The financial industry was a different beast twelve months ago. This time has shed some light on the toxic relationship between three key parties: the government, financial institutions and consumers.

Thinking of the times before the economy fell, we were able to get a credit card easily and most people didn’t have too much trouble obtaining a mortgage for their home purchases. Lenders were lenient and credit was readily accessible. Such was the alleged reason for the credit crunch and subsequent recession.

While I believe big banks were at fault for bring down the global economy, the government’s attempt to stick up for consumers by reprimanding the financial industry will eventually come back around to bite us in the rear – which will trigger another government intervention, thus repeating the cycle.

The Death Spiral Begins Continues
The media and financial experts predicted this a long time ago – that banks will try to replace lost revenues by implementing or changing their financial products and services.

It’s a natural response that is exhibited by all life on Earth. When you destroy a garden of beautiful flowers that used to be the feeding ground for bees, they’ll move to another garden. If you lost your job, you’ll look to replace that lost income by searching for another source of income. If a “fat cat” banker can’t charge you for “this”, they’ll charge you for “that”.

With financial reform, these were some bank revenue sources that suffered:

• The group under the age of 21. This is a severe blow to the college student market for card companies.
• Penalty fees. Overdraft, late, and over-the-limit fees were reduced with restrictions. No more multiple penalties for a repeated violation.
• Interest charges. To reduce lending risk, banks cut credit lines and close accounts while new laws forced them to drop APRs if customers paid on time for 6 months straight. Also, potential borrowers weren’t able to meet their lending criteria.

Here are some of ways that banks have negatively influenced us since:

• Increased APRs. Around the end of last year, many cardholders saw their APRs jump for no apparent reason (even those who paid in full every month). This could be due to the new rules that card companies have to cut interest rates on good payment behavior.
• Reduced credit limits. Just like with APRs, credit limits were being slashed with no explanation and many took hits on their credit score. Banks were cutting their risk by reducing their extension of credit.
• Inactive accounts were closed. To them, inactive credit card users are the top echelon of deadbeats (those who are lose money to banks). Credit scores took a dive for those with large credit lines and long histories.
• Reduced rewards. There were some pretty amazing rewards and cashback credit cards out there before the economic downturn. Now, the rewards programs are abysmal. I curse the geniuses who came up with rotating categories.
• Card conversions. Some cardholders are seeing their accounts being converted to different cards with different perks and programs such a no pre-set spending limit card.
• Non-free checking. As of late, the sizzling news is that free checking may soon become extinct. We may see the days when we are nickel-and-dimed for simple things such as talking to a teller or receiving a paper statement.

So the game we are playing goes like this:

1. Banks want to make money and impose industry practices to bring about a profit.
2. Consumers suffer and grow increasingly unsatisfied by these practices.
3. The government steps in to defend the consumers by imposing new rules on banks.
4. Banks want to make money and create new industry practices to bring about a profit.
5. Consumers suffer some more and become more unhappy with banks.

Hurting Many to Help a Few
It feels as if financial reform has caused banks to cut the harm they do to the irresponsible customers and transfer their financial burden onto the entire customer base. It’s similar to one of those situations where one person arrives late to basketball practice but those who were on time had to run 5 laps while that one person watched.

Sure, we can’t blame those who had to undergo foreclosure and bankruptcy due to unfortunate events that were out of their control. But, I do think put quite a tight leash around the necks of banks. The majority of you (I hope) are handling your personal finances responsibly. Yet, you may find that your bank accounts and credit card accounts are becoming less and less attractive.

Are these effects sinking in for you yet? Do you feel financial reform has done good for the consumer population?

(Photo credit: Daniel Morris)

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As the Great Oracle of Omaha preaches:

“Be fearful when other are greedy and be greedy when others are fearful.” – Warren Buffett

What was once one of the safest, must-have stocks in a portfolio, BP will be held in a different light as of April 20, 2010.

The incident at their Deepwater Horizon offshore oil rig marks the largest offshore oil spill in the history of the U.S. and the well continues to leak oil despite multiple efforts to stop it.

