[DaCounselor]

I think we are all very interested in seeing the criteria set by the soon-to-be-created govt. fund with respect to not only what they will purchase but also how they will manage it and ultimately dispose of it. I anticipate that the starting criteria on all fronts will change as the buying/managing/disposing process moves along. I don’t know what parameters they will begin with but they very well may end up with a sweeping and immediate mark-to-market action.

We are looking at a huge number of potential defaults in the pipeline. To the extent that the govt. fund is going to purchase souring mortgages in vast quantities, I can envision an immediate principal writedown to something actually below market value, with repayment terms modified into a very attractive 30 yr fixed rate. If the current owner (who is in default) can make the new payment, they keep the home. Essentially, I think we could very well see a situation where the govt. fund writes down principal/interest rate regardless of ability to pay more.

Of course this creates a moral hazard and will lead to more ruthless defaults from those with ability but I think the govt. has already served notice that it is willing to pick its poison. Is the overall economic impact worse if they allow ruthless defaults to run their course in the private sector or is it worse if they just buy the loans and write down the balances regardless of ability? That is the question. I certainly think it’s a possibility that they will determine that the former is the case and therefore they will go the purchase/write down route and keep those people in the home.

[DaCounselor]

I think we are all very interested in seeing the criteria set by the soon-to-be-created govt. fund with respect to not only what they will purchase but also how they will manage it and ultimately dispose of it. I anticipate that the starting criteria on all fronts will change as the buying/managing/disposing process moves along. I don’t know what parameters they will begin with but they very well may end up with a sweeping and immediate mark-to-market action.

We are looking at a huge number of potential defaults in the pipeline. To the extent that the govt. fund is going to purchase souring mortgages in vast quantities, I can envision an immediate principal writedown to something actually below market value, with repayment terms modified into a very attractive 30 yr fixed rate. If the current owner (who is in default) can make the new payment, they keep the home. Essentially, I think we could very well see a situation where the govt. fund writes down principal/interest rate regardless of ability to pay more.

Of course this creates a moral hazard and will lead to more ruthless defaults from those with ability but I think the govt. has already served notice that it is willing to pick its poison. Is the overall economic impact worse if they allow ruthless defaults to run their course in the private sector or is it worse if they just buy the loans and write down the balances regardless of ability? That is the question. I certainly think it’s a possibility that they will determine that the former is the case and therefore they will go the purchase/write down route and keep those people in the home.

[DaCounselor]

I think we are all very interested in seeing the criteria set by the soon-to-be-created govt. fund with respect to not only what they will purchase but also how they will manage it and ultimately dispose of it. I anticipate that the starting criteria on all fronts will change as the buying/managing/disposing process moves along. I don’t know what parameters they will begin with but they very well may end up with a sweeping and immediate mark-to-market action.

We are looking at a huge number of potential defaults in the pipeline. To the extent that the govt. fund is going to purchase souring mortgages in vast quantities, I can envision an immediate principal writedown to something actually below market value, with repayment terms modified into a very attractive 30 yr fixed rate. If the current owner (who is in default) can make the new payment, they keep the home. Essentially, I think we could very well see a situation where the govt. fund writes down principal/interest rate regardless of ability to pay more.

Of course this creates a moral hazard and will lead to more ruthless defaults from those with ability but I think the govt. has already served notice that it is willing to pick its poison. Is the overall economic impact worse if they allow ruthless defaults to run their course in the private sector or is it worse if they just buy the loans and write down the balances regardless of ability? That is the question. I certainly think it’s a possibility that they will determine that the former is the case and therefore they will go the purchase/write down route and keep those people in the home.

[DaCounselor]

I think we are all very interested in seeing the criteria set by the soon-to-be-created govt. fund with respect to not only what they will purchase but also how they will manage it and ultimately dispose of it. I anticipate that the starting criteria on all fronts will change as the buying/managing/disposing process moves along. I don’t know what parameters they will begin with but they very well may end up with a sweeping and immediate mark-to-market action.

We are looking at a huge number of potential defaults in the pipeline. To the extent that the govt. fund is going to purchase souring mortgages in vast quantities, I can envision an immediate principal writedown to something actually below market value, with repayment terms modified into a very attractive 30 yr fixed rate. If the current owner (who is in default) can make the new payment, they keep the home. Essentially, I think we could very well see a situation where the govt. fund writes down principal/interest rate regardless of ability to pay more.

Of course this creates a moral hazard and will lead to more ruthless defaults from those with ability but I think the govt. has already served notice that it is willing to pick its poison. Is the overall economic impact worse if they allow ruthless defaults to run their course in the private sector or is it worse if they just buy the loans and write down the balances regardless of ability? That is the question. I certainly think it’s a possibility that they will determine that the former is the case and therefore they will go the purchase/write down route and keep those people in the home.

