Property Grunt

Sunday, May 17, 2009


This is what it is all about.

The New York Times Magazine has shot a triple threat of articles regarding the current state of the economy which all have a common thread.

First up is

What Does Your Credit-Card Company Know About You?

Back in January, I did an entry on AMEX taking a pre-emptive strike in cutting their losses by cutting credit lines of customers within purchases that do not fit in their parameters.

Cutting their losses: Enter Financial Precrime

Now this type of profiling is being applied to marketing credit cards and collecting from dead beats.

The other solution was learning to predict how different types of customers would behave. Card companies began running tens of thousands of experiments each year, testing the emotions elicited by various card colors and the appeal of different envelope sizes, for instance, or whether new immigrants were more responsible than cardholders born in this country. By understanding customers’ psyches, the companies hoped, they could tell who was a bad risk and either deny their application or, for those who were already cardholders, start shrinking their available credit and increasing minimum payments to squeeze out as much cash as possible before they defaulted.

Credit card companies want to deal with their customers on an emotional basis because an emotional customer is a more malleable customer. It is a customer that they will have fewer problems with. When people are emotional, they can't think straight, they are only doing with their emotions are dictating them to do and that is not always in their best interest.

If a credit-card company detects unsettling patterns, it might start cutting credit lines, raising interest rates or accelerating repayment schedules. (Companies are expected to withdraw $2.7 trillion of credit by the end of 2010, according to a March report from the Meredith Whitney Advisory Group, a banking-analyst firm.) But the most useful information the card companies are deriving from their data are the insights that help them deepen their relationships with customers, particularly when a cardholder is going through a rough time. One of the strongest conclusions of the psychological studies is that cardholders are most likely to pay the bills of those companies with which they have an emotional connection.

“Today the goal is for customers to get a warm-and-fuzzy feeling from their credit-card company,” said Carl Pascarella, a former chief executive of Visa USA. “If we have a deep relationship with you over a range of products and experiences, if we trust each other, you’ll listen when we give you advice.”

It is a smart approach to create that relationship of warm fuzziness however, it is an illusion or aspirational at best. A customer's relationship with a credit card company should be base on what the benefits they can get out of the card when they pay their balance in full every month. Any benefits for minimum payments should be ignored because there are no benefits to minimum payments due to the interest they charge.

Santana had actually already sought permission from the bank to settle for as little as $10,000. It’s an open secret that if a debtor is willing to wait long enough, he can probably get away with paying almost nothing, as long as he doesn’t mind hurting his credit score. So Santana knew he should jump at the offer. But as an amateur psychologist, Santana was eager to make his own diagnosis — and presumably boost his own commission.

“I don’t think that’s going to work,” Santana told the man. Santana’s classes had focused on Abraham Maslow’s hierarchy of needs, a still-popular midcentury theory of human motivation. Santana had initially put this guy on the “love/belonging” level of Maslow’s hierarchy and built his pitch around his relationship with his ex-wife. But Santana was beginning to suspect that the debtor was actually in the “esteem” phase, where respect is a primary driver. So he switched tactics

“You spent this money,” Santana said. “You made a promise. Now you have to decide what kind of a world you want to live in. Do you want to live around people who break their promises? How are you going to tell your friends or your kids that you can’t honor your word?”

The man mulled it over, and a few days later called back and said he’d pay $12,000.

“Boom, baby!” Santana shouted as he put down the phone. “It’s all about getting inside their heads and understanding what they need to hear,” he told me later. “It really feels great to know I’m helping people in pain.”

Helping people? He's helping himself by scoring a bigger commission for himself by having the guy pay more. However, I don't begrudge him for that. In fact I am glad he did that because that customer is getting off light. As you see, there is no hocus pocus here. All it is basic psychology and the right words and tone and former deadbeats are turned into paying customers.

This next article is just f**king insanity. Edmund Andrews is a NYT reporter who covers the economics beat and is writing about his own financial woes which include massive amounts of credit card debt, a subprime mortgage and foreclosure.

