A1. FINANCIAL RESCUE EXPLAINED - Causes, Effects, and Rescue Measures
Affecting Us All
A note to our readers: This article was written near the end of October,
and, as we know, details change from day to day, and therefore some information
may have changed. As always, be sure to contact your own financial professional
before making any modifications in your portfolio.
Americans are watching in concern and disbelief as the world's financial
titans fall one after another. The government has stepped in with a $700
billion dollar intervention that will total closer to $900 billion by
the time we're through. At time of writing, the Federal Reserve has announced
yet another action to purchase short-term corporate debt.
What happened? Are we safe? We're going to explain it to you here and
now.
As with any problem there is a root cause, and there is fallout that
results from that cause. Often the fallout creates as many or more problems
as the initial trouble that must also be addressed.
The same is true in the current global financial crisis. Fortunately,
the Federal Reserve Bank, the U.S. Treasury, Congress, and the White House
are finally focused on real solutions, rather than just window-dressing
political statements. The first part of this article will describe the
root cause and fallout. The second half will explain what is being done
to solve the problem and get the global financial systems functioning
normally again.
Part 1 - The Cause:
Greed. Greed is at the root of the problem that led mortgage brokers
to swindle, encourage their customers to lie on their financial forms,
and led the banks to look the other way. Why would a bank look the other
way on forms that determine the creditworthiness of a borrower? You would
think that since their capital is on the line - their money - they would
be as careful as always when lending money. We all know how hard it used
to be for an honest person to get a loan, so why go willy-nilly lending
to anyone who can "fog a mirror"? The answer: They knew they could sell
off the loans to Fannie Mae and Freddie Mac. That's right, the government
backed agencies that were set up to help Americans buy homes.
The Federal National Mortgage Association known commonly as "Fannie Mae"
would buy mortgages from banks knowing the usual conservative nature of
lending terms and policies, then gather a pool of mortgages together from
across the nation to balance the risk in case one neighborhood hit hard
times from a factory closing or natural disaster, and so forth. They used
these as collateral for bonds -- investments that pay interest and principal
back to an investor a little each month. Investors would buy the bonds
knowing the high safety made the moderate interest they earned each month
a great investment value.
As families across the nation paid their monthly principal and interest,
Fannie Mae routed the payments to the appropriate bondholders. This system
worked perfectly for decades, providing liquidity to the housing market.
banks could lend, earn fees for originating the loans, and then sell the
mortgages to Fannie Mae and its counterpart Freddie Mac, thus regaining
their capital to lend to the next person. Then the cycle repeated, millions
of times over, and perfectly, every time. Families got homes, investors
got safe investments with good returns, and the American Dream of owning
one's own home and living on one's own terms was fulfilled--until banks
and mortgage brokers got greedy, that is. Once they started looking the
other way on the ability of a borrower to pay, or neglected to tell the
honest borrower looking for that American Dream that their payments would
double or triple in five years under the loan provisions they were signing
onto, it all began to unravel.
Compounding the Problem:
On Wall Street, Lehman Brothers was doing a brisk business in a very similar
fashion to Fannie and Freddie. Lehman used more complicated methods because
their goal was not to put homeowners together with capital for the good
of the nation, but to earn billions of dollars in fees and commissions
while participating in the home finance marketplace. They created their
own bonds and sold them to large investors, pension funds, investment
funds, and banks all around the globe. This isn't against the law by any
means. The notion is that investors will say to themselves: "These guys
aren't backed by the U.S. government, like Fannie and Freddie, so I'll
be more careful and demand higher returns to balance my risk." But the
risk was hidden, and in fact not understood completely even by the professionals
at Lehman Brothers because their bonds were so complex.
Lehman bought mortgages and made bonds out of them, like Freddie and
Fannie, but paid out the interest and principal much differently. The
highest rated AAA bonds they sold got paid first; the lower-rated got
paid last. This method meant that if somebody defaulted on his home loan,
the first group of bondholders wouldn't be affected. But the lowest class
of bonds would feel the pinch. These lower-class investments paid higher
interest to balance the risk. Why break it all up like that? To earn fees
for Lehman, of course! They created these "collateralized debt obligations,"
called "CDO's" for short, in order to sell them to mutual funds, giant
pension funds, and so on. They got fees for creating them. And they were
so complex that the leading rating agencies, Moody's and Fitch had the
wool easily pulled over their eyes. Plus, it turns out Moody's and Fitch
weren't looking very hard anyway, and those lower-rated securities got
ratings that were far higher than they deserved. Some even went out as
"AAA" when they should have been "unrated."
