TIME Greece

Here’s What Greek Austerity Would Look Like in America

Putting Greece's economic catastrophe into perspective

Greece is in the middle of a fresh round of economic tumult as its leaders try to negotiate terms for a new bailout package to keep the country financially afloat. Since 2010, Greece has been receiving money from the European Union and the International Monetary Fund in exchange for agreeing to harsh spending cuts and tax increases. The steep cost-cutting measures, known as austerity, have become a common practice across Europe as the continent has struggled to regain its economic footing following the global financial crisis of 2008.

But Greece’s case has been especially extreme. With steep slashes to health funding, salaries and pensions along with huge tax increases, Greek unemployment has skyrocketed, as have the number of people in poverty. As of Tuesday night, Greece had defaulted on a $1.7 billion payment to the International Monetary Fund, and the financial future of the country is looking increasingly dire. Greece will have to agree to even more spending cuts to continue to receive funding.

To place the severity of Greece’s austerity measures over the last several years in perspective, here’s an idea for how the same types of cuts would impact the United States.

  • Greece’s minimum monthly wage was cut by 22% in 2012, from 751 euros to 586 euros. A similar cut in the U.S. would drop the hourly minimum wage from $7.25 to $5.66.
  • In 2009 and 2010 Greece implemented a variety of cuts to salaries for public sector workers that worked out to an average pay cut of about 15%. In the U.S. that would decrease the average government employee’s pay from $51,340 per year to $43,639, using 2012 figures.
  • Pension cuts have been an especially controversial pain point in Greece, and the combined cuts have lead to a 40% decrease in pension funding since 2009, according to the Associated Press. A similar drop in Social Security payouts in the U.S. would mean the average senior citizen’s monthly would mean a drop in Social Security payouts from $1,294 per month on average to $776 per month.
  • Greece’s national health budget has been slashed by about 40% since 2008, according to the New York Times. Using U.S. health spending figures from 2013, that would drop federal, state and local government spending on health care from $1.25 trillion ($3,980 per person) to $725 billion ($2,388 per person).
  • In 2010 Greece increased the tax on cigarettes by about 20 percent. That would increase the tax on a pack of cigarettes in New York from $6.86 to $7.89.
MONEY stocks

How to Prepare for the Next Market Meltdown

A trader works on the floor of the New York Stock Exchange shortly before the closing bell, June 29, 2015. U.S. stocks fell sharply in heavy trading on Monday and the S&P 500 and the Dow had their worst day since October after a collapse in Greek bailout talks intensified fears that the country could be the first to exit the euro zone.
Lucas Jackson—Reuters A trader works on the floor of the New York Stock Exchange shortly before the closing bell, June 29, 2015. U.S. stocks fell sharply in heavy trading on Monday and the S&P 500 and the Dow had their worst day since October after a collapse in Greek bailout talks intensified fears that the country could be the first to exit the euro zone.

You don't need a crystal ball.

What will ignite the fuse that sets off the next big market crash? Greece, as it tries to cling to—or exit—the European currency union? China, whose economy and stock market are already showing signs of stress? Or will it be something closer to home, say, a snafu by the Federal Reserve as it attempts to unwind years of loose monetary policy?

The answer, of course, is that nobody knows. While anyone can come up with a long list of candidates that could cause the next downturn, it’s impossible to know in advance what the actual trigger will be. I’ve learned this from personal experience. Not long before the 2008 financial crisis I interviewed Richard Bookstaber, a risk expert who had just published A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation, a book in which he explains how our increasingly complex financial system is evolving beyond regulators’ ability to control—and our ability to predict its behavior.

During that interview, he ticked off a litany of problems that had the potential to topple the economy and the financial markets, including arcane financial instruments like credit swaps, emerging market funds, risky hedge funds, even overheated housing and mortgage markets. I remember thinking at the time, credit swaps, sure; emerging markets, yeah, I could see that; hedge funds, definitely. But inflated housing prices and problematic mortgages bringing the U.S. and global markets to their knees? It seems obvious today with the benefit of 20/20 hindsight. But before the financial crisis, it seemed rather far-fetched.

Fortunately, positioning your portfolio to weather the next big downturn doesn’t require that you be able to foresee when the setback will occur or what will instigate it. Rather, all you have to do is assure you have your savings invested in a mix of stocks and bonds you would be equally comfortable sticking with if the market continues to make it to higher ground—or gets whacked for a sizable loss from a development everyone anticipates or from a shock that comes completely out of the blue. In other words, it’s not as important that you be able to predict the timing or the cause of a rout as it is that you are prepared to handle the consequences.

How to Disaster-Proof Your Portfolio

The first step is to review your current holdings. Over the course of a long bull market, it’s easy to end up with a portfolio that’s more aggressive than you think. Which is why it’s important to do a quick inventory of what you own. Basically, you want to divide your investments into three broad categories—stocks, bonds, and cash—so you know what percentage each represents of your overall holdings. If you have funds that own a mix of those asset categories, such as a balanced fund or target-date retirement fund, you can plug its name or ticker symbol into Morningstar’s Instant X-Ray tool to see how it divvies up its assets.

