Sun, 26th Oct '08, 9:20 am::

I'm sitting outside in our Florida room next to Juliet, huddled in a blanket, studying on my laptop. I can see our three turtles, Loch, Ness, and Wolf swim around in the two aquariums along with the fishes and Giga keeps looking for ways to escape back into the house. The gliders Paxil and Rita are asleep and so is Herbert the tortoise. Jack, Tera, and Cookie are inside the house, probably asleep.

We went to Treasure Island beach yesterday for a stroll and had wonderful Thai food for lunch. We watched The Score last night. A two-hour movie is pretty much all the time we can spare to sit in front of a TV without starting to worry about projects, papers, and exams these days. She keeps glancing over to read what I'm typing and I keep hiding it from her. The sounds one hears in this room are soothing - the pitter-patter of the water in both the aquariums, chirping of morning birds perched on eaves and evergreen boughs, wind-chimes swaying in the winter breeze, and leaves rustling in the wind - it's quite a relaxing environment if you can tune out the infrequent automobile noises.

I have to write a six-page paper by noon and have more school assignments after that. I also have to work on a website with Tay whenever he hops online. Juliet has two exams this week. I got 97/100 in my Accounting exam last week. I cared tremendously about my grades back in undergraduate college but now I don't give much value to grades. The new things I am learning are valuable enough without me fretting over grades. It's back to reality for me now, i.e. the six-page paper that I have to write in a little over two hours.

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Fri, 24th Oct '08, 10:45 pm::

Juliet and I just bought a new Toyota Corolla 2009 with $0 down at 0% interest for three years. It's dark metallic gray and looks pretty nice. It looks kinda like this. We got a pretty decent deal and the first payment is in 45 days. I will continue to drive my Scion xA and Juliet will drive the new Corolla.

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Don't do muchThu, 16th Oct '08, 11:15 pm::

I had my first real in-class exam today after a break of four and a half years from college. I think I did well for someone who barely had the time to sit down and study. I have been pressed for time lately and this very lack of time is gradually teaching me how to better manage my todos, stress, expectations, and goals in quite an unorthodox way. I know my thoughts below will initially seem to be going all over the place but just hang on a bit because I will eventually reach the focal point that I intend to discuss.

The problem with life is that for most people, it really is the same story day-in and day-out. Even if you have an exciting work or social life, the excitement has the same flavor on a day-to-day basis. Then one day something changes and it starts to get more stressful. You can't change your life around immediately to counteract the increased stress, so it builds up. Pretty soon you fall way behind on your todo list and your goals and hopes are nowhere in sight. A few years later you ask yourself how did I end up here and whatever happened to my dreams and all those plans.

At the same time, you see successful people in every walk of life around you. The gym instructor is in better shape than you'll ever be, your coworker knows more about Excel than you thought was possible, your sixty year old neighbor can run faster and further than you can, the mechanic knows more about your car than you ever will, your friend has read more books than you can imagine, and even the stupid guy who interrupts movies on cable TV seems to cook better than you can ever hope for. It is as if we are being told we suck at life by being encouraged to be good at everything and we are going crazy trying to deal with it all.

Then New Year's Day comes around and the go-getters among us make resolutions and promises. Time to join gyms, lose weight, start reading, help the community, sign up for a music class, and take a course in web designing. All of this is supposed to make us a better person and help us grow. And I am all for it too, regardless of when and how you start. Knowledge, skill, and art makes one a well-rounded person so go for it by all means. The problem isn't that these things don't help us in the long run. The problem is that they displace the honest, self-actuating goals we had on our list and have forgotten over time. What was once a list of unique, personal goals, goals that truly mattered to you, is now a list telling you to sign up for pilates, swing dancing, and pottery classes just like eighty million others.

The trick is to not buy into it. I don't want to run faster than anyone and I don't need to be an awesome cook. I will not be jealous of my well-read friend's library and I will not try to be the best Excel number-cruncher (though I'm pretty damn good at it already.) What I will be, is the best me. I no longer want to be the best at anything and everything. If that means I get a B in Accounting while making more time for my wife and pets because that's what matters more, that is how it shall be. If it means my website gets fewer hits because I'd rather be sitting outside staring at the moon instead of computer code, so be it.

Throughout our lives we have been taught that it is a great thing to be good at something and success is what we should strive for. Society puts a great deal of value on the champions in every field. You cannot fight these uncontrollable urges to be better at everything unless you are consciously aware of your true desires in a given field. From the bottom of my heart, I do not care about running a mile in under six minutes. I never have and never will. However, the moment I see someone dart past me at a park, an annoying little bulb lights up in my head and commands me to "wake up early every morning and start running again so you can be fast like this runner." So I wake up the next morning, run for a few days or weeks if I'm lucky, and then give up. Why? Not because I hate waking up early or despise running, but because running is not something I genuinely want to do at this point in my life.

