Archive for September, 2008

In Layman's Terms: The Economic Crisis and 9/29 Bailout

September 30, 2008

This post was written by Allese, Wesabe’s Community Manager.

After yesterday’s failed bailout vote, the ominous headlines are everywhere:

“Stunning Defeat for Bailout Plan Torpedoes Stocks; Dow Sinks Over 750”

“America’s Money Crisis”

“Consumer Spending Loses Steam”

“End of the Superpower: Will US Lose it’s Status As A Result of Financial Mess?”

They’re big, bold-faced and downright scary. But what does it all mean?

After reading a few articles over at Yahoo! Finance and scanning Google News, I get that the situation is bad and it’s been bad. From the fall of Freddie Mac and Fannie Mae this past spring, to Washington Mutual’s failure last week and yesterday’s failed bailout, it’s clear that the American economy is in trouble. Outside however, these headlines seem far away — the stores are still crowded, the banks are still open, and restaurants and bars still overflow. Granted, I live in downtown San Francisco, an area where most people I encounter say that they are thus far unaffected by the economic crises.

Walking home last night, I wondered how long it took for the Black Tuesday of 1929 to affect the worker. If we’re headed into economic depression, how do we respond to it? How does one contextualize this crisis to make it hit home?

Trying to make sense of how this all happened for the non-financier (someone like me) is really difficult, as it is so complex. Lacking a degree in Economics, all this can seem like scary jargon. Attempting to answer my questions, I have read a lot and talked to several people about this crisis. Here’s my breakdown in layman’s terms.

It all started with mortgages. Banks were lending money to people who were qualified to get mortgages. These mortgages were very profitable for the banks. Investment firms and banks liked these mortgages, packaged a whole lot of them together, and sold them to larger financial institutions. In turn these financial institutions would repackage these into larger packages sell them higher up and so on. This was very profitable for the resellers, increasing the demand for mortgages, and causing banks and brokers to start lending money to less and less qualified people. At one stage, the bar got so low that you didn’t need to show any income or even have a job to get a mortgage (these were called NINAs – no income, no assets).

Now all this was being financed because home prices in the U.S. kept going up. The individuals who took out these mortgages began using their houses like piggy banks and borrowing against them. However nothing goes up forever. Eventually, the party came to an end, and house prices stopped going up and people needed to pay back their mortgages. But because loans were made to people who did not have the resources to pay them, they were unable to pay them back.

As people could not pay back their mortgages, these loans or pieces of paper, became worthless. Suddenly commercial banks that originated these loans and investment banks that repackaged these loans were left holding worthless (or toxic) pieces of paper. Worse still, investment banks leveraged these pieces of paper compounding the problem. As a result, investment banks such as Lehman Brothers, Bear Sterns, Merrill Lynch and commercial banks such as WaMu and Wachovia could not pay back these loans.

Back to my question, how does this all affect the average American citizen? These dramatic headlines are the beginning of a domino effect. The stock market is generally an indicator of market sentiment, or the way people feel about the future economy. When the market is down 8% in one day, as it was yesterday, there is clear concern and fear.

Banks are now less inclined to lend money to each other because they are concerned that the other bank will fail and not pay back their loan. Subsequently they have less money to lend to businesses and individuals, be it the American corporation looking to expand all the way down to the person trying to buy a car, the student trying to pay for college, or the Mom and Pop sandwich shop. As there is less money to be lent, corporations downsize and people lose their jobs, the Mom and Pop sandwich shop goes under as it is simultaneously unable receive loans to pay for its expenses and people begin to pack their lunches, the eighteen-year-old can’t go to college as he is unable get that student loan and so on.

Kiplinger has an interesting article titled “10 Things That Will Change,” spelling out what they think the economic and financial landscape will be in a few months. According to the article, “In reality, the change isn’t to a new environment. It’s a return to traditional norms of the past, before cheap money inflated asset values, undermined lending standards and encouraged excess risk. It’s bitter medicine, but it’s necessary.”