And to add to the pain, the oil spill poses a significant danger to the marine life in the Gulf of Mexico and to the coastal life surrounding the body of water. The seafood and tourism industries will also suffer a drastic impact.

And so far, BP has taken responsibility for all of it.

Nearly two months after the explosion, BP’s stock has lost approximately half its market capitalization. At one point, it’s dividend yield was at a tempting 9.90%. So, is BP the value stock that it once was?

Since April 20, 2010, BP has:

• went from $60.09 per share (closing) to $31.76 per share (June 18 closing).
• lost $87 billion of its shareholders’ equity.
• spent $1.8 billion on the Gulf oil spill.
• suspended its dividend payout for the rest of 2010.
• spewed over 118 million gallons of oil into the water.
• paid $104 million to Gulf coast residents.

Reasons for Concern

• Failure to stop the oil leak. Of course, the sooner that BP can control the oil leak, the sooner that it can return to profit. After many failed attempts, BP seems incapable of stopping the oil leak – equal to leaking millions of dollars. Two relief wells to contain the oil are being constructed. Their estimated date of completion is around August. Until then, some of the oil is being collected by a drilling ship.
• The $20 billion escrow fund. BP has complied with the Obama administration’s request to set aside $20 billion in an escrow fund that would be used towards compensation for people who suffered losses as a result of the oil spill. The fund would require BP to sell off some of the assets in its U.S. portfolio to support it.
• Increasing U.S. government intervention. Regardless of exactly how well President Obama is handling the oil spill fiasco, history has told us that he has effected major changes in the financial industry after holding banks responsible for the recent recession. Global energy companies could see similar changes if Obama decides to make a change – and that could lead to less profits.
• Falling oil prices. The price of oil will play a primary role in the future of BP because falling oil prices decrease earnings and make the company insolvent. The possibility of bankruptcy or a takeover would increase when BP cannot generate the funds to pay for damages caused by the oil spill.

Signs of Relief

• BP posted $17 billion in profits last year and is expected to generate $30 billion this year in operating cash flow.
• It has 18 billion barrels of oil in reserve – enough to fulfill U.S. oil consumption for two years.
• Delaying dividends for 2010 would create an extra $8 billion in cash.
• BP plans to raise $10 billion by selling some of its assets.
• Relative to the size of the company, BP carries little debt.
• Although BP’s credit rating has been downgraded quite a bit, it has already established a readily available $10 billion line of credit.

To Buy or Not To Buy?
At this point in time, the government has poked its nose into the situation. The residents of the Gulf coast are acting up. Cleanup costs, victim compensation, and claims are adding to the tab. Oil is still gushing out into the gulf. Essentially, BP’s wallet is a bottomless pit.

Certainly, it would seem that the average investor wouldn’t have the guts to invest in BP. And by that assumption, now would be the time to load on some shares.

Even if Warren Buffett acknowledged that everyone was scared to add BP to their investment portfolio, he probably wouldn’t – nor would I (at least not yet). There are simply too many variables that can decide the fate of BP. While the 50% discount is enticing, I’m going to wait it out.

The first sign of improvement would be the second that BP stops that oil leak. Of course, everyone is hoping for this. But from an investor’s perspective, this golden moment is the patch that would cover the hole in BP’s wallet. BP continues to be a highly speculative position if it doesn’t plug the leak.

Next, we must stay on top of government actions against BP and the legislations that might result from this incident. Just as the Credit CARD Act has stifled the earning potential of banks, new laws could arise and weaken oil companies or just BP alone.

As said before, the trend that oil prices take will play a huge role in BP’s journey toward recovery. It will have a good chance of survival as long as oil prices do not fall.

BP has long held a formidable position in the portfolios of mutual fund managers and dividend investors for its attributes of a value stock and income-generator. While CEO Tony Hayward has stated that he will not cut dividends, the suspension of dividends for 2010 will rule out BP as a dividend stock for the time being. At the current price levels, I am more interested in the ability of the stock to gain value rather than the insanely high dividend yield.

