*wall street-- part 2*

Hi all - so I didn't mean to cause any panic by that last post. There is certainly a lot of panic in the market now. I do not think it is a time to panic as it relates to the cash sitting in your bank account; remember deposits at your local bank are insured up $100k by the FDIC (if you have more than that then put it in multiple accounts at different banks). The carnage certainly did continuing today. Monday it was Lehman, Yesterday was AIG, where the government has stepped in and essentially took control (provided $85 billion in liquidity to the firm but took control and will likely be selling it off piece by piece in a more "orderly" process). Probably a good thing...if AIG went down like Lehman it would have been several orders of magnitude worse. After Lehman and AIG the panic continues to banks like WaMu, which is essentially done, they'll be sold by week's end. HBOS in the UK just sold today in a firesale to Lloyds. The biggest surprises of the day however were Morgan Stanley and Goldman. These are the two true juggernauts of Wall Street that everybody thought were untouchable. Morgan Stanley particularly is now under extreme pressure. Morgan Stanley going down would be as bad or worse than AIG given its size and breadth. Their stock dropped almost 30% today alone. The firm has started into a death spiral. Lots of folks are pointing at speculators that are driving the bank down to make a profit by short selling the bank's stock. This could be part of it. But this is also more simply a classic "run on the bank", just like it as been with the other firms. Morgan Stanley is trying to a few last ditch efforts to stem the tide otherwise it could be sold by week's end also. Some people think the most venerable of all Wall Street firms, Goldman Sachs, is now not immune from collapse.

Given all this it might make sense to set forth a simple example of the power of leverage. Simplest example that everybody can understand is a home mortgage. If you don't have $1 million to buy a house then you have to borrow, right? lets say you manage to put together a $100k down payment, so you have 10% equity to put down and you borrow 90% of the value of the home from the bank in the form of a mortgage. The beauty of leverage is that if the house appreciates to $1.1 million and you sell then you can pay off the mortage and you pocket $200k, you've made 2x your return. For the asset only appreciating 10% (from $1m to $1.1m) you made a 100% gain. Beautiful. But if the home value goes down just 10% to $900k then the reverse is true, your equity is wiped out. You had 9:1 leverage ($900k debt to $100k equity) and it didn't take much to lose 100%. Now consider that millions of home owners in the country purchased homes with much more than 9:1 leverage. Many put essentially no money down and bought with 100% leverage. As long as home prices keep increasing that's great for you...the return to your equity is turbo-charged. But when hoem prices move the other direction you're in a world of hurt. The same is happing at these large banks. Banks are essentially a large pool of financial assets that are financed with both debt and equity. Equity is the stock price you see in the market. Problem is that these investment banks are much more than 9:1 levered like in my example above. Bear Stearns and Lehman were about 33:1 levered. Morgan Stanley and Goldman are about 25:1 levered. Using the same numbers above, if the bank had $1 million of asset that means its equity investors (you who own the stock) only have $38,460 of equity in the game and all the rest is debt. In such a highly levered set-up it doesn't take much of a reduction in the value of the assets to suddenly wipe out that small equity cushion and the bank becomes insolvent. The banks all hold billions in mortgages and other loans to corporations, many of which were provided to homeowners/companies that couldn't afford them. As these home owners and companies default there is a ripple effect and the value of the mortgages the banks hold decreases. They are so highly levered that they move quickly toward insolvency. Right now were living through the downside of debt. This is exacerbated by a panic...and I'm sure most know, banks accept money and make loans and keep reserves in case customers demand cash from their accounts. If all customers were to demand cash simultaneously, however, the bank could not return the money because they lent out a portion of it to somebody else (likely through a mortgage). So with asset values falling and even consumers demanding cash, the banks are pushed to a standstill and insolvency.

Anyway, hopefully that was helpful to somebody...simple stuff but important basics to know/understand.

