We know many consumers damaged their credit score during the recession. A study released in July 2010 found that more U.S. credit scores are below 600 as of April 2010, a score that's considered subpar by FICO, the company responsible for our current credit model. It's funny to consider that a score of 600 doesn't seem far off from a perfect 850. Still, this got us thinking— just how low can a credit score actually go? Can it hit zero?
Technically, the answer is no. You can score 300, which, according to FICO spokesperson Barry Paperno, is the credit model's equivalent to a zero.
"The distribution of FICO scores is between 300 and 850," Paperno says. "That's just the way the model is built. It's not built to deliver a zero."
Fortunately for consumers, hitting rock bottom isn't easy to do.
Take Seattle resident Mark Mitchell Johnson. He watched his score steadily plummet after a series of poor investments led him to accumulate nearly $300,000 in debt back in 2007. But despite a foreclosure, debt management plan and ultimate bankruptcy, his score never reached the 300s.
"[It] hit a low of 471 from Experian," Johnson recalls. "I don't know what I could have done to get it any lower."
That answer is a bit more complicated. FICO tabulates credit scores using five criteria: your past payment practices (how well you pay your bills); your debt to credit ratio; the length of your credit history; the number of accounts you've opened and, finally, the type of accounts you've opened.
In order to receive a 300, you would have to a find a way to bottom out in each category. This means, as Paperno explains, you would need to open up a bunch of new credit cards, max them out almost immediately, file for bankruptcy the very next day and then head back out and apply for more credit cards.
You would also have to be relatively new to the credit industry, since a lengthy credit history, no matter how good or bad it is, will positively impact one criterion of the score. And you could only open one type of account, since having a variety on the books will also help your score. This may, incidentally, have been what spared Johnson's score since he had a mortgage, a federal loan and several credit card accounts on the books at the time of the 471, as opposed to a wallet full of Visas.
The lesson, at least where your credit score is concerned, is time heals all wounds.
"If all these things happened five years ago, you could have a decent score," Paperno explains. "[It] could have improved."
This may explain why a 300 is even more mythical than the 850. Though FICO has told MainStreet the perfect score does indeed exist, Paperno says he's never come across someone with a 300.
Neither has John Ulzheimer, a former FICO employee who now works for SmartCredit.com. "The lowest score I've ever seen is a 376," he says.
FICO couldn't provide exact stats of what percentage of people fell into the lowest bracket possible, but did say the scores tend to be closer to 850 than 300. Paperno said the average median score, last recorded in 2009, was 711.
There is a caveat, however. While you may not be able to score a zero, or the model's equivalent, you can fail to qualify for a credit score. This happens primarily to the unbanked, since FICO requires that a person has opened and then used at least one account in the past six months before it provides the score.
FICO also requires that you're alive at the time of the request as a means of fraud protection, a tenement Ulzheimer said could result in a rejection for a legitimate (and living) person should they share a joint account with someone who is recently deceased.
Those without credit need not fret. Though credit may be hard to come by in our current economic climate, securing some won't drop you directly into FICO's bottom bracket. Credit newbies who play their cards right could actually end up in the higher eschelons.
"I've seen people go from having no score to having a good score," Paperno says.
article source by Jeanine Skowronski
Monday, January 31, 2011
8 Rules of Thumb on Saving and Retirement
Financial planning still requires some math.
Sometimes the best advice is the simplest. After all, if it wasn't short and sweet, "stop, drop and roll" probably wouldn't do much for someone on fire. In the same way, financial rules of thumb are useful to many Americans who can't or won't make time for complete and in-depth financial planning.
"Rules of thumb are generally useful for most households, because we found through our research that simplicity is good, (and) that complexity is really the enemy of good household financial decision-making," says Michael Finke, associate professor of personal financial planning at Texas Tech University in Lubbock, Texas.
But while they're useful as rough guidelines for day-to-day financial decisions on saving, investing and retirement, rules of thumb often oversimplify complex issues in ways that can harm long-term financial prospects, says Certified Financial Planner Steve Pomeranz, host of "On the Money" on National Public Radio affiliate WXEL-FM in Boynton Beach, Fla.
"In order for you to do it right, you've still got to do the math, and that's the problem with a rule of thumb. It prevents you from doing the necessary math," says Pomeranz.
How much house can you afford?
The rule: You shouldn't buy a house that costs more than 2 1/2 years' worth of your income.
Why it works: During the wild years of the housing boom, consumers seemed to stop grounding their housing decisions in income. This rule can help remind consumers that income should be a primary criterion when deciding how much to pay for a house.
Grain of salt: One problem with this rule is it doesn't take into account how housing costs can fluctuate based on interest rates, says Pomeranz. For instance, a house that costs 2 1/2 times your income may be unaffordable in a high-rate environment but easy to pull off in a low-rate environment, says Pomeranz.
A better guide to whether to buy a home is rental prices in your area, says Finke. If you could rent a home that meets your needs for less than it would cost to buy and maintain a home, then renting is a no-brainer, he says.
How much should you save?
The rule: You should always save at least 10 percent of your income toward your retirement.
Why it works: The 10 percent rule gives people a simple, memorable target to work toward, especially if they're starting a serious saving regiment for the first time, says Michael Baughman, a Certified Financial Planner with Abacus Planning Group in Columbia, S.C. And depending on how early you start, saving 10 percent throughout your lifetime could well be enough to provide a solid retirement nest egg when you're ready to leave the work force, he says.
Grain of salt: Keeping the same target throughout your life ignores how much financial situations and expenses fluctuate throughout lifetimes, says Finke.
"When you're young, you should be borrowing money so that you can get an education," says Finke. "You'll have more room in your budget later on when your income goes up during middle age, and you'll have fewer expenses."
Stocks vs. bonds
The rule: The percentage of your portfolio invested in bonds should equal your age.
