Today I was reading an article at Yahoo Finance.  The title to their article was “Fed’s Lacker says must let ailing big firms fail“.  The idea of the article, as I see it, is to let the big firms fail so that financial institutions will stop taking risks knowing they will be bailed out.

Okay, so let’s look at risk.

Banks are not risk lenders, they are asset lenders meaning they want collateral to back the money they loan.

In reality, the government is the risk taker (putting tax payers on the hook) and can be seen with GSE’s.  GSE stands for Government Sponsored Entities.  Take FHA or the SBA.  These agencies will partially guarantee loans, allow for reduced requirements such as down payments, lower credit scores, reduced rates, etc. and actually encourage risky activities.

The SBA guarantees are to partially guarantee loans to banks so that borrowers have access to capital when they cannot seek funding elsewhere.  The SBA has been called the lender of last resort and is similar to an insurance policy for the bank.  I think the bank, by getting collateral and guarantees, is not acting risky, but smartly.

Let’s continue with risk.

Derivative.  What an ugly word in the financial section of the newspaper, written by  a writer and editor that doesn’t even know the Treasury is the one who prints money.

A derivative is simply a contract between two or more parties based upon an underlying asset.  It allows for leveraging.  Let me explain…

Take a stock option.  Let’s say you want to buy GM at $30 per share (trading at $32.33 right now).  You could buy a call option allowing you to purchase GM at $30 and pay a person $3.38 per for that right to do so.  If the price goes to $35 by June 18th for example, your cost is actually $33.38 and you would have made $1.62 per share.  If the stock price goes down, the most you would lose is $3.38 per share per contract, meaning 1 contract is 100 shares or $338.  If the price of the stock goes to $0 like GM did in the past, the option holder is out $338; whereas, the owner of the stock loses $3,233 for those 100 shares.  Therefore, derivatives are not always risky, but don’t take my advice…look at the Treasury….

I wrote an article about how the Treasury makes money and you can too.  Read about it here (it’s short and sweet).

Sure there are investment parts to the bank as well.  Banks buy and sell money and yes some action is risky and can be greedy.  In order to earn higher returns, more risks have to be taken.  (True for banks and business owners, etc.)  I’m not here to defend the bank, but a quick news clip or article doesn’t tell the story, and I’m not going to put 460 pages of Barking With The Big Dogs in this little article either.  Just don’t always buy the hype in a 30 second slot or the talk at the water fountain or break area.

To continue on with the Yahoo article, let them fail, in the Fed’s opinion as I see it.  Why?

Someone else will buy the assets and the government has a huge stake in the assets too.  You don’t think your loan is going away do you if you bank fails?

Take Citibank.  The government had warrants (options) to buy the company!  The sold the warrants and made money.  Of course I haven’t seen my check and wonder if I will have to pay income taxes on the gains.  The government may have sold any ownership they had in some banks, but they didn’t in GM.

Too big to fail hurts the average Joe, in my opinion, and some groups get very wealthy in the process.

Finally, take the Frank / Dodd finance reform bill; it can actually limit competition disguised as consumer protection and plays in to the hands of the big institutions or players.

It is interesting that the last line in the Yahoo article mentions the government should consider getting out of subsidizing.  Maybe that should include more than just housing.

I was in a meeting listening to a person speak about his local financial counseling service. His idea was that they would provide financial education. In addition to education, the company’s goal is to potentially fund a small grant, up to a few thousand dollars, when and if their organization is able to find organizations or partners to assist financially.

In addition to financial education, currently the program provides free tax return services.

As I sat there listening to his sales pitch on what their company can do and what we could do for them, my mind wondered on several topics.

First, who funds the “free” tax returns? If their organization is made up of private donors, no problem; however, if taxpayer money provides services, local business suffers.

Local bookkeeping and accounting services can’t compete against free services. As far as a “double whammy”, business pay taxes on their income and assets to fund these “free services”. In summary, businesses pay taxes which go towards providing free services and then cuts out their own business.

Next, why do people need financial counseling? For one thing, our educational system must not be working or working properly. People can go to school for free. Once again, free is not really free for everyone. Now there are free counseling services for people who did not obtain a decent free education. Hmmm.

Finally, what really got me was the presenter’s attitude and lack of knowledge toward financial education. His attitude was an air of greatness. However, his information was common.

What I mean by common is the subject was on net worth, which is very important, but the manner in which it was described was lacking in details.

The idea behind building net worth, in his mind, was to get out of debt. I don’t have a problem with getting out of debt, but being debt free is not necessarily increasing net worth. I’ll explain in just a minute, but first the typical advice this service was to offer was “save” money, not “make” money, which is a different attitude.

Every radio personality I hear talks about saving money, so why is this free service any better? It’s not.

Now, when I mention net worth, if I have $10,000 and owe nothing, my net worth is $10,000. However, if I have $10,000 and borrow $10,000 more, I now have $20,000 with $10,000 in liabilities thus creating the same net worth. Borrowing the $10,000 may be put to use to create more income which can be greater than the amount of interest paid.

I didn’t mention this new program wanted to focus more on net worth than income, did I? This, to me is another huge mistake in financial education. How?

With income, I can create net worth. With net worth, I may not be able to create income.

Without income or enough income, my net worth will eventually decline. Therefore, as important as net worth is, using net worth to create income or simply increasing income is much more important.

Bills will still come each month whether people have a loan or are debt free. However, little income may make people borrow, such as on credit cards, to pay bills; which starts the whole process of financial woes all over again.

The bottom line, since we are talking about the bottom line regarding net worth, is to determine if financial education teaches us something we don’t already know, or if what we are told is simply the same rehashed stuff we commonly hear.