Duff McKagan's Column 'Duffonomics' @ Playboy.com

[FunkyMonkey]

Duffonomics: Watch This Space!

02.02.09 9:33 AM CST ? Music  ? Playboy Staff

Appetite For Investment

My name is Duff McKagan. By way of introduction, I play rock & roll music as a profession and have been fortunate enough to have been a founding member of both Guns N? Roses and Velvet Revolver. I?m not tooting my own horn here, just letting you people know who I am. The beer on The Simpsons was named after me and not the opposite. You see, I was also known to be a big drinker.

Playboy has asked me to pen a weekly column on finance. This first piece will serve as sort of ?mission statement? to inform you of what to expect from now until they fire me. You may be asking yourself at this point, ?What the hell does this dude know about money?? Well, here is a quick version of my story:

I got sober in 1994. I suddenly found that I had a ton of time on my hands?bars and drug runs are very time-consuming passions. I found a file cabinet in my basement that held all of my GN?R financial statements from the previous six years. I began to try to make sense of these. The problem was, they weren?t written for the common person to read, and perhaps they were even meant to mislead a typical over-busy rock guy. I was 30 years old and didn?t know what any of the technical terms meant. I didn?t know what a financial ?vehicle? or a ?bond? (tax-free or otherwise) was, never mind the inverse relationship of supply and demand! I enrolled in a class at Santa Monica College the very next week, and it was there that I found my calling and?don?t laugh?my love of academia.

As an aside: From my experience, once you are pegged as a ?rock guy,? people just assume that you are either brain-dead or off high-flying on a private jet with hookers and cocaine. While I have definitely been guilty of both of the aforementioned clich?s, my life these days is just kind of simple and book-filled. Yes, I still tour and make records, but I am much more informed and therefore involved in the everyday commerce that is the music business. My business.

From my short stint at SMCC, I moved back home to Seattle and got myself into the Albers School of Business at Seattle University. Suddenly, the world of finance became a living and fascinating thing for me. I found that I could apply lessons from class immediately to my work in the music business. The more word got around that I was serious about getting my degree in finance, the more serious I was taken in business meetings. I do think that there was, in a sense, fear that one of the ?rock guys? was going to knock down the house of cards that is the record business. Cool shit.

As soon as Velvet Revolver started in 2004, all kinds of financial media wanted to talk money with me. From the Wall Street Journal to Neil Cavuto, PBS?s Frontline to Greta Von Susteren, everyone seemed to come to me as the voice of business from within the music industry. Pretty surreal.

Now, on to my mission statement. Initially, I think that this column should serve two purposes:

1) To educate
2) To bring down The Man

As for the first point, when I stated before that I found myself at 30 not really knowing which way was up as far as financial terminology and complexities went, I also found that I was not alone. I know that I was too embarrassed to actually cop to the fact that I was in the dark when it came to finance. I think this rings true for most of us. Unless you are a CPA, lawyer, or stockbroker, why would you know much about what they are talking about on the financial news? Those boneheads on TV just want to make themselves come off as smart anyway?hoping to maybe score some pussy that they didn?t get in their youth! I hope to shed some no-nonsense light on day-to-day money issues. In these days of financial woe, we can all use a little help.

And as for the second one, I am sick and tired of hearing of these Wall Street assholes getting huge bonus packages from our bailout tax dollars. What a lot of these people did to all of us in the first place is just plain criminal. I have never been keen on executives getting golden parachutes; I?m more apt to give them a golden shower. I will do my best to expose frauds and criminals, one at a time. Care to join?

I also look forward to comments from readers to let me know how I am doing and whether there are directions you would like me to take. Until next week.

[carmiedisco12]

Great stuff Duff.

Im educating myself along these lines.
We live in fascinating and scary times and reading your point of view will be awesome.
The Golden Showers comment was great

[FunkyMonkey]

Duffonomics: What Got Us Into This Mess? (Ignorance Is No Longer an Excuse!)

As I previously stated in my Monday mission statement, this column will be a place to come for some basic education on financial terms. I think by now, a lot of us would have maybe done things differently over the last couple of years if we had some knowledge on the bigger picture of what credit is and what a ?subprime? loan can do to the lendee (that?s you and me, the ones who take the loans). I also think that we will no longer be using the phrase ?I didn?t know what I was getting into? when it comes time for our next mortgage or even ?payday loan.? Ignorance is no longer an acceptable excuse.

Questions from you readers have already been coming in to me on a wide variety of subjects (i.e. ?What should I do with my 401k?? or, ?Is now a good time to invest in the stock market??). Before we get into any of that, however, let?s take an informed peek into some of the factors that drove us toward what the media has dubbed the ?credit crunch.?

Ah, the ?subprime? loan. What is it? Is it bad? A subprime loan is money lent at a rate above the prime rate. Someone with good credit ( a score above, say 680) should be able to get a loan at the stated prime rate. Banks borrow from the Fed at a stated rate and the prime rate is what banks charge to in turn give me and you that loan. Pretty simple. The moniker subprime is misleading in this context as it would seem to be below (or sub) prime. In fact, it is the opposite.

The market opened up sometime in the 1990s for loans to those of us who had imperfect credit scores. Mortgage and car loans started to go out to previously disallowed participants under names like ?second-chance loans? or ?non-conforming loans.? The loan companies offering these would charge an additional fee above ?prime? for the perceived risk?and business got good real quick. As business got better, companies started to loan money out to riskier and riskier loanees.