Once you know your portfolio’s stocks-bonds mix, you want to make sure you’ll be comfortable with that mix should stock prices head south. The simplest way to do that: complete a risk tolerance-asset allocation questionnaire like the free one Vanguard offers online. After you answer 11 questions about how long you plan to keep your money invested, how you react after losses, and what kind of volatility you think you can handle, the tool will recommend a mix of stocks and bonds consistent with your answers. The tool also provides performance stats showing how the recommended mix, as well as others more conservative and more aggressive, have performed in past markets good and bad.

You can then see how that recommended mix compares with how your portfolio is actually divvied up between stocks and bonds. If there’s a significant difference—say, your portfolio consists of 80% stocks and 20% bonds and the tool suggests a 50-50 blend—you need to decide whether it makes sense to stick with your current mix or ratchet back your stock holdings. One way to do that is to calculate how both mixes would have fared during the 2008 financial crisis, when stocks lost nearly 60% of their value from the market’s 2007 high to its 2009 low and bonds gained roughly 8%. By comparing their performance, you can decide which portfolio you’d be more comfortable holding if the next downturn generates comparable losses.

Keep in mind, though, that limiting short-term setbacks isn’t your only investment objective. If it were, you could simply plow all your dough into federally insured savings accounts and CDs. If you’re investing for a retirement that’s decades away, you also need capital growth to boost the size of your nest egg. And even if you’re retired, you likely still want to have at least some of your nest egg in stocks to assure that your savings can generate income that will stand up to inflation throughout retirement. To get a sense of whether the mix you’ve decided will give you a decent shot at meeting such goals, you can plug your investments, along with information such as how much you have saved and how many years you expect to live in retirement, into a good retirement income calculator.

So let the pundits engage in their endless guessing game of when the next meltdown will occur and what incident or set of factors will precipitate it. But don’t take it too seriously. It’s ultimately a fruitless exercise, and one that could end up wreaking havoc on your portfolio if you make the mistake of actually acting on their speculation and conjecture.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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TIME

Joseph Stiglitz to Greece’s Creditors: Abandon Austerity Or Face Global Fallout

Nobel laureate tells TIME that the institutions and countries that have enforced cost-cutting on Greece "have criminal responsibility"

A few years ago, when Greece was still at the start of its slide into an economic depression, the Nobel prize-winning economist Joseph Stiglitz remembers discussing the crisis with Greek officials. What they wanted was a stimulus package to boost growth and create jobs, and Stiglitz, who had just produced an influential report for the United Nations on how to deal with the global financial crisis, agreed that this would be the best way forward. Instead, Greece’s foreign creditors imposed a strict program of austerity. The Greek economy has shrunk by about 25% since 2010. The cost-cutting was an enormous mistake, Stiglitz says, and it’s time for the creditors to admit it.

“They have criminal responsibility,” he says of the so-called troika of financial institutions that bailed out the Greek economy in 2010, namely the International Monetary Fund, the European Commission and the European Central Bank. “It’s a kind of criminal responsibility for causing a major recession,” Stiglitz tells TIME in a phone interview.

Along with a growing number of the world’s most influential economists, Stiglitz has begun to urge the troika to forgive Greece’s debt – estimated to be worth close to $300 billion in bailouts – and to offer the stimulus money that two successive Greek governments have been requesting.

Failure to do so, Stiglitz argues, would not only worsen the recession in Greece – already deeper and more prolonged than the Great Depression in the U.S. – it would also wreck the credibility of Europe’s common currency, the euro, and put the global economy at risk of contagion.

So far Greece’s creditors have downplayed those risks. In recent years they have repeatedly insisted that European banks and global markets do not face any serious fallout from Greece abandoning the euro, as they have had plenty of time to insulate themselves from such an outcome. But Stiglitz, who served as the chief economist of the World Bank from 1997 to 2000, says no such firewall of protection can exist in a globalized economy, where the connections between events and institutions are often impossible to predict. “We don’t know all the linkings,” he says.

Many countries in Eastern Europe, for instance, are still heavily reliant on Greek banks, and if those banks collapse the European Union faces the risk of a chain reaction of financial turmoil that could easily spread to the rest of the global economy. “There is a lack of transparency in financial markets that makes it impossible to know exactly what the consequences are,” says Stiglitz. “Anybody who says they do obviously doesn’t know what they’re talking about.”

Over the weekend the prospect of Greece abandoning the euro drew closer than ever, as talks between the Greek government and its creditors broke down. Prime Minister Alexis Tsipras, who was elected in January on a promise to end austerity, announced on Saturday that he could not accept the troika’s “insulting” demands for more tax hikes and pension cuts, and he called a referendum for July 5 to let voters decide how the government should handle the negotiations going forward. If a majority of Greeks vote to reject the troika’s terms for continued assistance, Greece could be forced to default on its debt and pull out of the currency union.

Stiglitz sees two possible outcomes to that scenario – neither of them pleasant for the European Union. If the Greek economy recovers after abandoning the euro, it would “certainly increase the impetus for anti-euro politics,” encouraging other struggling economies to drop the common currency and go it alone. If the Greek economy collapses without the euro, “you have on the edge of Europe a failed state,” Stiglitz says. “That’s when the geopolitics become very ugly.”