The simple reason most of our resolutions fail is because we don't want to do them. And on top of that, we are told that we are utter failures if we don't stick to our resolutions and plans - plans that we never even wanted to make to begin with. So this is where we are right now. We make our own dreams but get sidetracked when we get stressed in our day-to-day life and see others succeeding at their own goals. So instead of working on our goals, we pick up their goals because self-help books and self-titled gurus said so. We try hard but fail after we realize we don't really like bending over backwards in yoga or rock-climbing. Then finally we ask ourselves what happened to our goals and why life seems so stressful and joyless despite our every effort at improving things.

I learnt all of this over time after trying to do too many things too fervently and failing miserably at almost all of them. I still hope to do a lot of things but only ones that I really, really want to do and without trying too hard to succeed in most of them. The handful of things that I am passionate about and dedicated to, will still get my full attention but the rest of the things on my todo list will get sort-of done, whenever, if ever. By not caring too much about everything, I am able to care a lot more about some specific things and that I feel is the key to reducing stress and reaching one's personal goals.

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Tue, 7th Oct '08, 2:10 pm::

Juliet likes the name Wolf too. So we have a new turtle, Wolf, in the house now :)

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Tue, 7th Oct '08, 8:25 am::

It's been a stressful week so far. Too many work to-dos, studies, projects, and general chores. I hope it gets better soon. Juliet is just as stressed with her classes and exams. I want to punch the next person who says we're still in the honeymoon phase. The good thing is that each day I feel more confident that we're a very strong team and can stand together against all odds. It's been over four months and we haven't even had a single fight or a major argument. I guess neither of us is the fighting type. Of course there's been tons of disagreements but we worked it all out in the end without yelling or bickering. So that makes me very happy.

The pets are all healthy and wonderful. Last week Juliet rescued another little turtle, a baby Cumberland Slider. We haven't named him yet but I like the name Wolf. Mainly because I've always thought about having a pet wolf but I don't think that's possible anytime soon.

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About that financial crisisFri, 3rd Oct '08, 6:15 pm::

A lot of people have been asking me what this whole "economy in crisis" situation really is. How can banks in the world's most prosperous countries run out of money? Is it because the houses were overvalued? Is it because the people aren't saving? Or is it because of a variety of reasons like health-costs, unemployment, inflation, gas prices, or political instability? On the surface, it would seem prudent to say that it is a deadly combination of all of the above that's causing the financial crisis. We hear statistics being quoted on the news constantly that inflation rose, unemployment rose, new-home sales fell, auto-sales fell, and stock prices crashed. As I see it, these are the effects of the financial crisis not the causes. The causes are far too murky and boring in details for the average person to identify and enumerate. Luckily for you, I have all the time in the world and I love talking in metaphors instead of confusing finance terms when explaining something, so here it goes.

We have to remember that at every level of business and economy, different people are looking at different pieces of information. What you and I hear in the news is what the media has decided is the information most relevant to us. So unemployment, foreclosures, inflation, and most importantly gas prices are the things we hear as the cause of the crisis. This is the same information that the industry leaders, lobbyists, and politicians use to tell us why the bailout was necessary. However, this is not the information they are all personally looking at. Warren Buffet has sailed steady through enough business cycles to not flinch at above-average foreclosures or rising oil prices. What he sees and bases his decisions on, is an entirely different zoo of numbers.

One of the most seemingly benign creatures that is and will considerably affect the economy of the entire world is "Credit Default Swap" (CDS). Economists and some smart people (pdf) have been warning against CDS for a while but nobody seemed to care. After all, what is CDS and why would it ever affect anyone not involved in big-business? Here's how I explained CDS to a friend. The names and figures are merely for illustration and not accurate.

A few years ago, Lehman Brothers bought certified poop for $10,000 dollars and asked American International Group (AIG) to insure them for up to $10,000 in case the poop starts to stink. AIG took $100/year in insurance premium and said "Sure! Why not? This $100/year premium sounds wonderful." Thereafter the executives at Lehman and AIG proceeded to pay themselves $50 because man, this is an awesome deal! Now you have to remember that the folks at AIG were a smart bunch and didn't really want to ever pay $10,000 to Lehman or the ten others like Bear Stearns, Merrill Lynch, and Morgan Stanley that they had similar contracts with. So, they got Bank of America (BoA) to insure them for up to $100,000 for only $500/year in case they ever had to pay off anyone. Bank of America obviously said "Sure! Why not? This $500/year premium sounds wonderful. " Thereafter the executives at AIG and BoA proceeded to pay themselves $250 because man, this is an awesome deal! And just like AIG, BoA bundled up 10 of these $100,000 contracts and found themselves yet another insurer. Sometimes, they would even go back to AIG to get them to insure $1,000,000 for $1,000/year!

