On March 14, 2012 I was reading the news headlines, while eating my lunch, when notice that one of them stated that 4 big banks failed the stress test administered by the Federal Reserve Bank. So what does that mean to me as a consumer and an entrepreneur?
First let’s define what a stress test really is. Stress testing is simply analyzing a financial institution under various “what-if” scenarios. The scenarios could involve anything from sharp increases in unemployment rates, interest rates, and oil prices to market crashes and reduced domestic production. It supposed to be better than forecasting and is widely used in Europe and by the International Monetary Fund (the world’s bank). According to Wikipedia, “Stress testing reveals how well a portfolio is positioned in the event forecasts prove true. Stress testing also lends insight into a portfolio's vulnerabilities. Though extreme events are never certain, studying their performance implications strengthens understanding.” In layman’s terms, a stress test shows how a financial institution will manage if the economy crashed (again) or if the world came to an end.
With the information above, now I can fully understand Jonathan Stempel’s article Fed gives high marks in bank stress tests results , right?
To quickly summarize, larger banks passed (15 out of 19 to be exact), while others failed. This means that 15 banks would survive extreme economic changes through 2013 if the changes occurred this year. JP Morgan Chase, Wells Fargo, and PNC were among the banks to receive a gold star. But the named financial institutions that failed are what are so intriguing. Citigroup, MetLife, Ally Financial, and SunTrust Bank all failed, miserably.
It really surprises me that MetLife and Ally Financial failed. According to the article, MetLife is the largest life insurer in the US. Ally Financial was the leading online bank, then switch gears to the consumer loan market when it purchased GMAC Finance. To think, Snoopy (MetLife’s mascot) would have a foreclosure sign on his dog house. And the auto industry was bailed out only to be financed by irresponsible CEOs and investors. However, I am not all surprised that Citigroup failed. If you asked me, it was in their destiny.
I have done business with Citigroup, and I will never do business with them again. Since 2009, Citigroup, better known as Citibank, made various business decisions that I was skeptical of. One of those decisions impacted me on a personal level and I am still dealing with the consequences of Citigroup’s actions until this day. I even owed stock in the company, but not anymore. In October 2011, 24 consumers were arrested for attempting to close their bank accounts at Citibank in New York during Occupy Wall Street protest. Click this link for additional information about this incident. I truly believe that if the customers were wearing business suits that NYPD would not have been involved.
So what does the stress test results mean to the rest of the U.S.? It means that 79% of the financial institutions tested are doing what we, as consumers, expect them to: protect our funds, offer competitive interest rates, and not issue risky assets (loans). It also means if you have any connections to the four failures listed above you may want to end those relationships. Obviously, they need to be monitored. Those 15 banks are considered to beacons of light in the muddy waters of this economy. And the stock prices of these banks have increased and probably will continue to do so. The world’s stock markets ended on a high note. So I guess majority of our banks passing a test means, that we can take a collective sigh of relief. Citibank, technically, did not fail the stress test. The Federal Reserve Bank merely did not approve the capital plan, or their explanation of where the money actually goes. My point: Citibank is a failure.
I really didn’t want to write about the NBA lockout. But I had to look deeper into the issue for my own reasons. It’s sort of emotional for me honestly. I look forward to the fall because I know the NBA season will be my pastime for the season, even though I work about 60 hours a week. Despite my personal feelings about it, I am now wondering how the NBA lockout affects the US economy. Or is the NBA being affected by the recession? Let’s investigate….
1). The NBA reported $3.8 billion in revenue during the 2010-2011 season and 57% of this figure amount to player compensation ($2.1 billion). The average salary for an NBA player was roughly $5 million dollars.
2). The NBA lost $650 million over the last two seasons. But its overall operating income (revenue minus players’ salaries, etc.) was $183 million dollars according to Forbes.
3).The owners want a 50-50 split of revenue. The players do not.
4).During an 82- game season, approximately 1.4 million spectators attend NBA games.
1). The City of Memphis is projected to lose $10.8 million dollars if a season-long lockout occurs. This will cause the city to default on its loan payments for the FedEx Forum. The revenue from the franchise covers these payments. The Grizzlies generate $233 million annually.
