Hey guys and gals, this time around we’ll be talking about IRA custodians that handle real estate transactions and if you’re unfamiliar with IRA custodians or real estate…or even both…that is no reason to be intimdated at all! It’s not only easy to work with a IRA custodian, but it’s also easy to find one as well!

Choosing the right IRA real estate custodian is an important decision.  When an IRA custodian allows real estate transactions, you have the ability to grow your retirement wealth faster than ever!

If you are new to this type of investing, you should know that there are some things that an IRA real estate custodian can do, and, of course, there are certain things that he or she cannot do.  Likewise there are certain kinds of investments that you can make and others that are prohibited.  Here, you will find information about all of these things.  First, let’s start with what your trustee or custodian is responsible for.

When an IRA custodian allows real estate transactions, he or she is responsible for all of the usual things that an account manager does, such as filing appropriate tax documents, but he also holds all deeds in his name.  The title for the deed will read like this, “Joe iLOC (Your IRA real estate custodian) Company’s name FBO (for the benefit of) John Smith’s IRA.

The reason being is because you and your retirement account are two separate legal entities.  That’s an important thing to remember, because it applies to the prohibited transactions, so I’ll come back to it.

When an IRA custodian allows real estate deals, he cannot give you advice about what to buy or when to sell.  He is a “passive” account manager, simply doing as directed by you, the account owner.

An IRA real estate custodian cannot give you legal or tax advice, other than information about prohibited transactions and the like.  So, you may still need an attorney, an estate planner, an accountant, etc.

If an IRA custodian allows real estate deals, he should be aware of the following prohibited transactions.  If you conduct deals like these within the account, you could lose your tax deferred status and pay heavily in taxes for that year, particularly if you made a profit.

A qualified retirement account cannot be used to purchase property owned by you or a disqualified person.  For example, an IRA real estate custodian cannot allow the account to be used to buy the house that you currently live in.

The “disqualified” people are you, your spouse, your children, their spouses, your parents, your grandparents, your grandchildren and your IRA real estate custodian.  So, if an IRA custodian allows real estate transactions, he must refrain from offering up a “good deal”, because it could be considered “self-dealing” and that’s against the law.

So, if your trustee can’t help you find good deals, who do you turn to?  Well, it is expected that you have the knowledge, time and experience to find the right property at the right price, but I’m sure some of you do not.

So, it’s good to know that there are some experienced investors that can help you find the right kind of deals for your retirement account.  They are willing to “take you by the hand” so to speak and show you the way.  Your IRA real estate custodian will help you in lots of ways, but you are primarily responsible for the health and wealth of your retirement fund.

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Joe Fazchas is a Real Estate investor as well as owner and founder of http://www.iLOCAdvantage.com, a company that partners with private individuals and lending corporations nationwide for the sole purpose of financing and/or rehabbing investment properties. All of which is done using a proven “turn-key” Real Estate system…The ILOC IRA.

The ILOC IRA was created in 2004 by national Real Estate speaker, author, and investor, Adam King. To learn more on how you can obtain among the highest rates of return on your IRA, 401(K), CD, or other source of private money, simply click and visit: http://www.iLOCAdvantage.com

Facing a high-profile crisis could have serious ramifications for your company for years to come. When a crisis situation arises, you will need to act right away to put your crisis management plan into full swing. Form a response team in advance of such a potential future situation and conduct the proper crisis media training.

Here are 5 tips for training your response team effectively on how to prepare for interfacing with the media in crisis situations:

Tip #1: Mobilize your media crisis response effort as soon as the crisis arises: In the era of when traditional media like TV, radio and print dominated, negative publicity about companies spread like wildfire. In today’s wired world of the Internet, viral videos and text messaging, such news literally spreads at light speed. With the ability to produce and spread news and gossip lying in the hands of the general public, it is imperative that your response team act swiftly to get out the right message about your position on the issue at hand. The history of PR is littered with companies who waited too long to respond credibly and promptly to a crisis situation and ended up paying the consequences with a damaged reputation and lost sales.

Tip #2: Understand first, respond second: It is important that your team not just fire off a knee-jerk response or quickly take an official position on a newly-released media story or viral campaign that portrays your company in a negative light. As any seasoned media veteran will tell you, perception equals reality. Stated another way, in the world of PR there is no distinction between perception and misperception. The way the public perceives a breaking story is precisely the reality that your message needs to address.

