Ken Lewis Doesn't Look So Smart Today, Does He?

Actually, he looks pretty darned smart. The government probably wouldn't have backstopped the deal when it was done, but they are now.

Pretty neat. He threatened to back out.

Shouldn't BofA insist upon renegotiating the price given all the toxic waste?

I hate to see the taxpayer giving BofA the money for a sweetheart deal for Merrill shareholders.

"Shouldn't BofA insist upon renegotiating the price given all the toxic waste?"

Probably, but that would have delayed consummation, which is what Paulson was trying to avoid.

Taxpayers are all being swindled by the banks. Merrill is not alone.

!@#$% Paulson. Capitalist welfare at its best. Shareholders need to understand that when their managements do dumb things they will suffer. A whole lot more shareholder democracy would also be worthwhile.

"Taxpayers are all being swindled by the banks."

Kinda related: banks are insolvent

http://www.youtube.com/watch?v=a5102wsJY94

I wonder how mh23's BAC postions are holding up?

JuiceMan, I'm thinking no one holding much BAC is particularly happy today. Myself included!

But you could argue that it's a good time to add to it.

"I wonder how mh23's BAC postions are holding up?"

Not too well, though I'd buy it at $8. We're almost there.

steve, we were there this morning!

Not too good...I jumped in to early on this one. That being said, it represents a very small part of my overall portfolio. I figure it will either go to zero, and I will write off the loss against any gains, or it will go up. All of my positions were taken with an eye to several years out, so I never expected to achieve my target for several years. However, in this case, I don't think I will even get back to my entry point, which was around 27.

If I would have stood pat with my initial position I would have had less exposure, but I liked the stock at the 22 offering, and that is where I loaded up. I suppose it the stock rallies I will sell some of it, or if it goes below 7 I will just dump it. I am an investor, not a trader, so I don't like making decisions in such a short time frame. My concern, as an investor, is that I did buy into Lewis' vision, but it now appears that Lewis may have had it wrong.
I respect Stevejhx's opinion, so I am somewhat persuaded by his arguments. However, I am starting to agree with Kass that this bank may just wind up as a ward of the state and the equitie will be destroyed.

It will come back. Son of TARP will institute what TARP was supposed to do: hive off bad assets. Banks will be smooth sailing after that, though I don't think we'll get to $27 anytime soon.

bjw, we were, but it's not where I'm putting my money right now. I said I would buy it, but with limited funds thanks to the Lehman fiasco I must be selective. I meant that it represented a good buy.

mh23, gotta say that I admire your and openness and honesty. Care to become a major financial institution CEO? :) We could sure use some of that in a bad way. Until that day comes, I'm afraid the equity market will remain very defensive.

I know Steve, I was just having a little fun. I got in under 15, and would almost certainly add now if I had a bit more money to play with right now. mh23, I wouldn't lose hope after just today - I'm with Steve on this.

I think they will be propped-up, but will decide to sell off a piece or two in the not-so-distant future.

They cannot fail....or, rather, they won't be allowed to fail.

I agree. I just sold 2/3 of my position at 8 and some change, and I put a 20% stop loss on the rest. No big deal. I liked the company, but things changed quickly over a short period of time.
I was out of the stock market entirely until this past September, when I started building positions in a number of companies on the dips. I am still over 80% in treasuries, so I have a lot of dry powder, and am happy about my average cost in my positions. It isn't so much the drop from 28 to 8 that bothered me, it is the concern about greater dilution of my position, and perhaps worse.

You guys have bigger balls than me. I can't stomach the volatility and been on the sidelines for months. Sorry about the loss mh23, bjw.

"I just sold 2/3 of my position at 8"

Nothing personal, but I wouldn't have done that. I would have ridden it out if you don't need the money. I think you may have sold at what would be the low or close to it. Son of TARP will help with price discovery. The problem is, as I've long said, each of these securities is unique so no one knows what's in them, so there's no way to know determine they're worth. I recently translated a contract about how these were put together, and which ones were included in which security or in no security was basically left to the discretion of the underwriter, and there was no guarantee of uniformity. Ergo, what are they worth?

However, if that problem is resolved, there'll be a lot of write-right-back-ups and huge profits.

"I can't stomach the volatility and been on the sidelines for months."

I agree. The long-suffering positions I have I've kept, but the rest (what's left of it!) is in cash.

No offense taken. I got into this stock based on emotion (exuberance), and I got out on another emotion (frustration). The bottom line is that there is another company that I want to build a position in, and I did not want to draw from my cash position. I kept 1/3 of my BAC just to have a position that I don't have to think about for several years. I respect your opinion, and I hope that you are right. I would imagine that the dividend is going to be eliminated, and I would further think that the equity holders may have the shares diluted by future capital raises. That being said, if Lewis can pull it off and survive, the company will do well.