2). Being that the season is now fragmented, the $4.2 billion revenue that was expected to be generated will not occur. On a per game basis, the league could have earned $1.7 million each game. Each spectator represents $2,987 in revenue for the NBA.
3). The Oklahoma City Thunder generates $100 million annually for the newly establish market. The Spurs generates $95 million and the NBA All-Star Weekend in Orlando, FL was expected to generate $100 million.
4). Players will feel the effects of the lockout in November 2011 when their paychecks are nonexistent.
5). Related business sectors will experience a sharp decrease in revenues: restaurants, transportation, retail stores, hotels, etc. This will ultimately result in layoffs, and people working in these sectors will join the 14 million people already unemployed.
6). NBA fans who purchased special cable packages like NBA Season Ticket will not get their money’s worth.
Needless to say, I didn’t want to get really deep in the issues of the NBA lockout. I just wanted to see the overall economic picture. And it appears to be rather fuzzy. During an era where banks are being bailed out, corporations are closing their doors for good, and foreclosures are skyrocketing, the NBA is still attracting consumer dollars. It is as though the US as not been in a recession for nearly 3 years. The NBA’s revenue has increased steadily and would have increased another 5% if the first tip-off was not cancelled.
I seriously doubt the players and owners are discussing the economic loyalty of the fans. I understand the players have a collective bargaining agreement, and that the owners want a higher rate of return. But I wonder if the negotiations would be necessary if season ticket holders demanded a written contract that guaranteed a minimum number of games to be played? If the NBA fans staged a boycott, would the players and the owners try to reach an agreement with us?
My solution is the owners should have taken the 46%. The player’s associated offered a revenue split of 54-46 instead of the current 57-43 split. The owners should have accepted it. The split could have been renegotiated in a couple of years or so. It is highly likely this issue will resurface again. I truly believe the owners want an even split to offset to their recent losses. In my opinion, the NBA owners were supposed to lose money during this time: it’s called a recession for a reason. The entire U.S. has been experiencing losses for a while now, every industry in U.S. is supposed to feel the effects in some fashion. For some reason, both sides are missing the point that some revenue is far better than no revenue.
And to think, I won’t get to watch basketball on Thanksgiving or Christmas because of someone’s bad business decisions.
How do you feel?
Post a comment at www.consulteclat.com on the blog itself.
Or view the note on Facebook at www.facebook.com/ConsultEclat in the Notes Tab.
Now that I have found a safe haven for my extra cash, I feel much better. However, I am asking myself: “What am I keeping the ‘leftover’ money for exactly?” My emergency fund was depleted a year ago. I have to start replenishing right away. The rule of thumb is to save 3 to 6 months of your minimum bill payments. I will also like to add my deductibles for my auto and renter’s insurance to this amount. So that brings my total to a whopping $5,500. Also, I am planning for two major vacations and one mini-vacation. That another $2500! Where I am going to get the money for all of this?!?!
Recently, I posted an article on Facebook called Save—or Earn--$1,000 by the Holidays. With Christmas is less than 90 days away, I would not be able to make this happen. I am on track to have 2 credit cards paid off by the end of this year. However, I can possibly make this happen by January, when my first trip is planned for. And I need to build up some fun money. So maybe some of the tips in the article will help? I will apply some of them to see if I can scare up some extra cash.
Let’s start with the savings tips:
1). Adjust my tax withholding? - At the beginning of the year, I estimated to have income tax liabilities of $5,160 (federal) and $3,408 (state). So I have a fixed amount of $357 in taxes from the wages from my first job each pay period no matter how much I earn in gross pay. I only felt comfortable doing this because my earnings usually do not fluctuate throughout the year. So is there extra money to be found? According to the withholder calculator at IRS.gov, I have would have an over payment of $637 when I file in 2012. So if I change my withholding and put the funds in my new Orange Savings I could save a total of $656 ($637 plus 1.1% interest for 3 months). But I will more than likely wait until December to see if I am fully paid up before capitalizing on the extra funds.