Tip #3: Get the facts: Just as it is when meeting new people, it holds true for crisis management that you only get one chance to make a first impression. The last thing you want to do when making media statements is to come across as unsure, nervous, or uninformed about the facts or about your official position on the situation. Instead, be sure to spend ample time separating the facts from the fiction about a developing crisis and how it is being spun in the media.

Tip #4: Master the art of the sound bite: Regardless of how well you control your message and choose your words in your public communications, the media will find ways to break it into sound bites that they can easily use in broadcasted news segments or quote in print. There are ways you can learn to effectively serve up these sound bites to the media so that you can better control the message that reaches the public. Remember, it is not what you say to the media but rather what they choose to report on that becomes the news. Master the art of creating effective sound bites in order to gain better control over how your message is received.

Tip #5: Practice media interviews in advance with a hands-on television crew: There is no better way to polish a skill than by actually doing it over and over again in a realistic setting. You cannot get any more realistic than actually hiring a professional television crew to interview you in preparation for a media statement. Sound like overkill? Think again. Imagine the confidence your spokesperson will feel after having rehearsed your media statement two or three times in front of an aggressive (mock) reporter while the cameras are rolling! By the time the actual media statement is made, your spokesperson will come across as cool, confident, and in control.

Preparing a crisis media training plan will significantly increase your organization’s ability to position itself in the best-possible light. The control your organization has over your message all comes down to mobilizing your team quickly, understanding current public perception about the situation, separating fact from fiction, mastering the art of the sound bite, and rehearsing in a realistic setting.

anthonyBarnum is an Austin-based PR firm that has conducted crisis response training for international, U.S., and Texas-based clients. You can contact Melissa Anthony, founder of anthonyBarnum, by visiting: http://www.anthonybarnum.com

In order to give an edge to your Australian investment and get advantageous returns on your savings, there are few establishments that offer such lucrative offers such as the world leader in finance, HSBC.

If you opt for the HSBC Online Savings Account scheme, your need to carry hard cash around with you becomes unnecessary with this HSBC banking product giving you free unlimited ATM transaction access besides combining all your products. The greatest benefit of this scheme is perhaps that you would not have to pay any charges to the bank on a monthly basis for keeping your accounts even as you enjoy a generous daily interest rate. And the good news does not stop at that your HSBC ATM transactions are free and unlimited, you also get five such free transactions with any bank’s ATM in Australia every month. The Gold winner of Money Magazine’s Best of the Best Award – Best e-Transaction Account (Bank) for the successive second year, HSBC’s Online Savings Account answers your day-to-day banking needs ideally.

However, you can also link your current bank account by HSBC Serious Saver scheme where internet banking can be done 24X7 and you get a fantastic monthly interest rate by not withdrawing your savings. Your advantage in this investment plan is that you need not keep any minimum opening or ongoing balance nor pay any monthly charges to keep accounts. The scheme’s recommendation also comes from the Money Magazine who awarded it the Bronze for 2008 Best of the Best Award – Best Online Savings Account (Bank).

There are many deals to be had when opening an Australian savings accounts, it’s just matter of searching Google and comparing the current offers.

James Trend has been writing finance articles for many years. You can find more of his work at his Australian website http://www.savings-accounts.com.au. This website offers a great selection of high interest savings accounts.

The home inspection is an essential part of any home buying process. Without a home inspection, you can never be sure what you’re getting and when buying a home that’s a lot of money to gamble on uncertainty. A home inspection ensures that there are no surprises and that you can enjoy your future home for years to come. Also most lenders will require home inspection before they will provide a loan. After all the lender has a vested interest in the home as well.

A home inspection will involve hiring a company to send a home inspector out to go through your potential home with you and thoroughly inspect everything to make sure there are no major problems that might not be obvious to the average home owner. He will go over all the wiring, plumbing, fixtures as well as the exterior of the house, the roof and the foundation to make sure everything is structurally sound.

At the same time as the home inspection it’s always a good idea to have a pest inspection to check for damaging insects such as termites or carpenter ants. A pest inspection is done separately from the home inspection by a company specializing in pest inspections. Depending on your location a pest inspection may be required by a lender before they will grant a loan.

Different states have different regulations for home inspections. So you need to be aware of what your specific state requirements are and make sure the inspector covers these areas. It’s a good idea to ask to see credentials and a professional home inspector will gladly show you any necessary certification.

It’s also best to make certain that your specific inspector has experience with your locale or region. A local home inspector will better understand conditions in your area such as damp basements, winter damage to roofing or cracks in the foundation caused by normal settling. In other words he is familiar with all the problems that may be common in your area and will know to look for them.

