If You Have A Credit Card: Beware the Ides of March!

Banks to Up Rates; Other Shoe to Drop?

While the government and the Congress have been propping up the banks with billions of dollars, the banks have not been spending all their time figuring out how to begin lending again, they have been using some of that money to contract rather than expand with drastic impact to consumers and the economy.

The banks have assigned just enough staff to create the illusion that they are lending, but in fact, they have been hiring hundreds of collection agents, reducing lines of credit, increasing rates for bank charges and in the credit card realm, dumping accounts that always pay on time in favor of accounts that they can push over the edge with more fees and increased debt in an effort to gain more income.

It is fast becoming known in the credit card world, that in March the banks will increase rates on millions of customers.  The annual percent rates (APR) will change and the consumer once again will take it on the chin, big time.

These predatory actions are helping to make it very clear that there is another shoe yet to drop in the banking industry and that is the credit card business.

With the collapse of the asset-backed securities marketplace, the banks took a big hit.  First, it was with mortgages and now it will be with credit cards.  Yes, just like with mortgages, since 1987, banks have been packaging credit card debt and receivables into what is called credit card asset-backed securities.

How Does it Work?

Over the past 12 months, we have come to know about how mortgages were turned into securities (mortgaged backed securities).  The same can pretty much be said for turning credit card debt and receivables into a security (credit card backed securities).

In the credit card model, the bank that issues the credit card bunches up groups of accounts or receivables usually into the form of a bond "backed" by these accounts or receivables and sells them to a trust.  In turn, the trust issues securities backed by those receivables.

Now, here is where I believe the process becomes risky.  The bank that issued the card and "sold" the account or receivables still services the account BUT, the assets that were "sold" have been removed from the bank's balance sheet.

Why is that important?

It's important because since the assets are no longer on the bank's balance sheet, the bank can reduce its capital requirements and seek new accounts to make for the ones "removed" from the balance sheet. Capital requirements are the reserves that banks must put aside by law to essentially protect the bank's business.  These funds can't be tampered with and must remain on deposit, just in case.

What happens next?

When you, as a credit cardholder pay your bill each month, that money goes into the trust. Those funds are used to pay those that have bought the Credit Card backed securities.

So what happens, if there is a slowdown in people paying on their balances?

Well, as you can imagine, the bank's are in trouble, not only because you owe them money on the balance they have lent you via the card, but also because they have already sold your debt/receivables and there is less money in the trust to pay the investors.  Also, when your balances increase, it means that the banks can't add as many new accounts and must maintain larger capital reserves.  Not good for them or you.

The Banks and Your Card

Banks want you to use your credit card because it creates more debt/receivables for the bank to use as noted above.  The banks do not like cardholders that pay their balances off in full each month because then the bank doesn't get to assess finance charges or to have reason to raise their APR rates.

When the growth of the banks portfolios of card users slows down, the bank looks for other ways to still get what it needs from the card accounts that remain in its portfolio.

One of the ways of doing that is by raising the basic Annual Percentage Rate they are charging on all accounts and then increase all kinds of fees across the board.  That is what I believe they will do in March. Further, I believe that the banks will also seek to close accounts that are not producing an ever-increasing amount of fees.  It will tell the customer that their basic rate is being raised and give them an opportunity to close their accounts and move elsewhere.

Not a pretty picture folks, but neither was it on March 15,  44 BC, when Julius Caesar went to the Senate.

Copyright 2009 WBSeebeck

Reengineering US Government, Lou Gerstner and John Madden

Shortly after the Super Bowl, I was speaking with a life-long friend, Mike Siani, NFL scout, coach and former Oakland Raider wide receiver.  I said, "You know Mike, I always loved when John Madden was your coach.  On first downs, he would use three wide receivers (Fred Biletnikoff, Siani and Cliff Branch) and send you all down field for a big gain pass play from QB Ken Stabler." (In Mike's 9-year playing career alone, he averaged some 17 yards after each catch)."  "Today, most teams are so predictable.  They run on the first two downs and then they try the pass on the third down."  I can still hear it in Madden's voice today, when he says, I'd pass on first down, you've got to be more aggressive right out of the box.  Go for it!

Another person, who liked "going for it" in business is Lou Gerstner, the former CEO of IBM.  There are at least two things Lou is known for, the first is being bold and the second being successful.