I've stayed the hell away from financials for two simple reasons: (1) I don't like investing in something I don't understand, especially if no one, including the people running it, and the government trying to bail them out understands it either. (2) their fate and that of shareholders will be decided by the feds, not by actual performance. I am an investor, not a gambler on political outcomes.

I did buy some GE around 18-19 on the theory that their non-financial businesses will help them ride out the storm and maintain the dividend, but I now regret it. Lesson learned.

"I don't like investing in something I don't understand, especially if no one, including the people running it, and the government trying to bail them out understands it either."

Bingo. Quote of the day.

Yes Steve,

WE are almost there..And "almost" where is that exactly? To the point of full nationalization of the banking system? To having to empty our collective cash register for the gang-land style stick-ups from the "brilliant" Ken Lewis, or his similarly strategically challenged brethren at C? I find it repugnant that a company that has blithely spent it's way buying up s@#ty companies into the teeth of a downturn can now keep offering it's sins up as chum for the rest of us to feed on until we bloat like that fat guy in "Seven"." It's now acquired the same symmetry as the credit problem we were trying to fight, one s#@ty company after the next that's gorged on undisciplined standards and greed, just puffing up another debt bubble and keeping walking carcasses like BAC and C around for another day.. A system that supports those "too big to fail" is a system that's failed. And investing in a company like this? Now? WTF? What exactly do you think you're buying? Latest article saying MER losses could total $10bn and that's reason for Gov't help? Then why do they need $100bn+ of gov't guarantees? This is truly sad...

Someday, the financials will be a good group again and perhaps the progeny of BAC, in some very different form, may walk tall in that crowd but after watching BSC, then LEH, then FNM/FRE, then AIG, now C and now BAC circling the drain, you don't have any better way to spend your money? You're better off hitting the ask on any apartment in NYC

That's a valid way of doing it, mh23, b/c I've done the same. But I NEVER sell or buy during earnings season, though 2morrow may be an exception.

newbuyer, agreed. I do understand financials, so I have no fear of them. JuiceMan is wrong - I've you've worked in a bank, or for or with a bank, you understand what they're doing. Ken Lewis just made another brilliant move - help us, or we'll bail. What a poker player!

aj - BofA did you a favor taking over MER's losses. Otherwise, the result would have been worse.

I will be investing in financials w/i the next 2 weeks. Nobody likes them.

Bingo.

BTW read my past posts - I said I was EXTREMELY surprised that BofA didn't close on the MER deal on 12/31 rather than 1/1.

Yet again, prescience.

"I got into this stock based on emotion (exuberance), and I got out on another emotion (frustration)."

Yes. That's a valid way of doing it Steve. And I'm glad you understand financials, because it's really hard to find someone in this city who's worked in a bank. And while I'm sure you understand financials better than anyone outside of Meredith Whitney, there are many who currently work for banks who have no f@#ing clue what BAC is doing. Exactly what do you think is so novel about what BAC is doing? The repeal of Glass/Steagall opened up the same options for everyone, but not everyone attacked in the same way as C. We've all seen many formerly "smart" people looking extremely dumb over the last twelve months trying to call bottoms in financials and I actually hope you are right, and that sometime in the next 2 weeks or 2 months, the fact that "nobody likes them" will serve as reason enough for them to move higher, but my #1 rule of investing is know your downside, and I don't think anyone's got a handle on that, (although I guess they can't go below zero)

BoA did no favors for me, and I'm not sure who they really did a favor for other than those who work at MER..Considering the stated value of the deal is now larger

The one thing I've learned about investing, and especially with levered entities like any financial is to know your downside. What's the risk/reward

sorry - bad edit

"That's a valid way of doing it Steve."

Read who made the post, dude. Not me.

"I do understand financials, so I have no fear of them"

Then you must be the only one I've ever encountered, among investors, bank executives, government regulators, auditors, etc.

Did you understand Enron too?

