I may have lost faith in Wall St., but today I regained faith in Congress.  The House shot down the $700 billion bail out… and I could not be happier.  And you wanna know why… Ok, but first let me lay the groundwork just in case

The gist of the bailout plan

HR 3997 would have allowed the Secretary of the Treasury to establish the Troubled Asset Relief Program.  This program would have been allowed “to purchase and to make and fund commitments to purchase, troubled assets (shaky mortgages and mortgage-backed securities) from any financial institution.”

My president, our president decided that it would be a good idea to use $700 billion of our tax dollar to save the finance industry.  He wanted to buy shaky mortgages and mortgaged-backed securities.  We all know what a mortgage is, but…

What is a mortgaged-based security?

It is sort of like a bond… an IOU.  Potential homeowners go to banks to apply for a home loan.  The bank issues the mortgages.  And then, the bank pools the loans into neat little packages and sell them on the market.  The people who buy these neat little packages receive interest and principle payments every month whenever the homeowners pay their mortgage.  In essence the investors are lending the money to homeowners and expected to receive payments every month.  The bank’s role in this is as the middleman.  For its services of connecting the buyer and lender, the bank receives a service commission.

Plan English…

Ok I got 10 friends who need a hundred dollars each.  They all ask me if I can loan them the money.  I shell out the $1,000 at 15% and get them to sign an IOU.  Then I turn to my friend Joe Blow and I say look Joe, buy these IOUs from me for $1,000. And when my 10 friends pay the bill, I’ll send you all the principal ($1,000) and interest ($150).  All I want is a small services fee of $2.

So I make $2 and Joe gets $148.  However, Joe now assumes all the risk.  If any of the friends don’t pay the bill, it is Joe who will be shafted, not me.

The problem with mortgage-backed securities

Generally, there is no problem.  Most times mortgage-backed securities are a safe bet.  Yeah, there is some risk involved, but usually not much.  The way it works is that the IOU is secured by an asset… the house.  The house is appraised by the bank, the applicant has adequate income to repay the loan, and the bank verified the homeowner’s financial credibility.

But… What happens if the house is over-valued, if the applicant overstates his ability to repay the loan, and if the banks did not adequately qualify the mortgages? 

So here enters the problem…

Well what happens is… that those mortgage-backed securities are worthless and investors will lose a lot of money.

Lately, investors have been taking a lot of losses on these mortgage-backed loans because the mortgage pools are filled with subprime products, foreclosed properties, soon to be foreclose properties… just a mess of worthless assets.  (I’m not really sure if “assets” is the right word to use here because asset implies value.)

Who are these investors?

Mortgage-backed securities are big business.  And because of the perceived low risk, many entities buy them…banks, hedge funds, pension funds, mutual funds.

Alright now back to why I am glad that this bailout was voted down. 

The bailout would have rewarded corporation for bad behavior

The bailout would have alleviated the mortgage risk exposure of financial institutions (and only financial institutions).  Aren’t these the people started this mess in the first place?  Financial institutions were being careless and greedy.  They knowingly exposed themselves to subprime lenders in order to increase short term profits.  Not only did these financial institutions give money to those with questionable financial credibility, but they also engaged in other greedy and deceitful behaviors.  They overvalued houses so that they can issue first and second mortgages.  They came up with all these colorful ways to qualify borrowers… balloons, no interest mortgages, one year ARMs, etc. They made stupid choices in order to fatten their pockets, but it backfired. 

I hate to get on the Harper story again, but just think about this… JP Morgan Chase loaned a family a half a million dollars.  The borrowers… a house wife and a home security alarm installer (not wealthy people).  The loan was secured with a house that cost almost a million dollars to build (the house was a free gift from Extreme Makeover: Home Edition).  At one point the family was trying to sell the house for $950,000.  It did not sell.  Why… because regardless of how much the house cost to build… a house (or anything else for that matter) is only worth as much as someone is willing to pay for it. 

The house is Lake City, GA.  The median income in Lake City $38,000, the median house value, $125,000… both less than the medians for the state of Georgia. 

Now granted I don’t know much about the neighborhoods in Lakeland, GA… but the Harper’s old house was ummm… a dump (I’m not trying to be ugly, but it was).  The dump was torn down and replace with a mansion.  Great! 

But if the Harper’s old house was a dump… then chances are that the houses around it are dumps too.  What sane person with a million dollars or even a half a million dollars would buy a mansion that was surrounded by dumps? I know if I had that kind of money to spend on a house, I would not be looking to buy a mansion that sits in the middle of dumps.  I would want a mansion that is surrounded by other mansion. 

No matter now much it costs to build, nobody is going to buy that house for so much money.  The house is not worth a half a million, it is only worth what someone is willing to sell it for.  Location, Location, Location - that is what the realtor says.  I am no realtor and I understand that.  So why would JP Morgan Chase value that house at a half a million dollars plus. 

Anyway, the family could not repay the loan and it went into foreclosure.  The house went up for auction.  I am not sure what it sold for, or if it even sold at all… but either way, that was a horrible business decision on JP Morgan Chase’s part. 

Taxpayers should not have to foot the bill for the bad decisions of borrowers and lenders.

The federal government has never come to my rescue when I did something stupid.  So why should they help stupid… (greedy) banks? And anyway a bailout out does not solve the problem.  It is just a band aid.  Bailing out banks just frees them to go out and make poor bad decisions.  So way to go House!  I think you all really voted for the people on this one.