An average home inspection can take approximately two to four hours to complete. Be cautious if an inspector tells you that he can do a complete home inspection in less time. A thorough home inspection takes time, so don’t settle for someone that you feel might be taking shortcuts.

Many home inspectors are happy to have you accompany them on the inspection. This way they can explain in detail about the condition of the house and point out any problems to you. A walk through with the home inspector is a great time to learn about how your home works and what to look for in terms of potential trouble.

The cost of a home inspection can vary depending on the size of the house as well as a number of other factors but it is can run into several hundred dollars. This is just a necessary part of the home buying process and one that will provide much peace of mind once you move into your new home.

Cherri Fox contributes to a real estate agent directory that helps people find the best realtor from a list of pre-screened real estate agents. Find your next realtor at http://realestate.clicksmart.com

A realtor is a perfect help if you want to expedite and simplify your real estate acquisition in Miami, Florida. These individuals are quite talented and knowledgeable about the buying and selling of properties, as well as helping their clients and customers finds the perfect residential property that will fit perfectly with their requirements.

For your home acquisition, however, you need to find a realtor that offers quality service to their clients, and nothing less. Finding the right one will determine if you get a property that is worth your while or just waste precious time and money asking the help of someone that is all talk but no action.

The Qualities Of A Good Realtor

There is no such thing as a perfect realtor; but you can sure find one that is near the same level. In order to maximize your home acquisition in Miami real estate, you need to find an expert realtor that has enough experience to back his or her credibility up, and with contacts with the right person to get the whole thing done with less effort and time.

1. Licensed To Practice

A good realtor should be licensed by the state to practice their trade. Since this means that they are a member of the local group that comprises all the realtors in the area, you can be sure that they will be following the code and ethics of a good realtor on how they should treat their clients and customers with utmost respect and service.

2. Experienced In The Business

A license should not be your only basis in picking out a realtor for your Miami real estate acquisition. A good realtor has years of experience in the property buying and selling industry; as well as some good testimonies and accomplishments to back up their claim.

3. Hearing Out A Client’s Needs

Another quality of a good realtor is how they handle their clients. There are some who are only interested in selling a property that they neglect asking the needs of their clients.

A good realtor will start off the consultation hearing out the client’s requirements about the property they want to purchase in Miami. They would offer their own advice that will help the client get the best property available in the market, as well as helping out in closing the deal.

http://miamirealestateinc.com — Miami Real Estate

Vanessa A. Doctor from Jump2Top – SEO Company

The United States use to be the best at everything in the World, and now we seem to be slipping in most of our technologies, sciences, businesses and other areas, but why? Well, part of the problem is that we have lost our competitive edge. Now realize that we are in the top tier in nearly every category of human endeavor, but no longer the best at everything we do.

How can America get the competitive edge back?

First, we must play to win, try to win and teach our children how to be winners. Too often these days we are trying too hard to make sure every child is warm and fuzzy and feels like a winner. Well that might be good for kids on Prozac, but there is a big difference between feeling like a winner and being an actual winner.

Did you know at most Junior High Schools they no longer keep score in Physical Education Soccer? Why, well because it might make some students feel bad because they were on the losing team? Big deal, maybe if that happens they will try harder next time, and learn the true spirit of completion. And then maybe we can dump this “Everyone is a Winner” motif, because in reality, everyone is not a winner, and we all know it.

Some folks excel better than others in some things and others in still other activities. A lot has to do with genetics, nurture and hard work ethic. Dedication, commitment, perseverance and strength of character are important traits for our children and for our nation. If we fail to instill these qualities in our future generation, America will become second rate. Something to contemplate in 2008.

“Lance Winslow” – Online Think Tank forum board. If you have innovative thoughts and unique perspectives, come think with Lance; http://www.WorldThinkTank.net/. Lance is a guest writer for Our Spokane Magazine in Spokane, Washington

It is so beautiful to recognize that the strongest tool for your home based business opportunity is located inside yourself. It is your attitude. Do you want to do it, or do you just want to play with the idea? What a huge difference!

It is the attitude, which gives you power to go through all the obstacles of your online business opportunity will meet. And it is not the outside help, which is the key. Online home business opportunity is the business and you run it. Period.

Running a home based business opportunity is extremely rewarding, easy and fun.

The end result is the success, which means that you see how your own ideas and attitude will be accepted by the other home business opportunity owners.

It is really a great feeling!

Why would it be realistic to start online home business opportunities without experience and to become successful? The answer is simple, because so many have walked this route so many times.

To start home business opportunities ask discipline. All working tactics have been invented, so the question is, do you want to pick them for your online home based business opportunity or not?