Why? Well, they were rating securities from their old pals Lehman Brothers,
of course! Lehman had been around since the "Westward Expansion" and "Manifest
Destiny" doctrines. They funded the railroad expansion across America!
Of course, last month they, and many banks, investment companies, and
pension funds that bought them failed under the weight of all the bad
mortgages that stood behind the bad CDO's, regardless of their vaunted
history, massive size, and gilded reputation.
The $900 billion dollar rescue signed by the president is meant to buy
up all the bad CDO's to put these financial firms back on solid ground.
The bonds and CDO's actually do have real value because most people are
still paying on their mortgages, and the CDO's are actually generating
real returns. But the fear around the globe means nobody will buy them,
so nobody can sell them, so in effect, they are worthless on the books
of financial institutions. This is actually the key to the current problem
in the financial markets - that the books of many firms are wracked by
worthless investments. We'll get to that in the next section of this article.
The government plan to eliminate the fear and stabilize the system by
buying up those investments was done with the idea that when the mess
is cleaned up, these investments will be seen for what they truly are
and taxpayers will recoup our $900 billion investment in the financial
system, meanwhile avoiding a deep financial depression.
How the Gears Ground to a Halt:
Remember those ruined corporate books we just mentioned? Would you loan
money to them? Of course not! But herein lies the biggest problem: All
businesses need to borrow money daily to smooth out their cash flow. It
is perfectly normal. Say you make tires, for instance. Say you need to
buy rubber today. You know that you sold a bunch of tires yesterday, but
the money won't be in for two days. What to do? Sell an IOU that lasts
for two days, that's what! You get the money in to smooth out your cash
flow, you pay low interest because it's only for two days, you buy your
rubber to make more tires, pay wages, etc., until your cash from the last
sale comes in. Meanwhile, the buyer of your IOU has a place to park their
excess cash for a couple of days until they need it for their own operations.
These IOUs are called "corporate paper," and they make all business flow
smoothly in our modern world and have for generations. It is so safe and
boring that at most corporations an accounting clerk does the job for
the firm's accounting department.
And then Lehman failed. Suddenly, one of the biggest, most prestigious,
knowledgeable, and oldest of all the Wall Street houses of all failed,
and their IOU's were worthless. All of that "overnight money" was gone.
Instantly, no business wanted to buy an IOU from another business. It
became impossible to borrow money overnight because of fear. The "biggest
and brightest" had fallen to dust. Immediately, car dealers could not
find funds to buy cars, or pay wages this week. Next week the money would
be in from last week's sales - but not today. Exterminators could not
get overnight loans to buy chemicals, and so on. Next week when payments
arrive? Yes. But not on the day they needed the cash. Tire makers could
not pay wages and buy rubber on a Monday, because their cash from last
Friday's sales was still two days away. The whole system literally froze
in fear. Disaster, hoisted upon the shoulders of an existing mortgage
calamity.
Part 2 - Good News! Washington Gets Serious:
We all know now about the U.S. government addressing the problem of the
worthless mortgage-backed securities and CDO's. President Bush just signed
into law a massive plan put forward by U.S. Treasury Secretary Henry Paulson,
which was modified by Congress insisting on oversight that was lacking
in the plan, because a lack of oversight and regulation got us into this
problem in the first place!
The plan is to buy the securities that still pay returns but are un-saleable
in the market, which ruined the books of Lehman Brothers and caused them
to fail, thus defaulting on everything including their commercial paper
"overnight IOU's," causing the cascade of fear that ground the corporate
paper lending market to a halt. The idea is to prevent any more banks
from failing the way Lehman did by getting the un-saleable mortgages out
of the system. The U.S. Treasury, with a virtual army of accountants,
will re-value them, with a mission of truth and quality, and then sell
them in the market at their true value, thus reclaiming our taxpayer investment
and even a profit for the taxpayers.
However, there is also a more immediately felt and extremely important
action underway: At time of writing, the Federal Reserve Bank's Chairman,
Ben Bernanke, has just announced that the Federal Reserve will immediately
begin buying overnight IOU's - the commercial paper all businesses need
? putting the traditional lubrication back into the gears of global finance.
