away into the sewers of New York, somebody in China is going to be very unhappy.  Very, very unhappy.  You know what I mean paisan?

Someone in China is going to be wondering what happened to the trillions of dollars that he lent in good faith to the demented sharpies of Wall Street. This unhappy camper controls 1.3 billion people, and he has nuclear weapons.  He has a slew of intercontinental ballistic missiles, and just completed a space walk equivalent to the Apollo program. This unhappy camper also fabricates most of the stuff we buy because we shut down all our factories and outsourced everything to the faceless, uncomplaining  Chinese resources.  We are totally dependent on this Chinese top dog.

A few days ago, our President and Secretary of the Treasury looked us in the eye and, voices choked with fear, they quakingly told us to be afraid, be very afraid.  We should be.  Our King Bush II has told us peasants that we have no choice but to bail out the earls and princes of Wall Street and save their gold from melting.  It’s all for the good of us peasants, they say. “Peasants to the rescue!”  They even have an a plan anointed by Congress. It goes like this: they’ll give some of our money right away to the princes and earls because their treasuries are running dry. But, don’t worry peasants, they won’t give them everything they asked for! We are being protected. Instead of buying all of Wall Street’s rotten trash, also known as toxic mortgages, the government will instead merely insure a lot of these mortgages.The U.S. government is going to insure mortgages for Wall Street!

Insure the mortgages?!?  Can you believe it? The U.S. government is going to issue Credit Default Swaps to Goldman Sachs and Morgan Stanley, and we peasants are going to fund the whole thing because we are terrified of what will happen if we tell China that they have to eat the losses!  These credit default swaps are one of the main reasons the whole financial world is crumbling down around us and now, in the eleventh hour,  the U.S. Government wants to play the game too???  This is the ultimate solution??

This sounds like government by The Three Stooges, doesn’t it? The only thing I wonder is who are the real stooges here? Any ideas?  Any ideas?

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Two New Alternatives to the U.S. Government Bailout Plan

The opinion polls indicate that over 90% of the American people are opposed to a bailout of the investment banks, banks that hold perhaps a trillion dollars worth of “worthless” mortgages. These mortgages were either given to people who were not employed and had no resources to repay the mortgage, or they were mortgages that amounted to predatory mortgages with escalating interest rates that made it impossible for the homeowners to repay.  Given that we now are in an election year and every member of the House of Representatives is up for reelection in November and about a third of the senators are up for reelection too, it’s not too surprising that the bailout process seems to have bogged down.

Secretary Paulson’s plan to stampede the Congress into bailing out Goldman Sachs (the company where he was formerly Chairman and CEO) and Morgan Stanley and perhaps a few others, has run into considerable resistance. The American public is saying we should let the banks fail – after all, isn’t that the capitalist system? Isn’t capitalism sort of Darwinian economics where the weak will surely perish and only the fit survive?  Isn’t that the wonderful thing about our system? Isn’t the marketplace sort of like an omniscient supercomputer where it decides which of the economic gladiators on Wall Street lives and which ones die?

Now Paulson and Bernanke are saying that we can’t afford to let some of these banks die. (Unlike Lehman Brothers) Are these few banks some sort of sacred irreplaceable national resource – like oil? Are there truly no other alternatives?  I have a couple of ideas for alternative solutions, and even though I have never been Chairman of the Board or CEO of Goldman Sachs, in the spirit of trying to help out, I thought I might just suggest them here for consideration.

Plan A: Let the banks fail. Meanwhile open a “U.S. Government Investment Bank” that will temporarily take over the functions of the investment banks that failed due to their own incompent investment practices. The new US GIB would provide the needed capital to existing and new businesses, via business loans, so they can continue functioning or expand and grow.  The US GIB would charge interest on loans at rates comparable to what the Wall Street banks currently charge.  As far as the U.S. businesses are concerned the whole thing would be pretty transparent – just a change in the name of the investment bank, sort of.  The profits from the interest the US GIB earns would go to the US Treasury and be used to reduce the national debt.  Then, whenever some new wealthy individuals finally come along and decide to start new investment banks the US GIB would gradually withdraw from the business and return this function to the private sector.  So what happens to all the toxic mortgages that the investment banks owned? They would probably be auctioned off at cents on the dollar. Maybe the people who originally took out the mortgages could buy them. At any rate the whole thing happens without any cost to the US taxpayer and doesn’t upset the normal course of business in the US because the US GIB temporarily replaces all the functions of the banks that have melted down.