Everyone has heard the big financial news of this week.  Bank of America acquired the troubled Merrill Lynch for $50 billion dollars. With this acquisition, Bank of America as upped it ranks as the biggest and largest everything… brokerage, mortgage lender, credit card issuer, bank. For just about every segment in the finance business… Bank of America is now the biggest.  They can easily be called thee monopoly of the finance industry.

Is this good…?  Is this bad…?

Ok I am going to tell you all my opinion… but first I must preface this with a disclaimer.

Neither am I nor have I ever been a big shot corporate executive.  And actually… I have no desire to be one.  It is too much responsibility and stress. And there too many people sneering down your back waiting for your next screw up.  Even with the millions in compensation, the loss of peace and sanity is not worth it to me.

Anyway, my opinion about Bank of America’s situation is entirely that of an outsider.  I am just the little man (woman) at the bottom of the totem pole who has something to say.

With the being said… I would like to present you all with a scenario. (I like to put things in simple terms so that I can get a better perspective.)

Ok for a moment… let’s pretend my name is America and I have a 10 year old Honda Accord.  It runs ok for now.  I have had a break down here and there.  But the mechanic had to put some patches on it and it is still rolling (for now).  And even though I get a clicking sound here and a clacking sound there, it gets me to where I need to go.

Now enters my friend… let call her Merrill.  Merrill has an Accord too.  Her car has also had some break downs here and there, the mechanic tries to put on a few patches… but the patches do not work.  As Merrill drives away from the mechanic shop, the wheels fall off and the engine drops to the ground.

So Merrill calls me (America) and says…

“Hi, my good ole’ buddy, America!  How are you today?…

Barely surviving yourself, huh? Yeah… good, good!…

Look America, I need a favor from you.  I am having problems with my little jalopy.  The wheels are gone, the engine is gone… all that is left is a shell of a car… and even that has dents and scratches…

No silly, I don’t need a ride.  What I need is for you to buy this jalopy from me for… umm… $50 billion dollars.

No, I am not kidding.  Seriously, $50 billion for a shell of a car is a bargain. You ought to jump on this deal while it is hot.  I’ve got three other people lined up waiting to buy it, but since you are my friend… I am making the first offer to you.”

My response… Yeah Merrill, I think I’mma have to pass on this one.  My little Accord is not in the best shape.  It’s getting me to where I need to go, but just barely.  I still hear a lot clicking and clacking coming from the transmission.  I need to get my car back to pristine running condition before I can take on your jalopy.  Thanks for thinking of me, but no thanks.  But, hey, maybe we can do lunch next week.

You see where I am going with this.

No PFA, I am not opposed to mergers and acquisitions.  It is usually a good thing because it creates opportunity and synergy.  But what opportunity does Bank of America have here?  The opportunity to add nearly $6 billion dollars of subprime assets to its portfolio.  Ain’t enough synergy in the world makes to make this a good deal.

September 15, 2008 was a sad day on Wall St.  Yesterday, three well respected, heavy hitters died.  Lehman Brothers, AIG & Merrill Lynch were all taken out in one foul swoop.

As I reminiscence about the better days, I can hardly hold back my tears.

The Lehman Brothers… high hopes, big dreams and endless optimism.

One of the world’s largest investment banks, Been around over 158 years, Managed over 280 billion dollars in assets, 30,000 employees, named one of Business Weeks best performing companies in 2008… as of yesterday BANKRUPT.

I can remember when AIG just a baby waddling around, trying to make his way to the top of the finance world.

One of the world’s leading insurance corporations, been around 41 years (the baby of the group), over 100,000 fulltime employees, made it to number 10 on the 2007 Fortune 500… One foot in the grave, the other on a banana peel.

Merrill Lynch, ahhh… Merrill, there are so many things I can say about Merrill.  He was the tenacious, strong willed… the driven type.  There was never an obstacle he could not overcome.

Another one of the world’s largest investment banks, been around over 94 years, 60,000 employees, Fortune 500 company… and as of yesterday SOLD to Bank of America.

The Lehman Brothers, AIG & Merrill Lynch each had their own methods, but they all had the same goal… to be industry leaders in the world of finance.  And they were the leaders… and this is why I am deeply saddened by their untimely demise.

The collapse of these three highly respected mega giants has got me seriously thinking about the poor state of the US economy.

What is the cause of this economic crisis?

Yeah, we all understand that the market must correct itself every now and then, but these current economic conditions are unheard of. We are living through the most massive market collapse since the Great Depression.  And why?

Well there have been several major events that lead to this.  The one that gets the most attention is the real estate market.  Call it incompetence, call it greed… but for whatever reason bankers were handing out loans to anyone who walked in the door.  This was their dastardly attempt to milk consumers and increase the bottom line…. And the plan backfired.

Even if you overstuff a money bag, it will start busting at the seams.  Eventually, the bag will have to give way and all the money will start flying out.  But the bankers gave no regard for the eventual consequences.  And my goodness… what a destructive consequence it has been?  Financial institutions are crumbling all around us.  And not just the little local bank in Podunk, KY… no I am talking HUGE - everybody knows their name - institutions are being chopped at the knees… one after another, falling all over each other… it is like they are in a competition to see who can hit the ground the fastest… and the hardest.