So here is the success formula for your online home based business opportunities: find them, copy them and train them by repeating them several times.

Success Requirements For Online Home Based Business Opportunity

A great starting point to your online home based business opportunity is to dig a quality training course, which you like and understand. The idea is that you will learn or are willing to learn and that is the reason why your feelings have so great meaning.

Your attitude is # 1 factor but the # 2 is absolutely the discipline, i.e. can you concentrate into your new online home based business opportunity with all your power and are you ready to stand the obstacles ahead?

Make yourself one promise: I do not spend any money on promotions, before I fully understand, why should I do that. This small advice can save your motivation.

Make another promise: your online home based business opportunity is a long term operation, which will grow little by little, not suddenly overnight.

6 Steps To Starting Home Based Business Opportunity

Here is my success-factor list for your home based business opportunity:

1. A strong attitude and a clear vision for home based business opportunity.
2. A proven, respected and long term affiliate program to join.
3. A training lesson, which you like and which you really want to learn. It must be your style.
4. A selection of online business opportunity marketing tools: videos, ebooks, email courses etc.
5. A helpful and active home based business opportunity marketing forum, where you can meet proven marketers, ask for help and share your own tips.
6.You need a quick, professional and helpful online support, which works 24 hour a day.

Find Your Own Online Business Opportunity Expertise

This is the key to your success with your home based business opportunity. You are talented in an area, which you do not know on your early days in the Net.

Your feelings have a great role here. Trust on them.

There are so many areas to become an expert. Article writing, PPC, SEO, forum writing, link building, list building, customer care, writing own ebooks or reports and so on. As you can understand, you cannot be a master on all of these fields, so you have to select.

I want to give you one hint. Think, if you could develop yourself to grow as a writer. Why do I recommend this? Because the Net operates with information, so a persuasive writings will do wonders for home based business opportunity.

Juhani Tontti, B.Sc., Marketing. Start Your Own
Home Based Business Opportunity With A strong Attitude. This Means Success For Your Online Business Opportunity. Visit: http://www.Way2Miracle.com

As many homeowners are aware, the Multiple Listing Service (MLS) is a database of homes for sale in a particular area. Each MLS has hundreds, if not thousands, of members and they each list their properties on the MLS. Thus there is no database out there that is even remotely as powerful in helping buyers’ agents and their buyers screen, view and select properties to purchase.

What buyers may not be aware of is that MLS systems are based locally. For instance, in the State of Arizona alone there are around 15 Multiple Listing Services; each unique to its own area. Some such as ARMLS cover an extremely large area (most of Maricopa & Pinal County – the Phoenix area) while others cover just a small area such as Safford or La Paz County. In the State of California, although there are some systems like Sandicor (San Diego) or MRMLS (Riverside, San Bernardino and part of Los Angeles County) that cover extremely large areas, there are other systems that are much smaller, for instance Humboldt County or Nevada City/ Grass Valley. To the typical homebuyer, the fact that MLS’s are local does not matter that much. You simply need to work with a member of that local MLS when you are trying to view properties or obtain more detailed property information. A real estate agent out of Phoenix, for instance, could not do much good for you if you are looking for properties in Flagstaff. They have no more property information than what a member of the public could obtain on the Internet, nor do they have lockbox access to Flagstaff lockboxes. So while that agent may be licensed to sell real estate throughout the state, they do not necessarily have the tools to do so unless they join all the MLS systems.

There has been talk recently about statewide MLS’s. For instance, in Connecticut, there already is a system that covers the entire state making the future of smaller MLS’s suspect. In California, there already is a portal called MLSAlliance which seeks to combine listing results from multiple MLS’s and some reciprocity exists between MLS systems whereby an outside member can list a property for a fee. The next step would be some type of statewide system and there are currently two initiatives attempting to do that, one called CALMLS and being led by the California Association of Realtors and one called CARETS which is led by six Southern California MLS’s. While a statewide MLS would cut down on fees paid by agents to belong to multiple bordering systems, it also hurts them in that “outsiders” or people from other areas could come in and do business in their area. As such, it is somewhat surprising that a major strategic change such as a statewide MLS would be made. The most likely explanation is that if the MLS systems do not make some radical changes, websites without local barriers such as Google, Trulia, Zillow or others might be able to take advantage in some way, although it is not clear at this time.

Originally licensed as a real estate broker in Arizona, Donald Plunkett is a member of over 50 MLS systems throughout the western United States. His company, Congress Realty, offers a $299 flat fee listing program for homeowners who want to take advantage of MLS exposure while saving $1000’s.

