AskDong

The Financial Times had an article about a rumored iPod that would “come with” music. This would be a big step for Apple as Steve Jobs has been habitually opposed to the subscription model for music. I’ve personally been opposed to the idea of subscriptions as well. I’ve always thought that owning must be more cost advantageous. But is it really?

Music subscription services such as Napster charge $12.99 a month for unlimited access. iTunes charges me 99 cents a song, or $12.99 an album. Subscribing to a music service is like buying an album a month. On average consumers spend $40 per person a year on music. That number however reflects an overall decline in music sales that has been driven file sharing. So, let’s just assume annual spending would be closer to $50 if not for file sharing. Subscribing to a music service works out $156 annually which is definitely more than what the average consumer spends on music. Also if you cancel your subscription, you’re left with nothing. Hence, Steve’s point that people want to own music.

As I get older and my own mortality is more apparent I become less and less opposed to subscription models. After all, when I own I’m really renting for the rest of my life (disregarding the value of passing property to heirs - and I don’t think heirs if I have them will want to listen to my music or be even own a CD a player). That ownership “rental period” is getting shorter with each passing day. So the real comparison is to look at what the cost of “ownership” if I were to subscribe to the music services. Assuming that iIve 40 good years left of listening to music, I come up with a lifetime cost of $3010 assuming a 4% discount rate. Would I pay $3010 to own all the music I want?

The reality is that answer for own vs. rent really depends on the individual. I think both models can make sense, but I do believe the current model of $12.99 a month is too expensive for most individuals. Record companies as usual are being to greedy. They want consumers to spend more money than they would otherwise spend buying music. I believe if that they lowered that cost to $5.99 they would have a lot more subscribers. I also think Apple is being inflexible with it’s unwillingness to adopt a subscription model. There are plenty of people who are happy to subscribe. I think the ideal model would be some type of subscription model where there’s the option of keeping a few tracks to own. I also believe a subscription model where the latest tracks are not available at a lower price could make sense.

The recent of bailout of Bear Stearns have fanned the flames of class warfare. Personally I’ve yet to make up my mind if the bailout is a good thing or a bad thing. I don’t know enough about how Bear was tied up with other firms, and what it’s failure would’ve implied for the market as a whole. Without knowing all those facts it’s impossible to know what effect the collapse of the firm would’ve had on the entire financial market.

I’m not opposed to government intervention despite my seeming rant on the Fed’s Term Auction Lending Facilities. I think the Government has important role to ensure the market behave smoothly and fairly. I believe that role includes helping the neediest Americans so that they can get a leg up, and assisting the financial markets when they run into trouble that has the potential to cripple not only the US economy but the world economy.

Many people like to view bailouts of financial institutions through the prism of class of warfare, just as some of differenint political stripes view government assistance programs through the other side of the same lens. I certainly have my own politics, but see problem with neither. I believe what’s good for the goose is good for the gander. However, I’m probably more worried about moral hazard than treasury secretary, Henry Paulson.

Moral Hazard is typically used when talking about Insurance (and that’s really what Government intervention is). The classic example is that drivers may drive more dangerously when they know they’re covered by auto insurance. Moral hazard is not isolated to insurance. Moral hazard exists in many different situations in which the person or institution does not bear the full repercussions of risky behavior. In the case of Bear Stearns and other financial institutions, the moral hazard is that they will take on too much risk in lending and investing because they know the Government will bail them out in the end. Personal and Corporate Bankruptcy laws offer the same kind of perverse incentive to take too much risk.

I argue that moral hazard exists and is something that we need to be vigilant about. I do however agree with Paulson that we shouldn’t avoid action only in order to avoid moral hazard. Safety nets such as the government guarantees of Fannie Mae and Freddie Mac benefit consumers by lowering borrowing costs. Other insurance such as unemployment benefits help American workers stay on their feet in times of need. The crux of insurance and the conundrum of moral hazard is that risk is potentially socialized from the reckless to the prudent. This is the cost of being in tightly knitted and constructed society. Most of the time, I believe the benefits outweigh the costs.

I’ve been thinking about how I need to take more risk, and more risk specifically related with money.  This is not to say I avoid risk.  I don’t.  Many people who know me think I take too much risk, but in truth I don’t.

I’m relatively young at 32 and am in good health. I have good job that pays well. My savings are more adequate. However, I’ve done very little to try “double” my money.  I’ve tended to subscribe to tried and true.  I invest steadily in solid blue chip companies and index mutual funds - though I’m not a pure index fund investor and dabble at market timing.  I look for real estate opportunities, but have done nothing as of yet.

Today and next two to three year could well be the best time to invest in my lifetime.  Market calamity usually means opportunity.  Right now, we certainly have that - market calamity.  The housing market is IN shambles. Wall Street is confused, scared and bewildered.  The economy as whole is likely to sink into a recession if it hasn’t done so already.

I’m generally not a big risk taker. I don’t believe in get rich schemes. I believe in hard work and steady accumulation of capital.  However, given my age, and where I am financially, I know I can take on more risk.  Losing 20% of net worth is not the end of the world for me. The question is why take on more risk than I have to? There are two fundamental reasons for any person.
1) To have and spend more money - While I’m relatively frugal I can’t say there aren’t things I like to do if I had more money. I’m just not much in to owning stuff.
2) To create something of enduring value - I think most people want to be able to touch other people lives in positive and enduring manner. This might be just through our personal interactions, but it can also be though what do through our public lives in business, politics, or philanthropy.

