Author Archives: admin

How the Real Business Credit Crunch Is Unfolding

Leave a reply

Today, I’m going to try to make you smarter than 98% of the population by giving you a real example insight of the business credit crunch. And without giving you a headache or making you sleepy:

Let’s say you’ve got a house full of antiques and know they’re worth around $100,000.

Now, you got to an antique auction in town and nobody is bidding on anything. I mean, you can hear crickets in the place – there’s just nobody bidding and the prices are averaging 60% of their actual valuations.

At home, you can tell all your friends your antiques are worth $100,000, but that’s just talk. For someone that relies on your financial statement, the true value right now is $60,000 because that’s what the last market value was out in the word! In the same way, you can’t count next months’ paycheques on your bank balance today.

It’s a law called Mark to Market and started because of Enron Energy frauds more than a decade ago where they counted billions of dollars of next years’ maybe profits as today’s income. The financial statement now has to show the actual true market value each day!

The logic of this regulation is solid but in our example it’s also totally stupid, right? Well, there’s also a law of unintended consequences and that regulation is responsible for a huge part of the credit crunch for businesses.

Here’s a “today” example of it: Drug giant Pfizer is buying another drug giant Wyeth. One lender was approached to do a $10 billion finance package as part of the sale. Maybe the rate was good, the deal was solid – I don’t know. But today, lenders have to value commercial loans at about 70 cents on the dollar. So the day the loan gets made, if it does, it isn’t a value of $10 billion – it has to be shown as $7 billion. So on paper, this lender has lost $3 billion the day the cheque is written! THAT is a problem and that’s part of the reason business lending has slowed down so much.

One other thing:

I have a great idea but I don’t want to do it alone:

The Washington Post recently featured a story about Katie Wheelock and her family who went two weeks without spending a dime. The original family went a month but how about you join me for seven days of No Spending Week.

Fill the fridge, gas up the car and keep paying your normal payments like utilities, the rent or mortgage payments and car payments. But nothing comes out of your pocket, off your debit or credit card. No Tim Horton, no lunch out, make the tank of gas last or take the bus, no restaurant meals or take out. Yes, on day five or six you’ll need to reach a little deeper into the fridge or further down into the freezer and get a little more creative. But you can do it, I guarantee it.

Now, I don’t want to be a lawyer here but you know exactly what I mean. Try it for a week and you’d be amazed at the lessons you’ll learn and the insights you’ll get about yourself, your habits and the money that just mysteriously leaks out of your pocket. As Canadians, our so called burn rate of a $100 is 3 ½ days! And that doesn’t count what we put on credit cards.

I hope you’ll join me because there’s definitely strength in numbers. We’ll start next Wednesday night to let you go shopping and to the gas station and go until Wednesday March 4th.

In the worlds of President Obama: Yes we can!

Credit Crunch? What Credit Crunch? Where?

Leave a reply

Whether it’s in the U.S. or here in Canada, I keep hearing about that “credit crunch.”

I understand it, but I can’t personally find it, and you won’t, either. Not as an individual who has decent credit, with a credit score above 700 and the income to justify making the payment.

In fact, all the talk in the U.S. recently was that the lowering of interest rates to near zero was fueling a huge boom in re-mortgaging. Well, those two stories of a credit crunch and all that refinancing don’t jive. And if I had the resources, I’d gladly put up a reward for anyone who can document being turned down because of a credit crunch. It won’t happen.
Find me a lender who’s got the sign out: Not lending today.

I tried to find it myself. I applied for three car loans and three lines of credit. No, I wasn’t getting them – neither you, nor me need more debt. But I was approved every single time! I’m pretty typical middle class and have a credit score over 720. All the approvals were a no-brainer and took less than five minutes each time.

Challenges for business credit issues are different and do exist. But you and I don’t borrow 50 million or a half a billion dollars. It’s why the government is getting the Export Development, Farm Credit and Business Development corporations involved, and helping them.