I have to laugh at myself...Anyway, as always Steve, I appreciate your opinion. From 2002-2008 I was invested in Treasuries, a private business, commercial real estate and Manhattan real estate. Back when you and I started debating, I was seriously considering renting my apartment, which I bought in 2003 rather than selling it ( I moved myself and my family to the suburbs). Based in no small part on your arguments back last Jen. and Feb., I sold, for a substantial profit, and obviously for much more than I could get today or probably at any time in the future. Unlike many others on this site, I value information and insight and I am capable of putting my ego aside and learning from people who have superior arguments and knowledge than I.
Beginning in September I began building positions in about 20 different companies (the first time I have bought stocks in several years), and I will continue to be adding and building for the next 12-18 months, which I stated back in September, even before Buffets famous op-ed piece. With BAC, I jumped in early and got pissed yesterday, which is no way to invest. That being said, big deal, live and learn. I will hopefully have some gains to offset the losses this year, and I will put the cash from the sale back to work in the market when the companies I am looking at hit an entry price that I like. I still own a decent amount of BAC, and now I don't have to think about it for many years.
Also, Steve, what was that financials ETF you wrote about last week?

Me too Newbuyer. I bought some GE at 17 and some more at 14. My thinking was that, if Obama really moves toward alternative energy and infrastructure, then GE would benefit. I also figured that since Buffet is a major investor in GE and a pal of Obama's that GE would be taken care of. Unlike BAC, GE seems to have a safe dividend for the next year, and unlike BAC, they have a diverse business that could benefit and grow from the stimulus that Congress is proposing. I am a long term investor, so I am looking out to the next growth cycle, which may be five or more years out.

newbuyer - that comment is classic steve. he will profess how much he understands something (in this case, financials) and chide everyone else for being foolish. if they go up, he will declare himself a genius. if they go down, he will just say that it was a small % of his portfolio, and that no one could have predicted the events that happened anyway, so it's not his fault (see his comments on brazil investments from earlier this year). all the while, he will pat himself on the back for renting instead of buying, while in the meantime his stock market investments are down 50% (or more in the case of Brazil). in the meantime, he will continue using 8% as expected returns from his cash while sitting on the sidelines, even though he is either down 50%+ in the stock market, or getting 2% from treasuries.

"not everyone attacked in the same way as C"

I always said that I never understood what Citigroup was trying to do, that it made no sense to combine insurance and banking, that they had a very weak retail distribution network which is what would make the "supermarket" model work.

BAC, WFC, JPM have "supermarkets," but entirely different structures. They (now) have vast retail networks with about 6,000 branches a piece. They have significant operations in mortgages and credit cards. Brokerages are just one more distribution network.

That said, I don't know why BAC would want to keep its Columbia funds family or Blackrock. They are materially different from everything else they do.

"what was that financials ETF you wrote about last week"

There is a highly leveraged 3x ETF, FAS, which if you have money to burn and don't mind trading rather than investing, could be interesting. Since inception its traded from a high of $50 something to a low of $11. It closed at $13 something yesterday, and trades in a range.

"(see his comments on brazil investments from earlier this year)"

Oh evillager, just because you're bitter about your apartment sliding in value, no need to take it out on me. I sold my Brazil a long time ago, not at the peak but on its way down, above where I bought it. I did say that Brazil had been upgraded to investment grade - which is true, but I didn't buy any at that time.

But so you know, Brazil is down this year about as much as the S&P 500. There was NO escaping the deleveraging after Lehman.

BOA wants to keep Blackrock because it is valuable and they may need it down the road. I can see them struggling and selling the Blackrock stake for a good amount of $.

steve - you don't understand why BAC would want to keep profitable asset management companies, whose products can be sold through the huge distribution network of Merrill's FAs?

"whose products can be sold through the huge distribution network of Merrill's FAs"

It would take LICC=tech_guy to make a stupid comment like that. The very reason that C sold Legg Mason and MER sold its asset management division to Blackrock is that it is illegal for financial advisors to favor their own products over others, as it creates a conflict of interest.

That's why it makes no sense - they're prohibited from doing what you say. They can offer them, but they must also offer everyone else's under the same terms, and can get in a lot of trouble by recommending their own.

steve shows that he is absolutely clueless. Yes, the offering terms must be the same as those offered for products of non-affiliates, and affiliate relationships must be disclosed, but the reps are not prohibited from offering the asset management products of affiliates.
steve really does try to sound good talking about things of which he has no knowledge. He probably was the type of accountant that could tally up numbers, but had no intelligent understanding of the business he was auditing or how things actually worked. I've dealt with plenty of those types and it is amazing how many times you have to explain basic concepts to them.

" it is illegal for financial advisors to favor their own products over others, as it creates a conflict of interest. "

No, its not...

Would be nice if it were, but its not...

"No, its not..."

Yes, actually, it is.

"the reps are not prohibited from offering the asset management products of affiliates."

I never said they were. I said it's illegal for them to favor theirs over others because of the conflict of interest. Therefore, any time they sold theirs they would be subject to extra scrutiny. That's why they sold them.