WaMu Adventure Part Two: Show Me The Money

September 27, 2008

I wanted to provide a quick update on my tales as a Washington Mutual customer. Yesterday morning, I took a trip up to my local Washington Mutual branch to take out $2,000 in cash. It was entirely, completely uneventful. I’m not sure what I was expecting – I knew it wasn’t going to be the bank run in It’s A Wonderful Life where I ask for $2,000 and the teller says, “Aw, Debbie, do you need that? How about $200?” But I guess I did expect something out of the ordinary – maybe a long line of customers or a quiet funeral dirge playing over the speakers…

There was only one other customer in the bank and there was no JPMorgan signage. Had I not read the news, I would never have guessed the bank just tanked. I asked the teller if my direct deposit and auto-bill pay would be affected; he said no. I asked if he thought this branch would remain open; he said absolutely – JPMorgan doesn’t have a West coast presence, so the only branches that were in jeopardy were on the East coast where there is some redundancy.

I’m glad it appears these folks will be keeping their jobs. I know that my teller wasn’t one of the WaMu executives looking at no income, no asset mortgages and saying, “Wow, these look great. Let’s get a few billion dollars worth.”

So who got screwed? Not me – my money was right there. Maybe I’ll want to change banks down the road if I don’t like the policies that JPMorgan brings with it, but as for now, it really is business as usual. Hopefully not the WaMu line workers – my teller seemed pretty sure of his job security. Not the FDIC – they played the deal broker role here and didn’t need to tap any of their funds to cover accounts. WaMu executives? Given the size of executive pay and bonuses for the last few years, I’m certainly not going to cry any tears for them. WaMu shareholders? Yup. Things sure haven’t been pretty for them for the last several months, but this deal guarantees their investment is just about worthless.

Washington Mutual: “Whoo Hoo?” More like “Whoa, who has my money now?”

September 25, 2008

[This post was written by Debbie, who has been with Wesabe from the start, and runs communications for us.]

Talk about retail therapy – I have been on a heck of a buying binge the last few weeks. Let’s see, first a few mortgage giants, then a big insurance company, and now I, along with all the other U.S. taxpayers, am looking at buying a whole bunch of bad mortgages and debt from the banking industry. Do these mortgages make my butt look big?

whoohoo.png

While still digesting our collective shopping spree, I heard the news tonight that my bank, Washington Mutual, has been shuttered and that JP Morgan has swooped in to “purchase its assets.” Part of the $307 billion in assets that JPMorgan Chase will absorb, according to CNN, includes “WaMu’s toxic subprime and option-ARM mortgages.” Toxic mortgages? Remember just a few short years ago those same ARM mortgages were being breathlessly called “exotic” by brokers? My head.

Just checked my balances on Wesabe and right now at Washington Mutual JPMorgan, I’ve got $9,703.43 in checking and $284.74 in savings. I’m not worried that this money is going to disappear, but I was actually planning to take out $2,000 in cash tomorrow to pay the guys who have been finishing our basement. The FDIC said this transition would be “seamless,” so I’ll let you know how things go when I head to my local branch. I am fortunate not to be part of the nearly half of Americans living paycheck to paycheck (I was, however, in that group for a number of years), but I certainly don’t have $2,000 in the cookie jar.

Last night at the dinner table after I told my four-year-old son Leo that he had to eat some broccoli before he got dessert, he thought for a moment, looked up at me and said, “Yeah, but I don’t have to like it.” And so it is with the bail-out and now with WaMu. Yeah, it looks like you and I going to be buying a bunch of bad debt and that my bank is gone. We understand. But that doesn’t mean we have to like it.

Making Connections: Money, Women and the Web

September 19, 2008

I was one of thousands of women to attend the annual Blogher Conference in San Francisco this past July. From mommy bloggers and passionate politicos to foodies and open source programmers, web-savvy women of every kind gathered to share their passion for writing, social media and the Internet. And boy, was it packed. After having to fight for a spot on the floor at the first two panels, I planned ahead and arrived five minutes early for my third session of the day, the Personal Finance, Business and Career Meet Up.  Ten minutes later, only eight more people had arrived

Where most of Blogher’s panels were literally overflowing, with people craning their necks around doors to learn how to improve their SEO skills or about issues that arise when blogging about sex, the personal finance, business and career panel was practically empty. Initially when reading over the various panels at Blogher, I was quite surprised that three such distinct, major topics were crammed into a “meet-up” (in contrast to a panel which featured well known speakers) and figured it would be brimming with bloggers of all sorts.  Many bloggers are, in essence, small business owners (their product being their blog) or hoping to be, thus making all of these issues of key concern. Not so much.

