We are living in a time some are calling the “Great Recession”. I am not an economist by trade. However, the events over the past few years have lead me to take notice closer of what is going on globally with finances in general. I realize the USA housing bubble was predicted to burst by many. I also believe many more people found themselves in toxic loans by one main reason, lack of financial IQ.
Financial education is not something that is generally taught in elementary and high schools. True, you may pursue that academic major in college but the seeds of financial understanding are needed at a much earlier stage.
What are the consequences of lack of financial intelligence? Besides what we are currently witnessing on a global scale, some financial institutions are actually luring individuals to invest in new disguised toxic opportunities. You read that right, we are not even officially out of the current recession, and banks are up to dishonest tactics in my opinion. Would you like to hear some examples?
The first one that comes to mind is those infamous high cost payday loans. For those not familiar with these offers, they are typically run by non-bank lenders and are found in poor neighborhoods. As the name implies, these loans are given out to individuals to hold them over until they receive their employment paycheck to repay the loan. In some instances, the interest rate has been in the triple digits! If someone does not understand the impact of interest rates, they simple walk into this financial trap and wonder what happened. As I mentioned, historically non-bank lenders ran these places. Guess who has now joined the game? You guessed it; the likes of U.S. Bancorp and Wells Fargo have jumped into the sandbox.
Secondly, let us consider the case for business loans. In the past lenders would normally link corporate credit lines to short-term interest rates. We have seen what risk this has brought on with personal credit cards. Now, the new flavor of business credit lines also includes a link to credit default swaps (CDSs). In non-technical language, CDSs are contracts that are meant to act as a security blanket by paying off the owners (banks) if the company who purchased the contract goes into default. The trick here is that a credit event that might trigger this payoff can be when a company undergoes restructuring, bankruptcy, or even have its credit rating downgraded.
Lastly, let me bring up another instance of lack of bank honesty and transparency. On August 3, 2009 a lawsuit by the SEC filed against Bank of America charged the bank failed to inform investors of Merrill Lynch’s plans to pay nearly $6 Billion in bonuses the night prior to the merger with BOA closed. Caught with this exposure, BOA quickly settled the suit by paying $33 Million but never admitting any guilt. I wonder if any bailout money contributed to that settlement? Is anyone keeping accounting of where all the bailout money has gone? That could be another interesting article.
One needs to be very careful in these difficult environments when seeking funds and perform expert due diligence. The results might be a hole too deep to climb out if you are not careful. People need to read more publications, magazines, or join organizations that will help them navigate through these perilous times. Just because you did not know financial information growing up does not mean you cannot afford to pick up some knowledge now. Ignorance with finance can be very expensive.
Sincerely,
Abner Figuereo