Why it works: Famously repeated by Vanguard founder John Bogle, this rule of thumb helps investors keep in mind that their portfolios need to change as they age, becoming more focused on avoiding risk in their investing than on higher growth. That's because older people have less time to recover from stock market shocks than younger people.
Grain of salt: As you enter retirement, taking all your money out of stocks could slow the growth of your portfolio too much, preventing you from keeping pace with inflation and possibly depleting your retirement savings, says Pomeranz.
Retirement withdrawals
The rule: To make sure your retirement lasts, never withdraw more than 4 percent a year.
Why it works: This simple formula has proven accurate over time, helping people easily figure out a guideline for how much they should withdraw so as not to exhaust their retirement savings, says Baughman.
Grain of salt: Be sure to track how your portfolio is doing. If it takes a hit, adjust your withdrawals downward. Withdrawing 4 percent of what your portfolio used to be worth is a good way to deplete it quickly, says Pomeranz.
Finke says another potential danger is that you won't live long enough to justify withdrawing only 4 percent of your savings, and that you'll miss out on taking vacations, making charitable contributions and giving gifts to family members. Finke says a better solution may be to use part of your retirement funds to buy an annuity or other insurance product to provide a base of lifelong income, allowing you to draw from your retirement funds more freely.
How much does the stock market return?
The rule: Over time, a diversified domestic stock portfolio will return an average of 10 percent per year.
Why it works: Some investors have a tendency to unload all their stocks when investing gets tough. Knowing that the returns of the stock market even out over time can help people stay in the market long enough to recover some of their losses rather than selling at the point of maximum discomfort, Finke says.
Grain of salt: To start with, there's the famous disclaimer you hear often in advertising for investment houses: "Past performance is no indication of future returns."
Given that 10 percent figure appears to be based on the Ibbotson Associates analysis of historical returns since 1926, when sustained economic growth reached levels rarely seen in human history, investors should take it with a grain of salt, says Finke.
The danger in the 10 percent assumption is that it could lead people to undershoot how much they'll actually need for retirement, says Finke. He says a better assumption might be stock market gains will be 3 percent above the rate of inflation, rising up and down as inflation increases and decreases.
Have an emergency fund for hard times
The rule: Your emergency fund should equal six months' worth of household expenses.
Why it works: When misfortune strikes in the form of a job loss or illness, having a financial cushion is key. As this down economy has proven, unemployment can last an unexpectedly long time, and having a six-month cushion can allow you to keep bad financial outcomes such as a drained retirement account or foreclosure at bay until you can find a new job.
Grain of salt: For many people, setting aside six months' of living expenses isn't really feasible, and for those who can set aside that much, keeping that large an amount of money set aside in an environment where they're earning little to no interest isn't an attractive option, says Pomeranz.
Baughman contends your emergency fund shouldn't be some arbitrary number but should be tied to your risk of extended unemployment. In a tough job market, people should have a larger rainy-day fund to cover a lengthier period to find a new job, he says.
Pay off credit card debt
The rule: Always pay off your highest-interest credit cards first.
Why it works: All things being equal, retiring the highest-interest credit card debt first, regardless of size, helps consumers minimize the amount of interest they pay over time, says Finke.
Grain of salt: For some consumers, the satisfaction and momentum they gain from starting with the smallest debts and paying them off first outweighs the interest benefit.
Starting with the smallest credit cards can help create a snowball effect, which can often help consumers with a big debt burden pay it off more quickly, says Baughman.
Buy life insurance for the unexpected
The rule: You should have at least five times your gross salary in life insurance coverage.
Why it works: The rule gives breadwinners a good guideline for how much money their families will need to meet their day-to-day costs and adjust financially to life without them, says Baughman.
Grain of salt: If you're the major or sole breadwinner in your household, and you don't believe your spouse's earnings could ever replace your salary in the event of your death, you may need to get more coverage to avoid leaving your family in need of money in the long run, says Baughman. In that case, he suggests multiplying your salary by a factor of 10 to arrive at how much life insurance you need.
article source Claes Bell
Sometimes the best advice is the simplest. After all, if it wasn't short and sweet, "stop, drop and roll" probably wouldn't do much for someone on fire. In the same way, financial rules of thumb are useful to many Americans who can't or won't make time for complete and in-depth financial planning.
"Rules of thumb are generally useful for most households, because we found through our research that simplicity is good, (and) that complexity is really the enemy of good household financial decision-making," says Michael Finke, associate professor of personal financial planning at Texas Tech University in Lubbock, Texas.
But while they're useful as rough guidelines for day-to-day financial decisions on saving, investing and retirement, rules of thumb often oversimplify complex issues in ways that can harm long-term financial prospects, says Certified Financial Planner Steve Pomeranz, host of "On the Money" on National Public Radio affiliate WXEL-FM in Boynton Beach, Fla.
"In order for you to do it right, you've still got to do the math, and that's the problem with a rule of thumb. It prevents you from doing the necessary math," says Pomeranz.
How much house can you afford?
The rule: You shouldn't buy a house that costs more than 2 1/2 years' worth of your income.
Why it works: During the wild years of the housing boom, consumers seemed to stop grounding their housing decisions in income. This rule can help remind consumers that income should be a primary criterion when deciding how much to pay for a house.
Grain of salt: One problem with this rule is it doesn't take into account how housing costs can fluctuate based on interest rates, says Pomeranz. For instance, a house that costs 2 1/2 times your income may be unaffordable in a high-rate environment but easy to pull off in a low-rate environment, says Pomeranz.
A better guide to whether to buy a home is rental prices in your area, says Finke. If you could rent a home that meets your needs for less than it would cost to buy and maintain a home, then renting is a no-brainer, he says.
How much should you save?
The rule: You should always save at least 10 percent of your income toward your retirement.