Lots of debt also gets sold as asset backed securities. That’s the balloon that blew up in the US housing market. It’s about a $50 billion market in Canada and that’s definitely slowed down. No investors really want to own pieces of these securities right now.

As a result, lenders have to keep their loans or credit card balances on their own books, instead of re-selling them. That is the reason rates haven’t moved down much for fixed mortgages and why credit cards are actually going up. It’s an issue of supply and demand.

If we call it business credit crunch, I’m OK with that. But for you and me – for us individuals, there’s isn’t a crunch, shortfall or lack of money. There’s just a new reality that we need good credit and the money to pay the payment. If lending based on good credit and income hadn’t been temporarily abandoned for a few years we wouldn’t have 90% of the mess we do now!

This Weeks’ Federal Budget

Leave a reply

I keep getting asked if this weeks’ stimulus budget is a good idea or flawed. But rather than specifics, what really concerns me is more of the big picture of the issue.

Any 100 politicians or economists in the same room wouldn’t agree what day of the week it is today. So it’s pretty easy to find large numbers of people to argue many of the items in the budget are a really bad idea that’ll never work. It’s just as easy for someone on the other side of the argument to line up the same number of people that think its’ a great idea.

What really bothered me is that two opposition parties announced they were voting against the budget weeks before it was tabled in the House of Commons. That’s sad and so wrong. If, every time you went to see your boss for something, he or she said the answer is no, now what’s the question – what would that be like?

One of the nastiest agendas is the attack on Prime Minister Harper that he should have seen all this doom and gloom coming. What? Talk about playing politics! The markets, banking problems, recession issues and housing problems in the U.S. are changing weekly. Nobody really knows what’s coming next. Yet somehow the Prime Minister should have had a crystal ball? Or is it just a political and agenda-driven attack that he is flexible enough to adapt to deteriorating circumstances in our economy? Talk about a no-win situation. Doing the right thing still gets criticized.

When we’re in the middle of a family argument and a big problem or crisis arises, you gotta know our little arguments get put aside, right? Big problems bring families and companies together to confront a common problem. Why do our politicians not care enough to do that? Why are we hearing nothing but arguments, objections and name calling instead of asking what they can do to help? We have some serious economic problems – can we cut the politics and pull in the same directions for the good of the country?

Should we run a deficit during these times? Well, if you or your partner were laid off, would you still pay the mortgage and groceries? Of course. There are times when we do whatever it takes. Why would the budget of the federal government be any different?

When many people say they support our troops, they’re told it’s terrible that they support the war in Afghanistan. What? Supporting the troops is different than supporting the war. Now we have some large economic challenges and we can’t pull together as a country, again? How sad that we can’t seem to disagree without being disagreeable.

When my car needs a boost because it’s dead, that’s not the time I really want to talk about how dirty it is or whether I should have bought a four-door. Can we just get on with allowing the government we elected to make their best efforts to get us out of the economic ditch?

Oh, and there’s one more industry in the U.S. that’s now looking for a bailout: It’s the porn industry lead by the publisher of Hustler Magazine. Yes, business is soft – but the porn industry looking for government assistance? Give me a break – talk about a stimulus package, though!

Getting Financially Fit For 2009 (Part I)

Leave a reply

Happy New Year, but it’s pretty depressing that us Canadians just hit the trillion dollar mark in consumer debt and it keeps growing.

New Years resolutions don’t work most of the time which is why fitness clubs are a ghost town in February while everyone is still stuck with an annual membership fee. Most of us just don’t have a “hallelujah moment” the first few days of New Years which has much of a lifespan.

The good news: It’s a new year! It’s a chance to start over, to resolve to do better, to do more, or in the case of your payments and all that interest – to do a lot less.

The bad news? You’re already broke! How’d that happen? Well, we spend more than 120% of our disposable income, half of us have no savings and almost 70% of us don’t even make RRSP contributions. Why? Because every dollar we earn goes to make a long list of lenders really really rich and there’s simply nothing left at the end of the month. Never mind that the average person figures it’ll take two months to pay off their Christmas debts when surveys keep showing it’s actually more like six months.

