As the subprime loan crisis expands, some CEOs have “retired” with $ 1 million in bonuses. Why should they get paid millions for making serious financial mistakes? Homeowners do not enjoy the same luck. When they fail to properly manage the largest investment of their lives, their dream or the initial home, they often lose everything through foreclosure.
The reason many CEOs who make mistakes don’t leave the facility empty-handed is that they protected themselves with a contract. The contract guarantees a parachute or some other rescue mechanism that can be activated in the event of a sudden fall from grace.
Home buyers don’t have the benefit of negotiating such a smooth downgrade with their lending bank. If you are suddenly unable to pay your mortgage, the bank claims your home. But if the owner had started the process as if he were the CEO of a small real estate empire, he could have exercised at least one basic business axiom: hedging his bet. And by doing so, the CEO-homeowner may have warned of the disaster.
Banks, real estate companies, and corporations of all kinds set aside funds for emergencies. We are not talking about a somewhat inactive savings account. No. These big firms make their money work. It is invested or traded in accounts that cover its risks. At least that’s what happened before the subprime mortgage fiasco. It now appears that some very large companies were exposed to financial risks that exceeded their ability to protect. So now we have several Titanic corporations scraping against an iceberg of their own making: stupidity. But I digress.
My point is that most homeowners do nothing to protect their investment. This is unfortunate. Perhaps the interest rate on your mortgage is fixed. Well. But other variables of the economy that can cause ruin are not fixed: loss of employment; inflation in food, education and other costs; changes in interest rates that affect the availability of money. And, oh yes, war, famine, and political turmoil.
Homeowners must see themselves as more than just housewives. They must become CEOs. They must oversee their real estate empire, modest as it may seem, devising a plan to protect the gamble of borrowing heavily from a bank. The plan must include participation in at least one of the markets that most affects your difficult situation: I suggest US Treasury bonds. More specifically, options on Treasury bond futures.
I am not talking about buying US Treasuries. The stocks and bonds that you may have in your investment portfolio are part of a long-term strategy. Learning how to trade options on the US Treasury bond on the Chicago Board of Trade gives you the ability to stay liquid and adapt to short-term changes in one of the world’s largest markets.
Are there risks in participating in this market? Yes. And the market may not be appropriate for everyone, although it is available to all Americans.
However, the smart homeowner-CEO compares the risk of learning a new skill to the prospect of remaining an easy target. After careful consideration, the CEO-owner realizes that it is potentially disastrous to remain ignorant of the only market his bank dominated decades ago.
Copyright 2007