Yes, and if we've learned anything over the past 12 months it is how strictly the industry is regulated...or not so much.

It is illegal for a rep to get more compensation or offer better terms to sell their own product, but if the terms are the same, the rep gets compensated the same, and everything is disclosed, the reps can market whatever products they choose and can focus on marketing to clients their own products, as long as they meet suitability standards. Stop pretending you know things steve.

LICC, you're really out of your league.

http://knowledge.wharton.upenn.edu/article.cfm?articleid=1403

Conflicts of Interest

Many big firms like Merrill had hoped that by offering a wide range of retail products and services, they could attract the "lazy money" from investors who would follow the firm's recommendations without much question, Siegel says. That way, the firms could steer customers to their firm's in-house funds and other products.

But then came the conflict-of-interest scandals of the past few years. In 2002, Merrill paid $100 million in fines after regulators found analysts at the firm had recommended stocks they knew to be no good. At other firms, such as Morgan Stanley, brokers were found to be pushing in-house funds instead of others that were better, often because they received higher commissions for selling the house brand.

These and other scandals made investors sensitive to conflicts of interest, diminishing the appeal of the big brokerage firms' in-house funds, Herring points out. Before the scandals "it was thought to be a real advantage to be able to use one's own broker-dealer network to sell proprietary mutual funds. But once the SEC questioned the incentive systems put in place to motivate broker-dealers, a captive broker-dealer network became more of a liability than an asset. Moreover, customers became concerned about receiving conflicted advice."

Companies also found that advisors at one brokerage were reluctant to recommend funds bearing rivals' names, Metrick says, while Siegel notes that more and more investors have turned to independent advisors who steer them away from brokerage's in-house funds and toward those of the free-standing fund companies. Hence, the big financial-services firms have lost interest in some of the key elements of the supermarket, such as asset management.

Last June, Citigroup, originally one of the strongest advocates of the supermarket model, sold its fund operation to Legg Mason in exchange for Legg Mason's broker-dealer business. (Several months earlier, Citigroup had sold off its Travelers life insurance unit.) Recently, Morgan Stanley tried to sell its money management operation to BlackRock in a deal that fell through. Last year American Express spun off its fund operation.

The Merrill-BlackRock deal is an attempt to have it both ways, Herring said. Instead of unloading the asset-management operation entirely, as Citigroup did, Merrill will keep a stake through its near 50% interest in BlackRock.

Merrill is betting that BlackRock can improve the operation's performance, and that changing the funds' names may eliminate investors' worries about conflict of interest. It is something of a gamble, though. Investors who are aware of Merrill's stake in BlackRock may see the same old conflict if Merrill brokers recommend BlackRock funds.

steve - thanks for confirming what I said and making clear that you have no conceptual thinking ability. No wonder you didn't last in Wall Street. The article you posted supports the position that the asset management and distribution model could work if structured and branded the right way. It answers your dumb question above where you wondered why BAC wants to keep those businesses. You really are a glutton for embarrassment.

LICC: "The article you posted supports the position that the asset management and distribution model could work if structured and branded the right way."

Article: "At other firms, such as Morgan Stanley, brokers were found to be pushing in-house funds instead of others that were better, often because they received higher commissions for selling the house brand."

Article: "Merrill is betting that BlackRock can improve the operation's performance, and that changing the funds' names may eliminate investors' worries about conflict of interest."

"You really are a glutton for embarrassment."

Back on ignore. I try, but it's fruitless.

"I do understand financials, so I have no fear of them. JuiceMan is wrong"

Is this a lame opportunity to say that I was wrong about something or do you actually have an idea what I was wrong about? Your portfolio performance highlights that you know very little about the financial sector yet your ego forces you to drone on about "expertise" as a banker. Your story is tired and comical.

By the way, I don’t know what LICC does for a living, but he has your number. You should listen to him a little more rather than put him on ignore, maybe you will learn something.

"Your portfolio performance highlights that you know very little about the financial sector"

I have not held anything in the financial sector for over 2 years, so I don't know what you're talking about.

LICC has my number? Please. I do recall your making a prediction that JPM would have to retain thousands of BSC people for years to merge their systems.

Sorry, they're gone.

The very reason Legg Mason was sold, and MER sold its asset management business, was to avoid conflicts of interest. My point is that what "financial supermarkets" have that C did not have is a retail distribution network. Blackrock does not require a retail distribution network, and generates an inherent conflict of interest when proprietary products are sold. LICC and you seem to be the only ones not to know that.

That you were wrong about something? "I don't like investing in something I don't understand, especially if no one, including the people running it, and the government trying to bail them out understands it either."