How do we make it through January with the Christmas and other bills heading our way?
When you’re in a hole – stop digging. In other words, spend less or earn more. Both will have a huge impact in changing your financial situation really quickly.

Annual bills kill your budget, but they’re not a surprise. We know they’re coming – but we haven’t got the money to pay them. Open a savings account that’s not hooked on your ATM card. Then add up what you’ll need for next years’ Christmas bills, your property tax and car or home insurance. Divide it by 12 and put that monthly amount away.

Set yourself a credit limit. Pick a dollar figure below which you’ll pay by debit card or cash. Maybe $20 or $30 bucks – that’s it. Anything below that, you’ll pay with real money instead of running up debts. It’ll become a great habit and will cut down your credit card balance in huge ways.

Pay off one bill. Minimum payments buy you another month – nothing more. It’s treading water. Credit cards and debt are not your friend. They’re financial dream killers and suck money out of your pocket and add a ton of stress to your life and your relationship. Take your smallest bill and put every dollar you can towards it while paying minimum payments on everything else. When it’s gone, take the next smallest and focus only on it. This step-up plan will get you debt free in less than half the time. It’s an entire section of the It’s Your Money book and will become a huge tools for you.

Close your overdraft. I know – it’s like being hooked on drugs. It’s so convenient and always there and you can’t live without it any more. Well, that’s what the banks were counting on. Just a $1,000 overdraft will cost you between $200 and $300 in interest and fees. It’s a one-time pain to cancel the overdraft, but it’s worth it.

Happy New Year – For Some More than Others

Leave a reply

Next year, a bunch of businesses, including American Express are going to be reinvented as banks. GMAC, the ex finance arm of General Motors, just made it yesterday. No, of course they’re not a bank. It’s just a neat way of getting in on the bailout money!

This was a hugely profitable company until they took stupid pills and got into sub prime mortgages in a huge way through their mortgage division Ditek.com that you see advertising on TV all the time. Two years ago, they made billions of dollars, last year they lost about $8 billion and now finance only about 2% of GM vehicle sales. How sad…but it was either deal with it, or get a bailout. I know I’d pick the free $6 billion…

In the U.S., the car loans 60-days in arrears is up 17% for the 3rd quarter. That just came out – and that pain will continue to worsen. If people can’t pay their current car loans there isn’t going to be any relief for the Little Three formerly known as the Big 3.

For the coming year in Canada, get ready for a ton more marketing of prepaid Visa and Mastercards. They’ll make the same profit, along with an administration fee, and have no chance of delinquency. After all, you can’t go in arrears if it’s all pre-paid. But right now they’re all freaked out since their internal rules require expiry dates and a number of provinces have outlawed that rip off.

Did you get any gift cards for Christmas? In our family there were none – OK, other than Tim Horton but if they go under we can likely shut down the whole country.

If you did, get out there and use them. The sooner, the better. It’s a real crap shoot if that merchant or restaurant will still be in business to honour the card and that isn’t worth the risk. Last week, a U.S. report showed that an estimated 148,000 retail businesses will go under in 2009. Someone paid real cash for that gift card but until you use it up, all you’ve got is an I.O.U.

Here’s one more prediction for 2009: As the economy gets worse, there’s a business that’s up 30% as a result: It’s on-line psychics. Yes, for about two to four bucks a minute, or $100 an hour, psychics are doing very well predicting your financial future on-line.

I’m going to do that free for you. Think of it as your late Christmas present: One on-line psychic was quoted as saying he tells people (that’s code words for: he tells everyone the same thing) your finances really won’t improve until about the middle of next year.

Now aren’t you glad you didn’t have to get on the computer to get that?

