There are derivatives and derivatives, most are clever instruments that are extremely efficient in generating leverage and spreading risk. It is in the way in which some of them were used that created the financial crisis.
Credit Default Swaps CDF’s:
Stupidity is issuing Credit Default Swaps insurance without setting aside any reserves.
Greed is accepting fees and payments for them without doing anything to legitimize their existence.
Stupidity is entirely relying on ratings and still not setting aside reserves to cover the risk of defaults.
Greed is allowing parties unrelated to a transaction to place side bets on defaults in order to receive fees and payments.
As a result of not setting aside reserves more CDF’s were issued than the issuers could possibly cover.
The taxpayers are now funding the liabilities of the issuers of these CDF’s (AIG and others) because the insurers were too greedy for fees and too stupid to set aside reserves when they should and could have.
Collateralized Debt Obligations CDO’s:
Stupidity is not balancing a portfolio by combining low risk/low interest CDO’s with high risk/high interest CDO’s.
Greed is having only high risk/high interest CDO’s to maximize returns without regard to the potential exposure of being wiped out.
As a result of this greed and stupidity the banks are holding worthless high risk/high interest CDO’s that have caused them to be greatly over leveraged and unable to lend.
The taxpayers are now funding the Banks that were overexposed to these worthless CDO’s because the banks were too greedy and too stupid to maintain a balanced portfolio of low risk/ low interest CDO’s.
So instead of behaving like rational prudent human beings, the management or guardians of our financial system were driven by greed and stupidity. Instead of treating one of the greatest inventions of our time, derivatives, responsibly and with care to expand credit and the economy, they instead turned them into a lethal weapon that changed a simple financial problem into a global nightmare.
What are Collateralized Debt Obligations, CDO’s ?
The instruments or Derivatives that were used to bundle mortgages issued by banks to homeowners are called Collateralized Debt Obligations (CDO’s).
These CDO’s were resold to other financial institutions to finance additional lending or issue more mortgages.
Each CDO was divided into roughly three slices or coupons. Coupon#1 was the safest guaranteed/low risk and thus carried a relatively low interest rate e.g. 5%, Coupon #2 was not entirely covered, held more risk but carried a higher interest rate e.g. 7% and the Coupon #3 was high risk and thus carried the highest 11% to 13% interest rate.
In case of any default or shortfall, holders of Coupon #1were the first to get paid and any surplus went first to coupon #2 and last to Coupon #3. Therefore, if any trouble or shortfall occurred the first coupon holders to get wiped out were those holding Coupon #3.
One of two things happened Coupons #1 and #2 were easily sold to prudent investors and the banks got stuck with coupon #3 or the banks were so greedy that they held on to coupon #3 because it had the greatest payout even though it carried the highest risk.
Saturday, November 29, 2008
Integrity, Trust, Duty, Honor, not just words!
During Mr. Greenspan’s testimony before congress a couple of weeks ago he acknowledged that he had made one mistake.
He had assumed that the corporate “Elite” in charge of governance of our corporations, would behave with integrity and fulfill their duties with the honor deserving of the trust the rest of us, including himself, had invested in those who held the highest of corporate offices.
We can discuss the problem of using the word “assume” for ever but as we all know many people interpret it to mean “assume makes an ass of u and me” which is of course exactly what has happened.
However, the discussion here is whether Mr. Greenspan had good reasons to make the assumption about integrity when he did or not.
Around the 1980’s, the Foreign Corrupt Practices Act and its requirements for compliance forced corporations to clean up their “act” in terms of ethics and code of conduct.
Since then a new wave of other management techniques, mainly to cope with a myriad of social legislation (e.g. equal opportunity, diversity, sexual harassment, etc.) gave birth to the Vision, Mission, and Code of Conduct statements which turned up on a mostly voluntary basis in the more forward looking organizations.
It took until the post Enron/Worldcom era Sarbanes Oxly (SOX) legislation to make having these Vision, Mission and Ethics/Code of Conduct statements almost compulsory as evidence of the “tone at the top”
The problem with all these expressions of desired behavior was that they were just that, expressions of desired behavior. Agreed many companies trained their employees with lengthy and numerous training sessions, and management was encouraged to give these statements endless lip service, but with some minor exceptions nothing really changed especially not in the top echelon of the corporation. Top management rarely walked the talk.
Evidence the continued raping of the corporations and by default the shareholders with outrageous executive compensation, the blatant cheating by secretly backdating options, the petty thefts committed by executives on expense reports which ensured that hardly any private expense of the executive remained unpaid by claiming it as an entitlement or fringe benefit.