If you are holding an American Express card, chances are it's because of the way Lou Gerstner changed their card business between 1978 and 1989.  If you enjoyed a Nabisco cracker during the Super Bowl, chances are you can thank Lou Gerstner and the fact that IBM is still one of the most successful American companies is definitely because of Mr. G.

His efforts at IBM are well known to me, in part because my former business partner Hunter Grant and I were hired as outside consultants to review and second-guess their Internet strategy in the mid-90's.  During that time, we looked at quite a number of projects and found them wanting, not because they didn't have great people, but because they weren't current with the rapid changes occurring in the information technology marketplace at the time. In addition, the organization had become so large, that it was getting in its own way in creating products.  Gerstner changed that, but only after instilling in the company a belief that change and a willingness to accept ongoing examination and criticism were good things that could help drive new growth.

It was no surprise to me then when I received my September 18, 2008 edition of BusinessWeek and found that Lou Gerstner had written a great column entitled, "It's Time To Reengineer US Government".

In this now five-month old article, Gerstner says, "Amid the ongoing turmoil, it seems obvious we must reinvent our government and create an efficient system that can anticipate and avoid major crises.  Despite many opportunities, however, this is not a lesson we have taken to heart.  Whether the task is fixing health care, upgrading K-12 education, bolstering national security, or a host of other missions, the U.S. is better at patching problems than fixing them.  Part of the reason is that we have two parties lacking comity and a sense of shared national responsibility.  But beyond the partisan divide, I would argue that the processes of government are broken, preventing us from taking responsible actions."

In the article, he invites readers to visit USA.gov and there he says, "You'll find thousands of directorates, agencies, boards, offices and services replete with overlapping responsibilities, ancient priorities, and divided accountability."

He continues, "We do not need Departments of Commerce, Labor and Education; we need a single Department of Skills that will promote an integrated approach to global competitiveness. Our military should be trained and structured around missions, not the elements of air, water, and land.  That requires fundamental change, but instead, the Defense Dept. has established an overlay of "commands" to compensate for organizational deficiencies.  Does it make sense, in 2008, even to have a Bureau of Alcohol, Tobacco, Firearms & Explosives?  If so, why is it part of the Treasury Dept?"

When it gets to the financial sector, Mr. Gerstner states, "...the regulatory processes in place are ad hoc and depend on leaders undertaking risky initiatives.  Now more than ever, we need a single federal organization to oversee all of our financial institutions..."

In addition to calling for bipartisan action and business cooperation, he suggests the creation of a commission similar to the one established by President Reagan in 1982, that became known as the Grace Commission (named after its chairman and my former boss, the late J. Peter Grace, Jr.).  It was this commission that uncovered great government waste.  In its final report, the Commission concluded that nearly one-third of all taxes collected by the federal government were squandered through inefficiency. Although, as Mr. Gerstner states in his article, 2,478 recommendations were made, few were ever tried.

I agree with Lou Gerstner.  A government reengineering team should be created, reporting directly to the President.  It should be vigorous in its effort to create change, not for change sake, but because we know that government no longer works.  It is a broken system.  We are much better off defining new requirements and creating a new government structure that we can migrate to, one that is lean, flexible and powerful enough to efficiently meet the needs of tomorrow's citizens.

Come on, don't be afraid, you've got to be more aggressive out of the box.  Go for it!

Copyright 2009 WBSeebeck

Oil, Oil, Oil: What Should the Price Be?

Before we begin, remember that before there was the cost of oil, there was coal, before coal it was wood and somewhere in between there was gas, not to mention electricity and who knows in the future, we may be complaining about windmill rates.

The reality is that there is some purpose to almost every form of energy, although the man made one -- nuclear seems to always be a problem because it can also be used to breed a weapon and we don't know how to protect ourselves and our environment from its most toxic waste.

Back to oil.  Well, we, the public, have been dealing with the price of oil in one way or another for the last eight years and it hasn't been pleasant.  If we didn't know it before, we now know that it can wreck a home budget overnight, can do the same to the travel and hotel industry, not to mention the cost of good, and every other product, goods or services we consume.  Yes, no having a fix on oil will keep us rocking as we begin the hard work of putting the economy back in balance.

So, what should be the real price of oil?

Well, news agencies are reporting that OPEC wants a price of $75 a barrel.  That would mean that the price at the pump would be closer to $3 per gallon.  For those nations that are listening, I can tell you that $3 is too much and won't work here in America.  Sounds like I'm negotiating a price?  Well, I am and I think we can negotiate a price or a price range that is acceptable to our economy and to OPEC.

