Juggling Dynamite

People frequently write to me expressing a fatalistic idea that they have no choice but to be used and abused by the financial services sector because “What is a little guy to do? What choice do we have?” Much to the contrary, there are many things people of all sizes can do to help themselves.

It starts with the idea of self-reliance and self-control. It means saving a significant portion of our income each year. It means controlling spending even during boom times so that we have money to soften the inevitable slow times. It means paying off our homes as soon as possible (even if the interest is tax deductible), because it is simply better for our peace and financial security to live in a debt free home. It means avoiding personal debt. It means operating our businesses with as little credit as possible. It means not buying consumption goods because we can “afford” the monthly payment if we do not actually have the money to buy the item upfront. It means understanding that there is a world of difference between between “having income” and “having money”. Most spend as if they have the latter when in fact they only have the former, and if anything happens to their employment income, they find themselves unexpectedly in financial distress. It means accepting that no financial adviser, mutual fund or stock is going to make us financially secure. Only we can do that for ourselves through our choices and behavior.

As we build our savings nest egg, the focus must be on keeping the bulk of our capital safe and liquid. Investment risk that we chose to take must be carefully controlled, monitored and calculated based on rational probability assessments not perpetual blind hope. This includes not making any investment unless we have damage control rules in place from the outset.

Over the past 15 years as much of the world became under-saved and credit-addicted, individuals and countries came to depend on the wizards of finance for their survival. This is a huge mistake. The lessons of the credit crisis and our ongoing challenges remind that risk sellers have their own profits as their primary motivation. Their agenda is often directly in opposition to the best interests of ourselves and our family.

No one controls the future. Life is full of risk. The only control we have are our daily habits and decisions based on the facts and probabilities we are presented with. Living with financial discipline (debt free) and self-reliance is the best way to have a say in our outcomes.

In this vein, I found this story about the Apollo 11 astronauts inspiring. In the early days of the Apollo program – an astronaut’s mission into space was literally uninsurable.

“Back then astronaut captains made about $17,000 a year, NPR reports and a life insurance policy for Neil Armstrong would have run about $50,000 a year, or more than $300,000 in 2012 dollars…

So about a month before they were set to go to the moon, Neil Armstrong, Michael Collins, and Buzz Aldrin were locked into a Plexiglas room together and got busy providing for their families the only way they could — they signed hundreds of autographs.

In what would become a common practice, the guys signed their names on envelopes emblazoned with various space-related images. The ‘covers’ would, of course, become intensely valuable should the trio perish on the mission. They’re now often referred to as ” Apollo Insurance Covers.”

And to ensure the covers would hold maximum value, the crew put stamps on them, and sent them in a package to a friend, who dumped them all in the mail so they would be postmarked July 16, 1969 — the day of the mission’s success — or its failure.

Fortunately, the trip went off without a hitch and all three men went on to live long, healthy lives and all remained alive until Neil Armstrong’s death a few days ago.

The covers are still around, and not too hard to find. In 2011, Collectors Weekly pegged their average value at around $5,000.”

Brilliant. See: Neil Armstrong couldn’t afford life insurance.

Danielle was a guest on the Financial Survival Network with Kerry Lutz yesterday talking about recent developments in the world economy and markets. You can listen to an audio clip here.

The rule of law is a key maxim of a just society and democracy. It dictates that laws of the land be transparent, published and applicable to all. No one, regardless of title, position or wealth can be held above the law and government decisions must be predictable because they follow known legal principles and encoded rules.

For most of the 19th century America was advantaged in its progressive efforts to adhere to the rule of law and strive toward equal opportunity for its citizens regardless of class, wealth or title. While politicians and individuals acting in self-interest have frequently transgressed this key principle (seems to be human nature for some), historically the courts were able to correct back to founding principles. If applying the law of the land results in a shockingly unfair or unjust outcome in a particular set of facts,courts are able to restore balance and respect for the rule of law through the principles of equity.

It seems that American courts have fallen horribly short of their impartial role in recent years. One of the most shocking examples of this is the recent decision out of the Court of Appeal in the case of Sentinel Management Group Inc. In this case Sentinel failed to maintain customer assets in segregated accounts as required by law, and instead pledged hundreds of million of dollars of client assets to secure an overnight loan at Bank of New York Mellon. Bank of New York was complicit in transfers to them from Sentinel client accounts for years, extending more and more credit to Sentinel. When Sentinel blew up in 2007, Bank of New York stepped to the front of the creditor line and seized 312 million dollars of Sentinel client assets. The district court allowed Bank of New York Mellon to keep the assets and on Aug 9 the Court of Appeal outrageously upheld the decision: See more here.

“Perhaps the bank should have known that Sentinel violated segregation requirements,” U.S. Circuit Judge John D. Tinder wrote for the panel, “but as the district court found, ‘such a lack of care does not rise to the level of egregious misconduct necessary for equitable subordination.’”

If this is not egregious misconduct, I cannot imagine what is. I have rarely read a legal judgment as unjust and outrageous in its conclusion as this one. Everyone should read the reasoning for themselves here. You can also watch this clip for more detail.

If America continues to plunder the rule of law by saving bankers from deserved punishment and allowing corporate offenders such as JP Morgan (MF Global custodian) and Bank of New York Mellon (Sentinel custodian) to retain rich rewards for willful blindness, fraud and collusion, then there is no way back to a strong economy or a just, vibrant democracy.

There are numerous examples of the federal government suspending or ignoring settled rules of law in order to quickly and effectively respond to particular problems created by the broader financial crisis starting in 2008. UPenn Law Professor, David Skeel, says that the federal government’s inability to revert to the long established principles associated with rule of law in the United States is beginning to have a profoundly negative impact on the national economy. He talks with Bloomberg Law’s Lee Pacchia. Here is a direct link.