Why it works: The 10 percent rule gives people a simple, memorable target to work toward, especially if they're starting a serious saving regiment for the first time, says Michael Baughman, a Certified Financial Planner with Abacus Planning Group in Columbia, S.C. And depending on how early you start, saving 10 percent throughout your lifetime could well be enough to provide a solid retirement nest egg when you're ready to leave the work force, he says.
Grain of salt: Keeping the same target throughout your life ignores how much financial situations and expenses fluctuate throughout lifetimes, says Finke.
"When you're young, you should be borrowing money so that you can get an education," says Finke. "You'll have more room in your budget later on when your income goes up during middle age, and you'll have fewer expenses."
Stocks vs. bonds
The rule: The percentage of your portfolio invested in bonds should equal your age.
Why it works: Famously repeated by Vanguard founder John Bogle, this rule of thumb helps investors keep in mind that their portfolios need to change as they age, becoming more focused on avoiding risk in their investing than on higher growth. That's because older people have less time to recover from stock market shocks than younger people.
Grain of salt: As you enter retirement, taking all your money out of stocks could slow the growth of your portfolio too much, preventing you from keeping pace with inflation and possibly depleting your retirement savings, says Pomeranz.
Retirement withdrawals
The rule: To make sure your retirement lasts, never withdraw more than 4 percent a year.
Why it works: This simple formula has proven accurate over time, helping people easily figure out a guideline for how much they should withdraw so as not to exhaust their retirement savings, says Baughman.
Grain of salt: Be sure to track how your portfolio is doing. If it takes a hit, adjust your withdrawals downward. Withdrawing 4 percent of what your portfolio used to be worth is a good way to deplete it quickly, says Pomeranz.
Finke says another potential danger is that you won't live long enough to justify withdrawing only 4 percent of your savings, and that you'll miss out on taking vacations, making charitable contributions and giving gifts to family members. Finke says a better solution may be to use part of your retirement funds to buy an annuity or other insurance product to provide a base of lifelong income, allowing you to draw from your retirement funds more freely.
How much does the stock market return?
The rule: Over time, a diversified domestic stock portfolio will return an average of 10 percent per year.
Why it works: Some investors have a tendency to unload all their stocks when investing gets tough. Knowing that the returns of the stock market even out over time can help people stay in the market long enough to recover some of their losses rather than selling at the point of maximum discomfort, Finke says.
Grain of salt: To start with, there's the famous disclaimer you hear often in advertising for investment houses: "Past performance is no indication of future returns."
Given that 10 percent figure appears to be based on the Ibbotson Associates analysis of historical returns since 1926, when sustained economic growth reached levels rarely seen in human history, investors should take it with a grain of salt, says Finke.
The danger in the 10 percent assumption is that it could lead people to undershoot how much they'll actually need for retirement, says Finke. He says a better assumption might be stock market gains will be 3 percent above the rate of inflation, rising up and down as inflation increases and decreases.
Have an emergency fund for hard times
The rule: Your emergency fund should equal six months' worth of household expenses.
Why it works: When misfortune strikes in the form of a job loss or illness, having a financial cushion is key. As this down economy has proven, unemployment can last an unexpectedly long time, and having a six-month cushion can allow you to keep bad financial outcomes such as a drained retirement account or foreclosure at bay until you can find a new job.
Grain of salt: For many people, setting aside six months' of living expenses isn't really feasible, and for those who can set aside that much, keeping that large an amount of money set aside in an environment where they're earning little to no interest isn't an attractive option, says Pomeranz.
Baughman contends your emergency fund shouldn't be some arbitrary number but should be tied to your risk of extended unemployment. In a tough job market, people should have a larger rainy-day fund to cover a lengthier period to find a new job, he says.
Pay off credit card debt
The rule: Always pay off your highest-interest credit cards first.
Why it works: All things being equal, retiring the highest-interest credit card debt first, regardless of size, helps consumers minimize the amount of interest they pay over time, says Finke.
Grain of salt: For some consumers, the satisfaction and momentum they gain from starting with the smallest debts and paying them off first outweighs the interest benefit.
Starting with the smallest credit cards can help create a snowball effect, which can often help consumers with a big debt burden pay it off more quickly, says Baughman.
Buy life insurance for the unexpected
The rule: You should have at least five times your gross salary in life insurance coverage.
Why it works: The rule gives breadwinners a good guideline for how much money their families will need to meet their day-to-day costs and adjust financially to life without them, says Baughman.
Grain of salt: If you're the major or sole breadwinner in your household, and you don't believe your spouse's earnings could ever replace your salary in the event of your death, you may need to get more coverage to avoid leaving your family in need of money in the long run, says Baughman. In that case, he suggests multiplying your salary by a factor of 10 to arrive at how much life insurance you need.
article source Claes Bell
Wednesday, January 26, 2011
Financial Meltdown Was ‘Avoidable,’ Inquiry Concludes
WASHINGTON — The 2008 financial crisis was an “avoidable” disaster caused by widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street, according to the conclusions of a Congressional inquiry.
The government commission that investigated the financial crisis casts a wide net of blame, faulting two administrations, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors, and risky bets on securities backed by the loans.
“The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done,” the panel wrote in the report’s conclusions. “If we accept this notion, it will happen again.”
While the panel, the Financial Crisis Inquiry Commission, accuses several financial institutions of greed, ineptitude, or both, some of its most grave conclusions concern government failings, with embarrassing implications for both political parties.
Many of the findings have been widely described, but its synthesis of interviews, documents and testimony, along with its government imprimatur, give it a sweep and authority that the commission hopes will shape the public consciousness. The full report is expected to be released as a 576-page book on Thursday. When the bipartisan commission was set up in May of 2009, the intent of Congress and the president was to produce a comprehensive examination of the causes of the crisis.