By providing financial aid, Russia and China would then be able to undermine Greece’s allegiance to the E.U. and its foreign policy decisions, creating what Stiglitz calls “an enemy within.” There is no way to predict the long-term consequences of such a break in the E.U.’s political cohesion, but it would likely be more costly than offering Greece a break on its loans, he says.

“The creditors should admit that the policies that they put forward over the last five years are flawed,” says Stiglitz, a professor at Columbia University.What they asked for caused a deep depression with long-standing effects, and I don’t think there is any way that Europe’s and Germany’s hands are clean. My own view is that they ought to recognize their complicity and say, ‘Look, the past is the past. We made mistakes. How do we go on from here?’”

The most reasonable solution Stiglitz sees is a write-off of Greece’s debt, or at least a deal that would not require any payments for the next ten or 15 years. In that time, Greece should be given additional aid to jumpstart its economy and return to growth. But the first step would be for the troika to make a painful yet obvious admission: “Austerity hasn’t worked,” Stiglitz says.

TIME Greece

Merkel Presses Greece to Deliver on Reform

Greece's bailout program expires June 30

German Chancellor Angela Merkel is pressing Greece to deliver on commitments to carry out reforms, stressing before a meeting of eurozone finance ministers that she wants the country to remain in the common currency.

Merkel said in a speech to the German Parliament Thursday that Greece’s government in February “committed itself to comprehensive structural reforms. These must now be tackled with determination.”

Merkel stressed that “Germany’s efforts are directed to Greece remaining in the eurozone.” She reiterated that “where there’s a will, there’s a way — if the political leaders in Greece show this will, an agreement with the three institutions is still possible.” That was a reference to Greece’s international creditors.

Greece needs to unlock loans from its creditors before June 30, when its bailout program expires.

TIME stocks

The Average Wall Street Bonus Was $172,860 in 2014

A trader works on the floor of the New York Stock Exchange shortly before the end of the day's trading in New York July 31, 2013
Lucas Jackson—Reuters A trader works on the floor of the New York Stock Exchange shortly before the end of the day's trading in New York July 31, 2013

But that's only a 2% rise on the previous year

Despite falling profits, the average bonus on Wall Street rose to $172,860 last year, according to a report released Wednesday by New York State Comptroller Thomas P. DiNapoli.

That marks a 2% increase from 2013 and is the highest average payout since 2007 — right before the financial crisis.

The bump comes as estimated pre-tax profits fell by 4.5% from $16.7 billion in 2013 to $16 billlion last year.

“The cost of legal settlements related to the 2008 financial crisis continues to be a drag on Wall Street profits, but the securities industry remains profitable and well-compensated even as it adjusts to regulatory changes,” DiNapoli said in a press release.

The New York Office of the State Comptroller, whose main duty is to audit government operations and operate the retirement system, has been tracking the average bonus paid on Wall Street for nearly three decades. When it began recording in 1986, the average payout was $14,120. The highest average bonus was $191,360 in 2006.

After two years of job losses, the industry added 2,300 jobs in 2014 to a total of 167,800 workers.

MONEY real estate

The Pre-Recession Housing Problem That’s About to Slam Homeowners

aerial view of subdivision
David Sucsy

Millions of homeowners face major payment increases when their HELOCs reset in 2015-2016. Here are your options if you face massive HELOC payments.

The home equity line of credit (HELOC) had been around for many years before it became a hugely popular financial product in the early 2000s. When the financial crisis happened in 2008, drastically lower home valuations put a stop to the HELOC boom, and today we see far fewer being issued by lending institutions. However, millions of homeowners still have this type of contract and will face major problems when their HELOCs reach a 10-year reset point in 2015-2016.

The Office of the Comptroller of Currency (OCC) defines a HELOC as “a dwelling-secured line of credit that generally provides a draw period followed by a repayment period.” If you don’t know what these terms mean, then it’s time to have a fresh look at your contract. As a debt relief consultant who includes second mortgage and HELOC settlement negotiations in my practice, I routinely encounter clients who are worried about their homes having negative equity, but seem completely unaware of their looming reset problem.

There are numerous types of HELOC agreements, but one common variation is the 25-year contract, with a 10-year borrowing period and a 15-year repayment period. Let’s say you obtained a HELOC in 2005 that was structured this way, and borrowed $50,000 on your house to pay off other bills, do some home improvements, and so on. This whole time you’ve been paying interest-only at 6%, which is high compared to today’s rates, but since you are only paying interest on the principal balance, the payment is still manageable at only $250 per month.

What will happen at the end of your 10-year borrowing period? The line-of-credit feature of the HELOC will expire and the payments must then increase during the repayment period to cover repayment of the principal balance (plus ongoing interest). At a 6% annual percentage rate, the $250 per month payment will suddenly spike to $492 and remain at that level until the $50,000 is paid off (assuming a fixed interest rate).

This of course illustrates a 15-year repayment period, which is already greatly compressed compared to a traditional 30-year mortgage. Worse, some HELOC products were set up for a total contract duration of 15 years, meaning a 10-year borrowing period followed by only a 5-year repayment period. With such a short period of time to repay principal, the monthly payment in our example would jump to $967 after reset, almost four times the interest-only level. Talk about payment shock!