As of today, the car dealer can again get money for two days to cover
the cost of buying inventory, until the sales from last week clear and
the cash hits their account. This will come from the Federal Reserve Bank.
The business that has excess funds for a week can invest it safely. The
exterminator company can smooth out its cash flow and sell an IOU to the
Federal Reserve Bank for a couple of days so it can buy the chemicals
this week that it needs in order to exterminate your neighbor's home.
The Federal Reserve Bank will earn a return (the interest for a few days
of borrowing) for the taxpayer while doing this. But most importantly,
business can immediately resume on "Main Street, U.S.A."
It remains to be seen over the next few weeks how and when the financial
system will recover. The effects have spread around the globe - but we
will be following the situation closely and will continue to attempt to
explain this all in a clear way to you.
Additional financial information for seniors can be found at:
http://www.seniorresource.com/finance.htm
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A2. IT'S CALLED THE SENIOR TSUNAMI by Neil Johnson,
Minnesota HomeCare Association
Over 78 million baby boomers are now approaching retirement age (the
first boomer just applied for Social Security benefits). As a result,
U.S. age demographics are shifting significantly. Seniors 65 and older
will soon constitute 20 percent of the population. And it's estimated
that by the year 2020, 12 million older Americans will need long-term
care.
With this aging of our population, homecare is an ever-growing and multi-faceted
industry. In fact, eldercare is fast becoming more of a growth industry
than childcare. The infrastructure, however, is not yet in place to handle
this coming age wave of American retirees.
The Olmstead Decision, passed by the Supreme Court in 1999, states that
the elderly and disabled have the right to enjoy care in the least restrictive
environment possible. To seniors, this means in their homes. But having
the right and having access to resources are often two very different
issues. To date, funding has not supported the Olmstead Act and lack of
such has weakened its impact. It's extremely expensive to raise Medicaid
payouts. For example, just a 2% reimbursement increase in Minnesota would
equate to over $70 million. And the for-profit model of home care hasn't
yet matured.
A 2006 study conducted by Ecumen, a non-profit provider of senior housing,
concluded that 89% of baby boomers surveyed want to live their retirement
years at home rather than in an assisted-living or nursing home environment.
Despite this expressed wish, 75% of Medicaid payments still go to nursing
homes even though Minnesota nursing homes have downsized 6,000 of their
beds over the past five years. A shift in focus and in resource allotments
needs to happen in the near future to accommodate this overwhelming preference
for home care.
Both baby boomers and their parents are interested in staying out of
what is commonly known as the "broken hip" revolving door of hospitals,
rehab centers and short-term nursing home placements. But what can be
done to prevent the fall that causes a broken hip? How can retirees keep
their current lifestyles without significant interruption? What resources
are available to make it feasible to grant their desire to remain at home?
Several home care service options are now available that ensure seniors
can maintain their "at-home" lifestyle while also meeting their healthcare
needs. There are four basic levels of home care to choose from:
- Personal care attendants provide assistance with
activities of daily living such as dressing, bathing, feeding, transferring,
etc. and are not licensed by the state. This type of care is typically
paid for by Medical Assistance (which in other states may be called
Medicaid).
- Private duty care - basically private pay care
- provides assistance with non-medical needs such as shopping, cooking,
transportation, and companionship and involves household management
services but no hands-on medical care. Some long-term care policies
will cover such home care, but reimbursement terms and exclusion criteria
vary. Reverse mortgages and long-term care insurance are two financial
resources that seniors use to pay for private duty care.
- Licensed Class B home care agencies employee
home health aides to serve ambulatory and medically stable clients.
Licensed Class A agencies serve seniors who are non-ambulatory, require
help taking medications, or need diabetic monitoring, wound care,
and other hands-on skilled care.
- Medicare-certified skilled home care is typically
received on an acute, intermittent basis following an illness, injury
or change in disease status. Such services are physician-driven and
reimbursement is contingent on the individual demonstrating progressive
improvement and being homebound. Most people aren't aware of these
policy restrictions and erroneously assume that Medicare automatically
pays for any and all home care services ordered by a physician.
New technologies are also making home care a more viable option today.