2). Ditch cable? - I would love to stream through Hulu.com or Netflix. But I made the dumb decision of signing a two-year contract. I called my cable company to see if I could downgrade at least. I swore I heard the service agent snicker when she said no. It would have cost me nearly three months’ worth of digital cable service to end the contract ($350). Seriously. Lesson learned: never make a long-term commitment to service provider: cell, cable, internet, etc. I also loved when the conversation was wrapping up, the agent tried to sell me more services! I had the last laugh in that situation.
3). Increase my deductible on my auto insurance? - The savings are not even worth it in my case. I recently just switched both my auto and renter’s insurance from Progressive to Geico. Geico offered me lower monthly rates and my deductibles were cut in half. I currently pay less than $100 for my auto and renter’s insurance combined. If I doubled my deductibles today, I would save $52.60 over a 6-month period, which is $8.77 each month. This does not even offset the additional $750 that would have to be added to my emergency fund goal… Next!
4). Eliminate Bank Fees? - I actually do not believe in paying for my own money. Therefore, I do not use ATMs that charge fees or engage in debit card transactions that cost money. Furthermore, I do not hold accounts with any financial institution that charges monthly fees. Why should have to help them make extra money? They certainly do not help me earn any of my wages. I do business with local banks and credit unions, as their interest rates are better and service fees are typically less expensive. Also, most of my banking is done online…no paper + no person-to-person contact= low or no banking fees. No extra funds to be found here.
Now, can I earn any addition income based on the article?
1). Sell precious metal possessions? - I do not have pieces of silver flatware or dinnerware. Nor do I have gold jewelry. But I do have sterling silver jewelry I don’t wear. According to a scrap gold calculator, I could make an extra $23 for 5 ounces of silver. But I would want an appraisal in person. I don’t trust mail-in offers.
2). Get paid for my opinion? - The article claims you can earn up to $200 per focus group with Delve. Before you sign up, there is a disclosure page for consumer members. Everything appeared to be standard. However, there are some points that stood out. Delve states “Members of our database have agreed to let us contact them from time to time at their primary e-mail address or call them at home, to ask their opinions about various products and services. Some email communications are sent to request responses via email to pre-screening questions to determine qualification for market research studies. Other emails contain links to web-based pre-screening surveys for qualification for market research studies. We also ask permission to call you at WORK or on your CELL phone. By entering your WORK and/or CELL PHONE number you are giving us that permission…. The research studies at our office might involve a group discussion and/or an interview regarding your opinions on such things as advertising, packaging, or perhaps new product ideas. At other times you might be asked to test a product or take a product home and use it for a specified period of time. Those who participate by visiting our offices usually receive a monetary incentive after completion of the research study.” Basically, there is no guarantee for receiving money for your opinion. I will pass.
3). Sell my stuff? - I attempted to have a rummage sale in July. I had decent items for sale, and I generally take care of my belongings. I sent text messages to about 30 people, only 3 people showed up. I made $55 dollars. I had at least $400 worth of items to sell. I put some of the stuff on craigslist. No takers. I can research consignment shops. I found 7 shops in the Milwaukee Area. I would go to only 2, but the cost of driving to investigate and my time will probably offset any proceeds I will receive. Consignment shops generally have commission rates between 20% and 45%.
In conclusion I have the opportunity to save $637 and earn maybe $23, a total of $660. I can start my emergency savings with this or pay for one of my mini vacations. I have decided to start my emergency savings in December 2011. I already allocated funds each payday for vacation expenses.
But one thing I noticed that the article did not mention was creating multiple sources of income. I have seen this piece of advice repeatedly in various personal finance articles. I believe that it is crucial to use your natural talents and skills to your own advantage. If you don’t, somebody else will, while undervaluing your attributes. For instance, I have a knack for checking facts and figures. So, I found a part-time job in 2010 involving data entry 15 hours a week. That’s an extra $400 each month that goes toward commuting costs to the second job, savings, and some minor expenses. Also, I love writing business plans, and helping small businesses grow and start. I’ve been doing it since 2004 and I haven’t charged high service fees over the years to do it. This is why Éclat Enterprises was started. But I have to wait for a return on my investment before it becomes a stable source of income. Time for a PSA: Support small businesses!!!