And what else contributed to this crisis… the unveiling of creative accounting that exists to create an illusion of financial stability.  Believe me folks, creative accounting is alive and well.  In the midst of the crisis, executives are doing everything they can to make their companies appear stable.  I do not see how Lehman Brothers can be on the Fortune 500 list a few months ago and bankrupt today.  It just sounds fishy to me.  But in the end… it will all come to light (Enron).

Another contributing factor… a loss of investor confidence.  With all the trickery, lies and deceit… how can and why would investors be optimistic?  I, for one, have lost complete confidence in those companies I once admired and respected.

The culmination of all of this has resulted in the worse financial crisis in history.

The government has made some modest attempts to save the economy…  brokering deals between drowning institutions (Merrill Lynch) and damn near drowning institutions (Bank of America), coming to the rescue of Fannie Mae and Freddie Mac, insuring billions of losses from deposit accounts. But is it not just the financial markets that have us in a rut… our own federal government is in a four billion dollar… no, I am sorry… I mean four hundred billion dollar deficit!  With a $400 billion dollar deficit already, the Iraqi war that seems as if it will never end, rising unemployment rates, and the domino effects of bank failures…  how many more hand outs can the feds afford to give?

Can the economy be revived?

The economy will fixed itself.  It has no choice… eventually it will hit the bottom and the only place to go is up.  By the time the market rebounds it would have shaken off all of the dead weight… no more greedy executives, no more careless boards of directors,  more accountability, and  many new lessons learned from those companies that did not make it.

This massive market correction is a test.  The survival of the fittest… and in the end… the best of the best will be revealed…  badly damaged and bleeding all over… but stronger, more learned and ready to propel back to the top.

Between Thursday and Friday of this past week the Dow Jones Industrial Average dropped 450 points, officially taking it into what stockbrokers call ‘Bear Territory’; that is, a drop of 20% or more in a single year.

Do I care?

Not much. Even though the last time I looked, my 401K was losing about 8% annually, I’ve decided that a better way to spend my energy is to focus on things that cheer me up. I spent Friday afternoon making strawberry jam. In an apron. A 1940s collectible full bib apron, a la Ma Kettle.

Yes, it’s true. I am a Domestic Goddess.

So even though I could write a post about how Ford Motor Company stock is at its lowest point since 1955, or how Citigroup is in big trouble again, or how NY writer Tom Wolfe thinks we are witnessing “…the end of Capitalism as we know it,” (this from a guy who dresses like Colonel Sanders and wrote one of the awfullest books ever, made into one of the awfullest movies ever, The Bonfire of the Vanities), or how Chrysler is denying publicly that they are considering bankruptcy (meaning that they almost certainly are considering bankruptcy)–even though I could write that post, I’m not going to do it.

Instead, here are ten much more pleasant things you can do while the American Way of Life collapses around your ears. Then, once the dust settles, we can all talk.

1) Make Jam. I spent $25 on a flat of strawberries, $5 on four boxes of fruit pectin, and $2 on a five pound bag of sugar. I put up 13 two-cup containers of freezer jam, two quart bags of whole strawberries, and made shortcakes to eat with the leftover berries. We’re having them again tonight. I figure I saved between $10 and $15 doing this all myself, which isn’t all that impressive savings-wise, but you haven’t tasted that jam. Yum.

2) Read a Big Book. My partner, the world’s smartest truck driver, is currently reading Truman by David McCullough, a book that is as big as my head and twice as heavy. The book is about Harry Truman, former US President, not Truman Capote or The Truman Show. Harry Truman was so broke when he was a US senator that he had to hire his wife Bess to be his secretary just so they would make enough to cover their basic living expenses, then he spent the rest of his political career worrying that this necessary and pragmatic action would ruin his political integrity. Wow, have times changed or what? (Can anyone spell Oink?)

3) See Pixar’s Latest Flick Wall-E. Pixar is used to effusive praise, but the positive ratings on this one are off the chart. Wall-E is a sad-eyed trash-compacting computer left alone on earth after all human life has disappeared. His only friend is a cockroach. Don’t worry though, Al Gore isn’t in it, and at the end we find out that the human race has survived, just on another planet. The thing is, if you must see an apocalyptic movie this year, shouldn’t it be adorable?

4) Rent ‘Fight Club’. What, you say you were just laid off your cushy broker job at Citigroup and the only cute robot you want to see right now is one you pump so full of lead it ends up looking like an antique sieve run over by an SUV? Fine, I get it, put that now-totally-legal weapon away, will you please? Go directly to the closest video store and rent the film version of Chuck Pahlaniuk’s dark novel about the end of the world as we know it, courtesy of fed-up cubicle slaves. Trust me, it will cheer you up, especially the final scene. Girls: I have two additional recommendations for you regarding this film which make it worth watching all by themselves; Brad Pitt and Edward Norton.

5) Write a Cheap Food Cookbook. Mark my words, with the recent midwest floods destroying corn and soybean crops and a world food crisis already fully under way, in about eight months, somebody in the US is going to make a fortune off a clever book on how to make a tasty casserole for a family of four out of lint. Why shouldn’t that person be you? If you work in the auto or financial industries, you’re going to need the money, so get crackin’! Times a-wastin’.