This now brings us to the dreaded Adjustable Rate Mortgage (referred to as ARM) and its eventual fallout. Banks and lending institutions began to make subprime loans (to higher risk lendees) at an initial low interest that lasted usually for two years?the ARM?s initial low rate and resultant low monthly payments made the loans attractive. And for the loan companies, it was all about getting paid on the initial loan that you wrote without any real regard for the long-term implications. At the end of the initial period, these low interest rates would skyrocket to something around 20 percent. In essence, these were unpayable loans from the get-go, but the selling point of these loans was that that you and I could just refinance (that is, get a new low-rate loan) before the interest rate would adjust up. Loans, however, became harder and harder to get as housing prices fell. A lot of borrowers defaulted on these loans because they couldn?t refinance or sell and the whole thing snowballed.

Meanwhile, these loan companies were also the first to feel the hit of a default (or non-payment) of a loan. But shit, the stock market was going up, and the real-estate market was going through the roof?so they thought, Hey, let?s just sell some of these risky mortgages and car loans to the bigger financial institutions and they?ll re-package them.

Re-package? These firms (Merrill Lynch, Goldman Sachs, etc.?the big boys) would bundle these bad loans in with good ones and sell these bundles as a new investment opportunity to you and me. (Do you actually know what your 401k consists of?) Everything went okay until the panic hit. Information about these bundled loans hit the news; in about a week, the bottom fell out.

The problem with the situation we are in right now is: How many of these loans that our troubled banks are holding are actually good and actually bad? There are hopefully some smart minds at work sorting this mess out. There are a ton of good loans out there, but the stigma of the bad ones and panic about where they are and what ratio of the whole they make up have helped to cause this crash. Let?s try to educate ourselves from now on. Let?s not get bullied and confused by stockbrokers and mortgage lenders from here on out. The Man has had us down for too damn long!

[FunkyMonkey]

Playboy's Rocky Remake

02.10.09

Which makes Jellinek's first major deal to re-create the old Playboy, well, incongruous. Last month Jellinek hired former Guns 'N Roses bassist Duff McKagan to write a financial column for both the magazine and Playboy.com.

Among his fans, McKagan is known more for his drug and alcohol problems than his financial prowess. After binging on a gallon of vodka a day, his doctor told him his pancreas had "exploded." Jellinek says McKagan will dispense business advice based on his rock star experience and the fact he once took courses at the Albers School of Business at Seattle University.

In his first Playboy column, Duff admits to cavorting with hookers on a private jet and doing cocaine. He then explains that one of the purposes of his column is "to bring down The Man," opining: "I am sick and tired of hearing of these Wall Street ass----s getting huge bonus packages from our bailout tax dollars. What a lot of these people did to all of us in the first place is just plain criminal. I have never been keen on executives getting golden parachutes; I'm more apt to give them a golden shower."

Wall Street, you've been warned.

http://www.forbes.com/2009/02/10/playboy-jimmy-jellinek-business-media-0210_playboy.html

[Genesis]

Cool stuff Duff! I didn't know the guy had a degree in finance.

[FunkyMonkey]

Duffonomics: Stimulate This!

As a slight disclaimer, you will notice some of my writings may contain a bit of a political or ideological slant. While I will do my best to convey ?just the facts? for the most part, I may get somewhat righteous when I feel strongly about a particular subject.

If you are at all like me, then you are probably trying to navigate the murky waters of this new federal stimulus package, trying to figure out what it actually means to us as a country and to you as an individual. I am going to do my best this week to try to shed some elementary light on the many confusing aspects of this proposed bill.

First off, let?s take a real basic look at the fundamentals of why the Democrats and Republicans are bickering over the basic tenets of this bill in the first place: The Republican Party has always been about ?less government? and ?more business.? As far as the stimulus package, they are striving for more tax cuts and incentives in the loan market?ostensibly making it cheaper to forge ahead with entrepreneurial endeavors. Personally, I don?t believe a bunch of new small business start-ups will be enough to get us back on our feet. Business left alone is what got us into this heap of trouble over the last eight years.

The Democrats believe that a larger government role in our day-to-day life will even out the highs and lows of the economy. In this new stimulus package, a large chunk of the money is earmarked for building infrastructure (roads, wind-powered energy, dams and the like). Some may think that these create only short-term jobs. But I would argue that new roads will open up more of our country for commerce; repairs to existing roads and bridges will ensure the continuation of commerce on them in the future; dams and other renewable energy projects will need ongoing servicing, creating long-term jobs in addition to the short-term construction jobs; and every kilowatt of power these projects generate is one we don?t have to send money to some foreign oil bandit to pay for. Grants for college students (Pell grants) are also included, and we would all benefit from the education of our youth?not to mention that such grant money would instantly be put back into our schools on our soil.

Let?s take a gander at some recent economic history. When Clinton left office in January 2001, we had (according to CNN) a budget surplus of $230 billion. Also, our unemployment rate was at 3.9 percent according to the Bureau of Labor and Statistics. When Bush left office, we had a $410 billion deficit (according to the Associated Press) and our unemployment was at 7.2 percent. Hmmm.

In the last 25 years, the two parties have become increasingly polarized, battling each other in the House and Senate and voting along party lines on particular bills and measures. I believe this ?party first? atmosphere has done nothing but cause mutual demonization and hinder our progress as a nation. The Republicans are now claiming that Obama?s stimulus package mirrors Roosevelt?s programs in the 1930s and suggesting those didn?t work. Bullshit is what I say! Maybe it wasn?t a fast elevator ride out of a hole, but it was a focused and upward movement out of the Great Depression. My grandfather Jon Harrington, an immigrant from Ireland who had fought in World War I as a new American, finally found work through the New Deal?after many years without a steady income?building dams throughout the West. And you want to talk about long-term benefits? We were able to win World War II in no small part because of air power?air power that would have been impossible to produce without the electricity from two FDR jobs projects, the Bonneville and Grand Coulee dams on the Pacific Northwest?s Columbia River. Those two dams provided the juice to manufacture tens of thousands of bombers and fighter planes in the 1940s as America scrambled to catch up to the military industrial might of the Axis powers. It?s no coincidence Boeing is in my hometown of Seattle!