Jared

*wall street crumbles*

Black Sunday
an editorial by Jared Barlow

Sunday saw two of the largest investment banks on Wall Street go down and yesterday the turmoil in the markets continued. Sunday will probably go down in history and folks on Wall Street will say for decades "do you remember where you were the weekend of Sept 13-14th when Lehman and Merrill went down". Lehman Brothers, one of the the oldest broker/dealers on Wall Street, died over the weekend and filed for bankruptcy Monday morning...not entirely surprising, it has been rumored they were next to go since Bear Stearns died last March when it went to JP Morgan in a firesale. On Sunday Merrill Lynch, the world's largest brokerage, announced it was selling out to Bank of America. Pre-empting a firesale (or worse) Merrill smartly found a buyer before it got any closer to its death bed. 3 of the 5 large independent investment banks are now gone (Goldman Sachs and Morgan Stanley remain). AIG, the world's largest insurer, is now on the ropes (stock down another 60%+ yesterday and 90%+ year-to-date)..the end for AIG could be any day (or hour) unless they get some capital quickly. After that my guess is that the next to go (or at least face a world of hurt) are WaMu and Wachovia; both have massive exposure to the mortgage market and need to raise capital or face insolvency. The government already back-stopped (with tax payer dollars) Bear's sale to JP Morgan (government assumed up to $30 billion in losses) and also took over Fannie Mae and Freddie Mac, the two massive mortgage companies that became insolvent a few weeks ago. All this at a massive expense to the US taxpayer, but the Fed determined the collateral damage of not doing so would be worse. The Fed had to draw the line against a bail-out of Lehman and AIG to teach the market there remains a "moral hazard" and that the US taxpayer will not be a "catch all" for the bad decisions and risks taken by companies. 18 months ago few could have thought that Bear, Lehman, Merrill, Fannie and Freddie - huge pillars of the American financial system - could all go down the way they have. The fear continues to be that there will be a continued ripple effect of pain throughout the financial industry and of course on to the broader economy. I walked by the Lehman building here in NY yesterday, people did not look happy there. Wall Street is being brought to its knees right now as almost never before. All the old guys on Wall Street - the guys with 30+ years of experience - are saying they've never seen such extraordinary events as are taking place now. Some quotes from big wigs on what has transpired:

"[The credit crisis] is in the process of outstripping anything I've seen, and it still is not resolved and it still has a way to go...Indeed, it will continue to be a corrosive force until the price of homes in the United States stabilizes. I can't believe we could have a once-in-a-century type of financial crisis without a significant impact on the real economy globally, and I think that indeed is what is in the process of occurring." Allan Greenspan, former Fed Chairman (also said the bottoming out of housing prices would not likely occur until some time in 2009)

"This is the biggest reshaping of the financial industry since the Great Depression" (Wall Street Journal)

"The tectonic places beneath the world financial system are shifting, and there is going to be a new financial world order that will be born of this." Peter Kenney, Knight Capital Group


How did all this happen? In short...an era of super cheap debt (2001-2007) for companies and consumers fueled over spending and a credit "bubble" that is massive and painful when popped. The culprits? Wall street firms themselves, banks generally, the government (Fed), and spend-thrift consumers. All have played a role. The Fed has kept interest rates super low the last few years to stimulate the economy and didn't adequately regulate the mortgage industry. This fueled significant growth (and speculation) but also resulted in a huge over-extension of credit to companies, banks, investment firms and consumers. Companies and consumers have taken on much more debt then they could ever handle adequately. In the run-up in home prices consumers started thinking of their homes as ATMs, taking loans against their equity and increasing their debt over-hang until they had no equity left. When prices correct, your debt-load is high, and your equity is gone you're in a world of hurt, whether you're a homeowner in Vegas or you're a Fortune 500 company that is leveraged to the hilt.

Global shift in wealth (away from the US and toward foreign economies): The crisis in the US financial system combined with the run-up in global commodity prices (oil, gas, minerals, etc.) has resulted in a massive wealth shift. America is literally mortgaging itself right now...and it is doing so largely to foreign investors (not necessarily a bad thing, without them we'd be in much worse shape). Just as our financial system is hemorrhaging... Middle Eastern and Asian countries and investors (as well as Russia) have been reaping HUGE profits in commodities as prices have risen and as these "emerging markets" have enjoyed generally strong economic expansion (although oil/gas prices fortunately coming down in recent weeks). 10-20 years from now I think we'll look back and see 2007-2009 as a turning point, a time when the US was seriously weakened on the world stage, when the layout of the US financial system was forever changed and when powerful world actors (economically and politically) emerged in Asia and the Middle East.

