Even if you haven’t been watching the news, you’ve heard about what’s going on out there on Wall Street. No doubt you heard that Monday afternoon The Dow (an invisible grouping of 30 companies who each have $7+ billion in annual revenues—Microsoft, Verizon, SBC Global, etc.) dropped the most it has ever dropped. You’ve also heard that the $700 billion bailout package went before Congress and was not passed. If you’re breathing on planet earth, you know something about the sub-prime mortgage mess in the USA.
Like you, I go to the gym in the morning and see the headlines splashed across the tv screens—I observe the people around me running a little slower, and elipticisizng (is that a word?) with less vigor as we watch the unfolding of an historic financial disaster. When a hurricane happens, everyone understands that a big, nasty storm blows through one of our cities, that lives are in danger, and real estate is going to be damaged. We understand that kind of disaster. I’m not so sure that we understand this kind of disaster.
Everybody has been calling, texting, and emailing me for my take on what’s going on out there. (Now y’all made me blush!) Most of us really don’t understand this kind of disaster we’re looking at, and what it means for us and what on earth it has to do with the Direct Selling business you’re building. So I’m going to unpack it in English for you! You already know that our passion here at Prosperity is to take all things financial, and turn them into something that makes sense to your worldview, the way you do business, and the way you leverage your greatest asset (your ability to generate income). We are big believers in capitalism and we believe in the Direct Selling businesses.
I’m not an economist, but I think that as professionals, we need to be empowered by knowledge so we can act appropriately. With that said, let’s dive in…
The three minute summary of the Sub-prime, Fannie Mae, AIG, & WaMu Mess
In Summer 07, there was an undercurrent of disaster brewing in the financial markets. The financial markets are where money is sold—literally. How can you sell money?
It starts with the Federal Reserve (central bank for USA) saying to big banks, “Hey, I’m going to lend you money…but you’ll have to pay it back at prime of 2%. So then those banks take the loan, and re-loan it with additional interest points (a point is 1%). They loan money to businesses as investment capital, to home owners, issue credit cards, give car loans, etc. Banks started to get a bit greedy—especially in 2004- 2006 when the housing market was booming. The Democrat Party spearheaded a movement to have 70% home ownership among us. With interest rates at an all time low, this seemed doable and banks would profit huge. The pervasive attitude was that real estate always appreciates. They started to offer mortgages to people who had bad credit, no credit, and sketchy income sources. Insult to injury—they gave bigger loans to people than they could afford (which artificially overpriced the value of homes). After all, if real estate “always appreciates” there was little risk. Banks were blinded by greed.
With zillions of dollars worth of IOU’s (mostly mortgages) on the books, financial institutions started to leverage—a sexy way to say speculation—they started to buy these things called Credit Default Swaps. They are demonic “investments” that supposedly offered insurance against a company or a pool of mortgages from defaulting. It was a get-rich-quick investment that everyone in the financial markets jumped into with both feet. AIG was the primary issuer of these pixy-dust securities (think of securities as stocks). They got in over their head, and were going to have their credit score reduced because they couldn’t pay when mortgages started going belly up. Whether you’re AIG or LeAnne Ozaine-Smith, if your credit score is pillaged, you’ll pay prohibitive interest rates to borrow money.
Enter the Government Sponsored Enterprises (GSE) of Freddie Mac and Fannie Mae (the US Postal Service is another example of a GSE). These organizations sold securities based on pools of mortgages; that’s why their called mortgage-backed securities. When folks started to default on their loans, the value of these stocks went to hell in a hand basket. The government was obligated to fix the problem because they basically own Freddie Mac and Fannie Mae. No way around it.
LeAnne’s Brief Soapbox
As a culture, it is easy to abdicate responsibility to the banks, the Fed, CEOs of businesses, predatory lenders, and Wall Street. We salivated at the American Dream, and bought more house than we could afford as if it was our inalienable right to live in a big, glorious home. Or if we didn’t buy a big home, much like banks, we leveraged our families to the hilt with Home Equity Lines of credit and continued to borrow as if the supply would never catch up with demand. We have no basis of financial responsibility and then wonder how we end up in hot water? Seems pretty obvious to me.