Please ask a question or post a comment.
Since October 2008, I have pondered reasons as to why the recession began. Over the past 3 years, I have read numerous articles and watched various news programs, each claiming to thoroughly explain the real reason for the recession. The housing market was often fingered as the blame; with its sub-prime mortgages and “no-doc”loans. However, I do not think it was the back-alley practices or suspicious activities of the real estate market that tanked our economy. I truly it believe it is our good old attitude in the USA of “My credit limit or score says I can afford it”. I only feel this way after reading an article provided by Investopedia’s Financial Edge on Twitter called “Why Today's 'Recession' Tops The Great Depression”. Based on the information in the article, our nation should have struggled more than our predecessors did during the 1930s. The article is laced with a lot of financial jargon. Here are the major comparison points of the article:
“1). The nation’s debt: During the onset of the Great Depression (June 1929), the national debt was $17 billion, which of only 16% of our gross national product (GNP can be viewed as the net worth of the US). Also, there were no significant interest payments. As a nation, we only incurred debt during wartime, and promptly paid our bills during peacetime. The current debt level is near $15 trillion, of which $434 billion represents interest payments. In 2010, our gross national product was almost $15 trillion. 4.5 billion of our debt is serviced by foreign nations, over half of this amount is owned by China and Japan.
2). The nation’s spending: Programs like Social Security and Medicare are tremendously underfunded. Another $62 trillion dollars, in addition to the outstanding $15 trillion in debt, is needed to properly fund these programs. This is calculated to be approximately $528,000 per household. These figures are expected to increase as baby boomers retire. During the Great Depression, these programs didn’t even exist.
3). The workforce: Unemployment was calculated differently during the Depression when compared to the current formula used today. But the overall gist is that unemployment levels higher if today’s numbers were recalculated. As of August 2011, unemployment was at 9.1%.
4). The real estate market: Average home prices dropped 31% during the Depression, compared to a 33% decrease in the beginning of 2011.
5). The economy: Due to the deficit of $15 trillion, caused by the government overspending funds, our gross domestic product was overstated (GDP is similar a person’s gross wages from their job). If the deficit was included in this calculation, the US has not experienced GDP growth since World War II.”
The author goes on to say that there were some historical and other economic events impacted our current financial state. I agree with him to a certain extent. It is true that the government’s effort to spend its way out of a deficit was not the best decision. By doing so, a false sense of hope and security was created. Please read the full article at: http://financialedge.investopedia.com/financial-edge/0911/Why-Todays-
My question is: Why did we buy into it, literally? Our own government is basically maxed out, the deficit equal the total output of all US based firms. And still, “overall consumer credit levels increased by 6% in July 2011”, according to the Federal Reserve.“In 2010, consumer debt amount to $2.4 trillion, or $7,800 for every US resident…These figures do not take into account mortgages. Typical, credit card debt accounts for one-third of all consumer debt, while installment loans (student, automobile, boat, etc.). comprise the other 67%. As of December 2010, the average homeowner spent 15.27% of their disposable income to pay creditors, while renters spent23.99%.”(http://www.money-zine.com/Financial-Planning/Debt-Consolidation/Consumer-Debt-Statistics/). In an economic letter posted by the Federal Reserve Bank of San Francisco, it states that “One of the striking features of the U.S. economic downturn that started in 2007 is that it was preceded by the largest increase in household debt in recent history (http://www.frbsf.org/publications/economics/letter/2011/el2011-02.html).”
I can find so much more information that proves that we, as nation, continued to buy everything we could get our hands on…with credit. It is true that the real estate market crash prompted the recession. However, we as consumers added fuel to the fire.
Now I am more motivated to become debt free because now I understand I am the only one responsible for my financial future.
"Putting My Money Where My Mouth Is" is a journal about real life experiences and concerns of Jéneen R. Perkins. The purpose of the blog is to exhibit the real life challenges and answer the tough questions posed by the concepts of business, entrepreneurship and money.