Still other types of HELOC contracts carry no repayment period at all. They were set up for a borrowing period of 5, 7 or 10 years, and at the end of that period the entire principal amount falls due in the form of a single lump-sum balloon payment. Using our same example, at the end of 10 years, instead of paying $250/month, you now owe $50,000 in a single payment.

Such financial products were built on the crucial assumption that real estate values would continue to rise, which would allow qualified borrowers to refinance to more favorable terms within a few years anyway. Essentially, these products were designed with the expectation that borrowers would extinguish the loans before reaching the point of reset, especially if there was a balloon payment rather than a reasonable repayment period.

Fast forward a few years, and the steep plunge in real estate values has left countless homeowners in a position where traditional refinancing is simply not available, thus exposing them to future payment shock when their HELOCs reset in 2015 or beyond. Since so many HELOCs were issued in 2004 through 2008 compared to prior years, the “HELOC reset” problem has the potential to affect America’s housing recovery for years to come.

According to the OCC, in 2012 approximately $11 billion in HELOC loans reached reset point, with “reset” defined as the point where the borrowing period ended and the repayment period began. By 2014, that figure had grown to $29 billion. It will nearly double again to $53 billion in 2015 and could exceed $111 billion by 2018. Between 2014 and 2017, approximately 58% of all HELOC balances are due to start amortizing.

HELOC-OCC

In the next few years millions of homeowners will face the HELOC reset problem and resulting payment shock. Many will have the ability to accept the higher payment after reset, or they will refinance to a new mortgage with more favorable terms. Others may already be planning to sell the home, either via traditional or short sale. But there will still be a large pool of homeowners who find themselves facing a true financial dilemma — a contractual trap based on a product designed years ago in a different banking era, before the “new normal” of underwater property values and strict loan-to-value ratios.

Options If Your HELOC Loan Is Due to Reset in 2015 or 2016

With all that in mind, let’s focus on potential solutions for homeowners facing HELOC reset. First, if you are not sure whether this is happening with your loan, please take a close look at your agreement document. Look for the dates pertaining to the Borrowing Period and the Repayment Period, bearing in mind your contract might use slightly different terminology. If you took a loan in 2005, for example, it’s likely the reset will happen in 2015.

Once you have confirmed the date on which your HELOC will reset, the next step is to determine the new payment schedule including principal. If you have not already received a notice from your lender with this information (many lenders are sending these out well in advance to warn consumers about the pending payment increase), then you should be able to determine the new payment from the contract terms and the help of a loan or mortgage calculator. Or, perhaps much easier, you can simply call your lender and ask them what the new payment will be after reset.

1. Absorb the New Payment

Using our first example above, some household budgets can tolerate a payment spike from $250 to $492 per month. If you can fund the new payment and otherwise don’t have any refinancing options available to you, then why not give the new payment a try for 12 months? See how you do before considering an aggressive solution that may entail serious credit damage.

2. A Traditional Refinance

Some homeowners facing HELOC reset will be able to obtain new mortgage financing that solves the problem. By combining the original first mortgage and the HELOC balance into a new single mortgage, all risk associated with the HELOC reset is extinguished with closing on the new note.

Of course, many homeowners will be blocked from this solution, based on three key factors:

  • Lenders require a loan-to-value ratio of 75-80%, so the property has to be worth enough at market value to offset the two combined notes and still leave 20-25% equity as a cushion. Many homes are still upside-down in value, worth less than the two note balances combined, or perhaps worth less than the first mortgage alone.
  • Your credit score has to be in excellent shape to qualify for the best rates. (You can see two of your credit scores for free on Credit.com.)
  • Your income has to support the new revised mortgage payment, based on strict debt-to-income ratio formulas.

Unless all three conditions are in place, a traditional refinance solution won’t be available to you.

3. Modify Your First Mortgage Under HAMP, or Second/HELOC Under 2MP

Although it was announced with some press attention a few years ago, it’s rare to see the government’s Second Lien Modification Program (2MP) discussed in the context of the HELOC reset problem. Government sponsored programs like the Home Affordable Mortgage Program or Home Affordable Refinance Program (HAMP and HARP) targeted mainly first mortgages, in an effort to stabilize payments so people could stay in their homes or refinance away from toxic mortgages.

While HAMP and HARP have helped millions of homeowners over the past half-decade, the 2MP has been something of a mystery. It’s common to hear someone report having successfully modified a first mortgage via the HAMP solution. Yet reports of successful second lien modifications under 2MP are quite rare. If HAMP modifications have proceeded like a gushing pipeline, 2MP modifications are more like a tiny trickle.

According to the Department of Housing & Urban Development (HUD) website, you may be eligible for 2MP if your first mortgage was modified under HAMP and you have not missed three consecutive monthly payments on your HAMP modification. What this should mean, at least in theory, is that once you have finished making your three trial payments under an approved HAMP modification, then your second lien should be reviewed for a corresponding modification.