Silver Lining (barely perceptible at present, but present none-the-less): There is a lot of doom and gloom now and certainly more pain still to come, but long term the market will get through this. The US is resilient and will rise from this (albeit slowly) and should not be written off. For those with capital to deploy there are going to some of the best buying opportunities in a generation. Get your eTrade and Schwab accounts ready (can't say I have any stock picks for you just yet...). In my line of business (private equity secondaries) we're currently raising lots of money to tackle buying opportunities. Some will make a fortune coming out of this if they play it right.

But what does all this mean to us? Understand the magical effect of leverage (debt). It can help you; it can kill you. It has made investors billions and wiped it out just as fast. Debt is not a bad word...understood and used appropriately debt is extraordinarily useful and crucial to a functioning financial system. Used inappropriately debt can be a prison that does not let you get free. Be cautious and conservative in its use in your daily life; understand how it works and make it work for you. Live within your means. Re-read the several articles from President Hinckley and others the last few years when we were warned/reminded of these principles. I was reading 1st Nephi on the plane the other day...a classic phrase kept jumping out at me: “Inasmuch as ye shall keep my commandments ye shall prosper in the land” (1 Nephi 4:14). This simple statement is probably repeated more times in the Book of Mormon than almost any other...to the extent it risks becoming numbing and we gloss over it. The promises made to the inhabitants this land still apply, but only if we are doing what we need to be doing and are following the Lord. Important stuff for us all to remember.

Regards,

Jared

*cinque terre part 1*

Ciao! Welcome to Italia!

Segment 2 of the Barlow's Euro adventure:
Cinque Terre, Italy (part 1)
August 20-22, 2008

Just in case you ever get tempted to take your kids around Europe on trains, watch this video. It will convince you otherwise. Or you can just imagine lugging 3 suitcases, one double stroller, and 3 kids up and down the stairs between platforms to make train connections. But, I do have to say, once you get to your destination you forget all about the pain it was to get there... well, until you have to do it again to get to the next place.



Our train had a few stops on the way to Monterosso, Italy-- we picked up a few "slices" of pizza on the Italian border. I think Sam said something like "this is the best pizza I've ever tasted!"

Sam sitting on the platform in Monterosso. We finally made it!


The Cinque Terre- or "five lands" -- is a 10 km stretch of land on the Northwestern Italian coast. There are five main villages that make up this world heritage site. They have walking and hiking trails that connect them, but no roads. Cars are not permitted. It's beautiful! Here's a few pics to hold you over. I'll do a more detailed post soon.

Beach in Monterosso, the village where we stayed.






A swordfish head we noticed through the kitchen window of a near-by restaurant.

Ciao for now!

*nice is nice*

Segment 1: Nice, France
August 18-20 2008

I was pretty worried that the kids would be jet-lagged for the first few days of our trip and we wouldn't be able to see anything in Nice. HA! When we finally arrived at our hotel after 18 hours of travel the kids were ready to go! We figured we would go out and see what we could and keep the kids (ahem, parents) up as long as possible to adjust.

That first day is one of my favorite from the whole trip...first of all, Nice is an awesome city-- it has a cool artsy feel with all the fountains and naked guys on top of poles. Then there's tons of shopping and restaurants (loving that) and then to top it off- there are the beaches...

We looked around the old town for a bit and decided to head to the beach and check it out... which then turned into a full on swim fest... clothes and all. We were soaked before long. The beaches in Nice are rock beaches... no sand. It gets kind of gravelly by the water, but up on the beach the rocks are all rounded and warm from the sun and I actually preferred it to messy sand. I also loved when the tide came in and the rocks would crash against each other and make a great ruckus. (sidenote: the topless population here was almost non-exsistant. Thank goodness!)




Rock beaches are a great place to look for sea glass. Here's a picture of the kids showing their hoard of "green jewels".

So when you get a little salty, you gotta have the sweets... gelato that is. I think we ate gelato about 2x a day or more on this trip. (please mom, please can we get some... "well, we've already had some... Ok.")



Then to top off the gelato appetizer we had a little crepe for dinner (pronounced CRAP). Mmm...that crap was good. My personal favorite- nutella and banana. Mia being silly in dad's glasses at the cafe. What a good day...


A few more random pics in Nice... Sam and Mia on a merry-go-round by the seafront.


Me and Eli sharing some love.


A heart I sculpted lovingly out of rocks on the beach for my sweetheart on our 8th anniversary. (Gag or sigh here, which ever you prefer.)