Real Estate on Maui is always a very lucrative investment. Buying an apartment will always pay you back many times over in the future. With the rise in demand real estate is booming in the area like never before. So as the saying goes you need to make hay when the sun shines, it’s highly appropriate to go for an investment in real estate in Maui.

There are numerous real estate agencies willing to help you realize your dreams. With their active assistance you can always own an apartment in prime areas of Maui. No matter where you desire to own a part of Maui real estate you can always have one. The special areas worth mentioning where you can always gain if you go for a house include Kula upcountry, Wailea or Makena, Kihei, Makawao or Pukalani, or Kaanapali, Lahaina, Kapalua or Napili and Kahanah, Paia or Haiku, the North Shore in Spreckelsville in West Maui. These apart you can also buy luxury homes or condos, commercial properties as well as vacant land in Maui.

The best way to know more about real estate in Maui is by going through the various websites of Maui Real Estate. It facilitates searching through all the Maui MLS listings and even latest Maui listings. All website is a treasure house of news on Maui Real Estate and is always one stop information source for everything about Maui real estate.

Real estate in Kihei is high on demand. This sunny vibrant area close to Wailea and Makena has many homes for sale on offer. There are several large, luxury condos and multi-million dollar mansions along with standard tract housing and mid-level condominiums. Arguably this is the best place to look out for a home. In all likelihood you can find a home of your dreams only in Kihei. Along with the personal charm of the place the diverse mix of architectural designs gives Kihei an unique identity of its own. No other area in Maui offers a more relaxed atmosphere than Kihei homes.

In Wailea you can come across many beachfront and oceanfront real estate. In fact investing in Wailea is arguably the best investment because the place has many world-class resorts, beautiful sunny weather, long stretches of white sandy beaches, renowned spas, tennis clubs, good dining options and modern shopping places.

So look for a house in the various Kihei homes for sale

Justin Eliot is a regular contributor of information on real estate properties to http://www.mauilistings.net

This article is a successor to an article I wrote on October 11, 2007 in which I suggested that the credit crunch would be far worse than most people believed and that the impact on the stock market, the financial system, economic vitality and inflation could be significant. Now it is the week after Thanksgiving weekend and as I contemplate last week’s market sell-off and this week’s dramatic rally, I realize that the stresses have grown more evident and I can’t help but contemplate what might now be in store for next year.

On the positive side we are almost six years into an expansion and the US economy continues to grow albeit at a slower pace. Unemployment remains low except in sectors related to housing but it is edging up. Corporate profits have been good this year but they declined a bit in the third quarter. Until the first full week of November the stock market indices were at or near all time highs, though of late trading has been increasingly volatile. The credit crisis of August now seems to be just a problem for the financial sector to manage. The Fed has lowered interest rates three times indicating it wants to protect the economy. On the surface things are looking OK.

But look under the surface and the picture changes. The credit crunch has lost its crisis atmosphere but many sectors of the credit markets remain paralyzed. This paralysis is now affecting businesses and consumers in areas other than real estate. Equity investors are nervous as evidenced by the stock market’s extreme volatility. The Dow was 1,000 points off its all time high and the S&P 500 was even down year-to-date, though both bounced back on interest rate cut hopes. The housing market is in a deep recession moving towards a depression. Declining home values are siphoning off vast amounts of consumer wealth while rising food and energy prices are eating into family budgets. Unemployment is edging up in many states and consumer confidence is at a two-year low. Consumer inflation is 3.6% year-to-date and edging higher. On top of it all, we are entering an election year and geopolitical events are more unstable and dangerous than they have been since WWII.

As consultants, business owners and senior executives our job is to be aware of what is happening in the world, anticipate how events might impact our clients or our businesses and stay ahead of the curve by taking action to mitigate identified risk. We can’t relax just because things are going well now. We have to look ahead at what might or might not be.

I see seven interrelated threats that business owners, senior executives and Boards of Directors should understand, anticipate and plan for in an effort to minimize the negative consequences should one or more of them become a reality. The principal threat is the growing credit crunch because depending on how it ultimately unravels it could lead to any one or more of the other six – depression, recession, inflation, stagflation, legislative action unfavorable to business and geopolitical crisis. This is a businessman’s effort to present the facts in a way that enables other interested parties to make sense of it all.