Check with your lender directly to see if they are participating in the Second Lien Modification Program. I would also encourage readers looking for more information on the government-sponsored programs like HAMP, HARP and 2MP to call a HUD agency counselor at 1-888-995-HOPE (4673). There is no cost to you, and the HUD counselor can help determine eligibility for one of these programs.

4. Modify Your First Mortgage, Then Apply the Savings to the Payment Spike

A successful loan modification on your first mortgage can result in significant monthly savings. If you modified under HAMP but your second lien did not qualify for 2MP, or you did a non-HAMP modification directly with your mortgage lender (also called an in-house or a private modification), then your first mortgage payment should now be lower than it was previously.

In some cases, the difference may be sufficient to offset some or most of the expected payment spike associated with a pending HELOC reset. Your budget will naturally determine this. If you pursued the modification due to financial hardship, then it may be that even with a lower first mortgage payment you still can’t handle the increased HELOC payment after reset. But others will find that the savings achieved through the first mortgage modification provides enough relief that the payment increase on the HELOC will no longer cause such a severe budget problem.

5. A Loan Modification Directly With the HELOC Lender

There are many situations where none of the above solutions will apply. What if you can’t absorb the new payment after reset or you have a balloon payment coming up? What if traditional refinancing is not available to you because the house doesn’t meet the required loan-to-value ratio? What if none of the government programs apply? What if modifying your first mortgage won’t or can’t work, now what?

Lenders do not want a default to occur. A logical step would be to determine precisely what in-house programs your creditor is willing to offer and see if any of these options look realistic to you. Financial institutions have been issued a strongly worded guidance by the OCC on the subject of HELOC reset, and they want servicers to work with customers to salvage these loans. So it makes sense to find out what the servicer is offering for modified terms and then compare to the original payment spike.

To get anywhere with a loan modification application, be prepared to submit two years of tax returns, bank statements, pay stubs and a personal financial statement. Be patient and polite. Do your own math before you approach the servicer for a modification. Know what you want in terms of a payment and loan duration, including possible principal deferment or even principal reduction, before you enter the negotiation. You may or may not get exactly what you want, but it pays to know your own figures and to be able to argue your case effectively.

6. Strip the Lien via Chapter 13 Bankruptcy

Bankruptcy is an aggressive solution that would only apply in specific circumstances. I mention Chapter 13 bankruptcy specifically because it has a unique feature that allows a second lien to be stripped from a property. This can only happen if the property appraises for less than the balance owed on the first mortgage, and of course with the court’s approval. If the lien strip is approved, the HELOC or second mortgage balance then becomes an unsecured debt co-equal with other unsecured debts like credit cards, medical bills and so on. The debt is then discharged after the case is completed, with five years being the typical Chapter 13 case duration. The advantage of this solution is that it yields a one-mortgage property with no further threat of foreclosure or potential litigation. It’s crucial to get the advice of a good bankruptcy attorney if your intention is a lien strip via Chapter 13.

7. Lump-Sum Settlement

Settlement is also an aggressive strategy that comes with credit damage and only applies in specific circumstances. There are tax consequences of settlement, in the form of a 1099-C for the forgiven balance, taxable income unless an exemption applies.

During the peak years of the real estate crisis many homes plummeted in value to a level below the balance owed on the first mortgage alone. That left second lien holders in a position without collateral, i.e., “underwater.” Under such conditions, many homeowners were able to settle their HELOCs for 10-20% of the balance after having defaulted for an extended period.

While HELOC settlements are still happening in 2015, conditions have changed considerably. We are now in an era of rising property values, and creditors are more reluctant to absorb a loss when the property underwater today may be “in the money” again before too long.

As a debt consultant, I find I’m recommending the settlement strategy for HELOCs much more selectively than I did in prior years. It does still work quite effectively in many situations, but it’s important to have a clear view of the risks before attempting a hardball negotiation strategy like debt settlement on a second mortgage or HELOC.

The bottom line is there is no single best debt relief solution for the problem of HELOC reset. I’ve presented seven potential strategies above, but each of those will only apply under specific financial conditions. Aside from the sister program to HAMP, the 2MP for second liens, there are no “Obama programs” for HELOC relief, and no bank sponsored programs to enroll in. Based on hundreds of consultations with consumers struggling with HELOC issues, my experience has been that creditors are taking a battlefield management approach, with the goal of stemming further losses. So beware of companies or services claiming they can have your lien extinguished, or have your HELOC note declared invalid. The growing HELOC reset problem presents a new opportunity for debt relief scammers to pitch bogus programs that promise to “make your HELOC go away.” Buyer beware!

More from Credit.com

This article originally appeared on Credit.com.

MONEY

The 5 Funniest ‘Saturday Night Live’ Skits About Money

SATURDAY NIGHT LIVE: WEEKEND UPDATE THURSDAY, (from left): Amy Poehler, Seth Meyers, Kenan Thompson, (Episode 101, aired Oct. 9, 2008), 2008.
Dana Edelson—©NBC/Courtesy Everett Collectio

As the NBC comedy show celebrates 40 seasons on the air, here are MONEY's picks for the best sketches making light of awkward bank ads, the financial crisis, and more.

