Bear Stearns Bailout Turns 10. Lessons Learned.

Bear Stearns headquarters. 383 Madison Avenue in New York City in December of 2005. Photo by: CR. (c) Wiki Commons. Used with permission.

March 2018 marks the 10th anniversary of the Bear Stearns Bailout.
 
One of the most heartbreaking things about the Great Recession was watching it play out, when there were so many red flags and warnings that were ignored. My first real estate warning for subscribers occurred in May of 2005. Real Estate had become unaffordable. Liar Loans were catching fire. The investment banks were all worried about who was going to get caught with a bag of useless collateralized loans, but sold them any way for the high fees. Main Street jumped in the fire, tempted by commissioned real estate and mortgage salesmen who promised massive, immediate gains. While all of this played out on stage and on television, with commercials everywhere on how easy it is to be a real estate investor, behind the scenes many of the top CEOs were cashing in. In my May warning, I alerted subscribers that the CEOs of Countrywide (Mozillo), Toll Brothers and KB Home were all cashing in hundreds of millions in stock.
 
I warned again in June of the following year (2006) that large investment bank insiders were cashing in, with Lehman Bros. insiders cashing in over $116 million. My first warning about Fannie Fae and Freddie Mac was actually years before all of that, in 2003. The “smart money” knew that Fannie and Freddie’s debt was astronomical – at 32 PE for Fannie Mae, five years before the crisis. However, the assumption was that Fannie and Freddie were backed by the government, and so the government would prop them up. In other words, financial planners continued to portray these over-leveraged stocks as “safe” to their client’s, with the added benefit of dividends, much like General Electric was portrayed until earlier this year.
 
The truth is that everyone on Wall Street knew the housing bubble would pop. They were playing a game called “The Biggest Fool,” to see who would go right up to the edge and make a killing without being skewered when the knife inevitably dropped. In fact, one of the persons who profited the most from the housing bubble is one of the persons who is often called a hero. Remember that when a Treasury Secretary comes into office he is “forced” to sell his stock. There is a tax loophole to protect his gains when he does. Most recently Anthony Scaramucci was trying to take advantage of this, even though he’d sold his stock long before his 10-day ill-fated turn at the White House.
 
Not one of the bank CEOs were prosecuted for the banking crisis that sank the economy into the Great Recession – even though worthless, toxic SIVs were sold with names like “High-Grade Structured Credit Enhanced Leveraged Fund” and Countrywide encouraged liar’s loans in their ads and incentivized the sales with commissions. The Goldman Sachs CEO got to sell his stock high, without taxes, so that he could become the Secretary of the Treasury, and is now considered to be a hero of the crisis, even though he was one of the architects of the toxic trading, SIVs and CDOs in the run-up to the crisis.
 

Henry Paulson, the 74th U.S. Secretary of the Treasury (2006-2009). Paulson was with Goldman Sachs since 1974. He led the firm as CEO from 1998 to 2006. Official photo. Public Domain.

So, what are the lessons we can learn from the Housing Bubble, the Bank Meltdown and the Great Recession? There are many…
 

1. FOMO. Fear of Missing Out is not a good investment strategy. FOMO fed the housing frenzy, where many good people lied on loan docs to try and make a quick buck. FOMO is rampant again today, as late-to-the-party investors rush to buy stocks at an all-time high.
2. Brokers are Salesmen, Not Surgeons (or Geniuses). There is often an inherent conflict of interest between salesmen and their client. The salesman needs the sales commission. The client needs to consider their budget, their time-frame and to be able to sincerely evaluate whether or not the investing strategy is sound, and is right for them. When that analysis is sidelined, pooh-poohed or shoved aside in favor of talking up massive gains, you are likely in the web of the commission being more important than your financial future.
3. If You Wait for the Headlines, It’s Too Late to Protect Yourself.  When I screamed from the rooftops for my subscribers to overweight 20% safe, on Dec. 23, 2007, the top financial dogs were still saying that all was well. The first that Main Street really knew of the depth of the trouble was when TARP was voted on and signed into law, Oct. 1 to Oct. 3, 2008. (Lehman Bros. filed for bankruptcy on Monday, Sept. 15, 2008.)
4. Market Timing Doesn’t Work. My diversified pie-chart plan earned gains in the Great Recession, while most people lost 55% or more of their retirement. It doesn’t call for jumping all in or all out because that simply doesn’t work. You’ll be too early getting out and too late getting back in. By diversifying properly and rebalancing annually, you have a passive income strategy that is formulated to buy low and sell high. As you can see from the Nilo Bolden testimonial, earning gains in recessions is a great foundation upon which to build your stellar gains in the bull markets. When you lose more than half, it takes you twice as long as the market to crawl back to even.

 
 
 
Low interest rates, quite frankly, create bubbles. Today, we are back to bubbles.  According to Alan Greenspan, there is a bubble in stocks and a bubble in bonds. Real estate prices are higher than they have ever been, as is debt. This is why Federal Reserve Board chairman Jerome Powell is so adamant about raising interest rates and tightening up monetary policy by selling off the mortgage-backed securities and Treasury Bills.
 
If you …

1. Have FOMO,
2. Are employing blind faith in an investment strategy that you don’t understand or is longer than a few pages,
3. Are waiting for Jim Cramer to tell you that we’re in trouble (remember that Jim Cramer quite publicly encouraged investors to buy Bear Stearns stock 11 days before it collapsed),
4. Sold everything (low) in 2009 and are now chomping at the bit to get in on the market gains (i.e. buying high),
5.  Were sold into buying gold coins in 2011 or thereafter, or
6. Got eviscerated in the Bitcoin implosion this year

 
Then it is time to get a second opinion on your budgeting and investing plan, and to learn The ABCs of Money that we all should have received in high school. There is a better way. Call 310-430-2397 to learn more about receiving an unbiased second opinion and about attending my 3-day Investor Empowerment Retreats.

​You have a to gain by using wisdom, including savings of thousands annually in your budget, and a lot to lose if you don't. Wisdom is the cure!