Larry Summers, our new chairman of the White House National Economic Council, summed up the squabble succinctly on ABC?s This Week by stating that ?those who have presided over the last eight years, eight years that brought us to the point where we inherit trillions of dollars in deficits, an economy that?s collapsing more rapidly than at any time in the last 50 years, don?t seem to me in a strong position to lecture about the lessons of history.? Indeed.

[FunkyMonkey]

It's Go Time (If You Are Ready)

02.19.09 4:01 AM CST ? Duffonomics ? Playboy Staff

Playboy is a high-profile publication; we are all aware of this fact. But it?s really hit home for me lately. I have suddenly been thrust into a very interesting position with newfound celebrity as Playboy?s financial columnist. Instead of people coming up to me and saying the usual, ?Hey dooood, I saw you play Madison Square Garden in ?93?I was sooo stoned!? it is now suddenly, ?Duff, I have some extra cash in the bank, what should I do with it?? or some such financial inquiry.

First off, I am going to do my best to shoot straight in this column while also keeping financial jargon to a minimum. I am qualified to write this column if only for the simple fact that I too am sick and tired of trying to figure out what the hell is going on right now in our economy. This column is a place for you and I to go back to square one and rebuild our financial confidence through knowledge.

Someone e-mailed me with timely question: Is now a good time to buy a house? In the case of this particular e-mailer, this would be a first ever foray into potential home ownership. Luckily for me, I have the go-to guy for just this question. My best friend has been buying and selling real estate in the Seattle area for the last 22 years and was more than happy to field a few inquiries from me. Here?s what I learned:

A lot of you may be sitting on a chunk of cash wondering how to time this real estate market. Markets around the country vary widely, of course, but they are all most assuredly down from the highs that we witnessed recently. How much lower will they go? No one knows for sure, but I have discovered a few factors that may help in your decision-making.

This recession will certainly not last forever and the drop in home prices will have to plateau at some point. Meanwhile, interest rates have sunken in the hopes of stimulating this economy. If you are waiting for that $300K home to perhaps reduce its price by another $5K to $15K by late summer, you?d better just hope that interest rates don?t go up in the meantime. If interest rates go up by just half a percentage point, you could end up paying 10 to 20 times the money you may have saved waiting for the ?perfect? price of your home. Now, interest rates could drop further, but certainly not by much. If you are looking to get into your first home, now just may be the perfect time factoring in the massive amount of inventory out there, the ?fire sale? prices and, most importantly, these low interest rates. Interest rates are what will kill you over the length of a loan.

Let?s talk about your credit score for a second. If it is below 640, forget buying for now. Rent. If it is above 720 and you have verifiable income (verified by the bank), you are golden and should qualify for the lowest-fee loans. Most of us however, have a credit score somewhere between 640 and 720 and will end up paying higher fees on a loan. Expect an additional half to two-and-a-half percent, depending on where your score sits within this range. There are things that you can do to better your credit score, such as paying off your credit cards. (Do keep the credit card, though, and make small purchases that you can pay off at the end of the month, thus building good credit). Also, pay all of your bills on time! A reported delinquent bill (to some creditors that can mean just 30 days late) will take three years to clear. There are some great non-profit organizations that will help with advice on your credit woes. Simply Google ?credit counseling? and you should find something that suits your particular malady.

Federal guidelines are again being followed by loan underwriters (banks and other loan institutions) as to what percentage of your monthly income is recommended for a mortgage payment. Full documentation of workplace and income is now again being required. (Yes, they were giving loans to people without a stated or proven income before this ?credit crunch.?) Just so you are aware, The Man (Fannie Mae) looks for your mortgage payment to represent 30 percent or less of your monthly income.

Once you have gotten yourself into a new home, just remember this: A house is your home and not your bank! This is where a lot of us have headed in the past. A bunch of us will buy a 300K house and start to think it is somehow wise to take out a second loan against your house so that you can buy flat-screens, Gucci, jet-skis, and hookers and cocaine to fill out this new lush pad. Three words: Bad fuckin? idea.

Until next week fellow voyagers?breath deep and look at pictures of naked chicks!

[FunkyMonkey]

Duffonomics: Hey, Ho, Let's Go

02.26.09 9:41 AM CST ? Duffonomics ? Playboy Staff

The stock market indexes are as low as we?ve seen for a decade or so and hopefully won?t dip much more. Last week, I tried to offer some helpful ways to figure out if now is a good time to buy your first home. But I think we should also be prepared to make our own decisions on when and how to capitalize on the stock market when it finally begins to turn.

Part of making those decisions is feeling you know the lay of the land. For that, you have to be able to make use of all the info out there. The most frequent complaint I hear from the casual MSNBC or FOX Business Channel viewer is that there is so much damn financial jargon that the underlying info goes over our heads. Articles in newspaper business sections also presuppose knowledge of a lot of terminology. For 99.9 percent of us, it?s fucking confusing and we?re sick of it. Well screw that! The average consumer?us, the ones over whose heads they try to talk?makes this economy tick. To bring some power back to us, we need to demystify the jargon. Let?s start with something that will have a direct impact on what you buy when you get back into the stock market. For those of you who already know some of this stuff, I hope you stick around. And for the rest of us, here?s lesson number one: ?Market capitalization.?