Some of them didn't understand what they were selling or buying, but I think now there's a clear consensus on what went wrong. Those products never made sense to me, and for a year I've been railing against Triple-A ratings given to securities backed by supbrime loans.

If LICC comes up with something good, I'll let you know. He's the one who refuses to acknowledge that opportunity cost is calculated on the full amount invested regardless of the source of funds (borrowed, cash, etc.), despite the inanity of such a concept. Imagine: buy a house with 0% down and there's no opportunity cost.

Enough.

Well, BAC continues to spiral. I'm glad I didn't buy more yesterday! Yikes!

steveie... i'd agree with you that Louie is an absolute genius if he had planned all along to "re-negotiate" b/f closing... but I'd say between the time the Term Sheets were signed and the actual due dil by his bankers were done... NO-ONE could price any of these assets... and he was forced to re-cut the deal...that's a different story.

On a personal note, everyone please stay out of financials these 3 quarters if you need the money. I've worked on the credit side of banks and know that there aren't enough paper pushers and credit officers to review a quarterly troubled watch list on time much less "re-price" their entire balance sheet 2/3 quarters with a fluctuating market.

Like I've also predicted, Son of Tarp is definite... congress/senate will give Obama at least the same dry powder to right this ship but wouldn't be surprised if a small grandson of Tarp will be passed at the tail end of this fiasco when the clouds are darkest, but the ship has passed the most treacherous portion of the storm.

An update of HRP, like I said they cut their dividends... but given the deterioration of the commercial market... I will cut my position in 1/2 in the next "pop"... the greed says someone is gonna take this over... but another softer/safer side of me says... even I can't see when a sponsor might appear (although the current mgmt is effectively doing a MLBO).

steve just brought up another one of his completely foolish positions, that opportunity costs include the amount you borrow to purchase real estate, even though you wouldn't borrow the money if you weren't buying the real estate. I'm not sure if this argument is as dumb as his marginal v. effective tax rate argument, or if it is even dumber.
steve, you have yet to have a discussion with me where you aren't shown to be a foolish amateur with social personality issues. It isn't as much me as that your opinions and arguments are nonsensical.

LICComment... you f'n have to consider the opportunity cost of the money you borrow... if you could buy a rental bldg in queens instead of leveraging yourself up to buy a "home" you have to consider this.

I chose to buy commercial condos in NYC when everyone was looking at WEA/CPW... so the money I make is totally fungible (not like a mushroom)... and I can again make that decision again in the next 4 years... i know not everyone likes to deal with commercial tenants, but when you are about to lay down $300K for an apt... ask yourself, would it be better to buy an entire apartment building in Jersey/outer borough and with the income just rent in NYC?

I think you are mistaking the fact financial won't allow you to leverage yourself by 20x and mark to market once in 30 yrs and forgetting to go back to my economics class :) If you don't get that last stmt, get yourself a RE broker license... you guys can all sit around and repeat the same Lawrence Yun economics mantras :)

w67 - I agree. And I also think that no one actually knew what MER had on or off balance sheet. I've changed my mind from earlier - I think he's a little humbled right now, but in the end it will wind up being a good deal. He should have renegotiated the price, but I think Treasury wouldn't let him b/c it would have to go back to the shareholders.

"BAC continues to spiral"

Yup. Which is why Son of Tarp will be announced soon, because you can't have half of the largest banks in the country trading below $5. Son of Tarp will be the original Tarp - a la RTC.

w67th - absolutely not. Yes, the opportunity costs will be different for each individual based on individual circumstances, but for most people, the alternative to buying a home for themselves is not to otherwise borrow the same amount of money and make other investments. The alternative for most is to keep what would have been their down payment invested and to keep renting.

So JuiceMan, are you willing to go out on a limb and support your buddy LICC's assertion that there no opportunity cost if you borrow money to invest?

Waiting....

steveie... again I have to disagree with you on that last point... Treasury doesn't give a ratz azz about equity position. They don't want any breakages in superhighway of cash... and any BKs in the large institutions ala BAC, Citi will be like losing I-95 for 6 months... can people get to Florida.. yep.. .but it'll be a pain in the azz.

LICComment... how is buying an apartment building or a house and renting it to someone any different than buying it for yourself and "renting" it to yourself?

It's not the equity position I was talking about - there would have been a time delay in getting the approval, and it would have upset the financial markets, & MER would have gone under in the meantime. They posted a $15 billion loss.

Citi is dead in the water forever. Can't be saved. It will be broken up like AIG. It has a thin distribution network, which is what you need for commodity products like retail banking.