The report, aimed at a broad audience, was based on 19 days of hearings as well as interviews with more than 700 witnesses; the commission has pledged to release a trove of transcripts and other raw material online. The document is intended to be the definitive account of the crisis’s causes, but its authors may already have failed in achieving that aim.
Of the 10 commission members, only the 6 appointed by Democrats endorsed the final report. Three Republican members have prepared a dissent; a fourth Republican, Peter J. Wallison, a former Treasury official and White House counsel to President Ronald Reagan, has written his own dissent, calling government policies to promote homeownership the primary culprit for the crisis.
The commission’s report finds fault with two Fed chairmen: Alan Greenspan, a skeptic of regulation who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but then played a crucial role in the response to it. It criticizes Mr. Greenspan for advocating financial deregulation and cites a “pivotal failure to stem the flow of toxic mortgages” under his leadership as “the prime example” of government negligence.
It also criticizes the Bush administration’s “inconsistent response” to the crisis — allowing Lehman Brothers to go bankrupt in September 2008 after earlier bailing out another bank, Bear Stearns, with help from the Fed — “added to the uncertainty and panic in the financial markets.”
Like Mr. Bernanke, Mr. Bush’s Treasury secretary, Henry M. Paulson Jr., predicted in 2007 — wrongly it turned out — that the subprime meltdown would be contained, as the report notes.
Democrats also come under fire. The 2000 decision to shield over-the-counter derivatives from regulation, made during the last year of President Bill Clinton’s time in office is called “a key turning point in the march toward the financial crisis.”
Timothy F. Geithner, who was president of the Federal Reserve Bank of New York during the crisis and is now President Obama’s Treasury secretary, also comes under criticism; the report finds that the New York Fed “could have clamped down” on excesses by Citigroup in the lead-up to the crisis and, just a month before Lehman’s collapse, was “still seeking information” on the vulnerabilities from Lehman’s exposure to more than 900,000 derivatives contracts.
Former and current officials named in the report, as well as financial institutions, declined on Tuesday to comment on the report before it was released , or did not respond to requests for comment.
The report is likely to reignite debate over the outsize influence of Wall Street; it says that regulators “lacked the political will” to scrutinize and hold accountable the institutions they were supposed to oversee. The financial sector spent $2.7 billion on lobbying from 1999 to 2008, while individuals and committees affiliated with the industry made more than $1 billion in campaign contributions.
The report does knock down — at least partly — several early theories for the crisis.
It says the low interest rates brought about by the Fed after the 2001 recession “created increased risks” but were not chiefly to blame. It says that Fannie Mae and Freddie Mac, the mortgage finance giants, “contributed to the crisis but were not a primary cause.” And in a finding likely to anger conservatives, it says that “aggressive homeownership goals” set by the government as part of a “philosophy of opportunity” were not major culprits.
On the other hand, the report is unsparing in its treatment of regulators. It finds that the Securities and Exchange Commission failed to require big banks to hold more capital to cushion losses and halt risky practices, and that the Fed “neglected its mission” to protect the public.
It says that the Office of the Comptroller of the Currency, which regulates national banks, and the Office of Thrift Supervision, which oversees savings-and-loans, blocked state regulators from reining in lending abuses because they were “caught up in turf wars.”
“The crisis was the result of human action and inaction, not of Mother Nature or computer models gone awry,” the report states. “The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble.”
Portions of the dissents are included in the report, which is being published as a paperback book (with a cover price of $14.99) by PublicAffairs, along with an official version by the Government Printing Office.
The commission’s chairman, Phil Angelides, a Democrat and former California state treasurer, has tried to keep the book under wraps, even directing the publisher to prevent bookstores from getting it before the eve of the Thursday release. He declined to comment.
The report’s immediate implications may be felt more in the political realm than in public policy. The Dodd-Frank law overhauling the regulation of Wall Street, signed in July, takes as its premise the same regulatory deficiencies cited by the commission. But the report is sure to factor in the looming debate over the future of Fannie Mae and Freddie Mac, which have been government-run since 2008.
Though the report documents fraudulent practices by mortgage lenders and careless betting by banks, one striking finding is its portrayal of bumbling incompetence, among corporate chieftains.
It quotes Citigroup executives admitting that they paid little attention to the risks associated with mortgage securities. Executives at the American Insurance Group, another bailout recipient, were found to be blind to its $79 billion exposure to credit default swaps, a kind of insurance that was sold to investors seeking protection against a drop in the value of securities backed by risky home loans. At Merrill Lynch, top managers were caught unaware when seemingly secure mortgage investments suddenly resulted in billions of dollars in losses.
By one measure, the nation’s five largest investment banks had only $1 in capital to cover losses for about every $40 in assets, meaning that a 3 percent drop in asset values could wipe out the firm. The banks hid their excessive leverage using derivatives, off-balance-sheet entities and other devices, the report found. The speculative binge was abetted by a giant “shadow banking system” in which the banks relied heavily on short-term debt.
“When the housing and mortgage markets cratered, the lack of transparency, the extraordinary debt loads, the short-term loans and the risky assets all came home to roost,” the report found. “What resulted was panic. We had reaped what we had sown.”
The report is dotted with literary flourishes. It calls credit-rating agencies “cogs in the wheel of financial destruction.” Paraphrasing Shakespeare’s Julius Caesar, it states, “The fault lies not in the stars, but in us.” Of the banks that bought created, packaged and sold trillions of dollars in mortgage-related securities, it says: “Like Icarus, they never feared flying ever closer to the sun.”
Article Source:new york times
SEWELL CHAN
The government commission that investigated the financial crisis casts a wide net of blame, faulting two administrations, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors, and risky bets on securities backed by the loans.
“The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done,” the panel wrote in the report’s conclusions. “If we accept this notion, it will happen again.”