At the meet up, we spent the hour pondering these issues, focusing especially on the question, where were all the personal finance bloggers? Our answers covered a wide gamut of reasons, including the unsexy sound of “personal finance,” the feelings of inadequacy and fear that “managing your money” arouses, and the inaccessible nature of much financial information. Whatever the reason, it became clear that the term “personal finance” was in dire need of a facelift. Elena Centor, the moderator and Blogher’s contributing editor to the Personal Finance, Business and Career section, put it well when she said:

“I don’t like to talk about money. Truth be told, I avoid the topic at all costs. I hate money. Yes, I like to use money. But I hate what it does to people. It divides. It judges. It makes people who have great personal success feel like failures. Money causes insomnia, tears, heartbreak and humiliation… (however) given the economy, given that money is often at the root of marital stress, given that decisions to stay at a job, leave a job, or start a business all center around MONEY, it’s ironic that so few people want to talk about it.” Read the synopsis on Blogher here.

After Blogher, I started looking at major websites dealing with women’s issues and more specifically, finance. There wasn’t much to see. Though finance is a crucial subject, most thriving, web-based female communities tend to leave it out.  For example, iVillage, a dominantly female website that boasts more than 30 million unique views a month, lacks not only a personal finance section, but a business and career one as well. I did find a few gems: Divine Caroline has plenty of thoughtful, intelligent discussions occurring in their Career and Money Section; Wisebread has offers an entire list of female personal finance bloggers; and finally, the Sugar Network has a site, SavvySugar, solely focused on presenting financial/career information to women in their twenties and rousing up lively discussion surrounding these subjects.

Thus, I am very pleased to announce that there is now a SavvySugar Group on Wesabe. While Wesabe has a great community for money issues across all consumers, I and the Wesabe team believe that a group focused on women’s finance issues would be a great addition, and we wanted to draw from the wide range of experiences and awesome members SavvySugar has today. We think that the Wesabe community — especially the way everyone in Groups supports each other and provides fantastic suggestions for people facing financial issues — has a huge amount to offer SavvySugar. So, think of this like a dinner party introducing two groups of friends we know will get along brilliantly.  Welcome, SavvySugar, and thank you for giving a much-needed voice to young women and the money and career issues they face.

What happens to your money if your bank closes?

September 15, 2008

bank failure

Wesabe members have been asking a lot of questions about the financial industry news in the US today, and how it might affect consumers. The situation today is a huge amount better than it was in the 1930s-era photo above, as a result of changes to the financial services industry after the bank failures of the Great Depression. Still, it’s good for consumers to be informed and to be safe with their money using some simple precautions. I tried to get some official answers, and then also talked to a customer who had all of his funds in NetBank, a bank that failed and was acquired by ING Direct last year, and have some advice based what I’ve found.

In general, US banking customers are protected by the Federal Deposit Insurance Corporation (FDIC). From the FDIC web site, here is a brief description of what protection is provided for FDIC-backed institutions:

An independent agency of the federal government, the FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. Since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure.[…]

Savings, checking and other deposit accounts, when combined, are generally insured to $100,000 per depositor in each bank or thrift the FDIC insures. Deposits held in different categories of ownership – such as single or joint accounts – may be separately insured. Also, the FDIC generally provides separate coverage for retirement accounts, such as individual retirement accounts (IRAs) and Keoghs, insured up to $250,000. […]

The FDIC insures deposits only. It does not insure securities, mutual funds or similar types of investments that banks and thrift institutions may offer.

As long as you have less than $100,000 in a deposit account, then, and your bank is FDIC-backed (you can find out if it is here), then your funds are protected. There’s a lot more practical information and detail at the FDIC’s “When a Bank Fails” page.

