BY MICHAEL RADKAY
Could you imagine if you had to pay 100% upfront on everything you bought? Some things yes, but how about for your car or your house? As the largest debtor nation on the planet, I’m sure the majority of you at one time or another put only a fraction to nothing down and received the car or the house you wanted by financing and borrowing money from a bank. For some of our other purchases we use a credit card to pay for things. We hardly ever use cash to buy anything anymore. This has been a great benefit to living in a strong economy that continues to grow. Borrowing works up to a point but when things get so over-leveraged they start to spiral out of control. It seems that the blame is being put on speculators, the financial markets or the so called “Boys Club on Wall Street” as we so often hear politicians shout. They need to throw somebody under the bus. Now I’m not discounting that greed was in the eyes of Wall Street, it was, but it was in all of us. Everybody played a part.
The banks on Wall Street and around the country, in my eyes, were the biggest culprits along with the politicians. The politicians beat their chests and said we want every citizen to have the chance to own a home. This was a noble goal but not overnight. The banks bought into it and saw profit and greed so fierce they couldn’t help themselves. Well, we couldn’t either.
Lets take a step back and look at what was building up to 2008-2010. We came out of the first gulf war in the early 90′s only to see one of the biggest expansions that this economy has every seen. We could do no wrong in the 90′s. Not just greed was born, “Gordon Ghekko”-type greed was born. I was in college during the 1987 crash and we weren’t talking about greed in our classroom, we were talking about defense. How could you not after witnessing that stock market crash. But, as things were growing in the 90′s and Greenspan was shouting “Over-Exuberance”, even he ignored himself after September 11, 2001. You can’t prepare for something like that horror but as we picked ourselves back up, the Fed dropped rates a record 13 times in a row to levels not seen since the 1950′s. A little over-exuberance and a little too much listening to the politicians. They spun fear in us all and even the Fed jumped on board. We couldn’t ignore the re-financing frenzy ourselves that began to consume our nation with such low rates. We jumped on some great deals that payed for themselves in months compared to the rate we were first initially offered.
In my experience I think things started to build in 1995. Some may argue with me but all I could do is speak from what my eyes have seen. When Steph and I first bought a condo in 1995 we were allowed to put 10% down and had to purchase what was called Private Mortgage Insurance (PMI) because you needed to own 20% or more of your home to avoid this insurance. We, of course, enjoyed this opportunity and were grateful that we could buy something as opposed to renting. But this is where I think the banks started to get caught up in the greed as they began offering these opportunities. Bank CEO’s had to perform and give stockholders strong earnings. Well they gave it to them but all done without once thinking defense should things go south.
As our country began to run through the turn of the century, we hit the tech boom crash and the 9-11 disaster. We climbed our way out by 2003 and our economy began to run strong again even despite fighting two wars. From 2003-2005 we began to see some really crazy stuff going on with bank mortgage loans as we heard stories of new home owners being offered $500,000 homes with ZERO down. That’s what we, as traders, would call 500,000 to 0 leverage. $500,000 value with nothing to lose financially. As a kicker the banks were putting people in 1yr to 5yr adjustable rate mortgages at 3 and 4%. Great deal for the home buyer, but where was the responsibility with that? Didn’t the banks remember 1987, 1999-2000? No wonder why people walked away from their homes during 2008-2010. Upside down and nothing to lose, it’s a no-brainer financially speaking.
When Steph and I decided to move to California we were hearing rumblings in the housing sector and knew some of those 5 yr arms were coming due in 2007-08 with a rising interest rate environment at the time to boot. Those ZERO down homeowners were going to get hit with a major increase in their monthly payments. We put our place up for sale and sold all of our stock Jul. 07 to Jan. 08. “Be fearful when others are greedy,” says Warren Buffett. Words to live by.
When the rug began to get pulled from under their feet some of these crazy loans and credit default swaps began getting called in. Well we all know what happened. Things collapsed and they collapsed hard. At least these days banks are going back to some old school ways and making homeowners put 20% minimum down. Gotta’ make it sting again before thinking about walking away.
Things are trying to turn themselves around as we near the end of 2010 and our financial markets are getting cleaned up as well. There are a lot of people in our industry groaning about the new Dodd-Frank Reform Act but its for our own good. People will be properly registered to sell financial products with this new Act, especially in the Forex industry. We applaud that move. We needed to clean out the unaccountable. Moving leverage to 50:1 was a bit extreme as we were able to trade up to 400:1 before the act. This basically means that now for every $50 of value we are required to put up $1 as collateral, as opposed to previously we had to put up $1 for every $400 of value. As an experienced trader and fully aware of the risks involved, in my mind its a bit harsh, but overall it does make the market safer. It forces traders to have more reserves in their accounts. I guess the most disappointing piece for me was that if we are fighting to get safer, why didn’t the futures markets have to face the stiffer guidelines. They weren’t trading 400:1, but 200:1 and 100:1 are common (as opposed to the 50:1 new restrictions for Forex). Personally I felt 100:1 would be fair across the board, especially on the most active crossover markets (i.e EURUSD, USDJPY, GBPUSD, USDCHF, AUDUSD, EURJPYand USDCAD to name a few) which are traded as futures, as well.
Our colleagues say the futures markets are so deep and liquid that it wasn’t necessary to restrict them further. When we respond with the Forex markets trade over $1.5 trillion a day and all of the futures markets combined trade only $30 billion, we get a lot of silence. Well I guess we now play the most liquid markets with Forex and also the safest when compared to the futures markets under the Dodd-Frank Reform Act. I’m a pretty fair guy and I love the futures markets as I have played them for almost 20 years, but we turned to the Forex markets as educators and traders because it allows the investor to alter the risk to lower values to fit personal risk tolerance as opposed to being forced to trade higher, uncomfortable levels in futures markets before a trader is ready. With the speed of the electronic markets and the huge volatility these days, we felt this was a much more responsible approach for new clients as they experience the money involved when risking for the first time. As clients gain confidence and knowledge of both themselves and whats involved, we expose them to all of the markets and build a fit that works for the individual. Its a great industry for the right person. It’s not for everybody.
Whatever you decide to trade or try; you can’t win, if you don’t play!! Prosperity is at your fingertips! All you have to do is grab it!!
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