The Credit Markets

Perhaps the greatest risk to the economy and our businesses lies in the credit markets. While the credit markets have calmed down since the crisis atmosphere of August, the underlying problem still exists as evidenced by the lack of liquidity in the capital markets and the huge write downs being taken at public financial institutions. It is now understood that the ultimate severity of the credit crisis still remains to be seen, and people are beginning to recognize that depending on how it unfolds it could result in any or all of recession, inflation, stagflation and geopolitical upheaval.

It is now clear that the massive amount of debt underlying the world economic system is at risk of unwinding due to collateral defaults. At the heart of the matter are Collateralized Debt Obligations, or CDOs. CDOs are derivative securities, as in derived from another asset. Trillions of dollars of these instruments were created and sold over the past six years. According to Satyajit Das, one of the world’s leading experts in derivative securities for over 20 years, $1.00 of real capital supports $20.00 to $30.00 in loans. That means each dollar is leveraged 20 to 30 times! He estimates derivatives outstanding to be $485 trillion, or eight times global gross domestic product of $60 trillion. The scary thing is that no one really knows for sure who holds all this paper.

The problem is global and there is only a limited amount the Fed or other central banks can do to manage it. This is because much of the problem lies in the unregulated shadow banking system[1] defined as the whole alphabet soup of highly levered non-bank investment conduits, vehicles and structures. The effect of securitization is that credit risk moved from regulated entities where it could be observed to places where it was unregulated and difficult to observe. Without regulators to keep tabs on cross-border flows and quality standards, investors didn’t really know what they were buying or what it was really worth.

U.S. ingenuity: In the post dot com bubble and 9/11 world of ultra low interest rates, US Banks saw their net interest margins shrink along with their loan volume which negatively impacted profits. So the banks developed ingenious ways of creating significant fee income by bundling volumes of consumer (many of them low income) and leveraged buy-out loans into what are called Asset Backed Securities (ABS) to be sold to institutional investors like “bonds”. The investors then use these ABSs as collateral for another high-yielding debt instrument called a Collateralized Debt Obligation. These CDOs were snapped up by Asia and Mid-East governments, hedge funds and pension funds looking for rated high-yield instruments in which to park their mountains of emerging markets cash. Financial engineers built towers of securitized debt with mathematical models that were fundamentally flawed, while managers overloaded on high-yield debt instruments they didn’t understand. All along the way the banks pocketed huge fees while shifting trillions of dollars of risk off their balance sheets and into the hands of investors. It is estimated that last year alone Wall Street bankers (including the money center commercial banks) generated $27.4 billion in fee income from the origination, securitization and sale of exotic Asset Backed Securities.

Because of low interest rates in the US and Japan most CDOs were bought with borrowed money. In other words, borrowed money bought borrowed money. Because of high credit ratings the CDOs could be used as collateral for more borrowing. These triple borrowed assets were then used as collateral for commercial paper purchased by risk adverse money market funds. When the assets underlying these securities begin to default in large numbers (sub-prime loans), the CDOs lose value and the institutions holding them incur losses. And because no one knows for sure who is holding this paper everyone is afraid of taking on new counterparty risk. The credit markets become illiquid and many financial institutions end up holding huge amounts of CDOs for which there is no or limited market.

Asset Backed Security basics: Let’s take collateralized mortgage obligations (CMOs) since they are the easiest to understand. In their simplest “pass through” form banks and other lenders originate loans, warehouse them for a brief time, package them into a bond, have the bond rated and sell the bond to investors. Instead of making money from the net interest margin over the life of the underlying loans, the originators earn origination fees and payments from servicing rights. Investors who buy CMOs are actually buying the future cash flow from the underlying loans’ principal and interest payments. Because the CMO is rated by the rating agencies the purchase price equals the future cash flow discounted to a yield consistent with the rating of the bond. The advantage of this system to the originator is that the fees are made up front, the servicing rights provide an ongoing source of fee income unless sold, the credit risk is transferred to the investor and the investment proceeds allow the originator to make still more loans. The investor gets a rated instrument with a yield appropriate to the rating.

The role of rating agencies: Ratings on bonds convey an agency’s assessment of the probability of default. Investors rely on ratings when making investment decisions because of the rating agency’s track record. For instance, over a 21 year period Moody’s AAA rated bonds demonstrated a .79% probability of default by year 10. In the asset backed securities world similarly rated loans or bonds are combined in a portfolio, then divided into different tranches with the riskiest tranches taking the first loss, receiving the lowest credit rating and offering the highest yield. Similarly the least risky tranche takes the last loss, receives the highest credit rating and offers the lowest yield. In this way a portfolio comprised of B rated individual securities can be packaged to offer senior tranches that receive an A or even AAA rating and junior tranches that receive a junk rating.