Over the course of a four-decade run, Saturday Night Live has taken aim at most of the trappings of American financial life—even the things you wouldn’t think were funny, like stock market crashes and consumer debt. In honor of the show’s star-studded anniversary celebration this Sunday, here are MONEY’s favorite SNL sketches about money, spanning nearly all of its 40 years.

1. Fix It! (Parts One and Two)

In these two Weekend Update segments, Kenan Thompson plays Oscar Rogers, a “financial expert” who describes a path out of the 2008 financial crisis.

Best line: “Fix it! It’s a simple three-step process. Step one: Fix! Step two: It! Step three: Fix it! Then repeat steps one through three until it’s all been fixed!”

 

 

In that one phrase, Thompson gives voice to the powerlessness and frustration felt by laid-off workers and pummeled investors worldwide. (We wonder what John Belushi’s samurai stockbroker would have to say about that.)

2. First CitiWide Change Bank

This 1988 commercial parody—featuring Jan Hooks, Kevin Nealon, and Jim Downey—highlights just how unimpressive financial services can be, in an ad for a bank that brags about offering change to customers. And they don’t mean it in the Obama way.

 

Best line: “We are not going to give you change that you don’t want. If you come to us with a hundred-dollar bill, we’re not going to give you two thousand nickels—unless that meets your particular change needs.”

Joking about how weak bank services are would be funnier if it weren’t so true.

3. “Don’t Buy Stuff You Cannot Afford”

Steve Martin and Amy Poehler play a couple in need of a budgeting intervention in this 2006 skit, featuring Chris Parnell as the author of a, shall we say, intuitively titled book about how to control spending.

Best lines:

Parnell: The advice is priceless and the book is free.”
Poehler: “Well, I like the sound of that.”
Martin: “Yeah, we can put it on our credit card!”

If only getting out of debt were as simple as the skit suggests; in reality, paying off loans and gaining financial stability can be hard no matter how smart or hardworking you are. But we’d still pony up for a copy of Stop Buying Stuff magazine.

4. Consumer Probe: Irwin Mainway

This 1976 classic features Candice Bergen as a reporter and Dan Aykroyd as the sunglass-sporting Irwin Mainway, purveyor of such children’s toys as Johnny Switchblade, Mr. Skin Grafter, Doggie Dentist, and Bag o’ Glass.

 

Best lines:

Bergen: “I just don’t understand why you can’t make harmless toys like these wooden alphabet blocks.”
Aykroyd: “You call this harmless? I got a sliver!”

5. Metrocard

Roseanne Barr plays a 24-hour hotline representative for the fictional “Metrocard” credit card in this 1991 sketch, which sends up confessional-style TV ads highlighting service. Phil Hartman plays a seemingly satisfied customer.

Best lines:

Barr: “And then he gets really mad and tells me I’m supposed to help him! You know, like I’m his mom or something. So I say, ‘Why don’t you call home and have somebody wire you the money? Or call your company and tell them the problem? Or, better yet, why don’t you take a personal check out of your checkbook, roll it up real tight, and then cram it!'”

Hartman: “She gave me several options.”

MONEY financial crisis

By This Measure, Banks Are Safer Today Than Before the Financial Crisis

150209_INV_BanksSafer
iStock

At least from the standpoint of liquidity, the nation's banks have come a long way over the last few years to build a safer and more stable financial system.

If you study the history of bank failures, one thing stands out: While banks typically get into trouble because of poor credit discipline, their actual failure is generally triggered by illiquidity. Fortunately, banks appear to have learned this lesson — though we probably have the 2010 Dodd Frank Act to thank for that — as lenders like Bank of America BANK OF AMERICA CORP. BAC -0.53% and others have taken significant steps over the last few years to reduce liquidity risk.

It’s important to keep in mind that banks are nothing more than leveraged funds. They start with a sliver of capital, borrow money from depositors and creditors, and then use the combined proceeds to buy assets. The difference between what they earn on those assets and what they pay to borrow the funds makes up their net revenue — or, at least, a significant part of it.

Because this model allows you to make money with other peoples’ money, it’s a thing of beauty when the economy is growing and there are no warning signs on the horizon. But it’s much less so when things take a turn for the worse. This follows from the fact that a bank’s funding could dry up if creditors lose faith in its ability to repay them, or if they need the money themselves. And if a bank’s funding sources dry up, then it may be forced to dispose of assets quickly and at fire-sale prices in order to pay its creditors back.

This is why some funding sources are better than others. Deposits are the best because they are the least likely to flee at the first sign of trouble. Within deposits, moreover, insured consumer deposits are preferable, at least in this respect, to large foreign, corporate, or institutional deposits, which carry a greater threat of flight risk because they often exceed the FDIC’s insurance limit.

The second most stable source of funds is long-term debt, as this typically can’t be called by creditors until it matures. Finally, the least stable source consists of short-term debt, including overnight loans from other banks as well as funds from the “repo” and/or commercial paper markets. Because these must be rolled over at regular intervals, sometimes even nightly, they give a bank’s creditors the option of not doing so.