Market capitalization (or ?market cap,? as the talking head types shorten it) is simply a company?s market value. The way to determine it is shockingly easy: Multiply the number of outstanding shares of a company?s stock by the current price a single one of its shares, and you will determine market capitalization. Not exactly rocket science. If a company has a million shares of stock outstanding and the current share price is $20, then the market cap is $20 million.

Companies are generally categorized based on market capitalization. Different brokerages use slightly different numbers, but here?s the basic breakdown.

?Small cap? means a company with market capitalization of $250 million to $1 billion. The upside potential for these stocks can be great?but the risks can be too. If there is a small-cap stock that you believe in and you see potential for the company?s business to grow, research it. Look at the sector it?s in and make sure saturation hasn?t been attained. For instance, when Starbucks first started to expand in the late 1980s and early 1990s, there just wasn?t any competition. If you bought shares in the company then, the upside was huge. But even then it was a risk. If Starbucks failed, so too did your chances of ever collecting on the money you had in it. There was no parent company to come riding to the rescue and absorb failure.

?Mid cap? is what you call a company with market capitalization of $1 billion to $10 billion. This kind of stock represents a sort of happy medium between risk and security. Companies this size tend to have some upside growth (like a small cap) while retaining a larger cushion to fall back on. If you have a girlfriend who you don?t want to lose, but still want to get some on the side, a mid cap might be the discreet call girl you?re looking for!

?Large cap? companies have a market cap of $10 billion to $50 billion. They are also referred to as ?blue chips.? These are the big boys. When building a stock portfolio, you should anchor it with a steady amount of blue chip stocks. Instead of huge peaks and valleys, growth in these stocks is just steady. But they can withstand most any financial storm. If you are getting to retirement age, large cap stocks are seen as the safest ?equity,? or stock, as they are historically steady. And these are also the companies that are getting the bailouts. So shit, even if they do something scandalous or just aren?t competitive with the rest of the world, we taxpayers still have to keep them running because they employ too many of us and are cornerstones of our economy.

With these basic categories in mind, everyone has to figure out their own tolerance for risk as they go back into the market. Of the money I have in stocks, I keep about 40 percent in blue chips. I keep about 15 percent in high-risk stuff and another 15 percent in medium-high-risk. But the key is making the ratio work for you and your situation. Then the biggest thing is to stick to the plan you come up with. Because if there is one absolute truth in all of this, it?s that everything is cyclical?no matter the scale of the downturn, if we can wait it out, it will turn back in our favor. Just look at the stock market crash of 1929. It?s the famous example they showed us in Finance 101. Anyone who stayed in their positions in 1929 came out ahead in just a few years. So you don?t have to just hope things will turn around, you can be sure they will.

[lynn1961]

Duffonomics: When the Banks Go Bankrupt

?Formal education will make you a living; self-education will make you a fortune.? ?Jim Rohn

This week has brought to light the fact that two of our largest U.S. banks are likely insolvent. Bank of America and Citi Group are at the center of this maelstrom. The spin by the CEOs of these banks is that everything is going just fine and that Wall Street and various economists are overreacting. Maybe so. But the discussions about these banks lead me to my latest attempt to simplify some current financial events and maybe even diffuse some of our collective anxiety while I?m at it.


Insolvency, whether perceived or real, is the last place any bank wants to be. Banks must of course carry and show their ?financials,? or, financial statements. A basic breakdown of a healthy financial would show that you own more than you owe right at this very moment. Whatever extra you own beyond what you owe is your equity (?assets? minus ?liabilities? equals ?shareholder equity?). Now there are myriad ways to cook the books?you might value an asset at more than it is currently worth, for instance, or assert that certain liabilities (or debts) can be put off for a year or two?in order to make a current financial statement seem more attractive and less alarming.

Have any of you heard of the term ?mark to market? being bandied about in the news lately? This is an accounting term and another example of talking heads in the financial news business pontificating with the assumption that we know what the fuck they are talking about ahead of time. How would we? Mark to market simply means that in the asset column of a financial statement, there could certainly be a difference between what an asset is ?marked? (or valued) at, and its current market price. If a bank lists a property as worth X but the current market price is lower, they may have to show their mark-to-market difference. Right now, as you may imagine, this would not be a very attractive prospect for banks. It could well be such an exercise would show that they owe more than they could possibly pay for in the current market. Meaning: Insolvency.

Likewise, some of us may currently owe more on our home than it is actually worth on the open market right now. This is called being ?underwater.? Some of us will choose to stay in that house and ride out this storm, but others may have no choice but to walk away (loss of job or loss of confidence in the real-estate mark for instance). The underwater phenomenon, coupled with the number of bad loans to people who could never pay the mortgage they received in the first place (or who got stuck at the wrong end of an adjustable rate mortgage?or ARM?and couldn?t refinance), has left many banks holding sacks full of crap. True mark-to-market transparency at this moment would be alarming for sure. As I said, bank CEOs are working feverishly right now to quell this anxiety?a big job.

On the bright side though, after the infamous runs on banks and the bankruptcy of a large portion of the banking sector from 1929 to 1932, the U.S. government created an insurance corporation to guarantee our bank deposits. Since 1933, the FDIC (Federal Deposit and Insurance Corporation) has provided a buffer against the dire sort of anxiety depositors faced at the height of the Depression. Banks must pay this insurance so that our money is always safe, whether they fail or not. The FDIC was given its first test when a number of big savings and loan banks failed in the 1980s.