Have a happy New Year and we’ll talk about the “real” New Years resolutions in the coming weeks. You and I both know that today is not the day for any resolutions which will survive beyond a week or two…

Happy Boxing Day

Leave a reply

Today, and it should probably be Boxing day, too, don’t head back to the stores for anything other than food stuff. Last minute shopping and impulse purchases are huge financial killers. Today, just say no. You’ve done enough, bought enough and are enough. One more present isn’t going to impact your Christmas, honest!

You know Christmas is coming again next year, right? That’s not going to be a surprise. Just like your car insurance and money for a vacation. There are a few annual bills that seem to always catch us by surprise. But nothing is further from the truth. We know they’re coming! So make a decision to set up a separate savings account that’s not hooked up to your ATM card. Then either do it yourself, or ask your bank or credit union, to transfer over a fixed amount of money each month. It just needs to be one-twelfth of what these annual bills add up to so you have the money when they come due.

Lastly, there’s the biggest, best and most powerful Christmas present you can give to yourself and your family. It’s the gift of financial freedom. And it all starts with two simple steps:

Firstly to make the decision to be debt free and dream ahead a little of what that’d be like to have literally no bills to pay and nobody sucking huge amounts of interest and fees out of your income.

The second step it to sit down with your partner if you’re married. One hour with no television, no kids and no interruptions. All you need is an open mind and heart and a genuine conversation. I know, most people would rather talk about the weather and sex than their finances, but few conversations are more important.

Talk about your dreams and your finances in an honest and open way. Then get a piece of paper and write down your net income each month and every dollar that’s going out right now. Each dollar has to have a label on it before it gets spent.
The 2nd part is just to list your bills and debt. Because it can only get paid with what you have left over after food, shelter, clothing and transportation.

The game plan is to pay minimum payments on everything but the smallest debt. Then the next smallest one, and so on. You’d be amazed how quickly you get traction and a huge level of confidence.

The section in the It’s Your Money book walks you through it really simply. It’s worth it. You’re worth it, and one of the best gifts you can give yourself and your family.

E-mail Scams – You Gotta Know

Leave a reply

This is likely the last time I’ll get a chance to talk to you because I’ve hit it big. Abdul Kashalanda Kukahereman from Nigeria sent me an e mail that I’m getting 7.5 million dollars from an estate. So I’m quite excited. Of the zillions of people with e-mail, he picked me!

Well, not quite. But on some of these e-mail scams, there was some good news recently. The most common scams are along the lines of purchasing something from you or paying you for something, giving you a cheque and having you refund the overpayment.

You’re sent a fake cheque that looks incredibly real from E-bay, lottery accounts, Wal-Mart, pre-payment on sales commissions or the likes. The scam is to get you to cash the cheque, keep 10 or 20 percent of the money for your trouble and just get a Western Union draft to send the rest of the money back.

It can be months before the cheque you thought was a cheque actually bounces. Now you’ve sent back the 80% or so with your real money and now the bank charges you back for the fraudulent cheque.

These scams are mostly run out of Nigeria, so finally the U.S. Secret Service was able to convict someone. Recently, Edna Fiedler was sent to prison for sending out over $609 million in these phony cheques. The U.S. Postal Service also sent 15 staff to Nigeria to work with the post office there. In a 90-day period they intercepted counterfeit cheques, lottery cheques, E-bay overpayments, etc. for, are you ready for this: $2.1 billion.

The newest scam is out of Hong Kong. It’s an e-mail asking for nothing at all, just telling you that you’ve won $5,000. You just need to send copy of passport, drivers license, etc. but they’re not asking for money. The scam is getting your identity with what you might mail. With that they can clean out your bank accounts and obtain fraudulent credit with this identity theft and that’s worth way more to the crooks.

You and I might be internet wise, but for those of us with older parents, make absolutely sure your parents get to hear some of these scams. Maybe these two, or print off the phony ones from the Royal Bank or Paypal claiming your account has been breached and you need to just update your information. Senior are the biggest group targeted and your parents, uncles or whoever needs to learn THE best words about e-mails from people they don’t know: Just don’t click.