While the panel, the Financial Crisis Inquiry Commission, accuses several financial institutions of greed, ineptitude, or both, some of its most grave conclusions concern government failings, with embarrassing implications for both political parties.
Many of the findings have been widely described, but its synthesis of interviews, documents and testimony, along with its government imprimatur, give it a sweep and authority that the commission hopes will shape the public consciousness. The full report is expected to be released as a 576-page book on Thursday. When the bipartisan commission was set up in May of 2009, the intent of Congress and the president was to produce a comprehensive examination of the causes of the crisis.
The report, aimed at a broad audience, was based on 19 days of hearings as well as interviews with more than 700 witnesses; the commission has pledged to release a trove of transcripts and other raw material online. The document is intended to be the definitive account of the crisis’s causes, but its authors may already have failed in achieving that aim.
Of the 10 commission members, only the 6 appointed by Democrats endorsed the final report. Three Republican members have prepared a dissent; a fourth Republican, Peter J. Wallison, a former Treasury official and White House counsel to President Ronald Reagan, has written his own dissent, calling government policies to promote homeownership the primary culprit for the crisis.
The commission’s report finds fault with two Fed chairmen: Alan Greenspan, a skeptic of regulation who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but then played a crucial role in the response to it. It criticizes Mr. Greenspan for advocating financial deregulation and cites a “pivotal failure to stem the flow of toxic mortgages” under his leadership as “the prime example” of government negligence.
It also criticizes the Bush administration’s “inconsistent response” to the crisis — allowing Lehman Brothers to go bankrupt in September 2008 after earlier bailing out another bank, Bear Stearns, with help from the Fed — “added to the uncertainty and panic in the financial markets.”
Like Mr. Bernanke, Mr. Bush’s Treasury secretary, Henry M. Paulson Jr., predicted in 2007 — wrongly it turned out — that the subprime meltdown would be contained, as the report notes.
Democrats also come under fire. The 2000 decision to shield over-the-counter derivatives from regulation, made during the last year of President Bill Clinton’s time in office is called “a key turning point in the march toward the financial crisis.”
Timothy F. Geithner, who was president of the Federal Reserve Bank of New York during the crisis and is now President Obama’s Treasury secretary, also comes under criticism; the report finds that the New York Fed “could have clamped down” on excesses by Citigroup in the lead-up to the crisis and, just a month before Lehman’s collapse, was “still seeking information” on the vulnerabilities from Lehman’s exposure to more than 900,000 derivatives contracts.
Former and current officials named in the report, as well as financial institutions, declined on Tuesday to comment on the report before it was released , or did not respond to requests for comment.
The report is likely to reignite debate over the outsize influence of Wall Street; it says that regulators “lacked the political will” to scrutinize and hold accountable the institutions they were supposed to oversee. The financial sector spent $2.7 billion on lobbying from 1999 to 2008, while individuals and committees affiliated with the industry made more than $1 billion in campaign contributions.
The report does knock down — at least partly — several early theories for the crisis.
It says the low interest rates brought about by the Fed after the 2001 recession “created increased risks” but were not chiefly to blame. It says that Fannie Mae and Freddie Mac, the mortgage finance giants, “contributed to the crisis but were not a primary cause.” And in a finding likely to anger conservatives, it says that “aggressive homeownership goals” set by the government as part of a “philosophy of opportunity” were not major culprits.
On the other hand, the report is unsparing in its treatment of regulators. It finds that the Securities and Exchange Commission failed to require big banks to hold more capital to cushion losses and halt risky practices, and that the Fed “neglected its mission” to protect the public.
It says that the Office of the Comptroller of the Currency, which regulates national banks, and the Office of Thrift Supervision, which oversees savings-and-loans, blocked state regulators from reining in lending abuses because they were “caught up in turf wars.”
“The crisis was the result of human action and inaction, not of Mother Nature or computer models gone awry,” the report states. “The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble.”
Portions of the dissents are included in the report, which is being published as a paperback book (with a cover price of $14.99) by PublicAffairs, along with an official version by the Government Printing Office.
The commission’s chairman, Phil Angelides, a Democrat and former California state treasurer, has tried to keep the book under wraps, even directing the publisher to prevent bookstores from getting it before the eve of the Thursday release. He declined to comment.
The report’s immediate implications may be felt more in the political realm than in public policy. The Dodd-Frank law overhauling the regulation of Wall Street, signed in July, takes as its premise the same regulatory deficiencies cited by the commission. But the report is sure to factor in the looming debate over the future of Fannie Mae and Freddie Mac, which have been government-run since 2008.
Though the report documents fraudulent practices by mortgage lenders and careless betting by banks, one striking finding is its portrayal of bumbling incompetence, among corporate chieftains.
It quotes Citigroup executives admitting that they paid little attention to the risks associated with mortgage securities. Executives at the American Insurance Group, another bailout recipient, were found to be blind to its $79 billion exposure to credit default swaps, a kind of insurance that was sold to investors seeking protection against a drop in the value of securities backed by risky home loans. At Merrill Lynch, top managers were caught unaware when seemingly secure mortgage investments suddenly resulted in billions of dollars in losses.
By one measure, the nation’s five largest investment banks had only $1 in capital to cover losses for about every $40 in assets, meaning that a 3 percent drop in asset values could wipe out the firm. The banks hid their excessive leverage using derivatives, off-balance-sheet entities and other devices, the report found. The speculative binge was abetted by a giant “shadow banking system” in which the banks relied heavily on short-term debt.
“When the housing and mortgage markets cratered, the lack of transparency, the extraordinary debt loads, the short-term loans and the risky assets all came home to roost,” the report found. “What resulted was panic. We had reaped what we had sown.”
The report is dotted with literary flourishes. It calls credit-rating agencies “cogs in the wheel of financial destruction.” Paraphrasing Shakespeare’s Julius Caesar, it states, “The fault lies not in the stars, but in us.” Of the banks that bought created, packaged and sold trillions of dollars in mortgage-related securities, it says: “Like Icarus, they never feared flying ever closer to the sun.”