I don?t really buy into much of the current alarmist financial news and information, but I have to be honest: The prospect of insolvency does give me pause. I had a couple of accounts at Bank of America. I am not too sure that I want to test the deposit insurance. If B of A were to fail, how long would I have to wait for my dough? In that interim time, will I receive a reasonable interest rate? I?ve been looking at the financials of a few local banks?I?d like to put my money into a bank that played it safe so I don?t have to worry about the particulars of FDIC.

http://www.playboy.com/blog/2009/03/duffonomics-when-the-banks-go-bankrupt.html
 
 

[FunkyMonkey]

Duff is interviewed by Jim Kerr @ Q104.3.  He talks mainly about finance....

Scroll down on the left:

http://www.q1043.com/pages/podcast.html

[FunkyMonkey]

Duffonomics: Ponzi and Madoff

 03.11.09 6:09 PM CDT ? Duffonomics  ? Playboy Staff

Before I get too far into this article, let me just make a suggestion to everyone reading this; turn off the TV and don?t listen to news radio for a little while?it?s way too brutal to watch right now. Maybe instead, listen to some AC/DC or Prince and go for a run, or better yet, fuck your brains out. It?s just not going to do anyone any good to watch financial news right now?bleak at best. Okay, I?ve said it.

Today we will apparently see Bernie Madoff appear in court and, according to his lawyers, plead guilty for his part in the 15 or so year long bilking of his investors. Madoff?s reign of deceit was a well-draped Ponzi scheme that collapsed once the financial markets began their downward spiral. But what is a Ponzi scheme? How did he get away with all of this? I will now do my best to speak plainly on this subject so that we can all get a general understanding and therefore avoid anything like Madoff?s scheme happening to us!

Charles Ponzi was a young Italian immigrant who came to New York in the early 20th century to find his fortune. He came upon a clever marketing and investment tool in international postage stamps. The deal was pretty simple in that an inexpensive Italian postage stamp could be traded straight across for a U.S. postage stamp; however, the U.S. dollar was incredibly strong against the Italian lira and the profits were something like 400 percent. All of this was actually legal and thought of to be genius. The good word spread regarding the genius of Ponzi the investor. As more and more ordinary people began to invest with Ponzi?s company, it became apparent to investigators that there just weren?t enough postage stamps in circulation to actually back all of Ponzi?s claims. When his earliest clients wanted to get paid on the their investment, Ponzi would simply pay them with new money he was getting in. But most people stayed in with him ?after all, if you were making 50 percent return on your money, why would you pull it out? In basic terms, he was taking from Peter (new investor) to pay Paul (old investor), and there really was no financial instrument making any money. The stamps were a ruse at that point. Homie was found out and went to jail, but not until he had bilked some $15 million in 1920s dollars from his victims?billions in today?s dollars.

Ponzi was in no way the originator of this type of financial deceit. Charles Dickens wrote in the mid-1800s of a pyramid-like money scheme in A Tale of Two Cities. I remember one of my economics professors speaking on the fact that these types of cons have been around since antiquity; Charles Ponzi just happened to do his dirty-deed in a time of modern communication: word spread and the moniker was his.

And then there is Bernie Madoff. Last December, he admitted that his asset management firm was nothing but ?one big lie,? a massive Ponzi scheme. Because of Madoff?s high-esteem on Wall St. (even serving as chairman at NASDAQ), he became a trusted name and highly sought-after broker of the uber-wealthy?s investment accounts. Madoff frequented the social events of the posh and even enlisted outside agents (see Sonja Kohn, who is allegedly in hiding now, trying to avoid Russian mobsters who lost money in the Madoff scheme) to lure big fish from beyond the U.S.

Since the breadth and complexity of Madoff?s financial knowledge ran so deep, few if any questioned his investment methods?they were even marketed as ?too complicated for outsiders to understand,? making a value of the opacity of his schemes. Madoff duped even the smartest of the smart, including members of the Securities and Exchange Commission (the overseer?s of U.S. stocks and bonds, simply put), and heads of many financial advisory firms. Rene-Thierry Magon de la Villehuchet of Access International Advisors committed suicide a week after Madoff?s scheme started to unravel; Villehuchet discovered that he had lost $1.5 billion of his investors? funds.

And to top it all off, unlike a common criminal, Madoff has been permitted to continue to reside in his multi-million-dollar luxury Manhattan town home under house arrest. Seems all those connections to the wealthy and powerful are still paying dividends.

All of this points to the importance of understanding what is happening with your money. I don?t want to end up broke with my broker holed up in a luxury apartment, and I?m sure nobody else does either. Together we can do our best to avoid that situation: The key to protecting yourself is also the reason for this column?getting and using basic knowledge.

http://www.playboy.com/blog/2009/03/duffonomics-ponzi-and-madoff.html#more

[alejoyp]

I play rock & roll music as a profession and have been fortunate enough to have been a founding member of both Guns N? Roses and Velvet Revolver.

No. The original bass player of Guns N' Roses was Ole Beich. That's a fact.

[D]

I play rock & roll music as a profession and have been fortunate enough to have been a founding member of both Guns N? Roses and Velvet Revolver.

No. The original bass player of Guns N' Roses was Ole Beich. That's a fact.

Jesus, just stop it already

[FunkyMonkey]

Duffonomics: Bad News Bared

?Beware of false knowledge; it is more dangerous than ignorance.? ?George Bernard Shaw

Last week, I started the column out by suggesting that we all may be better off not watching any financial news at all right now because it?s all just too shitty. Endless negative news does nothing good for the soul or the psyche. The recession of the early 1980s had arguably much worse data than this current one (in terms of jobless rates and decline in Gross Domestic Product, etc.), but cable news was in its infancy then and we didn?t all have instant access to tales of financial woe via the Web to make us knee-jerk and sob.