It should come as no surprise, then, that many of the biggest bank failures in history stemmed from an over-reliance on either short-term credit or on large institutional depositors. This was the reason scores of New York’s biggest and most prestigious banks had to suspend withdrawals in the Panic of 1873, during which correspondent banks located throughout the country simultaneously rushed to withdraw their deposits from money center banks after panic broke out on Wall Street. This was also the case a century later, when Continental Illinois became the first too-big-to-fail bank in 1984. It was the case at countless savings and loans during the 1980s. And it’s what took down Bear Stearns, Lehman Brothers, and Washington Mutual in the financial crisis of 2008-09.

A corollary to this rule is that one way to measure a bank’s susceptibility to failure — which, as I discuss here, should always be at the forefront of investors, analysts, and bankers’ minds — is to gauge how heavily it relies on short-term credit and institutional deposits as opposed to retail deposits and long-term loans. If a bank relies too heavily on the former, particularly in relation to its illiquid assets, then that’s an obvious sign of weakness. If it doesn’t, then that’s a sign of strength — though, it’s by no means a guarantee that a bank is otherwise prudently managed.

One way to gauge this is simply to look at what percentage of a bank’s funds derive from short-term loans as opposed to more stable sources. As you can see in the chart below, for instance, Bank of America gets roughly 16% of its funds from the short-term money market. That’s worse than a smaller, simpler bank like U.S. Bancorp, which looks to the money market for only 9% of its liquidity, but it’s nevertheless better than, say, Bank of America’s former reliance on short-term funds, which came in at 31% in 2005. Indeed, as William Cohen intimates in House of Cards, one of the “dirty little secret[s]” of Wall Street companies prior to the crisis was how much they relied on overnight repo funding to prop up their operations.

A second way to measure this is to compare a bank’s funding sources to the liquidity of its assets, and loans in particular, as loans are one of the least liquid types of assets held on a bank’s balance sheet. This is the function of the loan-to-deposit ratio, which estimates whether a bank’s deposits can singlehandedly fund its loan book. If deposits exceed loans — though, remember that not all deposits are created equal — then a bank could theoretically withstand a liquidity run by pruning its securities portfolio or using parts thereof as collateral in exchange for cash. This would protect it from the need to unload loans at fire-sale prices which, in turn, could render the bank insolvent.

Overall, as the chart above illustrates, the bank industry has aggressively reduced its loan-to-deposit ratio since the crisis. In 2006, it was upwards of 96%. Today, it’s closer to 70%. It can’t be denied that some of this downward trend has to do with the historically low interest rate environment, which reduces the incentive of depositors to alternate out of deposits and into low-yielding securities. But it’s also safe to assume that banks have intentionally brought this number down to shore up their balance sheets, and in response to the heightened liquidity requirements of the post-crisis regulatory regime.

Whatever the motivations are behind these trends, one thing is certain: At least from the standpoint of liquidity, the nation’s banks have come a long way over the last few years to build a safer and more stable financial system. This doesn’t mean we won’t have banking crises and liquidity runs in the future, as history speaks clearly on the point that we will. But it does mean that, for the time being anyhow, this is one less thing for bank investors to worry about.

MONEY financial crisis

S&P to Pay Billions for Being the Watchdog That Didn’t Bark

Standard & Poor's building
Justin Lane—EPA

Standard & Poor's settlement is a reminder that the industry's safeguards failed in the lead-up to the financial crisis.

On Tuesday, Standard & Poor’s (S&P), agreed to pay $1.375 billion to settle claims by the Department of Justice and multiple state governments that the ratings agency defrauded investors in the lead up to the financial crisis.

As a bond-rating agency, S&P was responsible for keeping banks and other major financial institutions honest. Its apparently intentional failure to do so shows how one of the guard dogs of the financial system was co-opted by the very people it was meant to police.

Perverse incentives

Standard & Poors is one of three companies designated by the Securities and Exchange Commission as Nationally Recognized Statistical and Ratings Organizations (NRSROs). Their job is to rate the safety of bonds and thereby provide a kind of warning label for investors. The safest bonds—those issued by companies deemed most credit-worthy and best able to meet their financial commitments—are designated AAA; debt rated BB or lower is considered below investment grade, or “junk” in common parlance.

While companies like S&P theoretically exist to protect investors, much of their revenue comes from the lenders whose securities they were rating. As Kathleen Engel and Patricia McCoy describe in their book The Subprime Virus, ratings agencies generally bring in 1% of any debt deal they rate. Between 2000 and 2007, the three agencies underwrote $2.1 trillion in subprime mortgage-backed securities.

With that kind of money at stake, there was an obvious incentive for these firms to issue ratings that are favorable to the interests of their paying clients.

S&P and the financial crisis

According to a statement of facts released by the Justice Department and “agreed” to by S&P, that seems to be exactly what the company did. Contrary to the company’s Code of Practices and Procedures—which promises that its ratings “shall not be affected by an existing or a potential business relationship”—S&P “toned down and slowed down” the roll out of a new rating model for so-called Collateralized Debt Obligations (CDOs) after an unnamed investment bank suggested the system could jeopardize “potential business opportunities.”

The statement also shows S&P delayed for months ratings revisions on securities it knew to be failing. As far back as November 2006 the head of S&P’s residential mortgage-backed securities group sent two senior executives a spreadsheet—revealingly entitled “Subprime_Trouble.XLS”—warning that many S&P-rated loans were in serious trouble and should be downgraded.