Now a few years later, Lehman's poop surprisingly starts to stink. So does the poop that Bear Stearns, Merrill Lynch, and Morgan Stanley bought. AIG has to pay up now. So AIG goes to BoA for the money, which goes to Barclays which goes to a subsidiary of AIG and that's when AIG puts its hands up in the air and says "OMG! I have no money! Somebody help me!" Lehman and Merrill Lynch go belly up. All the companies start to freak out because everyone's certified poop starts to stink, they cannot resell the poop to anyone, and nobody can pay them for the stinky poop even though they had insurance in the form of CDS against it.

Now multiply all the above numbers by something like a billion and that's where we are at currently. The total amount of money currently outstanding in CDS is over $54 TRILLION. To give a slight perspective on that, the amount of money that the entire nation of US spends on buying everything from food to houses to electronics to airplanes to space telescopes to rebuilding Iraq is $13 trillion a year a.k.a. the US GDP. The entire world GDP is $54 trillion and the CDS is currently slightly more than that. And this CDS is outstanding against just a handful of financial companies around the world.

The top-level executives see this figure and realize that a pretty big chunk of $54 trillion worth of CDS would have to be paid if every piece of certified poop starts to stink. If that ever happens, every company even remotely involved in CDS will go belly up just like Lehman Brothers. So they get the daddy governments to fix this mess they have gotten themselves into. The bailout that Wall Street has now won is nothing more than a $2 can of air-freshener they hope will mask the stench for a little longer. While $850 billion is a huge number, it is still only 0.17% of the entire CDS. This means if even 1% of CDS has to be paid, the companies will bleed money. If you have 100 pieces of certified poop, guess what percent will eventually start to stink? The executives at all these companies know that answer and are justifiably worried.

Now I have to add a big disclaimer that not all companies were as mind-numbingly dimwitted as those that have already gone belly up or are on the verge of. Some were instead pretty smart and actually bought CDS against these companies so in case these companies went belly up, they actually got money! Then there were companies that bought CDS against dirty socks and used towels which may not stink as bad as poop but still aren't sweet-smelling roses from the fertile lands of Bulgaria. And obviously there were many companies that bought CDS against those sweet-smelling roses in the rare case that the smell went away. So in reality the $54 trillion CDS is a mix of the good, the bad, and the despicably smelly. While nobody really knows the exact breakdown of the good vs. bad CDS currently, it can be easily understood that the bad chunk must be large enough for the entire financial sector to lose sleep and shirts.

Failing CDSs are just one part of this financial train-wreck. The larger part is of course the certified poop, known in more respectable circles as Collateralized debt obligation (CDO) and Mortgage-backed security (MBS), often backing some arcane Structured investment vehicle (SIV). MBS is the part that involves housing market, mortgages, and foreclosures. CDO is what magnifies the problems of faulty MBS exponentially. And SIV is what banks did to enable them to continue lending beyond their legal limits. So when I said above that Lehman Brothers bought $10,000 of poop, what I really meant is that they bought share in a bundle of house mortgages for a lump-sum of $10,000 in the form of a CDO, a CDO of a CDO, or a SIV backed by a CDO of a CDO backed by MBS. Even to me all of this sounds like a bunch of random letters thrown in without making much sense.

When I bought my house in 2005, I borrowed about $150,000 from a local bank here in Florida. They checked my credit history and determined that I was financially responsible enough to pay my loan for the next 30 years. However, dealing with all my payments is a chore because sometimes I want to pay extra, sometimes I want to pay a little early, and sometimes I want them to give me a detail of why my insurance and taxes requirements were increased. The local bank really doesn't want to deal with me and tens of others like me so they bundled up my mortgage with those of others and called up Citibank. Citibank did not care much about the quality of the mortgages it was buying from my bank because the executives who arranged these deals got paid on the potential revenues from this deal without taking into consideration the risk involved. Now Citibank bought ten mortgages from my bank, ten from another, and ten from another. Soon enough, they had a hundred mortgages that they expected to make a lot of money from over the course of three to thirty years. Now being smart like all these financial wizards are, they decided to do something productive with this money. Enter the insidious SIV, the infamous MBS, and the inscrutable CDO.

Thanks to the few remaining decent banking regulations, Citibank cannot loan out a lot of money if it does not have enough deposits. When Citibank bought my mortgage, it basically loaned out money to me and since I don't have any deposit in Citibank, I reduced their ability to loan more people more money. So the Citibank wizards decided to create a separate company, say CitiSIV which bought all the mortgages from Citibank. CitiSIV being a brand new company had no money so it borrowed a ton of money from the open market at low interest rates to pay Citibank for the mortgages. The lenders in the open market gave money to CitiSIV because after all, it's Citibank and everybody knows they are AAA rated. CitiSIV borrows money at low market rates but collects higher interest from the home mortgage payments. So CitiSIV make money. Then Citibank charges CitiSIV for loan origination and transaction fees so the money ends up back with Citibank. Not surprisingly, all of this is perfectly legal.