The $700 Billion Bail Out Bill—what the heck is that supposed to do?
It was the Government’s way of issuing a line of credit to the Treasury so that it could lend money to the financial markets in exchange for “warrants” in those companies. Think of warrants as more than IOU, it’s a legal stake in that company. They were trying to help companies dump their positions in stinky mortgage-backed securities. Also, it should be noted that Wall Street firms would not have directly received the funds (thus the whole hype about executives banking off of it was hog wash). The bill would have helped temporarily ward off a Firm’s creditors.
I think this quote is extremely profound in an election year:
“Of the 38 incumbent members of Congress from both parties who are considered vulnerable in the coming election, 30 voted against the bill…” (Without Bailout Plan, What will the Cost Be, Time Magazine, September 30th, 2008)
What in the heck does all this have to do with your business?
Everything. Since 2003 my team and I have been loud-mouth advocates in the business community of financial responsibility in business. We’ve exhorted you to manage your business with financial integrity so you can have financial peace in moments of history like this. And we’ve made it a no-brainer to manage your business finances with Prosperity—found out www.spendonpurpose.com
Never before has it been more important to take all that you envision for being financially independent and make it reality. Here are some practical tips to help you embrace capitalism, your God-given potential, and to bolster up your confidence.
1. Limit how much news you watch. Getting emotionally wrapped up in the things the talking heads on TV are saying is not going to positively move you to action. That doesn’t mean you turn a blind eye, it means that you watch, and purposefully move into action, not slip into inaction.
2. Stop pretending that its 2005. Credit isn’t cheap, and big shocker, you have to pay it back! The average business credit card carries an average 17% interest rate on it… regardless of the points, miles, or cash back bonus offered, it’s a debt and it’s no secret that if you use a credit card, you’ll spend an average of 30% more than you planned to. If you borrow money, you’re going to pay it back with interest, period. The “loose” money lending that happened between 2004-2006 is gone. This means that credit card companies are going to make it harder to borrow, they’re going to try to recover their losses, and they aren’t at all interested in providing you a break on your interest rates. Don’t lie to yourself and justify purchases just because the interest is deductible; make sure it’s a solid business decision, especially if you’re using credit to make the purchase.
3. Go Lean, especially if you carry inventory. Your inventory is valuable, but it has a shelf life. Your inventory is an “investment”, but it isn’t making you money just sitting there unsold. Unsold inventory is an asset, but often a depreciating one. It’s time to skim the fat off your business expenses! Get intentional about every dollar you spend, because chances are, you may not earn as many as you once did in a looser economy.
4. Spend on purpose. Get rid of the thinking that just because it’s a “write off” that it’s a good business decision. Now, more than ever, it’s time to become fiscally conservative. When you start running your business from cash, for a profit you will begin to recession-proof your business. Every single thing you spend money on needs to be re-evaluated for return. If it directly or indirectly ain’t increasing your profits, don’t buy it.
5. Think and act like a business person. The excuse you’ve given yourself that you’ll float by financially by just checking your bank-balance online just doesn’t cut it in this, or any economic climate (not to mention it isn’t legal). If you’ve been sitting on the fence, or trying to find the inspiration to start using Prosperity, stop waiting. Prosperity does your books. It is the watch-dog over your profits, and helps you run your business from a place of financial integrity.
6. Don’t stop investing. Do you want to buy when things are on sale or when they’re full price? Stay the course on saving and investing. If economic climates like these aren’t further proof that you need an emergency reserve for your business and your family, I don’t know what is. On October 28th at 12 pm PST (1pMST/2pCST/3pEST) I will be teaching a live webinar called How to Recession Proof your Business. Register using this link: https://www2.gotomeeting.com/register/332369951 It will give you some great pointers on how to use your business to inject a healthy sum of money into your family’s emergency reserves (or start one).
Ignore the marketplace. Focus on the fundamentals.