Multiple sources told the Justice Department investigators that the group’s head frequently complained that her concerns were ignored because downgrades would hurt S&P’s rating business. A public warning that major downgrades were imminent was delayed until July, 2007.

Aftermath

The rest, as they say, is history. The housing crash brought to light the incestuous relationship between rating agencies and bond issuers, and eventually resulted in lawsuits like this one. Though S&P was not forced to admit wrong-doing, the case and subsequent settlement revealed a trove of information about the inner workings of the agency and wiped away a full year of the company’s profits.

Dodd-Frank imposed a number of additional regulations on ratings agencies, including new rules regarding conflicts of interest. But S&P’s payout is a reminder that it wasn’t just crooked banks and lenders that tanked the financial sector. The supposed watchdogs were involved as well.

TIME finance

The S&P Settlement Is Odious—And Business as Usual

S&P Index Reports Record Drop In U.S. Home Prices
David McNew—Getty Images GLENDALE, CA - NOVEMBER 27: A reduced price sign sits in front of a house November 27, 2007 in Glendale, California. U.S. home prices plummeted 4.5 percent in the third quarter from the year before. It is the biggest drop since the start of Standard & Poor’s nationwide housing index 20 years ago, the research group announced. Prices also fell 1.7 percent from the previous three-month period in the largest quarter-to-quarter decline in the index’s history. (Photo by David McNew/Getty Images)

The settlement is huge news and proof that the shady arrangement between Wall Street and Washington is back to business as usual

The bill finally came due for Standard & Poor’s Financial Services: $1.37 billion. That’s what the company will pay to the federal, state and D.C. governments to resolve the culpability of its ratings agency in draining trillions of dollars from our bank accounts, 401ks and home equity not to mention contributing mightily to the global financial crisis.

As Attorney General Eric Holder put it: “As S&P admits under this settlement, company executives complained that the company declined to downgrade underperforming assets because it was worried that doing so would hurt the company’s business. While this strategy may have helped S&P avoid disappointing its clients, it did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression.”

But S&P got off cheap and the fact that none of the people in charge of the company at the time are going to jail tells you it’s business as usual between Washington and Wall Street. It’s just a speeding ticket, people. Move along. The company was quick to point out that it wasn’t guilty of what it admitted to: “The settlement contains no findings of violations of law by the Company, S&P Financial Services or S&P Ratings,” the company’s press release asserts.

Nope, just a level of odiousness that still resonates eight years later.

S&P, part of McGraw Hill Financial, Inc. rates bonds for a living—it still does—and it was living well up to the financial crisis by rubber stamping its top, AAA rating to tranche after tranche of residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOS) from 2004 to 2007. The way this works is that the bond issuers pay the ratings agencies to rate them. No conflict there, right? Triple-A is the rating reserved for the best of the best. But RMBs and CDOs that S&P was rating were partially underwritten by the vast number of no-doc, “liar loan” and other mortgages being handed out by equally sleazy outfits such as Countrywide Financial.

It all collapsed like the Ponzi scheme it was when these unfit buyers started to default on their mortgages and the value of the bonds crashed. It would lead to cascading calamities including the collapse of Lehman Brothers, the bailout of AIG, Freddie and Fannie Mac (quasi-government mortgage agencies) not to mention widespread contagion in the auto industry. S&P will also pay $125 million to calPERS, the California pension fund that, like many other pension funds, bought some of these AAA bonds under the guise that they were safe.

Nice work, that. For years, S&P was able to fend off lawsuits by claiming that its ratings were merely statements of opinion protected by the First Amendment, which particularly ticked me off. Don’t use our free-press/free-speech amendment to shelter your atrocious behavior. But that defense finally collapsed after the government took another tack: alleging that S&P committed fraud. “As S&P knew,” read the Justice Department’s lawsuit, “these representations were materially false, and concealed material facts, in that S&P’s desire for increased revenue and market share in the RMBS and CDO ratings markets led S&P to downplay and disregard the true extent of the credit risks posed by RMBS and CDO tranches in order to favor the interests of large investment banks and others involved in the issuance of RMBS and CDOs.”

S&P continued to resist, despite the DOJ uncovering emails that showed S&P employees knew they had clearly underestimated the risk of the RMBs and CDOs. Here’s my personal favorite: “Let’s hope we are all wealthy and retired by the time this house of cards falters.” (Some, in fact, did and are.) S&P’s other defense is essentially that the bankers all knew we were full of it.

In the agreement that S&P signed with prosecutors it admits to the fact that the company was selling garbage. The DOJ also made S&P eat the company’s assertion that the lawsuit was retaliation for S&P’s downgrading the debt of the United States in 2011. S&P was wrong about the quality of its bonds and wrong about the quality of U.S. treasuries. Treasuries have never been more desirable.

So now S&P is free to go about its business, which is an oligopoly that it shares with Fitch and Moody’s, the same threesome that controlled the rating market in 2007. In its reregulation of the financial industry, Congress left the ratings agencies alone. Which means that at some point in the future you can expect the same problems to crop again.

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