6) Start Your Own University. College has become unaffordable for most kids and their parents, but there aren’t many jobs for graduates anyway. Instead of whining and crying about this, why not take the bull by the horns and start your own university? You must know how to do something. A degree from a state college currently costs about $50K, so charge 10K a head and then teach kids something useful, like how to covert SUVs into affordable housing. You’ll be doing a community service and you only need 10 students and you’re in six-figure income territory!

7) Help Build SUV-Henge. We know that with big cities strapped for tax income (due to all the foreclosures and all the industries pulling out and moving to China) public parks are hurting. Why not take the current glut of undrive-able SUVs and stack them on end to build a monument to the Sun that can be used at the Summer Solstice to appease whatever Gods are mad at us? (Probably all of them right now.) A majestic Public Works project is usually just the ticket to cheer people up during hard times, and the raw material and free labor is all around you.

8 ) Take a Stay-cation. ‘Staycation’ is a new buzzword for something wonderful I’ve always loved more than anything else in the world: Stay home and do nothing. Right now, I am so behind on doing nothing that even if I do nothing for the rest of my entire life I probably will never catch up. So if you are lucky enough to be too broke to do anything, count your blessings. Look at it this way: at least you don’t have to go to Disneyworld. Those folks are insane. The giant mouse, the dancing princesses, it’s a horror show.

9) Walk Around, Take Photos. Can’t afford to drive? Recently laid off? Take that digital camera and walk around chronicling the end of civilization. Someone really should be doing this, and I am so busy constantly grubbing for money I don’t have time right now. Plus, it’s good for you, all that walking. And dumpster diving is the the new chic way to go, so anything good you see lying by the side of the road, take it home and brag to your friends!

10) Hoard Rice. Come on, I know you want to do it. Sometimes, just being told you aren’t allowed to do something is enough to make that thing the only thing in the world you ever wanted to do. Buy your four 100 pound bag limit at one Sam’s Club, drive to another and buy four more, then back to the one you started at and buy four more, and don’t stop until your entire house is so full of burlap bags of rice you think you are on a Red Cross ship bound for Myanmar.

There. That ought to keep you busy for the next two hundred days or so until Barack Obama is finally President. I don’t know how much he’ll be able to fix by the time the inaugural ball is finally over, but at least the madmen will have gone back to Texas.

Anyone want some jam?

Right now, the kind of mortgage that is right for you is one you can get, which is to say, maybe no kind of mortgage. Credit is so tight right now you couldn’t get a needle past it with a sledgehammer.

In fact, I was just reading today on MSNBC that things are so bad right now, realtors are getting up at the crack of dawn just to call the mortgage companies before their answering machines fill up for the day. Mortgage companies are laying employees off so fast that often no one is available to answer their phones in person, and by the time normal business hours start, the machines are completely full.

Happy house hunting! Rots-a-ruck!

However, let’s assume that eventually (and we hope sooner not later) things do get back to something resembling normal in the world of home finance. Once that happens, you will find that home mortgages tend to fall into one of a few basic categories:

Fixed Rate Mortgages

Fixed rate mortgages are just what they sound like they are: mortgages in which the interest rate stays the same for the life of the loan. In general, the longer the mortgage term, the higher the interest rate. The standard term for a fixed rate mortgage is 30 years, but 15 year mortgages are also very popular, especially for homeowners looking to refinance. Five and ten years terms are also available, and many lenders now offer 45-year fixed rate loans, which is generally an expensive way to go, but if you need to get your payment down a 45-year term can be one way to get into a home you can afford without a lot of tricky special conditions and hidden clauses.

Variable Rate Mortgages

Variable rate mortgages come in many different forms, but the general idea is that the initial interest rate is fixed for a short period (typically two to five years) after which the interest rate can go up or down with fluctuations in the prime lending rate.

Variable rate mortgages are often sold to young people who want to get the most house they can with the money they have right now, and who can count on their incomes rising over time. Sometimes this is a good idea; sometimes it is a disaster. When considering a variable rate mortgage, it is important to understand how often the interest rate can be reset (at what intervals?–six months? two years? five years?) and whether a cap is placed on how much the interest can increase at each interval, and how much it can increase over the life of the loan. You should be confident you can handle both best and worst case scenarios.

Another feature to watch out for on a variable rate mortgage is a balloon payment clause. If, after a certain amount of time, the entire amount of the mortgage is due in full, that’s a balloon payment clause. Many people who are losing their homes today took out variable rate mortgages with balloon payment clauses at the peak of the housing bubble, because they were told the value of their homes would only increase, and interest rates would only continue to fall, making refinancing to a 30-year fixed rate before the balloon payment came due an easy task. We all know how that worked out: Not so well.

Just because your lender says something will happen in the future doesn’t mean it will unless it’s in the contract. They’re lenders, not fortunetellers. They are there to sell you a mortgage; you are there to look out for yourself and make sure you understand what you are signing.

Interest Only Mortgages

Believe it or not, you can get a mortgage in which you never pay on the principle for five years, sometimes longer. These kinds of mortgages were popular in hot housing markets where, to get into the market at all, you had to buy way beyond your means and do it fast. The likelihood that anyone will write one of these mortgages for you now is not good, the credit crunch being what it is.

In general, this kind of mortgage is an awful idea anyway. You are betting that your home will only increase in value and also that you will be able to afford the actual payments when you start owing on the principle. Don’t bet with your house, bet in Vegas. Buy a house you can actually afford, and if you can’t afford a house, save your money until you can.

