Tag Archives: net worth

The Secret to Financial Well-Being?

Posted on by

The Consumer Financial Protection Bureau has issued a report, Financial Well-Being:  The Goal of Financial Education. I have been somewhat critical of the CFPB’s approach to financial literacy education, but I think that this report sets forth a pretty reasonable baseline for future research. It states,

A growing consensus is emerging that the ultimate measure of success for financial literacy efforts should be improvement in individual financial well-being. But financial well-being has never been explicitly defined, nor is there a standard way to measure it. Overall, the literature paints a picture of nuanced, complex interactions between financial knowledge, understanding, and actions taken. However, rigorously identified links between these factors and financial outcomes have yet to be established.

Our project provides a conceptual framework for defining and measuring success in financial education by delivering a proposed definition of financial well-being, and insight into the factors that contribute to it. This framework is grounded in the existing literature, expert opinion, and the experiences and voice of the consumer garnered through in-depth, one-on-one interviews with working-age and older consumers. (4-5)

The CFPB proposes a definition of financial well-being “as a state of being” where people

  • Have control over day-to-day, month-to-month finances;
  • Have the capacity to absorb a financial shock;
  • Are on track to meet your financial goals; and
  • Have the financial freedom to make the choices that allow you to enjoy life.

Because individuals value different things, traditional measures such as income or net worth, while important, do not necessarily or fully capture this last aspect of financial well-being. (5)

 This all seems reasonable to me in the abstract, although I am not sure how you would measure success across a large group of people given the very different ways that people would respond to the prongs of that definition. I would also note that events beyond the control of a financially literate person (illness, structural unemployment etc.) could devastate that person’s financial well-being, much as upright Job was devastated by the tests he had to endure.  Notwithstanding these concerns, I am looking forward to see how the CFPB uses its definition to develop its research agenda and to design its policies.

GSE Litigation Through Corporate Law Lens

Posted on by

Adam Badawi and Anthony Casey have posted The Fannie and Freddie Bailouts Through the Corporate Lens to SSRN. The paper takes a look at the bailouts as if they were simple insolvent private firms. This is a helpful thought experiment even though the two federally chartered and heavily regulated firms are anything but simple, private firms. They write that while it is politically controversial to wipe out the shareholder equity in the two firms, doing so

is consistent with what often happens to stockholders of distressed companies. Indeed that is the more likely outcome when a corporation is sold or reorganized under Chapter 11 of the Bankruptcy Code. There remains little doubt that the Entities [Fannie and Freddie] were highly distressed at the time of the PSPAs [Preferred Stock Purchase Agreements] and Amendments [to the PSPAs]. Thus, while procedurally suspect, these actions did not substantively violate the norms of corporate law and finance that would apply to private companies in the same position. To the contrary, in the private context there may have been no action available that would have legally allocated any future interest in the Entities to the (junior) preferred and common shareholders. (1, footnotes omitted)

They add, that in “the private context, there would have been pressure to file for bankruptcy to liquidate the assets and eliminate the risk to creditors. And once in bankruptcy, the directors would have been entirely barred from taking actions to benefit equity at the expense of creditors.” (3) And they conclude that “the substance of Treasury’s and the Entities’ actions – in September 2008 and August 2012 – were generally in line with acceptable actions of creditors and debtors involved in restructuring distressed corporations in Chapter 11 bankruptcy or in out-of-court reorganizations.” (3-4)

I could excerpt selection after selection, but instead, I recommend that you read this interesting paper for yourself!