HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
The first edition of my book The Physician’s Guide to Investing: A Practical Approach to Building Wealth went to press in late 2004 and appeared in print the following year. My comments pre-dated and accurately summed up why the real estate bubble fell apart over the next several years.
“Today, collateral is often not required…I feel banks are far too lenient in their lending practices. Part of the problem is that the bankers are not lending their own money. They just do the paperwork, sell the loan and take the fees. It is then someone else’s problem if it cannot be repaid. Considering that a significant percentage of mortgages are sold to Fannie Mae (FNM) and Federal Home Loan Mortgage (FRE), the problem is now everyone’s”.
No doubt many borrowers took on debt in their hearts knew they could never pay off. But the real problem was the lenders, the bankers. They were the ones who were supposed to impose discipline, and they abrogated their responsibility. Several of those old, responsible bankers subscribe to this letter; people who knew how to say “No!” In bygone times, banks loaned money from their own deposits and capital, essentially directly out of their own pocket. This made them very careful; they had no intention of loaning money to someone who couldn’t pay it back. The now old saying was you only loaned money to people who didn’t need it. More recently the banks began to loan money to people who really did need it, and look what happened. As Gomer Pyle would say “Surprise, surprise, surprise”, they couldn’t pay it back.
What makes me think about this is that I just finished The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis (Kosman, Penguin Group). I suggest you purchase this book, especially if you or a close relative work for a company owned by a private equity group (private equity employs about 20% of private sector workers in the US), such as Kohlberg Kravis Roberts (KKR), the Carlyle Group, Bain Capital, Cerberus, etc.
Kosman’s thesis is that private equity, really just leveraged-buyout firms by a more socially acceptable name, are out to enrich themselves and only themselves, and they do it with other people’s money. For example, say private equity buys a company. They put up 20%, maybe 5% of which is their’s, 15% has been raised from large investors (such as pension funds, endowments, etc.) and the other 80% is raised by the acquired company borrowing money to buy itself. The private equity firm then charges the company management fees and often declares a large dividend so that in a very short period of time their initial investment has been recouped (They have no “skin in the game”, they are now playing with other people’s money).
Kosman feels private equity rarely invests for the long-term; their goal is a quick profit. Jobs are often slashed and the company is deprived of financial and human capital. Financial results are “dressed up” so the company can be quickly re-sold for a profit.
One would logically question 1) Why a business that is doing fine takes on debt to buy itself and pay the people who just bought them money to do it and 2) Why the banks would loan money to saddle a company with such onerous amounts of debt while the owners (private equity) are taking money out to pay themselves dividends and management fees?
The reason is the same reason that the real estate bubble finally fell apart: the banks just take the fees from originating the loans and then sell them, the loans are no longer on their books. The banks are quite aware that private equity is so large that if they balk providing financing they will lose future, quite lucrative, business.
Kosman’s sub-title tells the story; private equity, using other people’s money, borrowed from banks, lending other people’s money, will cause the next great credit crisis.
The principle of Other People’s Money applies to all of your investments; beware of any investment where others do not have a significant stake. Their interests may not be the same as yours; they could just walk if things get tough, leaving you holding the bag.
RMD
CNN.Money 4/3/10. Headline: “Smartest ways to spend your tax refund”. Their very first suggestion: Pay down debt.
RMD comment: If anyone ever asks you what is the best investment you can ever make, tell them you can never go wrong paying down debt.
Say you are paying a note with 7% interest and you believe you can generate a 10% return on your money. What is the return if you pay this off early? Is it 7%? Is it 10%? No. I submit it is 17%. One dollar minus 7% interest =93 cents. One dollar plus 10% return=$1.07. Ninety three cents vs. $1.07=17% difference. And your financial situation is more stable because of less debt.
Barron’s 4/5/10. The Electronic Investor column notes “You should consider an online-only lender or credit union in light of the mind-boggling number of fees banks charge these days”. They profile FindABetterBank, http://www.findabetterbank.com They note the website maintains a comprehensive and growing database of fees and services at 53,000 branch locations in 11,000 US cities and towns, which lets you quickly compare institutions near you.
RMD comment: The Internet is the greatest force in the world to maintain our freedom because it facilitates the dissemination of knowledge. It is no surprise that the Chinese are cracking down on Google. I don’t know, but I would be quite surprised if there were an Internet in North Korea.
Since I read Bill Bryson’s book The Mother Tongue: English & How it Got That Way (Morrow, 1990), I have been fascinated with palindromes, something that is the same backwards and forwards. Bob, mom, and xanax are palindromes. Palindromes have been written that are pages long, but are just gibberish.
One of the most famous is “A man, a plan, a canal, Panama”.
But my favorite is the first words spoken by man to woman in the Garden on Eden: “Madam, I’m Adam”.
There are also 2D palindromes, word squares where every column and row reads a word in both directions.
S-T-E-P
T-I-M-E
E-M-I-T
P-E-T-S
I apologize for the recent difficulty in sending out the newsletters. I use Delta Systems here in Columbia, and have not been happy with the service. I assure you it will improve.
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