Now Citibank has a lot of money and none of the loans on its files. This means it can loan out a lot of money now and start the SIV cycle all over again by creating CitiSIV2. And there is where certified poop comes in. Lehman Brothers gave $10,000 to CitiSIV so CitiSIV could buy mortgages from Citibank and pay interest to Lehman Brothers. These mortgages that CitiSIV bought are now certified poop because the homeowners can no longer pay the mortgage. Why can't they pay the mortgage? Because most people, unlike me, bought houses much bigger than what they could afford and at variable interest rates that have now sky-rocketed, making it impossible to justify home-ownership with respect to renting. So there are a lot more foreclosures now. The mortgages that CitiSIV holds are not going to be all paid back and are effectively worthless. Why did people buy homes they couldn't afford? Because the local mortgage banks let them and even preyed on them.

While I know a bit about complex financial transactions from my background in Economics, most people don't and shouldn't be expected to. School teachers, research scientists, and office workers may know everything about their own fields but not much about ARMs, LIBOR, or HELOC. Most people can be expected to be moderately smart about their finances but that doesn't mean they know everything. What these borrowers weren't informed three to five years ago is that adjustable rate mortgages (ARM) and interest-only mortgages are only for those who know exactly how to invest their money. Selling ARM to an office manager was like selling drag-racing car to a soccer mom - both can only end in disasters. This means, the local mortgage companies loaned money to people who couldn't afford it after a couple of years. Why? Because they made money on sales and not on long-term payments. Real-estate agents and mortgage brokers got hefty commissions every time a house was sold so why should they care if the person who bought the house couldn't afford it?

Here is the wonderful game of hot-potato that has resulted in the current crisis. The home-owner didn't risk much when they bought the house because they got to "own" a fancy house without any down payment and could now potentially borrow money against this house. The mortgage broker did not risk his money, the mortgage bank did. The bank did risk money but only for a short time because it bundled up a bunch of these mortgages and sold them to Citibank. Citibank didn't worry about the risk because it sold SIVs against the mortgages. The people who bought the SIVs, say Lehman Brothers, didn't worry about the risky SIVs because they had AIG write CDS against these risky purchases. AIG didn't have to worry because BoA has insured them against all of these risky CDSs. BoA has no worries because Barclays has them insured. Barclays has nothing to worry about because AIG has them covered. So in the end, we have more money involved than most minds can fathom, resting on transfer of risk from one entity to another, all of it relying on the promise of the music-teacher who makes $25,000 a year that starting 2009 when his mortgage readjusts, he can pay $2,000 in mortgage payments a month.

This is how screwed up things are. And apparently $850 billion can help make things better. The politicians claim that $850 billion will be used to buy the bad mortgages from companies like CitiSIV/Citibank, sit on them for a few years, and then once the financial crisis is over, sell them back to companies like Citibank for a profit to the taxpayers. You would have to be brain-dead to even for a second think that somehow the bad mortgages will become valuable in a few years once the crisis is over. The music-teacher is not going to make $115,000 in a few years and will not be able to afford $2,000 a month in mortgage anytime soon. The bad mortgages will remain bad and significant portions of them will not be bought back from the US Government at a cost to taxpayers.

The solution to all of this? Suck it up. Let bad companies go bankrupt. Let bad investors lose all their money. Let investment bankers, mortgage brokers, and insurance underwriters be fired. And unfortunately, let people lose the houses they cannot realistically afford. If the government wants to help, they should first help those in dire need.

There is no painless way to heal a gaping wound but to stitch it up and bear the pain once. The sad thing about good economic policy is that it takes a while to take lasting effects and it makes a lot of people miserable in the short-term. Bad economic policy tries to help a few people immediately while making everyone else miserable in the long-term. $850 billion is nothing compared to how much it will cost to try to "fix" this crisis by throwing money at it. A lot can be done to improve the situation by giving direct help to the homeowners and small business owners who actually need it. Not much will be done by giving money to the same exact banks that took foolish risks, lost money, and begged the government for handouts. The bailout will infuse the markets with additional cash, reduce the value of the dollar, and once again, encourage bad investments because no investment is risky if the government is willing to bail companies out with taxpayer money.

Just think about it. You pay taxes. The government is taking that money and giving it to the banks. Now the banks will lend you money to buy a car. You will pay interest on that money, a part of which is actually your own money that you paid in taxes. You will pay interest to use some of your own money! This isn't some exaggerated doomsday scenario. This is right now. The bailout bill has passed and next month when I want to go buy a car, I will pay interest to borrow some of my own money. Meanwhile, the CEOs of all these companies will continue to get stock options, unlimited perks, and golden parachutes. Who said life is fair?

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