How to Choose?

I’m going to be very opinionated and frank here: Choose the shortest-term fixed-rate mortgage you can get, if you can get one at all. If it has to be a 30-year fixed rate mortgage, get the best rate you can and pay extra each month on the principal, even if its only $20 extra. This will build equity in your home and give you peace of mind. Don’t even consider a variable rate loan until the housing market gets done having the biggest nervous breakdown in its recorded history. That may take some time.

If you have to wait, because you can’t get a conventional loan, save.

Some people can qualify for special loan programs under the Veteran’s Administration, the Department of Housing and Urban Development, or the Federal Housing Administration. We’ll go over those options next Tuesday.

In the meantime, don’t give up! Be smart, be hopeful, be ready to grab that dream house when it appears; but on your terms, good ones.

PFA is happily participating in the Carnival of Financial Goals hosted by Cash Money Life, a sort of internet-wide blogger party taking on a variety of themes revolving around various topics related to goal setting. This month’s topic is Declare Your Financial Independence.

But how do you declare your financial independence when you are afraid of losing your job, prices on everything are skyrocketing, and you can’t even afford to drive your SUV anywhere anymore?

Actually, I’ve been thinking lately that the tough economic times we are going through right now do have another side, a silver lining of sorts. That silver lining is the opportunity to make yourself over completely. Part of that make-over is out of necessity. You can’t afford to drive so you walk now and take the bus. You can’t afford your favorite supermarket anymore so now you shop at Sam’s Club and the Dollar Store and Aldi’s. The mall? Forget it. When you need new pants it’s Goodwill or K-Mart for you.

Why not take it to the next level?

Ask yourself, “If I could do anything I wanted, what would it be?” Once you have the answer to that question, ask yourself if you might be able to actually do that thing if you were free of the debt and constant purchasing your old, pre-recession lifestyle involved. Sometimes it takes a crisis to force us to look at ourselves and our world a different way.

It is possible to pay off debt, but you have to be willing to cut up your credit cards and never use them first. If you can make yourself do that, you’re halfway there. Once they are all cut up, start paying as much as you can on the one with the highest interest rate, and pay the minimum on each of the others until that first one is paid off. So say the minimum on your highest rate card is $90 and you can pay $200. You pay $200 until your balance is paid off, then you close that card and apply that same $200 on top of the minimum payment on whatever card has the second highest interest rate. You do that until they are all gone.

You can find a great list of calculators, including a calculator that shows what it will take to pay off your credit card, at Bankrate.com. Calculators are a great tool for helping you to see what is possible, and also what the true cost of credit is. For example if you carry a $15,000 credit card balance at 21% (which, sad to say, is about average in the US), and you make the minimum payment each month of $375, you will pay $34,360.87 in interest on that original $15,000 in purchases, and it will only take you 554 months (or, a little over 46 years) to pay it off. Ouch.

Now, what if throw just $15 extra a month at that debt? Couldn’t help much, right? Wrong! If you pay $390 on that same card, just $15 extra each month, you will pay the card off in 65 months, or about five and a half years, and pay $10,134.33 in interest. That’s a savings of over 40 years and over $24,000!

What else could you lose right now that would open up a world of choices? What if you didn’t have a $2000 mortgage payment? If two of you are living in a 3000 square foot newer home in the suburbs, and if you don’t plan on children soon or have already had your children, you might want to dump the mini-mansion (if you can). A modest ranch in a decent city neighborhood, or an older home with all the charm and fireplaces, will save you money on transportation and save you money on your mortgage.

If you live in the midwest, a nice older home closer in can be had for around 100K, give or take ten thousand dollars; even less if it’s a repo and you can negotiate a short sale. Even with no down payment, that’s only about $730 a month at 7% interest. If you can put $20K down on it, you’re looking at a house payment of $531!

What kind of life could you chose to lead if you had no unsecured debt and a house payment if $500 or so?

That may not be what you want at all. Maybe financial independence to you means lots of money coming in, not small amounts going out. If that’s the case, this is your moment.

When Billy Vasquez, the blogger who writes and maintains The 99 Cent Chef first started his blog on cooking with dollar store ingredients, he was getting five or six hits a day. Now he’s averaging 5 or 6 thousand hits a day, and like they say, the hits just keep right on comin’. In times of crisis, the person with the bright idea gets the cash, and it doesn’t have to be a bright idea that costs a lot of money to start up.

I’ll be honest with you. I took some of my own advice last year in late October, early November. I wanted my unsecured debt to be gone, I wanted to do something I cared about more than my depressing day job. Specifically, I wanted to write for a living, something I equated to wanting to be a Ballerina or Space Barbie. That was my general sense of how possible my goals were.

As of today, I’ve paid off my car and two credit cards, and have two cards left to pay off. In March, I cut back my day job to 20 hours instead of 40, because I was so deluged with writing work I could not keep up, and what’s more, it paid better. Last September, if someone had told me that was even possible, let alone that it would actually happen, I’d have laughed myself silly. Yeah right! And yet, here I am. Currently I’m looking for a way to ditch the day job altogether (hint: health insurance is the stickler), because I have a couple of book ideas I’m pitching and my freelance work continues to grow.

