My wife hadn’t been particularly close to her over the years, but just the sheer number of years that they had known each other (more than 30) put her in a very small group of people. I can count on one hand, the number of people I’ve known for 30 or more years, and most people I know that are around my age are the same. Long-term friends are getting rare. My wife has been on the phone with her brother on a regular basis during the last couple of weeks and has had long talks with him, trying to help him deal with the situation.

One of the conversations I overheard was the discussion about paying bills and how things were not getting paid correctly. If you listen to Dave Ramsey very much, you’ll hear a recurring theme about how marriages are usually based on one person being a ‘geek’ (or the person that does the numbers) and the other being the ‘free spirit’ (or the one that isn’t as interested in the details). My brother-in-law was definitely in the latter category.

It’s not that he didn’t know about the finances and bills, but he wasn’t familiar with his wife’s bill-paying routine. Because of that, he sent two payments to his (their) truck, when he should have only sent one. He is going to have to call the credit company and see if they will cancel the second inadvertent payment.

That triggered a conversation between myself and my wife.

What if Aliens Abducted You?

Of course the ‘Alien Abduction’ is a euphemism. One that I heard from a friend of mine, Lynne over at BeingFrugal, some months ago. It really just covers any contingency when the ‘geek’ in the family disappears for some reason. The ‘free spirit’ will need to know a lot of details about the family and finances, that they might previously have not been interested in. I thought it was a cute statement, and filed it away for a Joe Sixpack writing when I got a chance.

Then circumstances brought back the whole issue in a way that highlighted the importance of getting this in place. After discussing finances with her brother, my wife was in a near panic thinking about worst-case-scenarios concerning her if I were to ever be ‘abducted’.

I can’t say that I’ve actually prepared anything formal so that she knows what to do if I were to disappear. I’m also not so sure what I would do if she were to disappear either. That, in particular, was what hit me. I hadn’t even considered about what to do in the opposite situation.

So, as a cautionary tale, I’m going to document what I’m planning on doing for my ‘kit’. It won’t be complete, so I’ll revisit it as I cover different areas other than just financial.

The Financial Kit

The first part I’m going to work on is the low-hanging fruit of finances. They’re an immediate concern should I disappear, and are one of the things my wife isn’t completely comfortable with.

I have all my bills paid automatically, as I’ve written before so the paying of the bills should continue whether or not I’m around. However, because of the way the automatic payments are made, there are some bills that need to have larger-than-minimum payments on them, or some of the other payments will overdraw the accounts. It’s a somewhat complex setup, but has worked flawlessly for me for years. Having my wife pick it up and understand what’s going on is another matter.

Step 1 – I’m going to update and move my spreadsheet-o’-bills that I use to track things, to a common area on our computer where she knows where it’s at. Since it’s also password protected, I’m going to make sure she knows the password. (She should already, it’s our family password, one that everyone in the family knows, but I’m just being super cautious).

Step 2 – I’m going to enforce (on a monthly basis) that we sit down and go over the bills, our investments, and debts, so she has an idea about where we stand and what would be necessary for her to do if I were suddenly to disappear.

Step 3 – I’m going to verify (or at least re-verify) that all our insurance accounts, retirement accounts, and other assets are either in both of our names, or that she is the beneficiary if I’m the only one on the account/investment (and vice versa for her as well).

Step 4 – This is the hard one. I’m going to write up a will. I haven’t until now because thinking about death is very depressing for me. I realize now that it’s vitally important for those left behind to get this straightened out. Leaving the family high and dry legally, isn’t something that I want to be remembered for.

First Steps, More Steps

There’s lots of things to do if you’re really going to prepare for the inevitable. This is just some of the first steps. It’s something that should have some thought put into it. Things you forget to add until after you’re gone, won’t help your family. Don’t forget anything!

In coming articles, I’m going to think and write about some other topics concerning what to do when planning for the worst.

If any of my readers have ideas, suggestions, or additions, I’d appreciate leaving a note with the info. I’ll add as much as possible to put together a complete ‘Alien Abduction Plan’ in coming weeks.

This can only be the work of the elusive Collateralized Debt Obligations (CDOs)!! For those that don’t know what one of these monsters are,..

Collateralized debt obligations (CDOs) are a type of asset-backed security and structured credit product. CDOs are constructed from a portfolio of fixed-income assets. These assets are divided into different tranches: senior tranches (rated AAA), mezzanine tranches (AA to BB), and equity tranches (unrated). Losses are applied in reverse order of seniority and so junior tranches offer higher coupons (interest rates) to compensate for the added default risk. CDOs serve as an important funding vehicle for fixed-income assets.

From Wikipedia – Collateralized Debt Obligations

Simple right? Not very.

So What Does the Beastie Do?

The CDO is a complex investment ‘vehicle’ thought up by some smart little investment specialist on Wall Street to protect investors from the dangers of investing in Sub-Prime mortgages. Because individual Sub-Prime mortgages were so risky, it was decided to ‘wrap up’ a huge number of these mortgages, and spread the risk of individual defaults across the entire investment.

Banks and lending institutions liked this so much that they decided to create about $47 Trillion dollars worth of them! To make things even better, since these are a new type of investment, they aren’t covered by government regulations!

What has happened is that there’s a whole shadow brokerage universe, similar to the stock market, that deals with buying, selling, and trading these CDO’s. They were so successful that a significant percentage of all the Subprime Mortgages were ‘bundled up’ into one CDO or another.

The Monster Awakens

All seems well. The CDO’s are trading like hotcakes, and even if they lose 10% of their value, they’re still making the banks a HUGE profit.

Then BOOM! The housing market starts to decline at a pace no one anticipated. Now the CDO’s aren’t losing 10%, but 20% or more! Panic sets in, for a couple of different reasons.

Huge amounts invested – As mentioned before, the money being talked about is in the Trillions range, and since there is no regulation, the ACTUAL value of the debt obligations has been determined by the ’shadow’ market (supply and demand) , so there is no one that knows what the REAL values of the assets are.

Liquidity drops – As these are supposed to be safe, low-risk investments, many banks have bought these as a hedge against HIGHER risk investments. That means that they depend on these constant revenue streams for day-to-day operating expenses of the banks. When these streams are disrupted (even by 10%) it can cause a cascade of troubles, adding up to liquidity problems (Bear Stearns) and a lack of confidence in the bank itself.

Om Nom Nom Nom

What are the banks to do now that around $200 billion in investment value has been ‘eaten’? With the Subprime crisis in full swing, you can’t give these things away any more. The value is dropping like a rock, since price is determined by demand (like stocks) and demand has dwindled to almost nil.

What to do?!?? Write it off (of course). Since the banks themselves don’t know exactly how much the investments are actually worth, it’s easier to err on the high side, and declare write-offs of the MAXIMUM amount they COULD be worth. That’s why the huge spate of banks and lending institutions announcing profit reductions and write-offs IN THE BILLIONS. It doesn’t look particularly good on the bank’s part, but at least it’s off the books, and they get to count it as losses when it comes tax time.

The banks had a good thing going, but the complexity of these CDO’s and the sheer AMOUNT of greed and money involved, set them up for unexpected consequences.

Burp!

One good thing. Even though the banks are hurting now, it seems like much of the worst is over, and the market is slowly correcting itself. Banks are shifting back to more conservative investments, and licking their wounds from the write-offs. The weakest or most over-leveraged have fallen (think Bear Stearns) and the surviving banks won’t be tempted to get too over creative with their investment strategies again.

For a while.

Do you think the banks are out of the woods yet? Betting on any other big-bank blowups? Tell us about your predictions and leave us a comment.