Since BP has been a well-managed company up until now, I remain optimistic in its future. Although I don’t believe now is the right time to buy, BP represents a great opportunity the instant it stops the oil leak.

Disclosure: At the time this article was published, I do not own any shares of BP.

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Thursday May 6, 2010 was a fun day for the stock market and all investors – pardon my enthusiasm. As I had my Scottrade streaming quotes on my screen and the Dow went skydiving, I was able navigate my account in such a flawless manner to transfer some cash over in order to not miss the largest sale of the year on the stock market.

It became a saddening sight to watch the Dow pull back up from its 900-point drop as I was about to punch in my buy order. Nonetheless, I shopped and I bought.

Clearly, it was an odd day to the jittery souls at the New York Stock Exchange and at home with their daytrading stations. The weirdest part is the speculative theories on what caused such a financial anomaly.

Do you really think a guy who had mistyped a “B” for an “M” could wreak such a havoc? Even if this person had input “billion” instead of “million”, the collective automated sale of stock is the true cause of the steep market dip. Add on the fears of Greece’s debt and other economic noise and we’ve got a recipe for pandemonium.

Don’t point the finger at the fat-fingered individual and blame those who scheduled stop-loss orders. Maybe automation wasn’t such a good idea….

Personally, I don’t agree with the actions that stock exchanges are taking – canceling orders on stocks that experienced sharp volatility. There was no computer error. Automated electronic trades are legitimate orders, correct? Can you cancel my order when I buy a stock that goes from $100 to $70 then to $120 and back to $50 in 20 minutes?

In fact, I hope this happens again – so I could continue to build my portfolio on a tight budget. Praise the Oracle of Omaha, “Be fearful when others are greedy and greedy when others are fearful”.

Don’t mind my opinion, there’s more to life – like these great posts:

• Money, Stress, and Your Health at Get Rich Slowly. Money affects everything we do. Money can ruin relationships and break up marriages. Whether we have it or not, money is a reason for concern, worry, and stress – which then trickles down to your health.
• Six Psychological Reasons Consumer Culture is Unsatisfying at PsyBlog. Shopping makes you happy? I wonder why… The things you never think about when you go out an buy stuff. Studying consumer behavior can curb your spending – not to mention how cool it is.
• 44 Ways to Ruin Your Financial Life By Age 30 at Frugral Dad. I think I’m doomed…

Carnivals that Realm of Prosperity participated in recently:

• Carnival of Personal Finance #253 (Demotivational Version) at Punch Debt In The Face

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The provisions of the Credit CARD Act of 2009 targeting youth and credit will be going into effect Feburary 22, 2010. President Obama is on a mission to reduce the availability to young consumers in an effort to solve a problem that hurts so many of us college graduates today – we graduate with too much debt.

Here is a summary of the major changes that will affect young adults:

1) Less Access to Credit Cards Before the Age of 21
The CARD Act’s most significant rule is putting the lockdown on availability of credit cards to young adults. Reckless spending has always been an activity that people identify with the similarly ruthless lives of many young adults. Well, the time has come to limit the spending power of everyone under the age of 21.

• Credit cards can no longer be issued to anyone under the age of 21 with the exception that
  (i) they have an adult (of at least 21 years of age) to co-sign the credit card agreement.
  (ii) or, they can provide proof that they are able repay the debt they incur.
• Pre-screened credit card offers cannot be available to consumers under the age of 21.
• Joint credit card accounts can only have their limits increased with the permission of the adult accountholder.

2) A Close Watch on College Campuses
College campuses are hotspots for credit card companies. Their pretty booths with free t-shirts, pens, toys, and other stuff will cease to exist within close proximity of campus locations. Hopefully, less college students will become victims of consumer debt.

• Credit card companies are banned from offering free goodies as incentives to get students to sign up for credit cards in or near campus.
• Companies must also disclose the details of their contracts with colleges and universities regarding their marketing towards students and alumni.

3) Promotion for Financial Literacy
A major reason why everyone is having problems with debt is because they didn’t learn how to handle money at an early age. Now, the government is taking the initiative to change this trend that is ruining the financial futures of people.