Both appeal to me, but the latter appeals to me a bit more. I feel for me to create something of enduring value, I’ll need to have much more than I have today. First off, I’m at heart a die hard believer in the good that capitalism can bring even if unintentionally. The business of making money inherently means providing people with good and services that they want. I believe the act of capitalism can create enduring value, but capitalism requires putting money at risk. I’d like to be part of that creation process both on a small scale (angel investing, real estate investing), and as small player on the larger stage (IPOs). Today, I’m pretty far away from having the capital that it would take to do many of the things I think I want to do. But I’m young and can take risks now that can maybe put me in that position in 10, 20 or 30 years.

I’m sure many of you noticed the nice “blip” up in the Market on Tuesday March 12th, and the subsequent tumble on Friday.  Wall Street reacted with joy and elation to the Fed’s most recent move. The Fed has been trying to pump money into the financial institutions over the last 6 months. It’s lowered the short term discount rate.  It’s held auctions to effectively lend money to banks at very low rates. It first announced these auctions Dec 12th.  The new Term Facility is only marginally but importantly different from the “old” auctions.  The Fed is now accepting mortgage backed securities, but only “highly” rated ones.  Previously the Fed in it’s TAF (Term Auction Facility) only accepted mortgage backed securities from Fannie Mae and Freddie Mac.  Those two financial institutions which are in business of securitizing mortgages are already guaranteed by the Federal Government. In addition the TSLF will be extending this lending to Investment Banks and not just commercial banks.  I didn’t realize this distinction until March 14th when the Fed via JP Morgan had to bail out Bear Stearns.  Bear Stearns would’ve been able to borrow directly from the Fed in 28 days when the new term facility became available for Investment Banks like Bear to use.  I find it somewhat odd that the market rejoices when the term facility is announced on Tuesday, and then on Friday when banks effectively use such a facility, it’s panic.

So what does this new term facility do exactly?  The government is now accepting as collateral any willy nilly mortgage backed security from any institution.  Yes, these securities must be highly rated, but we already know the whole ratings game is a bit of scam.  So who pays when many of these mortgages end up defaulting?  The American Tax Payer. The actions by the Fed is nothing but a bailout of the industry by another name.  Term Lending! My Ass!

Before I sound like all I’m doing is ranting, I’m really not.  I support the moves by the Fed. I believe that Government can and should play an important role in the smooth operations of the financial markets through both regulatory policy and intervention.  The current crisis at Bear Stearns is a classic bank run except instead of individual consumers, it’s other financial institutions making the run at Bear.  Any bank is susceptible to a bank run regardless of what the actual financials might be, and a bank run is self-fulfilling prophecy.  No bank has enough in liquid funds to pay out all the people to whom they owe money to, so as result when everyone clammers to get their money because they’re worried about the bank, the worried become real leading inevitably to collapse.

The one problem I have is that too many people decry federal assistance for individuals, but support institutional bailouts.  In the end they are no different except institutional bailouts tend to help the top of the income distribution.  Both individuals and institutions can lose footing in ways that endanger the whole economy.  Ultimately the need for Government bailouts should not be driven by any particular desire to help specific institutions, investors, or individuals, but rather by a desire to ensure the smooth operation of the market as whole.

n.b. As I finish writing this I just learned that Bear Stearns just got acquired by by JP Morgan chase at about $2/share (Bear closed at around 30 on Friday and as high as 170 in the last year). I don’t know what this mean for the loan that was just extended the other day. It’s certainly interesting times on Wall Street.

Citibank is no Eddie Money, but they are offering two free airline tickets for opening an account with at least $25,000. I first heard about this at My Money Blog, but didn’t think much of it since I already have a Citibank Account with a full complement of savings accounts. However, today I went to Citibank to make a deposit and the teller told me that I could still qualify for one free ticket by merely opening or depositing the amount into a money market account. Jonathan has since updated his post to reflect that existing customers do qualify for the promotion.

As I was about to make the deposit, I was told my current account did not qualify. I had originally opened the account via the now defunct Citifi and as a result the account was technically based in IL. Citifi was Citibank’s online banking offering to compete with the online banks that were all the rage in 2000. Citibank quickly realized there was no reason to differentiate it’s regular banking services from online banking. All they had to do was offer online services to it’s standard bank offerings. Because my account was based in IL, I couldn’t simply deposit the check into that account. Apparently the money had to be deposited to a local account.

I thought I was out of luck again, but I was quickly shifted over from a teller to a personal banker. The banker (I’ve never worked with a banker before) told me that I could still just open account and qualify for the free ticket(s). Since I did enough business with Citibank to make me eligible for a CitiGold account, I opened that. I still have to make 2 online bill pays in the next three months and maintain a 25k deposit in the money market account.

CitiGold is Citibank’s private banking and wealth management services. I’m hardly the type of individual you would think would qualify for such an account or services, but across all items such as mortgages, investment accounts, CDs, savings and money market accounts, I do quite a bit of business with Citibank. I was pleasantly surprised to qualify as there are a number of perks including a specific banker to work with. Two years ago I would’ve shrugged off the idea of working with someone as I’ve almost always done things myself and online, but being a little older and wiser I realize calling customer service is really not all that fun. Now, I have someone who know’s my name who I can email and call directly if I have a problem. That’s valuable. I can still choose to close the account in 6 months after I’ve received the Thank You Points good for one (or maybe two) free tickets.  Plus, they even gave me free gift at the bank.  I didn’t get a toaster though, just a branded mug.

The biggest drawback is that I now have yet another checking account, making my total number of bank accounts a rather unwieldy five. My “banker” tells me that after being a CitiGold account that I’ll assuredly close at least my other Citibank account even though I have everything linked to that account currently. I’ll think about in the next a couple months and if I find that I’m committed to the idea of having a CitiGold account at least I’ll be able to make the transition slowly.