[DaCounselor]

“You’re right DaCounselor and tax implications are worth considering; however, when you start having enough of a nest egg management fees and market fluctuations can wipe out any tax benefit.”
______________________________

There certainly are a number of variables but very generally speaking in the world of 401K’s the management fee premium you may pay will be easily trumped by the tax savings. For instance and using my earlier hypothetical, if you are deferring taxes on $10.5K/year (= $3K/year) and your management premium is 1% over an IRA, it would take about 30 years for your management premium to equal the initial tax savings, and that is assuming a 0% return on your investment, which is highly unlikely – you’re going to make more over the long haul – probably considerably more than 0%. Hard to see how a management fee premium is going to outweigh positive tax implications. As for the effect of market fluctuations – who knows what they will be – how can you figure that out?

Bottom line is there are more uncertainties than certainties and you can debate the uncertainties til the cows come home and never get anywhere. As for the certainties, again using my example above it is an absolute certainty that an extra $3K is going to get invested instead of going to Uncle Sam if you go with the 401K. I look at that as an instantaneous 50% return (instead of getting around $7K after taxes, I get $10.5K to invest). As Emeril says – BAM! – 50%. It’s also an absolute certainty that you will have an opportunity to have that extra money work for you in the market.

I absolutely respect everyone’s own choice to do what they will with their money but to me maxing out a 401K is a no-brainer.

[DaCounselor]

“You’re right DaCounselor and tax implications are worth considering; however, when you start having enough of a nest egg management fees and market fluctuations can wipe out any tax benefit.”
______________________________

There certainly are a number of variables but very generally speaking in the world of 401K’s the management fee premium you may pay will be easily trumped by the tax savings. For instance and using my earlier hypothetical, if you are deferring taxes on $10.5K/year (= $3K/year) and your management premium is 1% over an IRA, it would take about 30 years for your management premium to equal the initial tax savings, and that is assuming a 0% return on your investment, which is highly unlikely – you’re going to make more over the long haul – probably considerably more than 0%. Hard to see how a management fee premium is going to outweigh positive tax implications. As for the effect of market fluctuations – who knows what they will be – how can you figure that out?

Bottom line is there are more uncertainties than certainties and you can debate the uncertainties til the cows come home and never get anywhere. As for the certainties, again using my example above it is an absolute certainty that an extra $3K is going to get invested instead of going to Uncle Sam if you go with the 401K. I look at that as an instantaneous 50% return (instead of getting around $7K after taxes, I get $10.5K to invest). As Emeril says – BAM! – 50%. It’s also an absolute certainty that you will have an opportunity to have that extra money work for you in the market.

I absolutely respect everyone’s own choice to do what they will with their money but to me maxing out a 401K is a no-brainer.

[DaCounselor]

“You’re right DaCounselor and tax implications are worth considering; however, when you start having enough of a nest egg management fees and market fluctuations can wipe out any tax benefit.”
______________________________

There certainly are a number of variables but very generally speaking in the world of 401K’s the management fee premium you may pay will be easily trumped by the tax savings. For instance and using my earlier hypothetical, if you are deferring taxes on $10.5K/year (= $3K/year) and your management premium is 1% over an IRA, it would take about 30 years for your management premium to equal the initial tax savings, and that is assuming a 0% return on your investment, which is highly unlikely – you’re going to make more over the long haul – probably considerably more than 0%. Hard to see how a management fee premium is going to outweigh positive tax implications. As for the effect of market fluctuations – who knows what they will be – how can you figure that out?

Bottom line is there are more uncertainties than certainties and you can debate the uncertainties til the cows come home and never get anywhere. As for the certainties, again using my example above it is an absolute certainty that an extra $3K is going to get invested instead of going to Uncle Sam if you go with the 401K. I look at that as an instantaneous 50% return (instead of getting around $7K after taxes, I get $10.5K to invest). As Emeril says – BAM! – 50%. It’s also an absolute certainty that you will have an opportunity to have that extra money work for you in the market.

I absolutely respect everyone’s own choice to do what they will with their money but to me maxing out a 401K is a no-brainer.

[DaCounselor]

“You’re right DaCounselor and tax implications are worth considering; however, when you start having enough of a nest egg management fees and market fluctuations can wipe out any tax benefit.”
______________________________

There certainly are a number of variables but very generally speaking in the world of 401K’s the management fee premium you may pay will be easily trumped by the tax savings. For instance and using my earlier hypothetical, if you are deferring taxes on $10.5K/year (= $3K/year) and your management premium is 1% over an IRA, it would take about 30 years for your management premium to equal the initial tax savings, and that is assuming a 0% return on your investment, which is highly unlikely – you’re going to make more over the long haul – probably considerably more than 0%. Hard to see how a management fee premium is going to outweigh positive tax implications. As for the effect of market fluctuations – who knows what they will be – how can you figure that out?