Last year, the chairman of the National Bank of Kuwait suggested that the price range might be in the $35-$50 range.  At the pump, that would mean a price not higher than around $2.25 per gallon.  Even that is high but closer to reasonable given our current situation.  What would work is around where the price has been over the last 60 days, somewhere between $30 and $45 per barrel.  That would keep the pump cost below $2.00.  The price needs to be kept below two dollars per gallon.

Now at that price, do the OPEC countries make money?  Yes, they do.  In a variety of interviews at the close of 2008, it was reported that the cost of oil at the wellhead in the Gulf was still around $2,00, which it has been for some time. When you add costs, expense is around $18-$20 a barrel, OPEC will still be a profit margin of 50-100%.  That is more than fair.

What I learned from my time in Saudi Arabia, working with a company that had a major American oil concession, was that the companies make a profit, but collectively, it might not be enough to meet their own government's budget needs. That to me is a whole other situation.  I think that it is important that our government actively work to seek some level of stability in oil prices, so that we can better plan our lives in an effort to make a more predictable economic recovery.

Copyright 2009 WBSeebeck

War! What is it good for? Absolutely Nothing!

I think Ed Starr was on to something when he sang out the words of this popular anti-war song in 1970.

This was confirmed by my college economics professor, Dr. Emily Sun, who observed that no nation could sustain itself for long periods of time on a wartime economy.  Simply put, Dr. Sun would say, when you invest in war, there is no economic return.  I mean if you buy chickens, you will have eggs for breakfast and ultimately, roast chicken for dinner.  When you buy bullets, you get spent cartridges.

It seems that President Reagan understood this concept as it is generally acknowledged that his administration engaged in a military spending competition with the Soviet Union, such that their economy could not sustain the effort against the U.S. and ultimately collapsed taking communism with it.

However, the war in Iraq has been close to the longest engagement in daily combat by the United States in its history.  It has also cost the American people close to two trillion ($2,000,000,000,000) dollars, the lives of thousands on both sides and helped wreck our economy.

Somehow, we didn't understand the implications of the Reagan plan well enough.

So, here we are deep in the deepest financial crisis in our history and at the same time, we cannot ignore the great challenge that confronts us, as a result of our strategic, foreign and military policies.

Economics alone dictates that we disengage as soon as possible. Military sense dictates that our forces have been "punished" by continuous deployments with most serious long-range implications as to the type of force available to us for the future.

So, what do we do?

Experience in the region tells me that we should acknowledge that we are willing to maintain supportive relationships with governments that are not religiously driven.  We should further acknowledge that many countries that are ruled by religious bodies have a poor view of the west and as long as they make no designs on the United States, we should have no designs or interest in them.

With regard to Iraq, I believe that as long as civilians run their government, we will support their efforts to further modernity and that would include a joint military assistance program.  As for Afghanistan, I believe that unless and until we have a very broad, disciplined and honest relationship with Pakistan, that we should forgo further interests in a country long dominated by war-lords with an agricultural economy focused around one product - heroin.

In the short term, we should remove our troops from both Iraq and Afghanistan.  In our own self interest, we should make sure that the pipelines of oil that fuel our economies in the west are maintained without interruption through whatever needs required.  As for the terrorists that attacked us, they should never have rest from our vigilance.

Copyright 2009 WBSeebeck

Thoughts & Questions About the Universe on a Beautiful Day!

A couple of years ago, I followed Einstein's belief that more is discovered about the universe by laying on a blanket under a tree on a beautiful day than ever was discovered in a laboratory.

Now, let me rush to say that this article is not about factually defending what is contained in the previous statement.  Rather, it is about considering the world around us.

Here are the questions I wrote down on that beautiful day:

• If we see planets in their past, are we not seeing the past in our present?
  
• When other planets see us (assuming life out there someplace) are they not also seeing us in the past?  If so, is our past always alive in the universe?
  
• What role does distance play in the universe or in how we see the past, present and future?
  
• If space is a void, why can it be seen?
  
• Is space the representation of the decrease in magnetism and gravity?
  
• Is matter only present in the presence of other matter?
  
• Are we always present in the past?
  
• Do we die in part because our magnetic/gravitational presence changes over time and our matter in the presence of other matter decreases and we fail to maintain our "space" and proportional representation in the magnetic state?
  

Let me know what you think and if you know of answers to these questions, please send them along.

Have a beautiful day!

Copyright 2007, 2009 WBSeebeck