BofA, on the other hand, has a tremendous franchise in its branch network, mortgage & credit card platforms, now brokerage, wealth management, and investment bank. They were never involved in subprime lending (though they did do Alt-A liars loans, etc.) 75% of the guaranteed assets were MER's; I wouldn't be surprised if most of the rest were Countrywide's.

:) Stevie....

"LICComment... how is buying an apartment building or a house and renting it to someone any different than buying it for yourself and "renting" it to yourself?"

You pay tax on rent you receive from someone else. You don't pay tax on rent you "receive" from yourself. Plus, I know there are ways to get around this, but banks typically won't give you nearly as attractive mortgages if they don't believe you'll be an owner-occupant. Coops won't even allow the sale, or the successive rental.

Here's how opportunity cost works in the real world. stevejhx disagrees, but I think you, w67, are smart enough to understand. Take your would-be down payment. Figure out the best expected/average return you believe you can get on that money investing in anything other than an owner-occupied apartment. For me, I use 8%. Now, when buying your shiney new owner-occupied apartment, you figure every year you live there, you lose 8% of your down payment (plus 8% of whatever equity you accumulated via mortgage payments).

stevejhx believes the 8% should be calculated on the entire purchase price, not just the down payment.

have to tag out but... i'll rejoin later... keep up the fight stevie :)

Awww, the 2 lovebirds refuse to have a lovers quarrel and instead ignore their disagreements, letting it bubble up inside until they explode... I don't argue this with stevejhx anymore, so I'll tag out too. Maybe LICC wants to join in. Maybe stevejhx will tell me I'm LICC because thats all he does when he's proven so obviously wrong.

w67 - the discussion was about comparing the costs to buy v. rent. Therefore, the discussion is about comparing whether to buy a place to live in, or to rent a place to live in. When measuring the opportunity costs of buying, you take into account the return a buyer could have made investing his down payment as an alternative rather than buying. To say that the opportunity costs should include the return a buyer could have made by borrowing the same amount of money and investing it as an alternative is silly. Most potential buyers, if they decide to rent rather than buy, are not going to then take borrowings on the same amount of money that they would have taken as a mortgage and invest that money. Come on, this is pretty simple, stop trying to prop up your buddy steve - he's used to being wrong almost all the time.

"You pay tax on rent you receive from someone else. You don't pay tax on rent you "receive" from yourself."

Because one is income, the other is an expense.

You truly have no clue.

"Take your would-be down payment"

Wrong. Your opportunity cost is based on the full amount invested. It must be, because if you put down 0% and bought a $100,000 home, you could have used that same (borrowed) $100,000 and invested it in something else.

Sorry.

If steve was in a first-year economics class and gave that answer to a question relating to opportunity costs, the teacher would fail him and wonder why he can't understand simple concepts.

Is Steve saying I can borrow $100k from a bank, tell them I am using it to buy a home and then invest it in something else?

Because in garbled Steve-speak, that sorta sounds like what he's saying. If I am not buying the home, how am I getting the $100k?

You might be interested to know that in Switzerland "imputed income" from your owned home is actually subject to tax to put it on a level playing field with those who rent and pay that rent with after-tax dollars.

"Because one is income, the other is an expense. You truly have no clue."

w67 asks how something is different (implying that they aren't), I explain why, you further support my claim, and conclude that I have no clue? Folks, economics isn't his biggest problem.

waverly: Yes, yes he is. When I pushed him on the details previously, he mentioned margin accounts. When I asked who provided margin accounts with 5:1 leverage, 30 year fixed rates comparable to prevailing mortgage rates, no margin calls, he told me I was the same person as LICC.

tech_guy, I'm glad to hear you are not LICC.

Topper, other countries have that, as well.

No, waverly, that's not what I'm saying.

"So JuiceMan, are you willing to go out on a limb and support your buddy LICC's assertion that there no opportunity cost if you borrow money to invest?

Waiting...."

Don't have to go out on a limb steve. If you read LICC's explanation, he is absolutely correct. Would also like to point out that this statement "that there no opportunity cost if you borrow money to invest" is twisting his words around which you said you never do. Yawn.

"your buddy LICC's assertion"

steve, I don't know if LICC is my buddy but at least he isn't my daddy.