None of this would have happened for me though if I hadn’t taken some time to 1) figure out what it was I really wanted in my life (I’m 55–midlife crisis time, dontchaknow), and 2) DECLARE MY FINANCIAL INDEPENDENCE, which is known less dramatically as goal setting.

Knowing what you want isn’t half the battle: It’s 99% of the battle.

What do you really want? It might just be that the world is waiting to give it to you.

Yesterday, the FBI arrested two mid-level Bear Stearns investment bankers for intentionally over-valuing mortgage-backed securities even while their real value was plummeting. One of the bankers, Ralph Cioffi, valued one of the funds as having lost 6.5% in April, even while colleagues were valuing the same fund as losing 18.97% in that single month.

Now, of course, from all the major investment banks and global banks with investment arms comes the chorus of promises to self-monitor. (I’ve seen this play before. Have you?) Credit Suisse, Merrill Lynch, Morgan Stanley, and Citigroup are all rushing into the spotlight to assure the press and the public that they are cracking down on this sort of thing. Hard.

Sure they are. NOW they are. But how long will that last?

I predict it will last exactly as long as lower-level bankers are still being arrested and the whole thing is still in front of the press. Excuse my cynicism, but bankers today are under unbelievable pressure to make their employers money whatever the cost to their own integrity and safety. I’m not saying this excuses Bear Stearns Ralph Cioffi and Matthew Tannin, but I am saying that it is disingenuous in the extreme for corporate management to be out in front of cameras behaving like it is all very shocking and they certainly will not be tolerating any more of this, no sir. Juz terribul. Oh my!

In the past year alone several prominent CEOs retired early with huge golden parachutes after losing the financial institutions that employed them billions of dollars. They are not in jail. They have more money than God, and this as a reward for destroying the corporations that employed them through raw greed, financial mismanagement, bad investment decisions, and more than anything else, slippery underwriting practices and sleazy sub-prime mortgage deals. I guess if you are a CEO it’s OK. If you are a midlevel banker at an investment firm, you’re goin’ down, buddy!

It’s pretty hard to feel sorry for investment bankers. (Ever see the film ‘Boiler Room?’) On a personal ‘yuck’ chart they rank somewhere between insurance and car salespersons and attorneys; they move a little higher or lower depending on the firm. Still, the whole spectacle yesterday reminded me somewhat of the Abu Gharib scandal, in which a few low-level soldiers were hauled in front of cameras, charged, upbraided, and publicly shamed for actions that clearly originated in the offices of Donald Rumsfeld and Dick Cheney.

The soldiers deserved the court marshals. Where are the trials for Cheney and Rumsfeld?

Ever since Reagan, we have been singing the praises of deregulation and laissez-faire capitalism, and this is what it has brought us to. Now, all the weasels are scrambling for nice deep holes to hide in before any camera lights are shined in their direction.

When will we ask the bigger questions?

When will we say, you know what? This corporate model is not working very well. The financial industry is in a mess that verges on total collapse. The entire US has been gravely affected by it, and month after month it just gets worse and worse. When will we ask, How can we regulate the financial industry so this doesn’t happen for another 100 years or so?

Because it will happen again, you know it will. It’s the nature of the beast. The safeguards put in place after the Great Depression to prevent banks from collapsing, and the regulations put in place at that time are, by almost universal consensus, no longer working. That is because investment bankers have found ways around them, and retail banks and mortgage lenders, hungry for bigger bonuses and the chance to impress stockholders, have snapped up every chance to circumvent or slide under the law, just to make that extra buck. That’s what capitalism is all about.

The extra bucks have all floated to the top (what ever happened to the ‘trickle down theory?) and now the rest of us can’t afford to get to work. The entire economy is severely out of whack, so severely out of whack that no one even understands it anymore. Why not? Because it has never been this bad.

People who work for a living, or are laid off for a living, know this. Over 90% of us live on less than 50% of the money made in the US, and now that money is not being made. Fewer and Fewer people are working at all. Arresting a couple of suits and parading them around on TV is not going to fix any of that.

US prisons are already holding more people than any other country in the free world. Is there room in them for all the bankers who are breaking the law, or have done so during the housing bubble and the mess that followed? Probably not, but the image of shoving a bunch of bankers into shared cells with murderers, drug dealers, and child molesters is a compelling (and I confess, oddly appealing) one. Would they get tattoos? Would they become somebody’s bitch? Would they take up smoking?

Are there any Starbucks in prisons?

At the very least their presence would help even out the racial inequality in prisons across our nation. But until somebody addresses the underlying problem, it’s really just a big show.

Don’t hold your breath waiting for the big guys to go down.

They’re still in office until after November.

Rodney Hixon is an ordinary guy trying to make an extra buck or two on the side, and why not? Living in the state of Michigan has never been more financially challenging, so when Rodney discovered that he could buy up slum properties In Kalamazoo with ’stated income’ mortgages that didn’t require him to show any proof of his assets or salary, he jumped at the chance.

Hixon, currently describes himself as ‘a former real estate agent’ who makes ‘a couple thousand dollars a year as the coach of Mattawan High School’s girl’s lacrosse team’. He was the ideal candidate for the creative ’stated income mortgage’ that became so very popular during the housing boom that preceded the sub-prime bust. As a former real estate agent he knew the area, knew the mortgage companies and their policies, knew the ropes, knew he could do it.

So, when a person wants to invest in real estate, the idea basically is to buy low, sell high, right?

