Asian markets do not fall that much

After the bail-out fizzled out in the Congress, US Investors lost over a trillion dollar worth of market capitalization in a day. The next day was expected to be really bad for Asian markets, but these markets have not done so badly today.

In fact none of them had a fall as bigger as the American markets and either they have decoupled from the American markets altogether or are just optimistic about a new deal.

Here is a snapshot of how the various Asian markets  looked like at 6 AM EST, Sep 30, 2008, one day after the bailout talks failed to materialize.
Index Values

Will the 700 billion dollars bailout work?

There is a huge outcry and angst against the $700 billion bail-out plan by Messrs Paulson and Bernanke. The public is angered that they will have to foot the bill in form of taxes. And the cost of the bailout is almost as much as the Iraq war.

This anger is understandable, but there doesn’t seem to be any other way out of the current financial mess. The bailout is not just for AIG, Goldman, Fannie or Wall Street dark suits, it is, for all of us. This is a time when something needs to be done about the current financial mess and only the US Government has the necessary resources to do it.

First, let’s look at why the government is doing this at all?

Why should you bailout someone at a cost so high?

Treasury bills (T-Bills) are backed by Governments and the United States T-Bills are considered to be the safest investment in the world. Naturally the rate of interest on this is also the lowest because of the low risk, low return, principle.

For a brief period the yield on these went down to 0%, last week. That means that people were ready to invest in them even if they were getting no returns at all. Just, that their money was safe.

It is a dire situation. When was the last time you kept your money under your pillow and not in your savings account because you thought the bank may go under and you may lose all your money?

Right now no major banks or financial institutions are willing to lend to anyone, they just can’t afford more bad debts. Gradually the whole financial system will choke and collapse under its own weight.

If AIG closes, it doesn’t go down alone, it takes with it the vendors, employees and to some extent even the customers who are associated with it. AIG shuts shop, their employees go out of job and stop spending money on stuff like pizza and clothes causing Pizza Hut and Macy’s to go down. It sets in motion, a downward spiral which would have been very hard to stop.

The unemployment rate is about 6% right now, it was around 25% during the last Great Depression. Left to the market forces, it will not be surprising if we saw it rise to 10% by the end of the first or second quarter next year.

Someone had to step in, and that someone in this situation could only have been the Fed backed by the US Government.

So once they step in, what are they going to do?

What will they do with the $700 billion?

A fund will be created and financial institutions will sell their mortgages and other financial instruments to the government. This will give the financial institutions cash and help them do their every day business. Since their everyday business happens to be lending to people and other companies, this means that there will be more funds in the economy for investment and other activity.

The important thing to remember here is that because the government is buying assets from the financial institutions, this is not really a $700 billion bailout. It is quite likely that they will be able to sell these assets in a few years and at that time they will get cash for their sale. Those sales may not turn out to be $700 billion but it will not be 0 either. So in that sense it is not a $700 billion bailout.

It is a $700 billion cash injection in return for “toxic” assets but they are still assets.

Was this the only option they had? Why didn’t they do what Buffet did with Goldman Sachs?

Why doesn’t the Fed do what Warren Buffet did with Goldman Sachs?

Warren Buffet spent $5 billion to buy Goldman Sachs preferred stocks and got a 7% share in the company. That means that Warren Buffet will get an assured 10% rate of interest on his investment and will get an option to buy more stock of Goldman Sachs in the future at a price much lesser than the market price.

So why didn’t the government do the same thing? Buy the stock from the company, instead of their toxic assets?

Goldman Sachs get a $5 billion dollar cheque from Warren Buffet, but perhaps more importantly they get a vote of confidence from him. No man is more influential than him when it comes to giving a thumbs-up to a company’s finances. The original plan of Goldman Sachs was to get more funds after Buffet invested in them because their brand will get a boost and that is exactly what they did and did very succesfully.

On the other hand, if the Government were to invest money in any company using the “bail-out” fund, it will drive away all private investors. Instead of building confidence, that will shatter the confidence of investors in the company.

The other thing that Paulson and Bernanke cautioned Congress was that if the Government bought shares in such companies, then the government will get a say in how the company will be run. Politicians will be able to control many decisions of the company and that will drive how the company works.

This will definitely drive away other investors from investing in the company and even the US Govenment can’t infuse all the necessary funds to each ailing company in the economy.

Ultimately this would have led to a situation where, even after infusing all the capital, it would have gone waste.

There are definitely criticisms of this argument, but on the whole, I think this makes sense.

Will the plan work?

I think it will work. The plan gives a much needed infusion of cash in the market and creates conditions that will negate a deflationary recession. No one can do enough to avoid economic cycles, but a deflationary recession is much worse than an inflationary recession. This plan can steer us away from a deflationary recession and help the economy back on its feet, or at the very minimum stop it from falling on its face.

Manshu Verma

How much will my credit score dip if I miss a payment?