On Friday morning of last week, two friends emailed me urging me to watch The Daily Show with Jon Stewart from the night before featuring guest Jim Cramer from CNBC?s Mad Money. To me, Jim Cramer is the epitome of what not to do when looking after your own financial portfolio. He is a spastic and excitable day-trader, and his tactics are nothing short of Las Vegas gambling. Stewart and Cramer have been exchanging jabs on each other?s shows and Cramer accepted Stewart?s invitation to be a guest and get everything out on the table; Cramer walked into a buzzsaw.

Not only were Cramer?s on-air tactics called into question, but Stewart also posited that guys like Cramer?and, in fact, his entire network, CNBC?were as much to blame for the financial downturn as predatory sub-prime mortgage lenders (see my previous post on this topic). ?If it bleeds, it leads? financial news apparently gets high ratings, and that means even higher advertising dollars for the networks. Stewart surprised his guest with some previously unseen video footage that appears to show Cramer talking about illegally influencing the hedge-fund market with made-up rumors that negatively affect a companies? stock price. (Cramer responded that he had been talking in the abstract.) A downturn in a stock-price is an upturn for those, like Cramer, who specialize in the ?short-selling? of stock. (I will cover some of these practices next week.) Cramer was visibly shaken by this unveiling and promised to change the format of his TV show. Jon Stewart is my new fucking hero, a champion of anti-bullshit.

Ben Bernanke, the chairman of the Federal Reserve Bank (usually called the Fed), was on 60 Minutes this past Sunday. If anyone wants a simple primer on what the Fed is and how our money supply works, check the show out. This was my first real look at Bernanke and I must say that he impressed me with his common-sense knowledge of all things economic. He is a steady presence there at the Fed and a person I now trust at the financial helm in these hectic times.

Earlier this week, both President Obama and Bernanke spoke out against AIG giving almost $170 million in bonuses to their executives. AIG has thus far required four separate federal bailouts totaling $160 billion and executive bonuses at this time seem grossly inappropriate. Obama has responded by proposing a bill that gives the Fed additional oversight and controls over banking practices. This would mean corporate America would have a watchdog other than the seemingly inadequate SEC?the institution that failed to sniff out Bernie Madoff.

In the following weeks, along with continuing discussions about financial basics, I will also try to answer some of the questions that you readers have sent in. Maybe together, through dialogue, we can collectively forecast a bottom to this market and be prepared to take advantage of the eventual upswing. A lofty goal? Maybe. But I believe shared financial knowledge will eventually create a more solid market for us all. We will know the worth of things and we will be able to smell out BS. Until then.

The commentary on this blog is not intended to be taken as investment advice. The Author is not a registered investment advisor. There is no substitute for your own due diligence. Please be aware that investing is an inherently risky business. If you chose to follow any of the advice on this site, then you are accepting the risks associated with that investment. This is not a solicitation to buy or sell securities. The Author may have also taken positions in the stocks that are being discussed, and the Author may change his position at any time without warning.

http://www.playboy.com/blog/2009/03/duffonomics-bad-news-bared-1.html

[Red1]

I play rock & roll music as a profession and have been fortunate enough to have been a founding member of both Guns N? Roses and Velvet Revolver.

No. The original bass player of Guns N' Roses was Ole Beich. That's a fact.

LOL get a life dude

[FunkyMonkey]

Knowledge Now Means Dollars Later

?Never invest in a business you cannot understand??Warren Buffet

Okay, step away from the TV and all of the news about the AIG executive bonuses. Sure, it feels great to get good and pissed off right now?and it?s completely justified. But we must focus on what we can do for ourselves here in the upcoming months and years for our long-term personal financial security. An economic recession begets a slowing economy as we all tighten the purse strings to try to ride this thing out. Maybe with some understanding of how the economy works, we can feel more confident and perhaps even loosen those purse strings.

I have had a ton of questions regarding your 401Ks and what?s actually in them. Understanding the basics of financial instruments like stocks, bonds, CDs, etc. is important if we want to be able to capitalize on our economy turning around?and it will turn around! Your 401K is simply just a grouping of financial instruments that some financial planner has deemed best for you and the company that you work for. Let?s look this week at what a common stock is.

A stock is a type of security (or financial instrument) that indicates actual ownership in a corporation and represents a claim to the assets of that company. (A bond, on the other hand, is a loan to a company or government agency for which you are paid back with interest.) There are many ways to value a stock. It?s somewhat like going to a farmers market and comparing corn sold by two different vendors. Say an ear of corn is 50 cents at one booth but 75 cents at the other, and the quality is the same. You would more than likely buy the 50 cent corn. But if the 50 cent corn is rotten or otherwise inferior, the 75 cent corn would be the better choice. The same sort of logic and diligence should be used when choosing a company to invest in. Too often we just send our money to our broker, or press ?buy stock? on some Internet site without doing any research on the company we are buying into. We?re not entirely to blame?we have just not been taught how to valuate an individual company and the industry it competes in.

A price-to-earnings ratio?or P/E ratio?is simply the price that the stock is currently trading at, divided by the earnings per share. (Earnings per share are calculated by taking a company?s net earnings and dividing it by the number of outstanding shares.) If a share price is $20 and the earnings are $1 per share, then the P/E ratio is 20. P/E ratios are one of the main tools investors use to gauge not only a company?s value, but also where they stand in their particular industry?to be able to compare ears of corn in the example above.