A kiss to pretend we don't have 3 kids with us in Nice on our anniversary.


Sam out on the water throwing rocks to his heart's content.


Mia admiring the speckled rocks she found on the beach.


Look at this hottie!! Sorry ladies, he's taken. Do you ever take pictures of your husband just capture how cute they look to you at that moment? This is one of those for me.
A love letter for my husband:

Dear Jared,
Thanks again for marrying me. I promise you won't regret it more than 3 times during our life time and eternity together.
I love you,
Your ever adoring wife

(That's his "I am just humoring you while you take a completely random picture of me" face.)

I loved Nice! It's one of my new favorite European cities. Try it on for size some day- you won't regret it.

*the nest just got emptier... for a few hours anyway*

Wow. Sam's in Kindergarten. Yesterday we had a one hour orientation and met Sam's teacher and saw the classroom and it was great! It looks like a lot of fun. Mia said multiple times yesterday that she wishes she was in Kindergarten. Sam seemed pretty confident about the whole thing.

This morning was his first time on the bus. I have to admit that I have been more nervous about the bus than the actual school experience. So we walked to the bus stop this morning and waited for it to come. I was so nervous! Would he cry when he had to get on? Well, the bus pulled up and he climbed right in, smiled for the picture, and sat down-- like he was an old pro. As he was pulling away I got a little choked up. I guess this is the first sever of the apron strings and it stings a little. I am excited for him, scared for him, and really proud of him. He'll do great.

Good luck today baby Boy.

*swiss elephants*

We made it back. Whew, what a trip. It was 95% awesome and 5% awful-- pretty good considering we lugged our kids across the world and back and lived to tell the tale. I'll post a big post soon, but thought I'd give a little teaser...

Probably one of the most memorable parts of the trip was when I came back to our hotel in Zug, Switzerland after a long day of visiting friends. I have Eli hanging off one arm, my diaper bag slung over my back and about 5 plastic sacks hanging on the other arm. I am trying to nicely herd the children in my fakest nice "we're in public" mommy voice and not succeeding at much except sounding very screechy. I am trying to head quickly to my room 4 flights of stairs up and unload when the lady at the front desk says, "there is someone here for you." I think she must be mistaken when I see a gentleman in dark clothes next to her that I have never met before. I look more closely and notice that he is a Swiss policeman. Some people have nightmares about monsters, earthquakes, spiders, cannibals... etc. I have nightmares about Swiss policemen. They scare me. Anyway. So the policeman turns to me and says, "Frau Barlow?" (I am trying to keep composure- I figure peeing my pants won't help the situation. Plus, that wouldn't be a very good example for Mia, who I have been yelling at for that exact thing lately.) I put on my strong voice and try to keep circulation in my left arm (the one with 5 bags). "Yes?" (Sam and Mia stare, Eli wiggles and fusses.) "I have a matter to discuss with Mr. Barlow. Where is he?" I weakly explain that he is at work. "Does he have a cell phone?" I finally get a few eggs and say, " Can I ask what this is about?" (Why is the policeman looking for daddy, mommy?) The policeman replies, "He has an outstanding ticket for a traffic violation from a year ago." Phew... relief. Ok. A traffic violation. So I ask if I can pay it and he agrees. So he gets out the paper work and you'll never believe this. The traffic violation was a fine of 20 francs for going 4 km over the speed limit. Let me put this in American. He was going 2.5 miles over the speed limit and the fine was for 18 dollars and 10 cents. Then they tacked on 50 francs for an anal obsessive compulsive Swiss judge to decide whether to track us down. He decided it was worth it. After I had all the info I tried to joke with the policeman... "I thought you were here to arrest my husband! (ha ha)" He replies in a very stern voice "Not yet." (Rule number 267 in the Swiss policeman handbook: Never, ever, let the person you are talking to doubt your authority. And NEVER, EVER, appear to be, in the slightest degree, a real person with human feelings.) The robot was nice enough to let me go upstairs and drop off my items, but not without reminding me that he would have his colleagues guarding all exits with machine guns (not really). Jared happened to call while I was up there and It was actually pretty fun to tell him that I couldn't talk because I was getting money to pay off a Swiss policeman who had come to arrest him. He didn't believe me.

So, the moral of this story is: Swiss people are elephants in disguise... they never, ever forget.