Telehealth systems, home sensors, and online e-records are three ways
to make home care more time efficient and cost effective. Telemonitoring
companies offer remote distance monitoring so nurses can potentially "visit"
three times as many patients per day.
Other industries are adapting to accommodate the senior age wave as
well. Some homebuilders, for instance, are now using universal design
standards, because it is much easier to build a handicap-accessible house
up front than to retrofit an existing structure.
Changes in the home care industry yet to be realized include implementation
of best practices and comprehensive training as well as higher compensation
for home healthcare workers. They now make $7.50-12.00/hour -- on a par
with a McDonald's employee -- even though their skill levels suggest a
$16-18/hour pay range. If compensation levels don't increase, there will
be an ever-growing shortage of home care staff.
Another challenge is the "silo" fragmentation of healthcare and supportive
services created by regulation. Disjointed or repetitive communication
flow between public sector service agencies and end-consumers often makes
navigating the world of home care circuitous. An overall care coordination
and care management system redesign is direly needed. The Minnesota HomeCare
Association will soon be crafting a model to demonstrate a new care coordination
strategy to this end.
Proactive home care at the onset of physical or cognitive decline can
make a significant impact on the health and life expectancy of those 62
and older. Just as seniors often build a ramp to gain better entry to
their homes, the public policy and private business sectors need to significantly
"ramp up" their efforts to make home care more accessible to those on
the first wave of the coming Senior Tsunami.
Neil Johnson is Executive Director of MN HomeCare Association,
a non-profit statewide group that promotes the delivery of quality care
in a variety of home living environments. Neil can be reached at 651.635.0607
or njohnson@mnhomecare.org. Further resources are on www.mnhomecare.org.
Additional seniors' Aging in Place information can be found at:
http://www.seniorresource.com/ageinpl.htm
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B. DID YOU KNOW...?
IRS-Related E-Mail Scams
As the holiday season approaches beware of IRS-related scams. Here
are some things you should know and or be aware of.
The IRS does not initiate taxpayer communications through e-mail.
- The IRS does not request detailed personal information through e-mail.
- The IRS does not send e-mail requesting your PIN numbers, passwords
or similar access information for credit cards, banks or other financial
accounts.
If you receive an e-mail from someone claiming to be the IRS or directing
you to an IRS site,
- Do not reply.
- Do not open any attachments. Attachments may contain malicious code
that will infect your computer.
- Do not click on any links. If you clicked on links in a suspicious
e-mail or phishing Web site and entered confidential information, visit
our Identity Theft page.
How to report phishing, e-mail scams and bogus IRS Web sites
If you receive an e-mail or find a Web site you think is pretending to
be the IRS,
- Forward the e-mail or Web site URL to the IRS at phishing@irs.gov
- After you forward the e-mail or header information to them, delete
the message.
How to identify phishing e-mail scams and bogus IRS Web sites
You may also report misuse of the IRS name, logo, forms or other IRS
property to the Treasury Inspector General for Tax Administration toll-free
at 1-800-366-4484.
Report misuse of the IRS name, logo, forms or other IRS property to the
Treasury Inspector General for Tax Administration toll-free at 1-800-366-4484.
Learn more at http://www.seniorresource.com/finance.htm#resour
Good Practices in Picking a Charity
Before donating, there are some questions to ask charities Potential
donors should ask candidate charities questions about their programs,
mission, and goal. If donors don't have the time or resources to check
on the charities, several services are available to act as a guide to
establish donor confidence. There are some key questions that a donor
should ask before you begin to support a charity.
- Can your candidate charity clearly communicate
who they are and what they do?
- Can your candidate charity define their short-term
and long-term goals?
- Can your candidate charity tell you the progress
it has made (or is making) toward its goal?
- Do your candidate charity's programs make sense
to you?
- Can you trust your candidate charity?
- Are you willing to make a long-term commitment
to your candidate charity?
For more on how to select and check a charity visit: http://www.charitynavigator.org/
Additional seniors' financial information can be found at:
http://www.seniorresource.com/finance.htm
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C. THOUGHTS FOR THE MONTH
We present here some words from those with a birthday this month.
Maria Shriver - "Keep on doing the work and not worry what other people
have to say."
Keith Lockhart - "It's great to be home."
Joni Mitchell - "I love you when I forget about me."
Bonnie Raitt - "I've watched my peers get better with age and hoped
that would happen with me."