The reason why most people in high offices behave this way is because being in a high and powerful office is a new experience to them. Even though there are guidelines of how to behave with integrity and honor, it is not part of their DNA. There is no “noblesse oblige” mentality in their make up. They have worked hard to get to a position that they had no reasonable expectation to get to so they are “worth it”, they deserve everything they can get. It is difficult to deal with power responsibly if you have never been close to it or have never personally experienced it before.
Many fresh new executives have had no role model, no father who was in a high level position of power, whom they could have learned from at an early age, who they saw agonizing over difficult decisions he had to make which had major implications for a community, what it was like to be responsible for a large number of people, other than his immediate family’s, lively hood, how they had to be an example in their community and had to continue to earn their trust and confidence and so on.
Being taught by ones parents how to behave and conduct oneself in a position of power vis a vis ones servants thus learning how to treat them with respect, dignity and care is another example of learning at an early age that power demands duty and a sense of responsibility.
These are all things that shape an individual leader’s DNA. Admittedly it sounds like the preaching’s of an old era that is outdated and cannot work in a meritocracy. Therefore to assume that “noblesse oblige” is the M. O. in every high level executive is an unreasonable expectation. To expect that the ethics and self governance in the highest offices of the land are a substitute for sensible regulation and legislation is naïve and old fashioned to say the least. In this modern world omissions of a sense of duty and responsibility in some individuals can have global implications on the lives of millions of people.
Business is not just Business, it goes beyond the egotistical compensation and self help interests of the executives. Business is a serious undertaking; it carries with it responsibilities and duties to a broader community, it affects other peoples livelihoods and not only just those that work for the business, it affects whole communities, and as we have recently discovered, it affects the entire world.
It is time top management took the words seriously.
He had assumed that the corporate “Elite” in charge of governance of our corporations, would behave with integrity and fulfill their duties with the honor deserving of the trust the rest of us, including himself, had invested in those who held the highest of corporate offices.
We can discuss the problem of using the word “assume” for ever but as we all know many people interpret it to mean “assume makes an ass of u and me” which is of course exactly what has happened.
However, the discussion here is whether Mr. Greenspan had good reasons to make the assumption about integrity when he did or not.
Around the 1980’s, the Foreign Corrupt Practices Act and its requirements for compliance forced corporations to clean up their “act” in terms of ethics and code of conduct.
Since then a new wave of other management techniques, mainly to cope with a myriad of social legislation (e.g. equal opportunity, diversity, sexual harassment, etc.) gave birth to the Vision, Mission, and Code of Conduct statements which turned up on a mostly voluntary basis in the more forward looking organizations.
It took until the post Enron/Worldcom era Sarbanes Oxly (SOX) legislation to make having these Vision, Mission and Ethics/Code of Conduct statements almost compulsory as evidence of the “tone at the top”
The problem with all these expressions of desired behavior was that they were just that, expressions of desired behavior. Agreed many companies trained their employees with lengthy and numerous training sessions, and management was encouraged to give these statements endless lip service, but with some minor exceptions nothing really changed especially not in the top echelon of the corporation. Top management rarely walked the talk.
Evidence the continued raping of the corporations and by default the shareholders with outrageous executive compensation, the blatant cheating by secretly backdating options, the petty thefts committed by executives on expense reports which ensured that hardly any private expense of the executive remained unpaid by claiming it as an entitlement or fringe benefit.
The reason why most people in high offices behave this way is because being in a high and powerful office is a new experience to them. Even though there are guidelines of how to behave with integrity and honor, it is not part of their DNA. There is no “noblesse oblige” mentality in their make up. They have worked hard to get to a position that they had no reasonable expectation to get to so they are “worth it”, they deserve everything they can get. It is difficult to deal with power responsibly if you have never been close to it or have never personally experienced it before.
Many fresh new executives have had no role model, no father who was in a high level position of power, whom they could have learned from at an early age, who they saw agonizing over difficult decisions he had to make which had major implications for a community, what it was like to be responsible for a large number of people, other than his immediate family’s, lively hood, how they had to be an example in their community and had to continue to earn their trust and confidence and so on.
Being taught by ones parents how to behave and conduct oneself in a position of power vis a vis ones servants thus learning how to treat them with respect, dignity and care is another example of learning at an early age that power demands duty and a sense of responsibility.