Bubble trouble: In recent years double bubbles drove US economic growth by providing unprecedented liquidity to the financial markets: 1) asset securitization, most notably subprime loans; and 2) the shadow banking system, defined as hedge funds, pension funds and the whole alphabet soup of highly levered non-bank investment conduits, vehicles and structures like ABSs, CBOs, CDOs, CLOs, CMOs, SIVs and CDSs. The joint growth of these two bubbles was grounded in the irrational belief that home prices would forever increase irrespective of affordability, and access to capital at low interest rates would be unlimited because holders of “safe” asset backed commercial paper would forever roll their investments. Belief in the former proved unfounded in 2007 when subprime loan defaults soared, which caused a de facto run on the shadow banking system as investors refused to roll their asset backed commercial paper holdings and demanded their money back.

Changing models, changing ratings: As sub-prime loan defaults rose in 2007, in contravention of the rating agencies’ mathematical models, CMOs began to collapse. As defaults accelerated the rating agencies were forced to review their models. On July 10, 2007 the rating agencies changed their models and downgraded many CMOs. This caused panic and uncertainty among CMO investors and the contagion quickly spread to all other types of CDOs.

Uncertainty and risk: Investors believed that the default distributions of the ratings on their asset backed securities were the same as the default distributions of the individual assets backing them. After the mass downgrade of July 10^th investors concluded they were mistaken. Investors no longer knew for certain the default distribution of what they owned. What they did know was that the model upon which they based their investment decisions had turned out to be wrong. When Investors don’t know what they don’t know there is uncertainty. Uncertainty is different than risk. Risk can be quantified and diversified, uncertainty cannot. Uncertainty causes investors to step back with the result that asset backed securities markets are essentially frozen, bid-ask spreads are wide and “indicative” (not firm) and many investors are saying they simply do not want any ABS risk. This is a killer for the shadow banks.

Banking in the shadows: Unlike insured, regulated real banks, shadow banks fund themselves to a large degree with uninsured commercial paper which may or may not be backstopped by liquidity lines from real banks. The shadow banking system is particularly vulnerable to a run which is when commercial paper investors refuse to roll over their investment when their paper matures. That causes the shadow banks to tap their back-up liquidity lines with real banks and/or liquidate assets at fire sale prices. This is what happened in July and August as outstanding asset backed commercial paper plunged $300 billion and the Libor spread over the Fed Funds rate widened by 50 basis points. The credit markets had effectively frozen.

Cosmetic fix for a structural problem: That led to the Fed’s 50 basis point cut in the discount rate on August 17^th and the Fed Funds rate on September 18^th and October 16^th which were intended to create liquidity in the credit markets. But all they did was calm the markets, not create the desired liquidity. The reasons were three fold: 1) banks hate to borrow from the discount window because the Fed has always been seen as a lender of last resort (read troubled bank); 2) the discount rate remained a 50 basis point premium over the Fed Funds rate; and 3) now that the rating and pricing models for securitized debt had proven to be faulty, the real banks were looking to decrease exposure to the shadow banks, not increase it.

Frozen Solid: As subprime mortgage defaults increased and agencies lowered their ratings, investors, banks and funds began looking at all derivative backed paper with suspicion, refusing to accept it as collateral for the short-term commercial paper that provides liquidity to today’s money markets. It is estimated that 53% of $2.2 trillion US commercial paper is now backed by assets, and 50% of the assets are CDOs. That is over $500 billion in commercial paper backed by CDOs. As of November 2nd collateralized commercial paper had declined for 11 straight weeks in an amount totaling $300 billion or 25% from the amount outstanding at the end of July. Further, as much as $300 billion in leveraged finance loans were “orphaned” because they could not be sold or used as collateral (which means they have to be held in portfolio on the lender’s balance sheet). Large segments of the credit markets were frozen solid.

Now what: We know how much securitized debt the public institutions hold on their balance sheets, and it amounts to many billions of dollars. But these amounts do not account for the off-balance sheet exposure these institutions have to the highly leveraged special purpose companies they set up to create, buy and trade this paper, or to the private hedge funds that borrowed from the banks and represent counterparty risk as well. In the third quarter many of the public institutions took large write-downs against the derivatives held on their own balance sheets, including Citigroup, WAMU, Lehman Bros., Merrill Lynch, Deutsche Bank, UBS and Countrywide. However, the write downs amount to only a fraction of their Level 2 and Level 3 assets[2] so the fear is that much more will have to be written down as underlying collateral defaults increase.