One way to find a P/E ratio for an entire industry is to look at websites like Yahoo Finance. You can find a chart listing with ?industry statistics,? including the sector-wide P/E ratio. By comparing the stock you are interested in to the industry average (as well as comparing that industry with other industries), you will have another gauge for your decision-making process.

There are other bits of information to look for in the news about a company. Here?s a few:

Good earnings reports: It?s often a good sign if a company reports good or better-than-expected earnings. Bad earnings will usually have a negative effect on a company?s stock price.

A new product or service: If a new product is created by a company, it could mean increased profits. The potential downside would be liability issues arising if the product were found to be defective, for instance.

Financial problems: If independent analysis reports problems with a company?s financial health, that?s something to take into account. (A company?s annual report is required to have a statement from an independent analyst. These independent analysts must report their true findings under penalty of the law.)

A new business deal: Keep an eye out for company announcements of favorable business deals such as a joint venture.

Even if you are not in the market right now to buy stock, try tooling around the web and getting in the habit of educating yourself. Figure out what sites offer the information you want in ways you like. As I have said before, if we are prepared and educated, we can hopefully avoid another economic downturn like the one we are currently witnessing. Shit, I?d like to prosper on the way up and out of this thing. How about you?

The commentary on this blog is not intended to be taken as investment advice. The Author is not a registered investment advisor. There is no substitute for your own due diligence. Please be aware that investing is an inherently risky business. If you chose to follow any of the advice on this site, then you are accepting the risks associated with that investment. This is not a solicitation to buy or sell securities. The Author may have also taken positions in the stocks that are being discussed, and the Author may change his position at any time without warning.

http://www.playboy.com/blog/2009/03/duffonomics-knowledge-now-means-dollars-later.html

[FunkyMonkey]

Bond-age Gear

By Duff McKagan

?Having money ain?t everything, but not having it is.??Kanye West

Last week we covered the basic definition of a common stock. We also delved into some of the factors that can help decide if a particular stock is a good buy. This week, I hope to clarify not only what bonds are, but also some of the fancy language that surrounds them.

As discussed, a stock is an actual piece of ownership in a particular company?when you buy a stock, you become part owner in the company (you have ?equity? in the firm, and this is why stocks are also called equities). A bond on the other hand, is a loan you make to a company or government agency. In return for this loan, there is a stated yearly coupon rate (or interest rate) that is promised to be paid to you as the creditor.

A ?corporate bond? is simply a loan made to a corporation and the money you recoup from the coupon rate is fully taxable. Because the payments made to you are taxable and because corporate bonds do not have the solid backing of a bond issued by a government agency, the coupon rates are usually higher than for government bonds. Corporate bonds are often called ?paper? on Wall Street?you?ll hear ?corporate paper? and ?commercial paper,? but they both mean the same thing.

As for government bonds, ?treasury bills? are issued in three-month, six-month, and one-year ?maturities,? which means the amount of time before the loan will be repaid. They are bought at a discount to ?par,? which is a fancy way of saying the face value of the bond. A discount to par just means that they have figured out beforehand how much interest they will owe you at the end of the stated period and hence sell the bond to you at a discount reflecting the value of that interest.

?Treasury notes? (10 years or less) and ?treasury bonds? (30 year?also called a ?long bond?) differ from the treasury bills in that 1) they will have a higher coupon rate, and 2) they pay the coupon rate usually twice a year and 3) they are bought at their $1000 face value. Notes and bonds already in circulation on markets, however, can change hands for amounts different from their face value. If, for instance, the current coupon rate were higher than last year?s, you would buy that bond at a ?discount,? or less than its stated face value. If there were an older bond with a higher coupon rate, then you would pay a ?premium,? or a specified sum above the $1000 face value.

The interest paid on all treasury bills, notes, and bonds is exempt from federal income tax. Then there?s municipal bonds?similar idea as treasury bills, but issued by state or local governments. In states with state income tax, municipal bonds offer a double tax-free feature?they are free of state and federal income tax.

Credit ratings are available for both corporate and government agency bonds. (Yep, some cities or towns have been known to default on a loan or two, or try?hello Bridgeport!) The crappier the credit rating, the higher the yield on the bond?it?s just like when we have a crappy credit score, the bank can charge us a higher interest rate. Credit ratings go from really good (AAA, AA, or A), down to really bad (CCC, CC, or the dismal single C). While a bond with a C rating (also known as a ?junk bond?) may pay a really high coupon rate, the risk of default may be too high for the average investor. Standard and Poors is the best resource for finding all bond credit ratings.

If you have heard the term ?laddered portfolio,? this simply means that you have purchased different bonds with dates that mature when you are ready to receive the money. If you are 30 years old, it may be time to buy a few 30-year bonds per-year (for the next 20 or so years). You could use the interest payments now for other investments like stock; then, when you're 60, you would start to receive your principal back. Hey, I am not your financial advisor, just food for thought!

http://www.playboy.com/articles/bond-age-gear/index.html

[FunkyMonkey]

Duffonomics: Do We Need to Reconsider the Idea of a Central Bank?

By Duff McKagan

I had the pleasure of watching Senator Bill Bradley guest on Real Time with Bill Maher the other night. This guy is flat-out smart and really understands how our money and banking systems work here in America.

Bradley made an interesting point. He said that if we?that is the taxpayers, via government action?had bought Citigroup, we could have bought it for ?$10 to $15 billion dollars? and then, ?six months later,? sold the good assets back into the private sector for ?eight to 10 times what we paid for it.? This would have taken care of the toxic assets and turned a profit for the American taxpayer. Instead, we have bailout pledges of up to $400 billion to that one bank alone.