Plan B: Hey, aren’t we in a global economy now? Whatever happened to globalization and multinational businesses? Why don’t we let the foreign banks come in and perform the functions that the US banks were clearly not competent to do? How about HSBC, the largest bank in the world? It’s now headquartered in Scotland since it moved from Hong Kong and changed its name from Hong Kong and Shanghai Banking Corporation.  Speaking of China, why not invite the Chinese banks to set up shop on Wall Street and take over the investment banking business? From everything I’ve seen the Chinese are much more aggressive and smarter capitalists than the Wall Street bankers anyway. How about the German and Swiss banks? There is plenty of money in the world – after all, despite all the meltdowns and economic disasters the total amount of money in the world hasn’t decreased – it’s just changed hands. Hooray for the global economy!!! Besides allowing almost all of our factory jobs to be exported, globalization also allows our financial jobs to go to China, India, and other places too!!  Marvelous!

So maybe we should let the new owners of the world’s money run the investment banks and let the tired old incompetent bankers just step down. Let’s just rejoice in the new, global economy.  That, after all, is the global capitalist way.

Plan C: Actually, I haven’t thought of Plan C yet. That would take another ten minutes, and I don’t have time right now; besides, it seems to me that either Plan A or Plan B would be preferable to using our tax dollars to bail out the old billionaires on Wall Street.  Let me know if you think of a plan C, D, or E. Maybe we could send them in to Congress, then we would all be doing our part to help out.

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The Unbearable Lightness of John McCain

I suppose his standing in class at Annapolis should have been the tip off.  Almost dead last in a class of nearly 900 graduates, you can’t expect him to have too much intellectual horsepower.  Still he presents himself as a man who is sure of his convictions, a man who is unafraid of risks, a man who will go where no man has gone before, and then he changes his mind – all the time. I mean, really, does anyone actually know what John McCain stands for?  Other than making the wealthy people of this country even more wealthy, is there anything else? Anything at all? OK, I suppose a few examples are in order just to make my point.

Let’s take financial regulation. During his long career in the U.S. Senate, McCain has consistently supported deregulation of just about everything on Wall Street. His financial hero and adviser is Phil Gramm who introduced legislation that successfully repealed the financial protections that had been created, during the Great Depression, to protect us from the shenanigans of the big Wall Street banks . Now that our economy is collapsing, due to the Republican-created, elimination of regulations for Wall Street, John McCain is complaining that there isn’t enough regulation and is calling for “tougher rules on Wall Street”!

Let’s talk about Iraq for a minute.  Remember the whole issue about having a timetable to withdraw from Iraq? Remember when he said he was willing to stay in Iraq for 100 years? Then Barack Obama came up with a plan for withdrawal in sixteen months. Remember that? After Iraq officials said they wanted to do something like what Obama was saying, McCain said it sounded like a “pretty good timetable”.

Long ago, John McCain supported the moratorium on offshore drilling.  Almost everyone did because everyone knew that enormous damage had been done to our environment by previous oil spills and that the potential reward for offshore drilling was not worth the potential risk. Then as soon as oil prices go up, he completely changes his tune.  Now his mantra is DRILL NOW! (I’m not 100% sure about this. I haven’t actually heard him say it in the last few days, so it could be that he’s now against drilling.)

There is a long list of McCain’s breathtaking reversals on just about any topic you can imagine at the Carpetbagger Report .  It’s pretty depressing because it indicates that he doesn’t have any clear idea of where he is going, and he doesn’t have any identifiable guiding philosophy in his life. He claims he is a maverick because nobody can count on his allegiance. I guess that’s not too surprising, but I think a more accurate term (and maybe a more nautical one that his buddies in the Navy are more familiar with) is “loose cannon”.

Putting aside, for the moment, that he has tried to co-opt Barack Obama’s slogan of “Change”, recall his slogan of only a few weeks ago, during the Republican Party convention. That slogan “du jour” apparently was “Country First”.  Not a bad slogan, I guess. It certainly sounds patriotic and makes us think that the most important thing for McCain is his country. Right? OK, well, then he goes and chooses Sarah Palin as his running mate.  I don’t think there is any need for me to go into the almost limitless number of reasons why this is a really, really, bad decision, but let me just discuss one. What if McCain were elected and, heaven forbid, he died in office a week later. It could happen – William Henry Harrison, ninth President of the U.S., became ill after giving his inauguration speech and died a month later.  That’s why we have Vice Presidents. They are there, primarily, in case something happens to the President.  So can you imagine Sarah Palin becoming President of the U.S. in February 2009? She would be President for the next four years. Seriously, is that “Country First”?