• The act will require certain federal agencies to examine federal financial and economic literacy programs available to the youth ranging from kindergarten to 12th grade and adults.
• They must also recommend methods of funding and promotion of financial literacy programs.

Some of My Predictions
I’m guessing I was fortunate enough to not be caught in the middle of these changes. For those who are actually financially responsible during their younger years, the Credit CARD act may be a slight, but not major, setback. Also, just because these particular provisions are targeting young adults, it doesn’t mean they are the only ones affected – parents should embrace these changes as well.

For the future I foresee that:

• there will be less credit card debt for college students
• there will be a larger burden on parents to support their children
• students will borrow more on college loans
• college students are no longer a profitable market for credit card companies
• credit card companies will find loopholes to extend credit to young consumers
• many co-signers will have their credit histories ruined
• personal finance classes would be a standardized educational requirement

Alcohol is prohibited to everyone that is under the age of 21 but we all know that law hasn’t much of a restraint. How will this act fair in making a difference?

What are some of your thoughts on this act and how it’ll affect the younger generations? Share some of your predictions on the effects of this legislation.

(Photo credit: Rain Rannu)

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The buzz over the government’s cash-for-clunkers program has been extraordinary. It has surpassed the pessimism of skeptics who thought this program will not work. In just the past week, many car owners have traded in their clunkers for a more fuel efficient vehicle.

The car commercials swarming the televisions offering the program certainly played a major role in its success. In less than one week, the CARS (Car Allowance Rebate System) as exhausted the $1 billion budget that was set to run until November 2009.

Yesterday night served to be a hectic one for government officials to try to get more money to fund this very popular program. With President Obama’s unequivocal support for the program, the U.S. House has voted to infuse another $2 billion to keep Cash-for-Clunkers alive.

Ford has reported a substantial increase in sales since the program has started. This has proven to be a well-received stimulus plan for the auto companies and the economy.

The program will probably play a big part in the revival of the automobile industry. Plus, the government probably won’t let the momentum drop off as we are heading towards economic stability. It may be a great time to get that new ride and to fain a little more interest in investing in the troubled auto companies.

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Without a doubt, Bernard Madoff’s investment scheme did financial and emotional damage to all of his victims and whether his sentence does justice to the people he hurt is still up for debate. Now we question whether the people who directly [and indirectly] reaped the benefits of his scandal should have any repercussions for being affiliated with Madoff.

Ruth Madoff
The recent media coverage of Ruth Madoff have forced her to be accountable, to a certain extent, with the assets that she is in possession of due to the funds that Bernard Madoff had illegally acquired. As of last Friday, June 26, she has dropped her claims to $80 million in assets. Even after doing so, she is still under pressure to give up a remainder of whatever is left.

Ashamed of her husband’s deceit, she seems to want to mend the situation as soon as possible. With the victims of the scandal seeking redemption, they’ve turned to condemn Ruth for Bernard’s action although she appears to be innocent and unaware of what was going on.

Even with her willing to drop claims to a majority of her assets, should she be entitled the keep the rest? The victims would deem her as a partner in crime because Ruth has a part of their money and they want it back. If your spouse fed the family through unlawful activity, should you and your children be responsible?

The Biggest Winner
As investigators dig deeper, they’ve found a long time investor who truly received benefits that exceeded those of Madoff’s. The Picowers family is the alleged biggest beneficiary of the Madoff scandal. Although there seems to have been fishy activity, the Picowers have made large charitable donations to foundations and institutions. Will there be a lawsuit against the museum or the education center because their funds can be traced to the scandal?

Certainly, those directly involved should have consequences and they should lose whatever money they obtained through any illegitimate method but the victims of the Madoff scandal are on a relentless pursuit of any money that could possibly be returned to them. Next we’ll have to ask, how can you fairly return the money to the many investors if doing so is even possible?

These many questions won’t have definite answers but this event is a thought-provoking situation and readers should take the positions of both parties to understand but not to judge.

