This Week in Your Wallet: May 15, 2012
Posted by Jean
If you were tuned into the news at all over this past weekend — paper, web, or even the Sunday morning shows — you probably saw some headlines about J.P. Morgan. Specifically, headlines about how the company lost $2 billion in trading.
If you haven’t been following the mess — or if you’ve been trying to follow but words like “derivatives” and “hedging strategy” have your head spinning — let me try to break it down for you, by answering some questions you might have:
What are derivatives, and what do they have to do with this? A derivative is a financial instrument whose value is determined by the prices of other, underlying assets — like stocks, bonds, commodities, securities, etc. Traders use derivatives to secure the option to trade these assets at a higher price in the future — and this can help them offset losses that can occur due to other holdings. This is what J.P. Morgan tried to do: concerned about their holdings in the credit market, they set up a derivatives trade to offset potential losses in this area. However, the derivatives moved in the wrong direction and produced huge losses of their own.
How did this happen? We still don’t really know. J.P. Morgan CEO Jamie Dimon went on “Meet the Press” this weekend to try to explain, but he wasn’t able to clarify things beyond saying, “We made a mistake.” Some industry experts are speculating that it was a math mistake made in the middle of the trade, but it might take a few weeks for the real truth to come to surface.
Why does this matter? To answer that question, allow me to quote Ezra Klein, a columnist for the Washington Post who wrote a great Q&A about the loss:
“J.P. Morgan was known as the best manager of risk on Wall Street. But it turns out that even the best manager of risk isn’t very good. This trade, in fact, looks a lot like the financial crisis: They bet on something unlikely as if it was impossible. That’s what all those banks did when they made bets on the belief that the housing market never goes down everywhere all at once. It’s a reminder that this is a kind of mistake that even “good” banks make.”
For more answers to questions about the J.P. Morgan loss, I highly recommend reading the entirety of Klein’s Q&A, which you can find here.
And now, here are the other headlines for the week:
Avoiding Verizon’s Upgrade Fee
As some of you may have already found out, Verizon is following the footsteps of AT&T and Sprint and has started charging customers a $30 fee when they want to upgrade to a new phone. Annoyed by this move, a SmartMoney writer recently set out to find ways to avoid this fee. He discovered that you do have some options to get around the charge, but it takes a little creativity:
- Trade in your old phone when you are ready to upgrade, and then use the cash from the trade-in to offset the fee.
- Is something wrong with your current phone? Complain to Verizon — they may give you a new phone, free of the upgrade charge.
- Buy a new phone through Ebay and add it to your Verizon account. This side-steps the upgrade fee, and since you’re already a Verizon customer, there’s no activation fee, either.
Confusion Over Overdraft Policies
Have you opted in or out of your bank’s overdraft protection for debit purchases and ATM withdrawals? Not sure? You’re not alone.
According to a study through the Pew Charitable Trusts, 18 percent of customers had overdrawn their accounts and were charged a fee. Yet, more than half of these “overdrafters” did not think they had opted into overdraft protection, and eight percent of Pew’s survey respondents said they didn’t know their overdraft status one way or another. What’s more, over a third of the respondents didn’t even know their bank offered overdraft protection. Yikes!
Banks charge an average of $35 to cover a transaction for which a customer does not have enough funds — not exactly chump change. I’d recommend finding out your overdraft status today. It’s better to go without a purchase than to go through and find that not only did you pay for something you didn’t have the money for, but you owe another $35 on top of that.
The correlation between email and stress
It may come as no surprise that, according to a new study, people who do not look at email on a regular basis are less stressed and more productive at work.
Now, I know that for some people (myself included, most days), staying away from email for too long actually raises stress levels, which is why I wanted to share this Forbes article with you — Peter Bregman, the author, provided some great tips on streamlining your email process. Among his best: set a timer (it’s easier to focus on email when you’re doing it for a condensed and finite amount of time), file mail into categories (if you find yourself re-reading emails just to remember what it was about, it’s time to create a filing system for your digital life), and set up automatic signatures to save yourself some time.
Feeling more productive yet? It might take some time, but having the right email system can make a world of difference in your work life.
Have a great week!
Jean