Bottom line is there are more uncertainties than certainties and you can debate the uncertainties til the cows come home and never get anywhere. As for the certainties, again using my example above it is an absolute certainty that an extra $3K is going to get invested instead of going to Uncle Sam if you go with the 401K. I look at that as an instantaneous 50% return (instead of getting around $7K after taxes, I get $10.5K to invest). As Emeril says – BAM! – 50%. It’s also an absolute certainty that you will have an opportunity to have that extra money work for you in the market.

I absolutely respect everyone’s own choice to do what they will with their money but to me maxing out a 401K is a no-brainer.

[DaCounselor]

“You’re right DaCounselor and tax implications are worth considering; however, when you start having enough of a nest egg management fees and market fluctuations can wipe out any tax benefit.”
______________________________

There certainly are a number of variables but very generally speaking in the world of 401K’s the management fee premium you may pay will be easily trumped by the tax savings. For instance and using my earlier hypothetical, if you are deferring taxes on $10.5K/year (= $3K/year) and your management premium is 1% over an IRA, it would take about 30 years for your management premium to equal the initial tax savings, and that is assuming a 0% return on your investment, which is highly unlikely – you’re going to make more over the long haul – probably considerably more than 0%. Hard to see how a management fee premium is going to outweigh positive tax implications. As for the effect of market fluctuations – who knows what they will be – how can you figure that out?

Bottom line is there are more uncertainties than certainties and you can debate the uncertainties til the cows come home and never get anywhere. As for the certainties, again using my example above it is an absolute certainty that an extra $3K is going to get invested instead of going to Uncle Sam if you go with the 401K. I look at that as an instantaneous 50% return (instead of getting around $7K after taxes, I get $10.5K to invest). As Emeril says – BAM! – 50%. It’s also an absolute certainty that you will have an opportunity to have that extra money work for you in the market.

I absolutely respect everyone’s own choice to do what they will with their money but to me maxing out a 401K is a no-brainer.

[DaCounselor]

Why would anyone want to forego the immediate tax benefit of removing $15.5 from their taxable income via a fully-funded 401K? If you go it alone with an IRA you are only looking at a $5K investment annually (in terms of a tax-deferred investment), so you immediately pay taxes on $10.5K by not going with a 401K. Assume for the sake of argument a 30% tax implication, there goes over $3K every year to Uncle Sam. Sorry, but I would rather have that money working for me for the next 10, 20, 30 years – whatever the time line is. Yes, you ultimately have to pay taxes on withdrawals down the road, but given the choice I would much rather address taxation issues then than now.

The market has blown up plenty of times over the past 20 years. Black Monday, the Dot Com crash, the post 9/11 crash amongst the worst. I think sitting out during these types of downturns results in you missing out on tremendous opportunities to accumulate. I think you should be fully invested and maxing out a 401K throughout the current downturn and accumulating the whole way through. If the market tanks even more – fantastic, you are averaging down even further.

To the extent available I would be in index funds or funds that are as close to an index as possible. Of course there are fees that will be a drag on your net but to forego the huge tax benefit of not funding a 401K is a much bigger net loss in my opinion.

[DaCounselor]

Why would anyone want to forego the immediate tax benefit of removing $15.5 from their taxable income via a fully-funded 401K? If you go it alone with an IRA you are only looking at a $5K investment annually (in terms of a tax-deferred investment), so you immediately pay taxes on $10.5K by not going with a 401K. Assume for the sake of argument a 30% tax implication, there goes over $3K every year to Uncle Sam. Sorry, but I would rather have that money working for me for the next 10, 20, 30 years – whatever the time line is. Yes, you ultimately have to pay taxes on withdrawals down the road, but given the choice I would much rather address taxation issues then than now.

The market has blown up plenty of times over the past 20 years. Black Monday, the Dot Com crash, the post 9/11 crash amongst the worst. I think sitting out during these types of downturns results in you missing out on tremendous opportunities to accumulate. I think you should be fully invested and maxing out a 401K throughout the current downturn and accumulating the whole way through. If the market tanks even more – fantastic, you are averaging down even further.

To the extent available I would be in index funds or funds that are as close to an index as possible. Of course there are fees that will be a drag on your net but to forego the huge tax benefit of not funding a 401K is a much bigger net loss in my opinion.