Article Source:new york times
SEWELL CHAN
Thursday, January 20, 2011
Tax Changes for 2011: A Checklist
It's customary for this column to start the year with a roundup of what's new for taxpayers. Given last December's theatrics in Congress, some items on our list may seem familiar unless you were out mapping the tributaries of the Amazon.
But keeping tax details straight is tough—even for tax reporters. Our mailbox is full of queries from bewildered readers trying to sort out issues such as which Roth IRA conversion rules expired last year, how the new payroll tax cut works, or at what income level the zero rate on long-term capital gains ends.
The most important point to remember is that last year's 11th-hour tax changes, though favorable for most, are temporary. After 2012, many provisions are set to snap back to what they were before 2001, and a few even expire this year.
That raises the dreary possibility that in less than two years we will be in a replay of last year's tax debates, but in the middle of a presidential campaign. Once again tax rates on both pay and investment income will be set to spike, especially for those at the bottom, and the estate tax will revert to a $1 million-per-individual exemption and a 55% top rate.
Tax strategists like Robert Gordon of Twenty-First Securities in New York see this year as a lucky reprieve for those who didn't get around to planning for higher taxes earlier, especially on investments with long-term gains and stock options. "It's not a question of whether investment tax rates are going up, but when," he says. He already is meeting with clients who escaped a 2011 increase but are determined to get ready for 2013.
Meanwhile, here are important changes for this year:
Income Taxes
This year's rates carry over from last year, but the brackets are a bit higher than last year's due to inflation adjustments (see table). Expires: end of 2012.
'Stealth' Income Taxes
Affluent taxpayers won't have deductions clipped by the so-called Pease and PEP limitations. The Pease limit cut 3% of itemized deductions and PEP eroded the personal exemption, which is $3,700 for 2011. Expires: end of 2012.
for more of this article click here
But keeping tax details straight is tough—even for tax reporters. Our mailbox is full of queries from bewildered readers trying to sort out issues such as which Roth IRA conversion rules expired last year, how the new payroll tax cut works, or at what income level the zero rate on long-term capital gains ends.
The most important point to remember is that last year's 11th-hour tax changes, though favorable for most, are temporary. After 2012, many provisions are set to snap back to what they were before 2001, and a few even expire this year.
That raises the dreary possibility that in less than two years we will be in a replay of last year's tax debates, but in the middle of a presidential campaign. Once again tax rates on both pay and investment income will be set to spike, especially for those at the bottom, and the estate tax will revert to a $1 million-per-individual exemption and a 55% top rate.
Tax strategists like Robert Gordon of Twenty-First Securities in New York see this year as a lucky reprieve for those who didn't get around to planning for higher taxes earlier, especially on investments with long-term gains and stock options. "It's not a question of whether investment tax rates are going up, but when," he says. He already is meeting with clients who escaped a 2011 increase but are determined to get ready for 2013.
Meanwhile, here are important changes for this year:
Income Taxes
This year's rates carry over from last year, but the brackets are a bit higher than last year's due to inflation adjustments (see table). Expires: end of 2012.
'Stealth' Income Taxes
Affluent taxpayers won't have deductions clipped by the so-called Pease and PEP limitations. The Pease limit cut 3% of itemized deductions and PEP eroded the personal exemption, which is $3,700 for 2011. Expires: end of 2012.
for more of this article click here
Sunday, June 6, 2010
The Advantages of Having a Good Credit Score
There are many advantages and benefits of having and maintaining a good credit score. If you have a credit score of 720, 740, or 760 and up, you have a good score. With high credit scores you will be able to save money each month with lower interest rates on all your financial products.
You will also notice you get a better reception by the car salesmen, home lenders, and even insurance salesmen when you step into their office. They know they have a better chance with closing the sale with you because they can get you approved for a loan at a low rate that you can afford and one that you will be happy with.
A above average credit score will entitle you to demand the best interest rates on home loans, home equity loans, credit cards, car loans, personal loans and more. And in most cases lenders should have no problem accommodating your requests. You've earned your credit now put it to good use.
Another of the advantages of having good credit or good scores to be more precise since you do have to maintain a good score with all 3 of the major credit reporting agencies - Equifax, Experian, and Transunion - is that potential employers will not turn down your application because of your credit history. You stand a better chance of landing a job with a high score as opposed to a low score.
Even if you do not agree with the way most companies use credit scoring information, if you want to get into their game, you have to play by their rules.
And when you do play by their rules, you get to enjoy the benefits of low rate balance transfer offers even when credit is drying up for less than qualified applicants. You still get the perks of being disciplined and not overextending yourself and spending more than you could afford to pay back.
As you can see, there are many benefits and advantages of having a good credit score. To get into the high 700+ credit score range, pay all your bills on time. Stay on top of the due dates like a hawk. Only use a small portion of the balance - less than 25% is ideal. Keep accounts open - 10 to 15 years at a minimum. And don't apply for credit you do not need. Follow these simple steps and you'll be on your way to the best deals on credit anywhere.
Article Source: http://EzineArticles.com
You will also notice you get a better reception by the car salesmen, home lenders, and even insurance salesmen when you step into their office. They know they have a better chance with closing the sale with you because they can get you approved for a loan at a low rate that you can afford and one that you will be happy with.
A above average credit score will entitle you to demand the best interest rates on home loans, home equity loans, credit cards, car loans, personal loans and more. And in most cases lenders should have no problem accommodating your requests. You've earned your credit now put it to good use.
Another of the advantages of having good credit or good scores to be more precise since you do have to maintain a good score with all 3 of the major credit reporting agencies - Equifax, Experian, and Transunion - is that potential employers will not turn down your application because of your credit history. You stand a better chance of landing a job with a high score as opposed to a low score.