My Personal Credit Crisis

The cause of this problem can be summed up in the author's words.

As for me, I had two utterly compelling reasons for taking the plunge: the money was there, and I was in love. It was August 2004, just as the mortgage party was getting really good. I was 48 years old and eager to start a new chapter in my life with Patricia Barreiro, who was then my fiancée.

And here is how it unfolded.

Between humongous loan balances and high rates, we had hung ourselves with the rope they gave us. In the previous December alone, we charged $2,845 on the Chase card for Christmas gifts, food, gasoline, clothing and other expenses. The charges included almost $350 for groceries, $700 in clothes from J. Crew, $179 at GapKids and $700 for airplane tickets for two of Patty’s children to visit their father in Los Angeles. Our balance climbed from $14,118 to $17,135, and in January 2006 we maxed out at our $19,000 credit limit. And there were other expenses on other cards: $1,200 in dental work for Patty’s son Ben; $1,600 to rent a beach house the previous year for us and all the children. Granted, the beach house was an embarrassing mistake. But given that Patty had landed a solid job, it seemed like an indulgence we could work off later.

I don't think so.

My next paycheck would come in about a day or so, but that was entirely reserved for the February mortgage payment. We didn’t have enough cash to cover more than a week’s worth of groceries and gasoline. For the last few months we were living off the cash left over after I sold my Times stock and we bought the house. But now it was gone.

“How the hell could we have run through so much money so quickly?” I asked her accusingly.

Patty wasn’t sharing my shock. “I don’t know what’s going on,” she responded. “Let’s talk about it when you get home.”

Patty had spent much of the two previous decades as a stay-at-home mother in Los Angeles. Her last full-time job, as an editor at a political research company, was back in the early 1980s. Not surprisingly, Patty’s re-entry into the job market was bumpy. When Saks Fifth Avenue offered her a full-time job selling high-end clothing on commission — something she knew about and loved — she grabbed it. But with her take-home income averaging only about $2,400 a month, we didn’t make enough to cover our bills because my take-home pay was going straight to the mortgage. We were spending way more than we were earning.

It is always the house.

After a one-year bicoastal courtship, Patty was about to move from her home in Los Angeles to Washington. We would need a home with enough space for her two youngest children, as well as for my own teenage boys on the weekends. I had assumed we would start by renting a house or an apartment, but it quickly became clear that it was almost easier to borrow a half-million dollars and buy something.

Patty discovered a small but stately brick home in a leafy, kid-filled neighborhood in Silver Spring, Md. We sent in an offer of $460,000 and one day later got our answer: the sellers accepted. I felt both amazed and exhilarated, convinced that the stars had aligned for us. I loved the house as soon as I saw it. It was one block from a school and a park. My boys would be within a 15-minute drive, and it would be easy for them to come over and stay whenever they wanted.

The only problem was money. Having separated from my wife of 21 years, who had physical custody of our sons, I was handing over $4,000 a month in alimony and child-support payments. That left me with take-home pay of $2,777, barely enough to make ends meet in a one-bedroom rental apartment. Patty had yet to even look for a job. At any other time in history, the idea of someone like me borrowing more than $400,000 would have seemed insane.

Edmund and Patty's objective was to have a life together that would include their own kids. It is very admirable but they let hearts not their minds lead them into this direction. Edmund is what is known as an educated fool. He is probably very well educated and could probably run circles around any of us on the issues of economics. But he still can't control his own finances.

If he had simply had walked across the hall and spoke to Joyce Cohen or Gretchen Morgensen he would have learned what a bad idea this was before getting into that mess.

I remember reading a column by the late Reverend Kensho Furuya who was an Aikido master and ordained Zen priest. He wrote about how a discussion he had with a sensei of his who explained to him that people usually come undone not from one problem but a series of problems. When they are not addressed, these problems land on top of each other, creating a compounding problem. It is when the last problem steps over a person's threshold and the person freaks out. That is why it appears a person loses their s**t over one issue.