Which explanation, JuiceMan. Just true or false: opportunity cost is on the full amount of the investment regardless of the source?

http://books.google.com/books?id=qixN5rBGERUC&pg=PT58&lpg=PT58&dq=%22opportunity+cost%22+%22borrowed+money%22&source=bl&ots=OnSxYB_Qk4&sig=gNIZmYITIZm625VuszXHRnE1M1o&hl=en&sa=X&oi=book_result&resnum=4&ct=result#PPT59,M1

This one's even easier: "The Opportunity Cost of Borrowing."

http://www.ncpa.org/pub/ba/ba615/

That link involves borrowing from a 401k. You are both the borrower and the lender. You don't see any difference between that, and borrowing from a third party?

steve, you can’t be serious with these links. A link that describes opportunity cost for a manufacturer and one that focuses on the opportunity cost of borrowing from your 401k? It is a waste of time to even acknowledge these links never mind that they could possibly prove your point. You are slowly becoming rufus.

LICC is right, he'd be laughed out of a freshman economics class. To claim opportunity cost refers to anything you never had the opportunity to do is just plain ridiculous.

"I don't know if LICC is my buddy but at least he isn't my daddy."

Hahahaha!

That was the funniest thing I've read all day...nice one!

JuiceMan, opportunity cost is opportunity cost.

Perhaps I am slowing becoming rufus, but you have quickly become spunky.

Still can't answer the question directly?

"JuiceMan, opportunity cost is opportunity cost."

steve, what specifically is the opportunity cost of the leverage on owner occupied real estate? What specifically could one personally do with that leverage outside of buying a home? Can I borrow that money and invest it? No. Can I borrow that money and buy a business with it? No. Can I borrow that money a buy an alpaca farm with it? No. If I can only use that leverage to purchase owner occupied real estate than what specifically is the opportunity cost to that leverage?

"Still can't answer the question directly?"

What question?

"but you have quickly become spunky."

No, there is only one spunky and he was friggan hysterical.

Hey JuiceMan, thanks buddy. At least he doesn't think we are the same person.

JuiceMan - you can say that about anything. "I buy stock on margin. What specifically could one personally do with that leverage outside of buying stock?"

The question is, is opportunity cost on the down payment, or on the full amount invested?

(I do miss spunky!)

LICC, brace yourself for a four page dissertation in response to my last post. There is absolutely no way steve can credibly answer these questions without including a bunch of misdirection’s, off topic crap-o-la, and twisty turns of the truth. So predictable.....

Be that as it may, you obviously thoroughly enjoy the repartee as you do keep posting and posting and...

[JuiceMan - you can say that about anything. "I buy stock on margin. What specifically could one personally do with that leverage outside of buying stock?"]

That's exactly right. You mean it sarcastically, but its perfectly correct. Since the margin account leverage is a unique benefit to stocks, you can't count the margin account's total dollar value as opportunity cost in another non-stock investment. Only the base amount.

You're more correct in sarcasm than you are in serious discussion. That's pretty hilarious.

Well, I see that JuiceMan is still unable to say whether there is an opportunity cost to using borrowed money.

Seems an easy question to answer: yes, or no?

"The question is, is opportunity cost on the down payment, or on the full amount invested?"

That's easy, down payment for the reasons I stated above.

"Well, I see that JuiceMan is still unable to say whether there is an opportunity cost to using borrowed money."

huh? I will tell you there is opportunity cost to a mortgage as soon as you tell me what I can do with that money other that purchase a home.

The CEOs who had run their companies to the ground after taking huge salaries and bonuses for themselves and their cronies/executives and board members are running Ponzi schemes on us, the taxpayers. Where is justice? I don't see any of them being investigated, indicted or jailed. Wake up Americans, let classify and call them for what they really are...

"what I can do with that money other that purchase a home."

Then what is the opportunity cost of capital? Can capital not be borrowed? As in working capital?

Lame.

+ I already told you: what else can you do with any secured loan that you take out? It is secured by the asset you are borrowing it for.

No wonder you expected real estate prices to hold steady.

Just when you think that steve can't get any more basic, simple concepts wrong and appear entirely dim-witted again, in an obnoxiously ignorant way too, he goes and does it again. How can someone bungle the application of the opportunity cost analysis so badly? wow

"opportunity cost of capital: Return or income forgone in investing in a particular project, instead of investing the same sum in 'blue chip' securities."

Ooh! The return or income foregone in investing in a particular house, instead of investing the same sum in blue chip securities."

Thanks for misapplying concepts again, making your comments totally meaningless. You are comparing opportunity costs relating to a company's use of capital to an individual's purchase of a home. You are becoming a clown with this nonsense.

Ask him if income is after the payoff of principal on a loan, and other familiar concepts.

"You are comparing opportunity costs relating to a company's use of capital to an individual's purchase of a home."

There is no difference if you're talking about opportunity cost, LICC. To wit: buy your property in the name of a corporation.