Morley Safer - "Has it changed the way you look at the rest of your
life?"
More "Thoughts" at: http://www.seniorresource.com/thought.htm
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D. SPECIAL OCCASIONS THIS MONTH
1. American Diabetes Month
November is a time to communicate the seriousness of diabetes and the
importance of proper diabetes control. This year, the focus is on the
deadly complications of diabetes, and asks the American public "Why should
you care about diabetes?" Throughout the month, the American Diabetes
Association (ADA) provides opportunities both nationally and locally to
raise awareness about diabetes and its serious complications, such as
heart disease, stroke, kidney disease, blindness and amputations.
- Since 1987 the death rate due to diabetes has
increased by 45%, while the death rates due to heart disease, stroke,
and cancer have declined.
- Keeping blood glucose, blood pressure, and cholesterol
in control can make a difference in reducing your risk for heart attack
or stroke.
- Annual dilated eye exams and routine foot exams
and blood pressure checks can prevent blindness, amputations, heart
disease, kidney disease, and strokes.
The ADA is the source for diabetes information. Call 1-800-DIABETES (342-2383)
or visit http://www.diabetes.org
for information and materials.
2. Vegan Month
What is a vegan (pronounced VEE-GAN)? Vegans, like vegetarians, do not
eat animal or fish flesh. However, vegans also avoid eating products that
contain eggs, milk and honey. The vegan diet is 100% plant-based, and
it is reputed to be very healthy, too! Going vegan may be one of the most
positive steps you can take to improve or maintain your health. Celebrities,
nutritionists and millions of others have gone vegan, recognizing it's
not only kinder to their health, but to the planet and, of course, animals.
What do vegans eat? Pretty much the same things as everyone else, just
without the animal products. Try: soups, stews, pies and pastries, casseroles,
curries, bangers 'n' mash, roast dinners and gravy, Thai, Chinese and
Japanese foods, pasta and pizzas! Learn more at http://www.veganmonth.com/
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E. SPECIAL SURFING SITES
Poignant Videos of Those Who Fought for Our Freedom
Through the eyes of those who were there, Americans at War® looks back
at the moments when ordinary people were called to extraordinary heroism.
High-definition interviews offer intimate, one-on-one experiences. It's
a priceless understanding of the effects of war through harrowing personal
accounts. Featured on PBS, this award-winning series offers 50 compelling
vignettes
Americans at War® is a signature program of the U.S. Naval Institute
that has engaged national audiences through poignant and personal portrayals
of the war experiences of America's men and women in uniform. Individual
veterans are presented in a series of 90-second short stories - powerful
tales that inspire pride and patriotism. The Naval Institute is documenting
the American war experience for a diverse audience and honoring the strength,
character, leadership, perseverance, and sacrifice of America's heroes.
Learn more at http://www.americans-at-war.com/index.php
Books on wartime stories can be found at:http://www.seniorresource.com/SRBaz.htm
Say "NO" to Gasoline Prices
With high gasoline prices, more Americans, especially seniors, are just
saying no to the gas pump; they are choosing to use their public transportation
option. Riding public transit saves you money, is easy, safe, and efficient.
It also reduces the wear and tear on your personal vehicle and saves on
maintenance costs. Learn about the transportation options in your community
by visiting the American Public Transportation Association (APTA) site
at http://www.apta.com/gasprices/
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F. OH MY AGING FUNNY BONE
More Wisdom of Larry, the Cable Guy
- He who laughs last, thinks slowest.
- Depression is merely anger without enthusiasm.
- The early bird may get the worm, but the second mouse gets the cheese
in the trap.
- Support bacteria. They're the only culture some people have.
- A clear conscience is usually the sign of a bad memory.
Some Irish Humor
- Patient: "I have a ringing in my ears." Doctor:
"Don't answer!"
- A drunk was in front of a judge. The judge
says, "You've been brought here for drinking." The drunk says "Okay,
let's get started."
- I wish my brother would learn a trade, so
I would know what kind of work he's out of.
- How can you tell if an Irishman is having
a good time? He's Dublin over with laughter!
- What do you call an Irishman who knows how
to control a wife? A bachelor.
"Oh My Aging Funny Bone" is at:
http://www.seniorresource.com/jokes.htm
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This issue has been edited by Betsy Day (betsyjday@aol.com).
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