INFRASTRUCTURE FINANCE - April 2008


In the April 9 Wall Street Journal, there is a front-page story about the impact of sub-prime lending on ordinary citizens. Featured in the story is a 74-year-old self-employed tailor who put her entire $55,000 life savings into a high-interest-rate notes issued by a Philadelphia lender called American Business Financial Services. When the firm went bankrupt, she and others lost their entire life savings. The blog entitled The Importance of Being Financially Literatereinforces the fact that Americans lack financial knowledge even in the most basic savings and investment decisions.

While the story is a tragedy, it brings to mind the urgency of focusing on teaching all Americans financial literacy. The National Urban League and its affiliates have specific financial literacy programs, specifically focused on first-time home buyers. Operation HOPE, headed by the very impressive John Bryant, is specifically focused on broad-based financial literacy. These are great programs, and they provide individuals with good nuts-and-bolts tools. Other notable mentions on behalf of the National Urban League in partnership with Honda amid the turbulent economic climate include their offering of personal financial management classes. The acclaimed “Know Your Money Program” seeks to provide economic empowerment and financial literacy to those individuals in communities seeking to change the attitudes about money and money-management. The program is highlighted in this Honda Blog post.

The story also suggests something else, which goes beyond literacy. We all get tempted to try to achieve our financial objectives by being more aggressive and taking higher risks than we should. Most of us resist the temptation most of the time, but some of us fall into the trap of trying to get richer more quickly than low or moderate-risk investments will allow. As cited in this Revolution blog, with 2008 becoming a financial turning point for millions, new financial decisions have become an imperative.

When I was young, one of my favorite TV comedy shows was The Honeymooners. Jackie Gleason played a bus driver named Ralph Kramden living in a dreary one-bedroom apartment in Brooklyn with his long-suffering wife Alice. The timeless humor from that show came from plots which, week after week, had Ralph get victimized by some get-rich-quick scheme.

My parents would talk with me and my siblings about the lessons from that show:

  • Don’t put all your eggs in one basket.
  • If something promises a bigger payback than normal and seems too good to be true, it probably is not true.
  • Unless you understand what you are investing in, don’t invest.

I never violated all those rules, and, therefore, did reasonably well with investments in my adult life, although, as a former CEO of Pitney Bowes, I have put a lot of my eggs in one basket, Pitney Bowes. However, when my wife and I lived in New York in the mid-1980’s, we took the profits from my wife’s successful real estate partnership, and invested them in two real estate deals. We were tempted to take more risk to get more return because we did not have quite enough saved to make a down payment on a home. We also failed to understand how dependent these deals were on the then-current tax laws, which changed a few months after we committed to the investments. We lost everything we invested in the two deals, and we did not save up enough to buy a home until 1994.

However, there were two differences between us and the woman featured in the article:

  • We did not put our entire life savings into one investment, and we had to certify that we could afford to lose everything. I still had Pitney Bowes stock and some other assets.
  • I was 39 years old and still on the upward trajectory of my career when we had these losses, so I had the opportunity to recover from my mistakes.

The woman featured in the article was 74 years old, and probably has little ability to recover from her losses. In this respect, financial counselors could have helped this woman. They would have told her that, at 74 years of age, she should invest conservatively, and accept lower investment returns. Whether she would have taken their advice is unknowable, but it is mystifying to me why the Wall Street Journal would not have taken the opportunity to talk about the basic investment principles she violated.

Perhaps there should be a law that requires a court approval for someone over a certain age to commit the entirety of their net worth to a single transaction, and there should be a certification that a person is not committing all assets. That age could be based on whether the individual has retired from active employment. I am normally not paternalistic, but I feel differently about older people who are at a stage in their life at which they cannot recover from having lost everything. It’s worth thinking about. This is also why Federal Reserve Chairman Ben Bernake is rallying for the call to improve financial literacy that will essentially aid Americans in making better informed financial decisions at an early age, so that they are better prepared to navigate through the financial marketplace as they get older, as cited in this Wall Street Journal Blog: Real Time Economics.

We require people to wear seat belts and motorcycle helmets, and we are debating health care reform proposals that would insure that individuals cannot be wiped out by medical bills. We owe older Americans a similar vigilance on highly-risky financial investments.