(It’s a good thing the FDIC has a fairly comprehensive web site. I called them today to talk through some of the questions I’ve heard from Wesabe members, and they said today was the biggest day of call volume they ever remember having, and asked me to call back later. Today’s financial news has definitely brought a lot of people to the FDIC with questions.)

What really happens, though? I spoke with a Wesabe user who had almost all of his funds at NetBank at the time it failed last year. ING Direct acquired NetBank, so he was able to get access to his funds through that new account once it came online. His experience was instructive:

  • For two to three weeks after NetBank closed, he had “no real access” to his money. At the time, he had all of his liquid funds in NetBank accounts, so in order to get by, he relied on his parents and his fianceé, and a couple hundred dollars he happened to have in his wallet when the bank failed.
  • He got one note from the FDIC saying that NetBank was failing, and after that, all of his communication was with ING Direct. (He had less than $100,000 in his accounts, so all of his funds were protected.)
  • The first message from ING Direct said (paraphrased), “In a few days, you’ll get read-only access to your account so you can confirm the funds are present.” As he put it, “Oh, great, a web page with some numbers on it. When can I actually get that money!?”
  • He had direct deposit set up to his NetBank account, and had one direct deposit payment “vanish into nowhere.” He had to get his employer to resend that payment to his new ING Direct account. (Note that the FDIC site says this won’t happen.)
  • Several automatic payments from his NetBank account were not processed, but since he was able to get the new ING Direct account set up within a few weeks, there was no real harm from this.
  • Overall, the experience was a big shock. “If I didn’t have very, very nice parents and a very, very understanding fianceé, I’m not sure what I would have done,” he says. He now has accounts at three separate banks in order to provide better access in the time of a crisis.

(Thanks much to this former NetBank customer for providing so much information for us.)

In many senses, the NetBank failure was the best possible scenario, since a well-funded and -equipped bank immediately acquired the accounts. Of the 38 bank failures since 2000 FDIC currently shows on its Failed Bank List, 34 of them resulted in the failed bank’s accounts being acquired by another bank. While the FDIC delivers insurance checks to consumers in the event that no other bank acquires the accounts, promises to do so “as soon as possible,” and says payments “usually begin within a few days after the bank closing,” I could imagine that situation might be even more stressful and confusing, since an acquiring bank is probably better-equipped to handle new customers’ service issues. I would be especially concerned if these sorts of acquisitions became impossible because the failing banks became too large, or failures too widespread.

So, looking at the FDIC guarantees and one Wesabe member’s experience with a bank failure, what should consumers do to protect themselves? My advice:

  1. Never keep more than $100,000 in any deposit account. If you have more than that much to save in deposits, distribute it over several different banks.
  2. If you maintain an emergency financial fund (which is always a good practice), consider housing it at a separate institution from your primary account.
  3. Always keep essential deposit accounts at FDIC-backed institutions.
  4. Check your bank’s stability using Bankrate’s “Safe & Sound” ratings, or another rating system if you prefer.
  5. As part of a standard home emergency kit, keep some cash in the house in a safe place — several hundred dollars, if you can. Storing your savings in your house doesn’t make sense, but having some cash to get you through in the event of any kind of trouble — bank trouble, natural disaster, or otherwise — is smart.
  6. Be an informed consumer! Keep up with the financial news, and of course we believe Wesabe Groups are a huge help as well. Financial topics are overwhelming and can be hard to follow, but the more you learn, the better-off you’ll be.

Hope this helps. I’ll be talking about this topic tomorrow night on CNBC’s “On the Money” personal finance show, with host Carmen Wong Ulrich. If you have questions you think we should cover on the air, leave them below or drop me a line at marc@wesabe.com.

New Feature: Wesabe Windows Vista Sidebar Gadget

September 15, 2008

Wesabe‘s Mac Dashboard Widget has long been a popular feature for our Mac users, but we’ve gotten frequent (and insistent!) requests from our Windows users for something similar. Today we’re happy to be able to answer those requests, with the launch of the Wesabe Windows Vista Sidebar Gadget.