Political conservatives think such a move?nationalization of a bank?is just too damn ?socialist? to see the obvious upside of it, an upside in an area they care deeply about: taxation. The difference between the plan currently underway to spend hundreds of billions of dollars propping up banks versus the much cheaper takeover Bradley advocates is huge in terms of government spending. And the bill for that spending is going to come due?meaning the result of conservatives? reluctance to be more aggressive in saving the banking system now will spell higher taxes later, either for us or for our children, depending on when we start paying it back.

In staying with the educational slant of this column every week, I?m going to change gears here. This week I want to give a brief history of the Fed with the hope it will empower you to gain more confidence as we prepare ourselves for the eventual economic recovery?and maybe even change your mind along the lines of Bill Bradley.

The Federal Reserve, or Fed, is our central bank, empowered to regulate the quantity of money and the banking system and serve as lender of last resort when banks are unable to satisfy demands for withdrawals from their own reserves?as happened during the bank runs of 1929. The Fed was established in 1913. But the Federal Reserve was preceded a century earlier by a series of efforts to establish a national bank which would serve as banker to the federal government, stabilizing private banks by providing credit in times of crisis.

The idea for a central bank was always controversial in American politics, condemned, for instance, by Thomas Jefferson as a dangerous centralization of power. The first Bank of the United States was established in 1791, but its charter from Congress was allowed to lapse after only 20 years. The Second Bank of the U.S. was chartered in 1816, largely in response to the disorder following the War of 1812.

President Andrew Jackson disliked the Second Bank, and made it a campaign issue for his 1832 reelection. Jackson felt it functioned to help the rich, it hurt the smaller banks that he felt were crucial to the development of the American West, and it centralized power too much; he also raised corruption charges against bank managers. Jackson vetoed a renewal of its charter and then tried starve it. The result was that the Second Bank, too, lasted just 20 years, closing in 1836, at the tail end of Jackson?s administration.

If not for these failures, the Fed could well be called the Bank of the United States, following the model of other central banks like the Bank of England. But centralized banking conflicted with the American ideal of decentralization, states? rights, and so forth?Jackson, in fact, had transferred the federal government?s deposits to state chartered banks during his attempts to starve the Second Bank.

I am a big fan of the ideals behind capitalism, but these ideals have been undermined by greedy advantage-takers who have thought only of what?s best for them, and not the country as a whole. Maybe the objections to central banking in the past have actually become the justification for moving in that direction now? Indeed, a centralized banking system to act as a watch dog for us workers and taxpayers may today be a good idea. After all, according to Senator Bradley, we would already be on our way to a profit if we had acted this way with Citigroup. And making a profit is good business! Food for thought at least, right?

[FunkyMonkey]

Duffonomics: Why Teabaggers Need to Check Their Junk

By Duff McKagan

Before You Go Teabagging, You Better Check Your Junk

This week, I am going to break away from the educational emphasis that I have thus far maintained. In my Playboy mission statement, I wrote about my hope that we could all perhaps learn together as this column progressed, and that over the course of that process this new knowledge could be transformed into power to help us in these troubled economic times. But this week I?m talking money in only the most general sense. With tax day just past, I want to point out some bullshit that has been going down?a sort of propoganda being spread by network news. My plea: Let us not be sheep.

Have you heard about these so-called anti-tax tea parties that are supposedly a grass roots effort built up by local networks of concerned citizens? Well, I have no problem with protests of any sort, but this has to be one of the most uninformed and politically-motivated that I?ve ever seen. Fox News seems to be instigating this whole mess, and its viewers seem to be following like so many mindless sheep.

Let us get to what I think is the main root cause of this recent protest. Sean Hannity from Fox claims that people are protesting because they have just filled out their tax forms and are horrified to be paying 30 to 40 percent of their income to the government. You can hear the media echo: Obama must be stopped! Of course, this is utter bullshit, as any tax that we pay right now was set-up up by the previous administration. Why is this blamed on Obama? Well, the Republican Party is so beat up right now that they seem to be resorting to lies and innuendo as a last and desperate resort.

Newt Gingrich and Dick Armey (great name, by the way, for someone playing a role in a mass teabagging effort) seem to be the primary idea guys behind this ?protest,? and it seems that Fox is the only channel making this story news at all. Neil Cavuto from Fox defended his station against criticism of harboring an anti-Obama slant this week by saying that Fox news was there to cover the Million Man March in 1995. It should be noted that Fox News did not even start until 1996.

Another conservative tool of late is to throw the ?socialism? card. They want to convince us that Obama is a socialist and that socialism is a very bad thing. Let us not forget that our economic system takes from aspects of both capitalism and socialism. If we didn?t have aspects of socialism, there would not be Social Security or Medicare, just to name just two government services we take for granted.

I may be looked at as a tree-hugging liberal for writing this piece. The fact is, I am not. I believe in Adam Smith and his invisible hand theory?I just don?t think of it as a sacrosanct or inviolable principle. I believe that government also needs to use a hand to keep corporate greed at bay. I also think that at times like these, a central bank would be beneficial to this country. (Check out the book The Forgotten Man by Amity Shlaes.)

What I am getting at is that it is important to our recovery and sense of confidence for us all to look under the hood when it comes to the news and those who report it. I?ll have my chance to do so soon: I am booked to be on Sean Hannity?s show on May 8. That should be interesting!

[FunkyMonkey]

What I am getting at is that it is important to our recovery and sense of confidence for us all to look under the hood when it comes to the news and those who report it. I?ll have my chance to do so soon: I am booked to be on Sean Hannity?s show on May 8. That should be interesting!

After reading this column...it could be an interesting show.