The Case for Debt

The surging deficit in the United States has led to much consternation and fear. We are rightfully concerned. But not all debt is bad. It is a matter of size and context.

The type of debt that deserves a bad name is, as Bill Gross of PIMCO so eloquently puts it, "the perversion of American-style capitalism over the past 30 years -- a belief that wealth was a function of printing, lending, and of course borrowing money in order to make more money." In essence, we continued to borrow from future generations in an effort to improve our current standard of living. The problem arises, according to Gross, when liabilities become so large that the interest burden and probability of repayment overwhelm both borrower and lender alike.

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Crash Course

Reading about the decline of the U.S. auto industry is like watching a Hitchcock suspense film.  The camera lingers on the murder weapon.  We know what is going to happen, but the apparent victim remains unaware of her fate.  You want to yell: "Watch out!"  Unfortunately, it's too late.

Hopefully, it's not too late for Detroit's Big Three car companies.  In "Crash Course: The American Automobile Industry's Road from Glory to Disaster," author Paul Ingrassia depicts how an endless series of poor decisions seriously impaired General Motors, Ford, and Chrysler.  As a Detroit native, it is a particularly sad tale. 

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Avoiding Financial Advisor Fraud

With all the craziness in the world, you probably have given little thought to the investment portfolios of such celebrities as Sylvester Stallone, Uma Thurman, Caroline Kennedy, Martin Scorcese, and Henry Kissinger.  These are just some of the high profile clients of investment advisor, Kenneth Starr, who was criminally charged last month with fraud.

Starr allegedly diverted $59 million from 11 clients to such luxuries as a large New York condo with an indoor swimming pool and a 1,500 square foot garden.  The advisor – no connection to the Clinton prosecutor – "cultivated business at charity events and lavish parties, bridging the world of New York and Hollywood to build a star-studded client list of socialites, financiers, philanthropists, A-list actors and Hall of Fame athletes" according to the New York Times.

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Buying Garbage

As part of our recent discussion of the Goldman Sachs affair, it seemed that people were willing to take positions on what could be considered "bad bonds."  The question arises: Why would investors buy such garbage?  The answer is "price."  Or as one Wall Street veteran explained it, "there are no bad bonds, there are just bad prices."

Caroline Baum, in a commentary in Bloomberg, said investors "buy crap all the time.  They purchase distressed debt, defaulted loans and foreclosed properties.  They buy them at a discounted price that compensates them for the risk.  They stand to lose little and win big."

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The Goldman Sachs Affair

The story continues to unfold as to the role Goldman Sachs played in the huge financial mess that we recently experienced.  There are, of course, numerous parties who share culpability. 

Consumers bought houses they could not afford.  Mortgage lenders made unsound subprime loans to anyone who could fog a mirror.  Wall Street bundled these loans and sold them as fast as they could for huge fees.  Ratings agencies blessed these loans as being safer than they really were.  The federal government promoted home ownership at any cost via Fannie Mae and Freddie Mac.  The Federal Reserve kept money cheap and easy with low interest rates.  All were complicit.  

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