Just how much does McCain actually care about America to be so utterly irresponsible as to put Sarah Palin in such a position. That decision may be a lot of things, but it is certainly not “Country First”. There are so many reasons that Sarah would be a disaster as President, but they are all summed up in the brilliant Saturday Night Live parody . I suppose almost everyone has seen it, but if you are the one who hasn’t, take a look at it, you’ll see what I mean. What else could I possibly say to prove my point about Sarah?

But this election is not about Sarah, it’s about a choice between John McCain and Barack Obama.  This is a time when our country’s economy is being challenged by an economic meltdown that compares only to the meltdown that preceded the Great Depression, and John McCain has already admitted that he “doesn’t really understand economics“.  This is a time when we face significant challenges in the Middle East, and yet, a couple of weeks ago hot-headed McCain goes looking for trouble with Russia saying “We are all Georgians.” I’m not a Georgian, and I don’t want to be.  I don’t care what happens between the Georgians and the South Ossetians, do you?  Let them settle their own problems.  What is this man thinking? And that is my point. John McCain is an intellectual lightweight. He has, time and again, adopted  any position on any subject for any reason at any moment.

Far from having built his foundation on a rock, he stands on shifting sands, loyal to no one, undependable for more that a moment at a time, mercurial in his alliances, and, in the end, nothing more than a falling leaf, blowing in the wind.

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Paulson Bailout Bill Dooms U.S.

We’re doomed.  The inmates have taken over the asylum.  Secretary of the Treasury, Henry Paulson, former Chairman and CEO of Goldman Sachs, a man whose career at Goldman Sachs spanned twenty-two years before he was appointed Secretary of the Treasury only two years ago, is now demanding that Congress immediately sign up for a $700,000,000,000 (and maybe lots more) bailout for Goldman Sachs, Morgan Stanley, and others.  Nobody is asking about the propriety of his engineering a bailout of Goldman Sachs at the expense of the U.S. taxpayer while only a week earlier he stood by and let the investment bank of Lehman Brothers, a competitor of Goldman Sachs, simply evaporate.

We’re doomed.  It’s not only those investment bank “whiners” on Wall Street, suffering from a “mental recession”, who are being bailed out by the U.S. government. Now the U.S.  government has changed the wording of the bailout bill to include any financial institution having “significant operations in the U.S.”  Swiss megabank UBS and British bank, Barclays, are already lining up.  It seems they didn’t understand what they were purchasing when they bought all those toxic mortgages, and now they want the U.S. taxpayer to reimburse them too.  It seems that the bailout is a gift from the U.S taxpayers to the poor banks.  Frankly, I would have made it a loan that starts out at 0% interest for the first three months, and then goes up to 33% interest after that, with severe penalties for late payments. I would also reserve the right to change the interest rate again, at any time, for any reason, up to any amount.  I’m sure the banks would understand.

We’re doomed.  The U.S. government has just announced that the last two remaining U.S. investment banks, Goldman Sachs and Morgan Stanley, can now become Bank Holding Companies, i.e. combined commercial and investment banks. In the wake of the 1929 Stock Market crash and the ensuing Great Depression, the U.S. Congress enacted the Glass-Steagall Act in 1935. This Act prohibited banks that lent money, as part of their business practice, from also investing money in stocks, etc. This Act essentially created two types of banks: commercial banks and investment banks. It had been found that, prior to the Depression, U.S. banks had been mixing depositors funds, like savings account money, with investment funds which led to many internal abuses and eventually the collapse of banks during the Great Depression. The Glass-Steagall Act served the country well for over sixty years, but it was repealed in 1999 via the Gramm-Leach-Bliley Act (That would be Phil Gramm of “whiner” and “mental recession” fame). Phil Gramm is now one of John McCain’s chief financial advisers.  He is also currently an investment banker at the Swiss bank of UBS.

We’re doomed.  Secretary Paulson says that we need to act immediately to bail out the investment banks so that our banking institutions will have the confidence to start lending money again and people can get mortgage loans. He believes that easy credit is critical to the functioning of our economy and that if we can just make it easier for people to get mortgage loans people will start buying houses and our economy will improve. He doesn’t understand that our economy collapsed because the housing market was a pyramid scheme and that we don’t have a true underlying economy because we have outsourced the engine of our economy to China. Think about it: When was the last time you bought something (other than food in a supermarket) that had a label saying, “Made in USA” on it?

We’re doomed.  Albert Einstein said that the definition of insanity is “doing the same thing over and over again and expecting different results”.  The inmates have truly taken over the asylum.

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