How to Pick Up Free Money from the U.S. Government
By Dr. Steve Sjuggerud
August 20, 2007
I'm buying an old house on the ocean here in Florida…
I wasn't in the market for one... But the thing just came up on the market here at a good price. You don't find lots this size at this price, so I snapped it up. I then called my friend Jim…
"Jim, here's the deal… I have no debt, my current house is paid for, and you know the assets I have. The new place needs some work. So I would like to borrow money for about two years. In two years, I'll sell my existing home, and move into the new one after it's been renovated. We'll use the proceeds of selling our old home to pay off the loan from you. Can your bank lend me the money?"
Jim didn't think twice. He called it a "slam-dunk" loan. He knows it really is a no-risk loan for his bank. He's not stupid... He will gladly take the free money from me, in the form of no-risk interest. "You've got the assets. You simply need a bridge loan ‘til you move in. No problem at all."
Jim also said: "Steve, I'll do the best I can for you... But as your friend, I recommend you shop around to see how you can do. If you can get a better deal, then go for it."
I took his advice. I called Doug at Bank of America. Apparently, I have Premier Banking status with Bank of America. It took Doug a while to get back to me. When he did, he was dejected. He quoted me a rate. But he knew it wasn't competitive.
"What's going on?" I asked. "You know what assets I've got… And you know you have no risk with this loan."
"I know Steve... But I was told that we're not doing any jumbo loans now," Doug said. I could tell Doug was more upset than me. He's wanted a loan from me for years. And now, the day that loan lands at his feet, he's not allowed to pick it up and take it.
Think about this for a minute… Bank of America – America's second-largest bank – won't do a "slam-dunk" loan… It is unbelievable! Bank of America won't do an over-collateralized, no-risk loan.
What's going on? I'll tell you…
Some "suit" in a corner office at Bank of America decided the bank wasn't going to do jumbo loans. Not only that, this "suit" decided to call in as many loans as possible, regardless of quality. "Simply get out, at any price," the suit told his minions. So Doug, with his head held low, can't do a loan. What business is Doug in again? What business is Bank of America in?
It's not just Bank of America… it's every major financial institution in America. It's like there was "suits" convention… and they all decided the same thing: "Call in all loans, period." So for the last few weeks it's been like someone yelled "fire" in a crowded theater… And in this case, the bankers didn't look for the fire, and they definitely didn't make an orderly move for the exits.
When Bank of America won't do a no-risk loan – when Bank of America won't take free money – the situation on Wall Street is no longer rational.
Meanwhile, my friend Jim – the local bank CFO – is not a "suit in a corner office." He is the opposite of Bank of America. He has less than a dozen employees, and he wears a golf shirt to work.
Unlike Bank of America, Jim is willing to take all the free money coming his way. He'll take my no-risk loan. He doesn't have a "suit" above him, telling him "no loans, no matter what." This bank is his bank. He is a founder, and shareholder – and these facts are important… because they mean that he's risking his money… and his future. But you know what? He's got free money from me for his bank staring him in the face. He'll take it!
What should you do now? You can play this in two ways…
You can play it like the Bank of Americas out there and join the rush for the exits, trampling the smaller guys doing the same rush, just to make sure you survive.
Or you can sit back and play it like Jim, the local banker. Jim is able to take advantage of the comical behavior of the suits from the big banks and brokers. He is able to take the free money that the big banks are turning away – free money like the interest on my loan.
That's why I think it's time to own companies that are willing to pick up free money. If you're a long-time subscriber, you know the businesses I'm talking about… They're what I call "virtual banks." We bought several virtual banks in True Wealth when times were similar in 2002. We made safe double-digit capital gains and nice dividends in both Anworth Mortgage and Annaly Mortgage (as it was called back then).
Also keep in mind if you've got some cash built up: When the banks stop lending money, those with cash to buy can pick up some amazing deals. Put some low offers out there… you may pick a great bargain.
Good investing,
Steve
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