GadgetThe Vista Gadget provides full access to all of your Wesabe account information in a compact, convenient window. Instead of needing to log into the Wesabe site to check your balances or look for a recent transaction, you can instead just call up your Vista Sidebar and get everything you need. If you see a transaction you want to drill into or edit, just click on it and you’ll get sent to the Wesabe site for the full transaction details.

If you don’t want people peeking over your shoulders at your bank information, just click the Wesabe logo, and the Gadget will collapse into a compact, hidden form. Clicking the “Wesabe” name at the upper right will take you through to the Wesabe site.

The Wesabe Vista Gadget is built completely using the Wesabe API, which allows you to get access to your financial data in other programs and forms. The initial prototype of the Vista Gadget was developed by a Wesabe user using nothing but the API documentation. We’re always happy to see people making good use of the API, and this application is a great result of providing a free and open API.

Thanks to Tim for the fantastic job building this out. Let us know what you think!

Budgeting? Me? Get outta here….

September 11, 2008

(This post is part of Allese’s (Community Manager at Wesabe) blog series detailing her journey into the real world of finance. You can also find Allese at Wisebread, a website about living large on a small budget, in their Forums. Stop by and check her out!!)

So, I’d be the first to tell you that I am really bad with money. In fact, I think I already did, if you missed my manifesto, check out my first Wheaties post ever. Regardless of the fact that I have spent the past year working at Wesabe, a company centered around frugality, intentional spending and investing for the future, I still don’t stick to a monthly budget. I certainly better understand my spending, but haven’t really made any dramatic changes to my spending habits. I am a classic spender with a capital S.  While this often makes me feel quite guilty and hypocritical, I am choosing to blog about it. Why? Because, I, yes, Allese, am representative of a much larger population of non-money managers that cringe when their bills show up in the mail and coil at the word budget.

Now, you can throw stones all you want and try to jam your very wise words of saving and budgeting wisdom down my throat. Trust me, I absolutely, one hundred percent, believe you. And, I am guessing if you got my fellow population of spenders to sit still for a few moments, they would too. But my point here is, if an open minded gal like me, working as the community manager for a money management company, can’t pin her bad habits down… think about how hard it must be for the rest of my people! For us lovers of the moment, happy go luckiers, managing your money comes about as easy as eleventh grade calculus… or perhaps better put for you financers, creative writing and art class.

That said, one thing I most certainly have learned from the Wesabe community is the importance of managing your money. In fact, I’ve got pretty good at talking all about it, so much so that I might even be able to title myself a personal finance dilettante. Thus was quite excited to see that Andrea of Queercents, is writing a series about how to turn Spenders into Savers. As I have seen many discussions in the Wesabe community popping up with the big… “Where to Start!” “How to Budget!” “What to do!” questions, I thought people might appreciate this.

I am going to try Andrea’s series and see if her steps would work for me. This may be challenging for as my situation is fine for where I am now (23, just graduated from college), but I realize that some good planning at this stage of my life will make a huge difference when I’m ready to buy a house, have kids, or retire and could also provide a soft landing for the unexpected. Most of all, I truly believe in what many of my fellow Wesabeans have said about managing your money, for example:

CharliePark says: “Budgeting isn’t about spending less on the stuff you want. Budgeting is about spending MORE on the stuff that matters.”

Justinwp says: To me a budget isn’t restrictive at all. Rather a budget allows me so many opportunities that wouldn’t be available otherwise.

Rebecca2Lexington says: For me, great happiness has come from living on less than I make, so that I can save for what I really want. It is not about being miserable or not enjoying life, it’s about thoroughly enjoying what I do buy because I did not have to borrow from a friend or put it on a credit card. I feel great joy in my small savings because it has allowed me to fully fund my son’s college education, provide for retirement and an emergency fund. When you are a saver, you can enjoy what you do buy, without the sting of debt. It’s all about priorities. While others might feel differently, I don’t mind. I drive a Mercedes, and it’s paid for!

So, join me and let’s give it a go!

Check me out on Wisebread, a website about living large on a small budget… I am their personal finance woman of the week! Bring on the questions… I will find some answers!