Wrong!

In the past 15 months 38 of Rodney’s investment properties went into foreclosure, and it came to the attention of some Kalamazoo city officials that he had overpaid for each of the properties. In fact, Hixon had overpaid alot. On his 38 most recently foreclosed properties, Hixon paid between 2% and 375% over and above the city’s tax-assessed value, for an average purchase price on Hixon’s investment properties of 68% above SEV. Profits (for the seller) on Hixon’s 38 foreclosed properties (all of them in slum neighborhoods) topped out at $2.7 million.

On one property alone, Hixon saw a 1,837% appreciation in the short three years before the home went into foreclosure. That home, at 722 Egleston Avenue in Kalamazoo, sits in one of the cities most distressed areas and sold for $8,000 in December of 2002. Hixon purchased it in October of 2005 for $155,000. It went into foreclosure in June of 2007.

Hixon’s investment properties are all listed as rentals but few were ever rented, not even briefly. Most sat vacant from the date of sale right up to the date of foreclosure.

The FBI is currently investigating Hixon for mortgage fraud. They suspect that he might have been involved in a scam that goes like this:

A real estate agent, an appraiser, and a ’shill’ buyer purchase a slum property at many times its city-assessed tax value and take out a 100% mortgage on ‘creative’ terms. The shill buyer and the seller then divide the substantial profits amongst themselves, defaulting on the mortgage almost immediately, leaving the mortgage company or lender holding a bad debt on a property worth a fraction of its selling price.

The FBI would probably already have charged Hixon with something if it weren’t so horribly backlogged with similar cases occurring all across the United States. According to figures printed in the Kalamazoo Gazette, in 2002, the FBI investigated 5,623 cases of mortgage fraud that resulted in $293 million worth of losses for lenders. In 2006, the FBI was busy investigating 35,617 cases of mortgage fraud with losses totaling over $946 million. Figures currently available for mortgage fraud in 2007 are topping out at well over $1 billion, and by all accounts, at this point the FBI is not able to keep up with the number of claims in 2008.

In fact, as the chart above shows, the FBI is having no small amount of trouble just adjusting its tables and figures on this topic fast enough. You can look at other tables on mortgage fraud cases by year along with pending cases by year at the FBI’s own website, but that report hasn’t been updated since 2005.

Reading about Hixon, who tops the current list in Kalamazoo of foreclosed property owners, I couldn’t help but wonder what the real scope of this problem is, how deep it goes, and how much of it is institutional versus individual. Lenders often buy back their own foreclosed properties because it makes their books look a little bit better. (That is possible through some magical accounting process that I confess I do not entirely understand… sorry! If you do understand it, feel free to enlighten me here by posting why that works for them!) My question is this:

What (besides the law) would prevent lenders from doing the same thing Hixon is doing so successfully right in my home town? They would have to operate through a shill or third party and rip off some other lender of course, but how can we know that isn’t exactly what is happening as we speak? Kind of a very, very high stakes version of ‘hot potato’ and the one left holding the potato goes under. What a game! It makes Monopoly look positively warm and fuzzy!

Just ask Anthony Mozillo of Countrywide about those kinds of games. Countrywide is such a mess right now it doesn’t even have records that show how deep the mess is, and the records it does have, nobody can quite understand. Fewer and fewer employees remain to even look for those records, and I have no doubt that at some point everyone is going to just throw up their hands and exclaim, “Oh, nevermind!”

Honestly, I don’t want to rain on Hixon’s parade. He just got married after all, and he swears that everything he did is on the up and up and it’s all been very heartbreaking for him, losing all those homes. At least he has a sweetie now to soften the crushing blow.

I don’t know who he’s marrying, but if I were her, I’d want a separate bank account and a pre-nup.

In blood.

Almost every adult can remember at some point in his or her younger years being given a US Savings Bond by a grandparent or well-meaning relative for a birthday or graduation, and then being instantly frustrated by the fact that the bond couldn’t be converted into a Beatles album or Grand Theft Auto cartridge the very next day. Of course, that is the appeal of US Savings bonds as gifts (at least from the point of view of the giver): They are one way to (almost) force a young person you love to save.

The Savings Bond grandma gave you when you were twelve was a Series EE Paper Bond. Paper Series EE Bonds are purchased at half their face value. So, for example, a $50 paper bond costs $25. Series EE Paper Bonds mature at different rates depending on the interest paid, which is set by the federal government and changes every six months. You can’t really predict when a paper Series EE Paper Bond will mature. For example, if the interest averages 5%, a $50 Series EE Bond will mature in 14 and a half years. If it earns an average of 6% interest, it will mature in 12 years. Paper Series EE bonds earn market-based rates that usually are much higher than deposit account rates at retail banks.

You can also purchase Series EE bonds at face value electronically for up to $30,000. Most banks will help you to purchase Series EE Bonds, or you can purchase them directly from the Treasury Direct website at http://www.savingsbonds.gov/, and you can also manage your bonds there and find a wealth of information on bonds and investing, all free of charge.

Another less familiar kind of Savings Bond is the government I Bond, which is an accrual-type security, meaning interest is added (accrues) monthly, much like a savings account. The interest is paid when the bond is cashed. I Bonds can earn interest for as long as 30 years depending on how you set them up. I Bonds purchased after 2003 must be held at least 12 months before they can be cashed.