Gift Cards: Be Careful This Year

Leave a reply

A recent survey reported that almost 60% of us would like to receive a gift card this year. OK, but hands up if you’re also fine with receiving cash.

Last year we bought around $27 billion of gift cards in North America and 95% of people bought at least one of them. But this year, we’re in a new economic reality and I want to make sure you’re really careful and think twice before buying them.

When you buy a gift card you’re paying the merchant real Canadian money. What you get in return is a piece of plastic or paper that’s nothing more than an I.O.U. That’s all it is, and you gotta hope they’re still in business when you, or the person you gave it to, want to use it.

When the retailer or restaurant goes bankrupt, your gift card is worthless. That’s a huge risk you’re taking. A year ago, who would every have predicted the Bombay Company would go bankrupt, or Circuit City, the parent company of Radio Shack, or Linens ‘N Things, to name just a few really big ones?

Sure, you’re safe with a bunch of retailers from Tim Horton to Wal Mart but better safe than sorry. This year, give them some real Canadian cash. It doesn’t go bad, has no fees or expiry date and it’s not impersonal – merchants have marketed that and it isn’t true at all. It’s safe and the same thing as a piece of plastic. But the cash is good forever. If you want, put a note in there that your financial adviser recommended staying away from gift cards in case the retailer goes under and that you care enough to do that.

If you’ve got a store credit or some gift cards around – use them up. Besides, more than 20% of gift cards, or around $8 billion, are never used! That’s a huge amount of wasted money!

And one more thing: If your church or non-profit group wants a cool fundraising idea to re-claim these unused gift cards, send me a quick note and I’ll give you a great idea.

High Tech Credit Cards Are On the Way

Leave a reply

Finally, credit card issuers are coming out with technology that isn’t from the 1960s and hasn’t changed since the invention of the cards.

They’re changing from the current swipe card with a magnetic stripe to a pin number and chip-type card. For the transition it’ll still have that old magnetic stripe, but also an embedded microchip.

These new cards are already being issued. The Royal is putting them out and remember I told you about a super cool Capital One 6.9 fixed card? I got it with the microchip today. As merchants get new point-of-sale terminals you’ll insert it and use a PIN number just like your debit card. So no more slip to sign because your PIN number is your identification.

What it’ll do is to drastically reduce the $300 million in credit card fraud. Now most of the time when merchants haven’t taken the basic steps, they’re liable for the fraud charges. The rest of the time, the card issuers eat the loss. Until now, that loss hasn’t been as expensive as converting the cards.

No, they’re not doing the conversion because they have much interest in identity theft or helping you. On fraud, you’re also not liable for any of the phony charges. Never have been. They’re doing the conversion because it’s going to be cheaper for them to convert to the new cards instead of seeing the fraud amounts increasing each year.

It’s been in use in Europe for a very long time but the conversion and rollout in Canada will be slow. If you get the new cool card it’ll work exactly like your old one did until all merchants have the new point-of-sale machines where you insert the card, not swipe it. It’s just that this new card has a little chip in it.

This year, about 4.5 million of these will be in your hands. By October 2010 it’ll be fully implemented, because about 90% of all cards will have expired and replaced.

What this’ll also start is a huge wave of contact-less cards that are NFC enabled. For tech people, that’s Near Field Communication. Nokia will have it in their cell phones next year and by next summer, Rodgers will be doing their trial a trial. It’ll let you just wave it past a merchants’ scanner and pay for something. It’ll be exactly like the Esso and Shell payfast keyfobs but it’ll be your Visa or MasterCard.

In all this, you still have to remember why they’re doing it. It’s never to help you but to get you to use your card a whole lot more. And especially in the small-ticket purchases that add up to tens of billions of dollars that card issuers really want a huge piece of!

After all, we spend almost 20% more when we use a credit card instead of cash. Mark my words: Two or three years from now the percentage of small-ticket purchases on credit card will be way up. Card issuers will get richer and you’ll go further in debt so this is not a win-win arrangement, trust me.