Indeed, in October and November the write-downs have accelerated with Citigroup, Merrill Lynch, JP Morgan Chase, Bank of America, Wachovia, Freddie Mac and others all announcing multi-billion reserves for expected losses. To date over $66 billion in provisions for losses have been announced and much more is expected. Two high profile CEOs have been fired, Citigroup and Freddie Mac have been downgraded, may cut their dividends and are raising capital to meet minimum regulatory requirements. The effect of leverage in a declining market is that losses are amplified. As value goes down other assets must be sold (usually at a discount) to maintain covenants. When derivatives are sold at a discount, accounting rules require that all similar assets in the debt chain be marked down by the same discount. This quickly drains more liquidity from the system making the global liquidity situation worse.

No one knows for sure to what extent any entity is exposed so everyone is reluctant to take on new counterparty risk. This is why the credit markets remain just one bit of bad news away from panic. The credit markets also impact the stock market which until recently had in part been driven by CDO type instruments that go under the heading of “structured finance” (LBO, MBO, stock buy-backs), by corporate liquidity created through the issuance of asset backed commercial paper and by the securitization gains reported by publicly traded banks, funds and other financial institutions. If deals don’t get done, if corporate liquidity dries up or if banks, mutual funds and others continue reporting large losses on derivative securities, the market is vulnerable to a sell-off as we have seen in the first and third weeks of November.

Deflating bubbles: Thus current market volatility is more than just a correction. It is fear of a gigantic liquidity bubble deflating. The Fed cannot prevent this by lowering interest rates or injecting liquidity because the problem is not the amount of money in the system. The problem is that investors are questioning the entire risk transfer model and its associated leverage and counterparty risk. The August credit crisis did not go away, it just moved off the front page. Consider this – billions of dollars of investment grade CDOs are held by state and local pension funds. These funds are generally restricted by law to investing in only investment grade paper. What happens when the investment grade CMO held in a pension fund portfolio is downgraded to non-investment grade or even junk status? The fund is forced to sell these securities, most certainly at a discount. That is why many people who understand the extent to which the global economy has been supported by debt are making risk mitigation a high priority. These include people at the Federal Reserve and Treasury Dept.

Contagious crunch: As the business model for the securitization of subprime mortgages ceased to work, that asset class imploded. Rather than being contained as the Wall Street and Beltway authorities predicted, Wall Street soon began repricing other classes of financial risk assets (credit card and auto loan portfolios, etc.) to higher risk premiums (lower valuations). But the contagion is no longer limited to portfolios of securitized assets.

The housing recession is clearly being exacerbated by a mushrooming mortgage crunch as lenders raise credit standards and reduce loan amounts. And as the financial stress from housing makes its way into family budgets lenders are beginning to see increased credit card and auto loan delinquencies and defaults requiring increases in reserve requirements for these asset classes. When reserve requirements go up lending goes down and terms get more onerous. Interest rates, late fees and penalties go up, credit limits are reduced and grace periods are shorter. These are early signs of a classic consumer credit crunch. The trend in all credit markets toward less and more expensive credit will be a drag on the economy in 2008. How much of a drag is really anyone’s guess because the subprime meltdown puts the economy in uncharted waters.

A companion article titled “The Seven Threats to Your Business in 2008″ will be published this date and will explain the potential impact that the credit crunch will have on the general economy and your business specifically.

[1] Shadow Banking System is a term coined by Paul McCulley of PIMCO

[2] Level 3 Assets are those assets for which there is no market. Level 2 Assets are those assets for which there is a thin, erratic market. Because there is no reliable market value for these assets, accounting rules and securities regulations allow the institutions to determine value using internal valuation models. The result is that a CDO could be valued at .95 at one institution while at another institution that same CDO might be valued at .90.

Howard Fletcher is an author, speaker, consultant, executive and corporate finance professional who has helped many companies overcome serious challenges that limited their growth or even threatened their viability. He has been CEO of four companies, COO of three others and the owner of a small manufacturing company. He has been a senior executive of a major international corporation and non-executive director of numerous for-profit and not-for-profit organizations. Mr. Fletcher speaks and writes primarily about topics of interest to entrepreneurs and owners of small to mid-size companies. These would generally be management, leadership and corporate finance topics. However, he also writes and speaks about economic and geopolitical forces and how those forces impact the business community at large. Mr. Fletcher has lived, worked and traveled overseas extensively. He is an avid student of global political and economic affairs and is adept at reducing complex global issues into a form that understandable by and relevant to anyone trying to run a business of any size.