"You are becoming a clown with this nonsense."

Indeed. Because opportunity cost is opportunity cost is opportunity cost, regardless of where you get the money from.

"Ooh! The return or income foregone in investing in a particular house, instead of investing the same sum in blue chip securities"

So you are saying one can take out a mortgage and invest it in securities rather than a home? Please tell me that is not what you are saying.

Still waiting for steve to tell us what the opportunity cost of a mortgage is or, he can just agree with LICC's original point and we can move on to the next subject.

"So you are saying one can take out a mortgage and invest it in securities rather than a home?"

Oh, JuiceMan, how you confound! Confounding the loan, and the collateral given for the loan.

Have you ever signed a loan agreement, JuiceMan? Did you know that if you take out a loan for a car, you can only spend it on the car, not on carrot sticks?

Investopedia defines "opportunity cost" thus: "1. The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action."

And it gives a cute little example: "1. The opportunity cost of going to college is the money you would have earned if you worked instead. On the one hand, you lose four years of salary while getting your degree; on the other hand, you hope to earn more during your career, thanks to your education, to offset the lost wages."

Does it matter HOW you finance your college education? No. Does it matter that if you take out a student loan you must spend that money on tuition? No.

No wonder you've remained so perilously attached to the real-estate market. You don't understand a) the difference between a loan and the collateral for it; or b) the basic concepts of economics.

You buy a meal at McDonalds, pay for it with a credit card. Is there a different opportunity cost than if you paid for it in cash?

No.

"Have you ever signed a loan agreement, JuiceMan? Did you know that if you take out a loan for a car, you can only spend it on the car, not on carrot sticks?"

Yawn. More classic twisty turns from steve. Funny how you turn this around, this is exactly what you are implying in your posts.

Thanks for the lesson on opportunity cost steve but you still haven't answered the question. So far you have told us about the opportunity cost of machines, 401k, stocks, college, etc. Why can't you answer the question posed?

What is the opportunity cost of a home mortgage? Just answer the question.

"What is the opportunity cost of a home mortgage?"

That's a stupid question. The mortgage per se does not have an opportunity cost. What has an opportunity cost is the purchase of the home. And that opportunity cost - as with all opportunity costs - is the full value of the purchase price regardless of how you finance it. Just as it makes no difference if you buy McDonald's in cash or on credit. The opportunity cost is not buying Burger King, not how you pay for it.

"The mortgage per se does not have an opportunity cost."

Yes, finally.

"And that opportunity cost - as with all opportunity costs - is the full value of the purchase price regardless of how you finance it."

How can the full value of the home have an opportunity cost if the mortgage does not?

I guess you aren't going to ever admit that LICC was correct are you?

"That's a stupid question."

Yeah, that's a stupid question. So stupid you can't answer it.

steve, you contradict your own idiotic conclusions with the cites you post. Your investopia definition of opportunity costs - "The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action." The alternative to buying a house is not taking borrowings in the same amount as the price of the house and investing it. You can't be this stupid that you don't understand this; I have to believe that you refues to admit you are wrong because of your inferiority complex.
In the other example you posted about going to college, the opportunity costs are the money you could have earned in salary if you didn't go to school, not the money you could have made if you borrowed money for the same amount of any student loans you had taken and invested that money instead.
Thanks for providing more support to show that, once again, I am right and you are pitifully wrong.

"How can the full value of the home have an opportunity cost if the mortgage does not?"

Oh JuiceMan! I used to think you were reasonably intelligent, but now I don't. You will do anything - ANYTHING! - to try to prove that your property is not going to fall 50% in value.

You asked what the opportunity cost of a mortgage is. It has none. Nor does having a credit card have an opportunity cost. What has the opportunity cost is what you do with it.

I tried to reduce this argument to a level you could understand: that the opportunity cost of buying an Egg McMuffin is the same whether you pay for it in cash, or with your Discover Card. Likewise, the opportunity cost of buying a house is the same whether you pay for it in cash, or take out a mortgage. It's: what would you have otherwise done with the money you spent for the home, regardless of where you get the money from.

Very dense. Very dense. Very dens.

I can't steve can be so stupid that I have to explain this, but here goes - using a credit card to buy an egg mcmuffin is just substituting your payment method from cash in your pocket to a credit card. You are not taking a loan beyond your existing capital and collateralizing that loan with your egg mcmuffin. I know basic concepts are hard for you to understand steve, but please try to follow. When you take a mortgage, the opportunity cost of buying a house is not the full price of the house because you would not take the loan in the alternative of not buying the house. If you can't figure that out, please re-take the 6th grade and then get back to us.