Everyone knows that their credit score will take a hit if they miss their credit card payments or max out their credit cards. A lot of people find themselves in such situations and wonder how badly their credit score will be hit.

While the exact drop in your credit score will depend on your particular situation, MyFico has got some examples of how much your credit scores will change because of certain events.

As you can see, while defaulting on the credit card payment results in the worst credit score drop, maxing out your cards has a pretty bad impact too.

Credit Card Scores
A lot of readers will notice that the credit limit itself is not known and a lot of other information is not there as well. That is true and there is really no way to tell beforehand how much your credit score will drop or gain based on a certain action.

The next best thing is to look at examples given by MyFico or talk to someone who has faced the same situation as you.

If you know how much your score dropped or gained with a certain action, please share it with us through comments. A lot of people can benefit from that knowledge.

Your APR is not really your annual rate of interest

Annual Percentage Rate or APR is a term widely associated with credit cards but is hardly ever understood correctly. One of the most common misconceptions is that it is the annual rate of interest.

Although APR is an annual rate since it is charged monthly, in effect it translates into much more. For example if you owed $100 for 12 months and the annual rate of interest was 12.99%, at the end of 12 months you will have to pay $112.99. However since the APR is charged on your credit card balance every month, in the case of credit cards you have to pay slightly more.

Here is how it works. Suppose your APR is 12.99%, so that means per month it will be 12.99% / 12 which is 1.0825% per month.

So if you have taken a loan of a $100 for the first month, at the end of the first month you will owe 101.0825.This is how it will look like for the 12 months.

So you see in the above example that at the end of the year you will have to pay 113.79 and not 112.99 as would have been the case if APR were the annual rate of simple interest.

APR also includes fees and other charges which can’t be calculated like simple interest therefore it becomes difficult to calculate APR sometimes.

Your best bet when comparing two cards is to evaluate the fees of the two cards and the interest they will charge to the outstanding balance separately.

A full green Danish island

I came across a very interesting and perhaps unique example of an island which is fully self sufficient when it comes to its own electricity generation.

Samso is an island in Denmark with permanent population of only 4000 and an area of 40 square miles. The unique thing about this island is that they generate their own power by the use of windmills.

Almost all the power that is used by this island is generated through renewable sources. For example all the electricity is generated by the windmills that are located at the seas. Tractors are powered by rapeseed oil (canola oil) and homes are heated using boiling water that runs through all households and is heated by solar panels. On an island which sits on a freezing sea with short days and long nights, it is a wonder that the water is piping hot at any point in the day!

The economic angle to Samsa is that the shares in the wind turbines are sold to all the locals and the surplus is getting shared by the people of Samsa.

So, not only have they found a green way of running their town, they are making profit out this green adventure too.  In fact they are able to generate power surplus which they are selling off to the mainland also!

This small island is showing the way to the rest of the us in a world with oil prices soaring above 100 dollars.

You can read the wiki entry here:

Find out whether your credit application will get rejected

A credit inquiry is not good for you because every credit inquiry pulls down your score by a few points. For most people this does not impact their score at all because five or six points can be covered in pretty good time, especially if your credit is approved.

However, if you get rejected, you tend to apply again and then if you get rejected again, these negatives can add up pretty quickly. That is where it helps to get an idea if you will be approved for credit or not.

Most credit card issuers do not clearly state what kind of FICO scores are needed in order to get approved by them. So it can be a little difficult to find out before applying if you will get approved or not.

WhoGaveMeCredit is a good resource which has a list of credit cards and the scores at which they were either approved or rejected. You can see the credit card issuer, state in which it was issued, score at which it was approved, date and the credit limit.

So for example you can see that Chase Platinum was issued to someone with a Trans Union credit score of 685 with a credit limit of $200 on 07/04/04 in the state of Arkansas.

This is a good resource and while it is not completely exhaustive it is better than have nothing to go by.

What is common between John McCain and Joseph Stiglitz?

John McCain said today that if he comes to power he will fire the SEC chief Rox because the regulator has failed to perform his duty. This is a bid from the McCain camp to distance itself further away from the Bush administration and point out how many things that administration got wrong.

What is interesting is that not long ago, Nobel prize winner Joseph Stiglitz has also noted that regulators didn’t do their job well enough. He said that “key regulators like Alan Greenspan didn’t really believe in regulation; when the excesses of the financial system were noted, they called for self-regulation — an oxymoron”.

Stiglitz goes one step ahead and says that the goals of the CEO and the shareholders are not aligned and that is why they ended up doing a lot of things that ended up in hurting the long term finances of the company. When you consider that Lehman never even reported a quarterly loss after going public till early this year and then goes bankrupt suddenly, its just something that can’t be comprehended easily.

While both McCain and Stiglitz are recognizing a failure of regulation there are differences in the way they wish to approach the problem. McCain has always been a supporter of deregulation and favors not going after companies and increasing regulation. In fact just last week he said that the fundamentals of the US economy are still strong. A comment that drew much flak from a lot of quarters.