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An article at Yahoo! Finance from earlier in the week addressed the consumer mentality of buying discounted automobiles instead of buying fuel-efficient ones. Cheap, gas guzzlers are preferred over hybrid vehicles simply because the people want to shell out as little money as possible since gas prices are quite low. It sparks the thought of how the U.S. consumers act when deciding what they buy.

Why buy cheap rather than buy efficient?
Whatever the reason, everyone is saving their money and industries that sell big ticket items seem to be suffering in the short-term. Even though it is obvious that purchasing items for the long run is a smarter move, consumers are just not comfortable with having a high cash flow.

I witnessed this first hand the other day when interning at the dental office. When treatment options were provided, the patient chose temporary teeth over dental implants as she openly expressed her concerns of her financial stability. This mentality has become widespread and we can see these same results when applied to other buying decisions.

Just think:

• Would you buy a $7000 car or $16000 car?
• Would you opt of a $12,000 treatment plan or a $30,000 treatment plan?
• Would you rent an apartment for $600/month or $1100/month?

Many would choose the less expensive route because they just can’t afford the luxury at this time. Surely, my assumption shouldn’t be universally applied to everyone because these purchases can vary greatly, in terms of quality, and an individual just may fork over the extra cash for something better. But, no matter how much wiser it is to plan for the future, people just need something that can do the job now.

Once we make it out of this slump, the difficult decision may become as ridiculous as asking: Should I get the red Ferrari or the yellow Lamborghini?

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The economic events of the past year have led to the dramatic increase of concerns over how one can afford paying for college. Every method of paying for higher education has been negatively affected. All prospective college students must consider their options when it comes to being able to pay for the college that they want to attend.

My younger cousins are close to the stages of college selection and application and their parents are worrying how they could pay for their children to attend the expensive brand-name colleges if they get accepted into those schools. When it comes to school selection, the financial aspect has been magnified.

Calculating how to cover the costs of tuition would need to account for the changes to these financial sources:

1. Scholarship and Grants
   Scholarships and grants can come from any type of institution and come in any amount. Over the past year, these institutions have lost money to bad investments or lack of business. For example, a few universities lost money in the Maddoff scandal. Therefore, we will see a decrease in the availability and the amount of money that will come from scholarships and grants.
2. Federal Aid
   It is very difficult to say whether the government will provide less federal aid even with the billions of dollars in bailout money to banks. Logically, many would assume this would affect all other governmental financial policies but it seems like money is being created out of thin air anyway. Federal aid may be the least affected by the recession.
3. Student Loans
   Probably the most significant source of paying for college is the student loan. The effects of the housing and credit crisis that led to the downfall of many financial institutions have tricked down to everyday borrowers. Although interest may be lower, credit is harder to get. Normally, students can easily obtain a school loan from anyway that is willing to lend them money. Now, there are speculations that those with little to no credit will have trouble when it comes to getting a school loan.
4. Parents
   Ah, the most direct source of money for college students is also the source that took the biggest hit from the recession. Investments made through IRAs, 401k’s, and 529 plans have all fell into the negative area and those who used these financial vehicles to pay for college education will find little in them. Also, loss of jobs must be mentioned because no money for mom and dad means no money for the student.

From the perspective of getting a good education, students shouldn’t let costs hinder them from going to prestigious schools like Harvard or Princeton even if it mean they’ll be paying for it for many years to come. Though it is not as simple just wanting to attend an Ivy League school, other options such as state and city colleges can produce highly competent individuals and these institutions would receive much more attention from potential students.

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Many people have heard of the economy tumbling because of the housing crisis which became a credit crisis. At first, I had no knowledge of what such a crisis meant. I learned more through many mornings of waking up to CNBC but I was still confused. And since the economy went down the drain, I didn’t care and didn’t want to watch any more tickers with numbers in the negative and in red.

Anyway, this video makes it simple to understand how our recession came to be. Watch and learn.

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

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I had the honor to guest post on another personal finance blog for college students and new graduates at Green Panda Treehouse. The post talks of Obama’s $4000 tax credit for college students who complete 100 hours of community service.

It is something that concerns everyone who is about to go or already going to college. So read the article and learn more about this plan.

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