[DaCounselor]

Why would anyone want to forego the immediate tax benefit of removing $15.5 from their taxable income via a fully-funded 401K? If you go it alone with an IRA you are only looking at a $5K investment annually (in terms of a tax-deferred investment), so you immediately pay taxes on $10.5K by not going with a 401K. Assume for the sake of argument a 30% tax implication, there goes over $3K every year to Uncle Sam. Sorry, but I would rather have that money working for me for the next 10, 20, 30 years – whatever the time line is. Yes, you ultimately have to pay taxes on withdrawals down the road, but given the choice I would much rather address taxation issues then than now.

The market has blown up plenty of times over the past 20 years. Black Monday, the Dot Com crash, the post 9/11 crash amongst the worst. I think sitting out during these types of downturns results in you missing out on tremendous opportunities to accumulate. I think you should be fully invested and maxing out a 401K throughout the current downturn and accumulating the whole way through. If the market tanks even more – fantastic, you are averaging down even further.

To the extent available I would be in index funds or funds that are as close to an index as possible. Of course there are fees that will be a drag on your net but to forego the huge tax benefit of not funding a 401K is a much bigger net loss in my opinion.

[DaCounselor]

Why would anyone want to forego the immediate tax benefit of removing $15.5 from their taxable income via a fully-funded 401K? If you go it alone with an IRA you are only looking at a $5K investment annually (in terms of a tax-deferred investment), so you immediately pay taxes on $10.5K by not going with a 401K. Assume for the sake of argument a 30% tax implication, there goes over $3K every year to Uncle Sam. Sorry, but I would rather have that money working for me for the next 10, 20, 30 years – whatever the time line is. Yes, you ultimately have to pay taxes on withdrawals down the road, but given the choice I would much rather address taxation issues then than now.

The market has blown up plenty of times over the past 20 years. Black Monday, the Dot Com crash, the post 9/11 crash amongst the worst. I think sitting out during these types of downturns results in you missing out on tremendous opportunities to accumulate. I think you should be fully invested and maxing out a 401K throughout the current downturn and accumulating the whole way through. If the market tanks even more – fantastic, you are averaging down even further.

To the extent available I would be in index funds or funds that are as close to an index as possible. Of course there are fees that will be a drag on your net but to forego the huge tax benefit of not funding a 401K is a much bigger net loss in my opinion.

[DaCounselor]

Why would anyone want to forego the immediate tax benefit of removing $15.5 from their taxable income via a fully-funded 401K? If you go it alone with an IRA you are only looking at a $5K investment annually (in terms of a tax-deferred investment), so you immediately pay taxes on $10.5K by not going with a 401K. Assume for the sake of argument a 30% tax implication, there goes over $3K every year to Uncle Sam. Sorry, but I would rather have that money working for me for the next 10, 20, 30 years – whatever the time line is. Yes, you ultimately have to pay taxes on withdrawals down the road, but given the choice I would much rather address taxation issues then than now.

The market has blown up plenty of times over the past 20 years. Black Monday, the Dot Com crash, the post 9/11 crash amongst the worst. I think sitting out during these types of downturns results in you missing out on tremendous opportunities to accumulate. I think you should be fully invested and maxing out a 401K throughout the current downturn and accumulating the whole way through. If the market tanks even more – fantastic, you are averaging down even further.

To the extent available I would be in index funds or funds that are as close to an index as possible. Of course there are fees that will be a drag on your net but to forego the huge tax benefit of not funding a 401K is a much bigger net loss in my opinion.

[DaCounselor]

davelj you pretty much have it down. AIG has a ton of diversified assets, but the important question is what could those assets bring in a quick sale to boost AIG’s immediate liquidity problems. What their books say they are worth and even what third party estimates of asset values are do not answer the specific question of immediate valuation by prospective purchasers. In fact, we are indeed given a clue as to valuation in relation to risk assumption by the lack of scavenging of AIG’s assets, which speaks volumes.

No offense to anyone but I do business with AIG and I can assure that things are not “fine”. This massive beast has been ravaged in the market and I certainly would not characterize their loss of 95% of their market value as an indication that things are fine. They have diversified assets but again they must be sold to raise funds and where are the buyers? I do think AIG will survive, with assistance, but things are not fine.

As for a FFR cut, I still believe we will end up at 1.5% before the Fed begins tightening but I’m not so sure we will see a cut this year. The typical strategy has been to mix jawboning with some actual tangible intervention to keep things propped us as best they can. I do think we will see things get dire to point where the jawboning and intervention will not be enough to stave off a capitulation spiral, which is when the cuts get thrown at the problem. I quess we’ll see. No question there’s going to be alot more bad news coming.

[Author]

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