On the other hand Stiglitz proposes a creation of a “Financial Stability Commission” to take an overview of the entire financial system, more regulation to improve the safety of the financial system and more consumer protection laws.

Stiglitz has some very interesting ideas on how to avoid the next crisis and you can read them here:

How does closing a credit card affect my credit score?

There are two factors that impact your credit score when you close a credit card. One of them impacts it in the short term and other one in the longer term. The good news is that the factor that impacts it in the short term can be easily managed and you can close out the card on which you pay a high fee with no impact on your credit score at all.

Short term factor

Credit Utilization or Util as it is more commonly known is the short term factor and one that can impact your score substantially if you do not manage it.

Util is how much of your available credit is being used up by you right now. For example suppose you had two cards

Credit Card 1: Limit of 5000 and an outstanding balance of 1000. That means you are utilizing 1/5 or 20% of your credit limit on this card.

Credit Card 2: Limit of 3000 and an outstanding balance of 1000. That means you are utiliizing 1/3 or 33% of your credit limit on this card.

Add the two together and you will see that you have a credit limit of 8000 out of which you are utilizing 2000, which is 1/4 or 25%.

Now if you close out the first card with the balance still on it. Your credit limit is now just 3000 but the outstanding balance is 2000 which is 66%. A higher Util is not good for you as it pulls your credit score down.

So what you need to do is, to pay off your credit card completely before closing it. After that, make sure that your Util stays under 10% for a few months and you will be fine. That will mean that you spend less on your credit card than you are used to, but that is just something that you will have to live with.

Long term factor

Length of your credit history and Average account length will get impacted in the longer term. A credit card which was closed gets deleted from your credit history in ten years time. So that means after ten years, if this was your first credit card, your credit history might get shortened or in other cases the average age of your accounts may come down. This factor will reduce your credit score. However if you play your cards right, ten years is a long time to make the right moves and ensure that this drop in score doesn’t happen at all.

Bottom line

If you took a secured credit card or a prepaid credit card to build your credit history and are paying a high annual fee on it, you should definitely close them if you have managed to get some other card which has no fee on it. Do not use too much of your credit limit and you will be fine.

Dilbert creator – Scott Adams does a poll of Economists

Scott Adams is the creator of the popular cartoon series Dilbert and he writes a very interesting blog. In fact that is the only one that I follow regularly. In fact on days when he doesn’t write, I feel disappointed.

He recently did a survey of economists to find out the views of economists, on who will be the best president for the economy – McCain or Obama. The results were published by him today on his own blog and you can go there and download the powerpoint which has got a whole lot of details about the results.


There is a lot of interesting information in there, let me point out to you what what I found most interesting:

  • Overall 56% economists say that Obama will be better for the economy, 31% for McCain and  8% say there will be no difference
  • According to the economists – Education, Health Care, International Trade, Energy and Encouraging Technology and Innovation are the top five issues for the economy. Mortgage housing crisis ranks 7.
  • A lot of people had commented on Scott’s blog that the survey will show Obama, more popular with economists and it turned out to be true.
  • Out of the economists who were surveyed, 48% are democrats, 17% Republicans and 27% Independents.

These were some things that I found interested, you should definitely check this out and see the details for yourself.

Manshu Verma

Japan has problems of its own

With Lehman and AIG on everyone’s mind the entire spotlight is on the US Financial market right now. In all of this gloom and doom stories surrounding US, the second largest economy in the world Japan has been completely forgotten by market pundits.

But the truth is that Japan’s economic situation is getting worse by the day and there is more bad news coming out from Japan this quarter.

The recent GDP numbers for the second quarter of 2008 suggest that the economy has contracted by 0.7% compared with last quarter and the other numbers do not look any good either.

  • Private non-residential investment has contracted by 0.5% compared with the previous quarter
  • Exports of goods and services are down 2.5% compared with previous quarter
  • Private consumption has contracted by 0.5% compared with previous quarter

Exports and Private consumption have been two lynchpins of the Japanese economy and both are pushing each other in a downwards spiral right now.

The weak global markets have meant that the exports are weakening which is impacting sentiment of consumers at home and resulting in lesser private consumption. Those factors are impacting Japan in a very big manner right now. Coupled with its ageing population these systemic factors are plaguing its economy and it will take long term systemic reforms to get out of such a situation.

Short term measures are just not doing the trick, as evidenced by the failure of the recent stimulus package to perk up the economy.
There was a $110 bn stimulus package which failed to do much to boost the market sentiment (much like US?) and then there have been rate cuts that have failed to stimulate the economy either. These rates are very low right now and there is not much scope to reduce them any longer.

As long as there are no major negatives coming out of Japan (think Lehman) the world economy should be able to come out of this shock by early next year. However if things start going worse there as well, then we could be looking at a definite global recession.

Manshu Verma