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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:
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:
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:
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:
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:
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:
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 email@example.com. Further resources are on www.mnhomecare.org.
Additional seniors' Aging in Place information can be found at:
B. DID YOU KNOW...?
IRS-Related E-Mail Scams
The IRS does not initiate taxpayer communications through e-mail.
If you receive an e-mail from someone claiming to be the IRS or directing you to an IRS site,
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,
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
For more on how to select and check a charity visit: http://www.charitynavigator.org/
Additional seniors' financial information can be found at:
C. THOUGHTS FOR THE MONTH
We present here some words from those with a birthday this month.
More "Thoughts" at: http://www.seniorresource.com/thought.htm
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D. SPECIAL OCCASIONS THIS MONTH
1. American Diabetes Month
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 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/
E. SPECIAL SURFING SITES
Poignant Videos of Those Who Fought for Our Freedom
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.
Books on wartime stories can be found at:http://www.seniorresource.com/SRBaz.htm
Say "NO" to Gasoline Prices
F. OH MY AGING FUNNY BONE
More Wisdom of Larry, the Cable Guy
Some Irish Humor
"Oh My Aging Funny Bone" is at:
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SPONSOR AN ISSUE
This issue has been edited by Betsy Day (firstname.lastname@example.org).
This Copyright E-zine may be forwarded to others only if sent in its entirety. Other uses are subject to written permission of the publisher.
Aging in Place