What Edmound Andrews is experiencing is simply a compounding of problems and that he has been unsuccessful to solve.

By the way, if anyone believes that the housing market has bottomed. Don't bother.

I called Chase back in January, when I was 90 days past due. Another representative told me that I would automatically be evaluated for a loan modification.

“You should just wait until you hear from one of our negotiators,” he told me politely.

Another two months passed without anyone calling, so I tried again in late March.

“I’m sorry, but our analysts have been backed up,” yet another Chase rep told me, even more politely than the previous one. She said each analyst had about 500 distressed borrowers to deal with, and it had been taking about five weeks for customers to get a direct response. The delays seemed to be getting longer.

Then we have Suze Orman.

Suze Orman Is Having a Moment

Overall, she is a good reputation but she does have her detractors. In all honesty, I find her a bit much. But I like her message and they she ties emotion to finance.

What’s most striking about Orman’s frenetic, outsize celebrity is how starkly it contrasts with the sober simplicity of her message. Track your spending. Stay out of debt. Take care of your car. Look into a Roth I.R.A. Though she is larger than life and wealthy, her primary message is not about larger-than-life ambition or a sky-high entrepreneurial spirit. Orman’s advice rarely sounds like “Go West, young man.” It sounds more like, “Everyone should have a liquid eight-month emergency fund.”

Orman has been propelled to fame not by her financial success, or because of any revolutionary insight about, say, index funds. Rather, she has figured out a way to channel an innate charisma and a televangelist’s intensity into an otherwise bland message of fiscal responsibility. She could recite the phone book with her broad, Midwestern accent, her repetitive rhetorical flourishes, her interjections of “Are you kidding?” and people would still sit up and listen. There’s as much Joan Rivers in her delivery as there is Deepak Chopra, and somehow, in Orman, neither part makes the other look ridiculous.

This I have never heard from any author.

Karen Fonner, the vice president of strategic content for QVC, recalls watching Orman tell a heavily indebted woman who had just ordered her book not to buy it. “She told her: ‘I want you to cancel your order. Go to the library, my book is there,’ ” Fonner remembers. “That was the first time I’d ever seen someone do that.”

That is ballsy and sensible for her customer. And it shows how much Suze stands by her principles even if it means she does not benefit.

Orman has strong opinions in general. She won’t speak before many doctors’ groups, because they get on her nerves (doctors always think they know better, she says). Until recently, she didn’t like to speak at universities, because they generally don’t charge students to attend her lectures, and she says that people don’t value things they haven’t paid for.

She has been reluctant to work on school curricula on personal finance, because she says students can’t learn empowerment from people who aren’t empowered, and teachers, she says, are too underpaid ever to have any real self-worth. She told me: “When you are somebody scared to death of your own life, how can you teach kids to be powerful? It’s not something in a book — it ain’t going to happen that way.” She once delivered pretty much the same message at an anniversary celebration of a private school — she seems to recall calling the school a “travesty” — and was all but escorted to the door when she was done.

Love her or hate her she is upfront with her opinions and has no problem with lacing them with her passions. That is why she has such a large following because she is able to connect to everyone on an emotional level.

Emotion is the common factor for all of these articles. From losing focus and making the wrong decision to using them influence people to take certain actions, it is all emotional.

When I was in high school I had an AP American history tutor who told me once that economics is all psychological. These articles are just more evidence of that statement.

I am not perfect folks. In fact, from reading these articles I am quite humbled and grateful for what I have in my life. There have been many occasions where my Amygdala nearly got the best of me and I almost made decisions that could cripple me.

If I my words appear judgmental, I assure you they are not. But I admit to being very firm with I am saying because you and I could be these people who are taking the brunt of our failing economy.

So please, I urge all of you to exercise a strong sense of emotional detachment in your financial matters, especially during these times.