Even if you do not agree with the way most companies use credit scoring information, if you want to get into their game, you have to play by their rules.
And when you do play by their rules, you get to enjoy the benefits of low rate balance transfer offers even when credit is drying up for less than qualified applicants. You still get the perks of being disciplined and not overextending yourself and spending more than you could afford to pay back.
As you can see, there are many benefits and advantages of having a good credit score. To get into the high 700+ credit score range, pay all your bills on time. Stay on top of the due dates like a hawk. Only use a small portion of the balance - less than 25% is ideal. Keep accounts open - 10 to 15 years at a minimum. And don't apply for credit you do not need. Follow these simple steps and you'll be on your way to the best deals on credit anywhere.
Article Source: http://EzineArticles.com
Tuesday, May 18, 2010
Carry a balance? Banks may be gaming your payments
NEW YORK (AP) -- Credit card issuers are still playing "gotcha" with customers.
Landmark reforms this year were intended to stop billing practices that gouge unwitting consumers. Yet banks are hanging onto a tactic that ensures borrowers rack up as much as possible in interest charges.
The practice in question comes into play whenever portions of a cardholder's balance carry different interest rates. Cash advances, for example, can come with dramatically higher interest rates than purchases. At Bank of America, it's about 24 percent versus as low as 13 percent.
From the consumer's perspective, it makes more sense to pay down the higher interest rate balance first, because it rises at a faster pace.
Before the reforms went into effect, however, banks would apply any payments first to balances with the lowest rate. This ensured that the costlier balance kept fattening up for as long as possible.
The tactic was among those targeted by regulators. The new credit card law, which took effect in February, specifies that any payments above the minimum must first be applied to the balance with the higher interest rate.
The key phrase? "Above the minimum"
That means minimum payments can still be applied to the lower rate balances.
And that's exactly what the biggest credit card issuers are doing, including American Express, Capital One and Chase. Customers can't request that a payment be applied any differently.
Although it's legal, the practice undermines the spirit of the credit card reforms, notes Odysseas Papadimitriou, CEO of CardHub.com.
"Why should any part of a payment be applied in an unfair way, especially for people who can only afford to make the minimum payment?" said Papadimitriou.
The loophole was probably the result of regulatory compromise by lawmakers, said Ruth Susswein of Consumer Action. She said most customers don't realize that banks apply payments to their disadvantage, and are infuriated when they find out.
Bank of America, the country's largest bank, noted that the policy is clearly stated in its cardholder agreements and did not provide further explanation. The Charlotte, N.C. company earlier this year touted a new effort to build customer trust with more transparent policies.
American Express spokeswoman Desiree Fish also noted that the policy is standard industry practice, and is compliant with the reforms.
Minimum payments are usually about 2 percent to 4 percent of the balance, or a flat dollar amount. At Discover, for example, it's 2 percent of the balance or $40, whichever is greater.
At Discover, the cardholder agreement states that any payments up to the minimum will be applied "at our discretion, including in a manner most favorable or convenient for us."
Spokesman Matt Townson confirmed that meant payments go to the lowest interest rate balances first.
If you have a consumer comment or question, please e-mail Candice Choi at cchoi(at)ap.org.
Candice Choi, AP Personal Finance Writer
Landmark reforms this year were intended to stop billing practices that gouge unwitting consumers. Yet banks are hanging onto a tactic that ensures borrowers rack up as much as possible in interest charges.
The practice in question comes into play whenever portions of a cardholder's balance carry different interest rates. Cash advances, for example, can come with dramatically higher interest rates than purchases. At Bank of America, it's about 24 percent versus as low as 13 percent.
From the consumer's perspective, it makes more sense to pay down the higher interest rate balance first, because it rises at a faster pace.
Before the reforms went into effect, however, banks would apply any payments first to balances with the lowest rate. This ensured that the costlier balance kept fattening up for as long as possible.
The tactic was among those targeted by regulators. The new credit card law, which took effect in February, specifies that any payments above the minimum must first be applied to the balance with the higher interest rate.
The key phrase? "Above the minimum"
That means minimum payments can still be applied to the lower rate balances.
And that's exactly what the biggest credit card issuers are doing, including American Express, Capital One and Chase. Customers can't request that a payment be applied any differently.
Although it's legal, the practice undermines the spirit of the credit card reforms, notes Odysseas Papadimitriou, CEO of CardHub.com.
"Why should any part of a payment be applied in an unfair way, especially for people who can only afford to make the minimum payment?" said Papadimitriou.
The loophole was probably the result of regulatory compromise by lawmakers, said Ruth Susswein of Consumer Action. She said most customers don't realize that banks apply payments to their disadvantage, and are infuriated when they find out.
Bank of America, the country's largest bank, noted that the policy is clearly stated in its cardholder agreements and did not provide further explanation. The Charlotte, N.C. company earlier this year touted a new effort to build customer trust with more transparent policies.
American Express spokeswoman Desiree Fish also noted that the policy is standard industry practice, and is compliant with the reforms.
Minimum payments are usually about 2 percent to 4 percent of the balance, or a flat dollar amount. At Discover, for example, it's 2 percent of the balance or $40, whichever is greater.
At Discover, the cardholder agreement states that any payments up to the minimum will be applied "at our discretion, including in a manner most favorable or convenient for us."
Spokesman Matt Townson confirmed that meant payments go to the lowest interest rate balances first.
If you have a consumer comment or question, please e-mail Candice Choi at cchoi(at)ap.org.
Candice Choi, AP Personal Finance Writer
Tuesday, April 27, 2010
Online Credit Repair - Have Your Credit Ratings Refurbished Quickly
Unfavorable statements on your credit report can set you back significantly with obtaining credit. You do not need to give up looking however, since it really is never too late to become credit worthy once again.