You will owe tax on interest on both I Bonds and Series EE Bonds, but the interest can be deferred in for a number of reasons. Tax is not owed on the interest earned on I Bonds that are cashed. With Series EE Bonds, you want to make certain you cash them by or before the maturity date, since you will owe tax on the interest on the maturity date whether you cash them or not, and since they also quit earning interest on that date.

Bonds are attractive when the stock market is a mess (like now), but there are strict limits on the amount you can purchase. You can buy up to $30,000 in paper and electronic I bonds (for at total of $60K), and $30,000 in paper and electronic series EE Bonds (for a total of 60K). So, you can’t have more that $120K locked up in bonds in your name, and you can’t get around this by changing up the other signers like you can on other kinds of interest bearing accounts. Basically, if your name is on the bond, it counts toward your total allowance no matter who else is on it.

Savings Bonds are regulated by the same great folks who brought you the US tax code, so don’t expect all the rules, regulations, and rates to be transparently easy to comprehend, especially if you’ve been buying them for awhile. The rules are changing all the time in regard to bonds. Once you’ve purchased a bond, those specific rules for that specific bond do not change. But you could come back a year later and find that everything has been moved around and new rules apply.

Other great sites to find information on bonds, how to manage them, how to buy them and which ones to buy, and all the rules and regulations that apply to them include The Bureau of Public Debt, Tom Weishaar’s Savings Bond Advisor site, and Jack Quinn’s Savings Bond Information Center.

For current rates on Series EE an I Bonds you can also call 1-800-4US-BOND (1-800-487-2663) or any Federal Reserve Bank, or you can write to request a rate table to The Bureau of Public Debt, Bonds Div., Parkersburg, WV 26106-1328.

You don’t have to wait for an excuse to buy bonds, and frankly, they’re a great way to save without even thinking about it.  All you need to do is set this up at the Treasury Direct website, www.savingsbonds.gov.

You can download the Beatles Album anytime you want from I-Tunes.

All you need is love. And Savings Bonds.

Yesterday my internet server was down all day, but I actually felt pretty lucky about it, since while I waited for it to come back on. I whiled away the hours watching local news shows that featured brand new houses in Wisconsin sliding into raging flood waters, sink holes swallowing up cars with people in them (two people died near here delivering newspapers Sunday when their car disappeared into a 50-foot sinkhole), and various photos of trees on cars, cars on cars, houses on cars, cars on houses, and so on and so forth.

Right now, 11,500 people in the mid-sized Michigan city where I live are still without electrical power, and the dog and I have had to take refuge in the basement twice in as many days, but finally, as Jack Nicholson said in The Shining, “I’m b-a-a-a-ck!”

I’m waiting for the plagues of locusts that are sure to follow this summer, that is, once the tornadoes and floods get done with us this spring. That would be about right, since the only creatures around here that appreciate this year’s weather are the 21 tomato plants I put in our Victory Garden last week. They’ll make good eatin’ for those locusts alright.

It’ll be just like The Tomatoes of Wrath.

Recession? Oh yes, but the way, we are in a recession. Here’s a quick recap of the major recession issues of the past week, along with pithy commentary on each:

Should the Gas Tax Be Dropped for Temporary Price Relief?

No, God no. First of all, the gas tax is what helps keep our deteriorating roads and bridges from deteriorating even more. Second, the price break would be so tiny as to be gobbled up almost immediately by increasing demand. We would net nothing, and our roads would suffer even more. (Did somebody say, “sinkhole? ” God, what a horrible way to die, delivering Sunday papers and then just getting swallowed up by a the mother of all potholes. Does anyone doubt we are dealing with Divine Wrath here? And you think repealing the gas tax will help?)

Should the Federal Reserve Lower Interest Rates Again?

Lower them to what? A negative number? Look, right now Ben Bernanke, Federal Reserve Chairman, has two public roles: 1) Spin current events in such a way as to minimize panic, and 2) Lead us in prayer. He also has a private role: Print new money to keep some of the biggest financial concerns in the US from going belly up week to week (or even day to day) and thinking of other creative ways to prevent that same negative outcome, if he can. Yesterday Lehman Brothers, after posting a $2.8 billion loss, raised $4 billion and plans to raise $2 billion more, but this is not good news. Moody’s downgraded Lehman Brother’s credit rating yesterday from stable to negative. Its stock has plummeted 60% over the past 12 months. The bank where I work? Started at $5.81 yesterday, down to $4.51 at close. I may soon have more time to write.

Should the US Step Up Ethanol Production?

Sure, if we can make it out of switchgrass and not use any of the land dedicated to food production to do it. Otherwise, no, we have bigger fish to fry than that, and possibly no cornmeal soon to fry them in. At a time when the US really needs a bumper crop of corn and soybeans, both are already suffering badly, and the recent torrential rains in the Midwest will almost certainly wipe out a certain percentage of these crops entirely. It’s too late to replant, and the poor outlook has global consequences that make our gasoline complaints look like very high class worries.

Should We Drill in Alaska, or Off-Shore, or on the Moon?

No, no, and no. What we need is any energy policy. We needed one 20 years ago; still need one. Buy a bicycle, take public transport, work from home, plant a vegetable garden (watch out for the coming locusts though), and hang onto your hats. You ain’t seen nothin’ yet.

And yeah, that goes for Toto too.