Make sure you acknowledge that online credit restoration will never take place overnight. It calls for serious determination and perseverance to get going in a clean slate once more. Although online credit repair company can significantly help with taking the work off you.
Below some easy repairing credit methods are discussed to get you rolling. But if you want quick credit repair with limited effort is it important you find a legitimate online credit repair company.
It's best to be aware of the three credit bureaus are declaring about you. Considering charge card companies really don't need to report to Equifax, TransUnion and Experian altogether, they more often than not report to 1 or all of them.
This merely signifies that each report coming from each bureau is somewhat unique from one another. This is a very important fact because the last thing you want to do is assume that one report will look like the other. You need to check out your reports from each credit agency to make sure they are the same.
Of course, you are permitted to a free of charge copy of your credit rating from the bureau if you have been completely denied of employment or consumer credit because of to your credit profile. You can check with the company to give you with the name of the credit agency, phone number and address.
When you get a hold of your credit score, look at it cautiously. Given that the credit reporting agencies develop your credit rating basing on the facts they receive from your creditors, they are never verified.
The bottom-line is the most important thing you ought to consider is ordering your credit reports. If you get an online credit repair law firm then don't waste your time as they will do it for you. But if you don't remember to buy it from every single institution mainly because you only waste time and financial resources if you only order a credit profile from one particular agency. The fee of the credit rating may differ from state to state though it is likely that the cost of your credit file is around $9.
It is your job to maintain your credit report that is a very good reflection of you. Be on the lookout for mistakes on typing, imperfect details, and outdated and inaccurate histories of your account. After examining the report correctly, list all the errors you want to challenge and the reasons why.
Seeing that bad reports are not free, remember to be thorough. You'll have two alternatives, which is to either finish the adjustment form supplied with your credit rating or craft a letter. With this form it is important to deliver a photocopy of your report with the problems circled to the credit agency who supplied the report. At the same time, keep in mind to add supporting files along with your report.
Right after submitting the paperwork and report, don't forget to maintain copies of all of the forms and the date you sent it. Routinely, the agency will investigate the dispute in the course of 30 days just before acquiring your correspondence. In addition, almost everything which is proved to be incorrect is removed.
Other ways to correct your credit is to including beneficial facts and stableness with your credit life. Even when you possess the credit, there can be a period of time when you're getting denied of credit because of insufficient credit file. You will find several lenders that do not report your history of credit to the credit bureaus. What you might do is to try asking the grantors to report the facts of your account and the background of your monthly payment for the credit agency.
You can even try making some kind of credit standing through the use of guaranteed bank cards. This type of credit cards are presented to those with absolutely no consumer credit or in the process of repairing their credit.
At the same time, it truly is well-advised to open a checking account in your bank. Doing this, would likely show your creditors that you'll be attempting to conserve so you are saving income to pay off the money you owe.
To get your credit repaired fast online check out
http://creditsonline.info/
Article Source: http://EzineArticles.com
Make sure you acknowledge that online credit restoration will never take place overnight. It calls for serious determination and perseverance to get going in a clean slate once more. Although online credit repair company can significantly help with taking the work off you.
Below some easy repairing credit methods are discussed to get you rolling. But if you want quick credit repair with limited effort is it important you find a legitimate online credit repair company.
It's best to be aware of the three credit bureaus are declaring about you. Considering charge card companies really don't need to report to Equifax, TransUnion and Experian altogether, they more often than not report to 1 or all of them.
This merely signifies that each report coming from each bureau is somewhat unique from one another. This is a very important fact because the last thing you want to do is assume that one report will look like the other. You need to check out your reports from each credit agency to make sure they are the same.
Of course, you are permitted to a free of charge copy of your credit rating from the bureau if you have been completely denied of employment or consumer credit because of to your credit profile. You can check with the company to give you with the name of the credit agency, phone number and address.
When you get a hold of your credit score, look at it cautiously. Given that the credit reporting agencies develop your credit rating basing on the facts they receive from your creditors, they are never verified.
The bottom-line is the most important thing you ought to consider is ordering your credit reports. If you get an online credit repair law firm then don't waste your time as they will do it for you. But if you don't remember to buy it from every single institution mainly because you only waste time and financial resources if you only order a credit profile from one particular agency. The fee of the credit rating may differ from state to state though it is likely that the cost of your credit file is around $9.
It is your job to maintain your credit report that is a very good reflection of you. Be on the lookout for mistakes on typing, imperfect details, and outdated and inaccurate histories of your account. After examining the report correctly, list all the errors you want to challenge and the reasons why.
Seeing that bad reports are not free, remember to be thorough. You'll have two alternatives, which is to either finish the adjustment form supplied with your credit rating or craft a letter. With this form it is important to deliver a photocopy of your report with the problems circled to the credit agency who supplied the report. At the same time, keep in mind to add supporting files along with your report.
Right after submitting the paperwork and report, don't forget to maintain copies of all of the forms and the date you sent it. Routinely, the agency will investigate the dispute in the course of 30 days just before acquiring your correspondence. In addition, almost everything which is proved to be incorrect is removed.
Other ways to correct your credit is to including beneficial facts and stableness with your credit life. Even when you possess the credit, there can be a period of time when you're getting denied of credit because of insufficient credit file. You will find several lenders that do not report your history of credit to the credit bureaus. What you might do is to try asking the grantors to report the facts of your account and the background of your monthly payment for the credit agency.
You can even try making some kind of credit standing through the use of guaranteed bank cards. This type of credit cards are presented to those with absolutely no consumer credit or in the process of repairing their credit.
At the same time, it truly is well-advised to open a checking account in your bank. Doing this, would likely show your creditors that you'll be attempting to conserve so you are saving income to pay off the money you owe.
To get your credit repaired fast online check out
http://creditsonline.info/
Article Source: http://EzineArticles.com
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