These are all things that shape an individual leader’s DNA. Admittedly it sounds like the preaching’s of an old era that is outdated and cannot work in a meritocracy. Therefore to assume that “noblesse oblige” is the M. O. in every high level executive is an unreasonable expectation. To expect that the ethics and self governance in the highest offices of the land are a substitute for sensible regulation and legislation is naïve and old fashioned to say the least. In this modern world omissions of a sense of duty and responsibility in some individuals can have global implications on the lives of millions of people.
Business is not just Business, it goes beyond the egotistical compensation and self help interests of the executives. Business is a serious undertaking; it carries with it responsibilities and duties to a broader community, it affects other peoples livelihoods and not only just those that work for the business, it affects whole communities, and as we have recently discovered, it affects the entire world.
It is time top management took the words seriously.
Thursday, August 14, 2008
Mean but Green 1
We are all suffering from the current downturn in the Economy and most people are trying to tighten their belts by economizing on the two things they should not economize on and those are health and food. Many of us boomers are also approaching our retirement where we have got to get used to live of fixed incomes and try and cut costs.
The following is a sampling of all my suggestions I wrote about in my various blogs where we can economize without resorting to scrimping on health or food.
Telecommunications:
- Telephone; Landlines
Do you have a traditional landline costing you $60 per month at least, including Long Distance?
Did you know you can get a landline for $25 per month with Voice over IP (VOIP)? If you have a DSL or Cable internet connection you can get VOIP. T-Mobile can even offer this service for your mobile phone from home for only $10 per month if you do not need international. That is a savings of between $35 and $50 per month!
- Telephone; Mobile Phones
Are you on a post pay plan that costs you at least $60 per month with tons of free minutes that you never use and where you are constantly cut off? Did you know that you can get pre pay or pay as you go plans for as little as $10 per month? If you use your mobile phone for texting or SMS only, this money can last you for longer than a month and your message always arrives! You can also fill it up with higher amounts if you need to but my average spend is less than $25 per month. So here is another saving of between $35 and $50 per month; the messages can be as long as you want to make them!
- High Speed Internet connection
Have you refreshed your Internet service contract lately? Are you paying nearly $ 65 per month for DSL or Cable service? Check out all the offers and threaten your service provider with changing to another provider, and watch how quickly your charges will be reduced to $25. Another savings of $40 per month.
- Cable TV
Do you really need 100 to 200 channels? Do you really benefit from your $90 per month? How often do you use your DVR? Do you not have a VCR or a DVD recorder which can perform almost the same functions? Also, is it not true that most of the programs (sport, series, funnies) us boomers watch are on the national channels for free?
Buy some rabbit ears for $20 from Radio Shack, put them on your roof , tune them correctly and attach them to your cable wiring. You now have all the TV you need in picture perfect HD for free! Saving your self another $90 per month.
So by simply going through your everyday communications needs and paring them down to what you need, without sacrificing anything, we have just saved ourselves the grand total of between $200 and $230 per month.
Just imagine what that can buy you in quality food and health care in a month. And you aint seen nothing yet!
The next episode I will discuss, savings on ELECTRICITY, use of your CAR and CAR PAYMENTS, your HOUSE and MORTGAGE PAYMENTS and so on
Sunday, August 3, 2008
Utilities to install Solar Panells on Residences
Why not?As Anthony Ingram wrote in a letter to the editor of The Dallas Morning Post on July 30th.
"The Resident benefits from lower or zero Electric bills. The Electricity Company benefits from having small inexpensive power generating sites with minor maintenance. The community benefits by additional generation without major power plants. Everybody wins, except wind generation producers."
This clearly is an alternative way to add clean capacity to our power generating capability without adding new power stations. Imagine thousands of green mini-power stations that feed power to the grid and make your energy needs virtually free of charge.
This method of generating power, helps our country, saves the environment and helps the consumer with reduced or zero energy prices. No need for expensive wind farms, no need for new or enhanced grids to transport the energy from the farms to the existing grid costing billions of dollars. Believe me the grid between our homes and the utility company exists TODAY. The Technology exists and works TODAY!
As it is too expensive for most ordinary households to install, even with a 50% subsidy and a $7,000 tax credit, why not have the utility company install the panels and pay for it? They are going to spend money on new and additional green energy generation capacity anyway!
As a payback on their investment the utility company will not have to pay the resident for any electricity the panels on their homes return back to the grid, (believe it or not the meters on your residence will start spinning backwards and put electricity back into the grid when your home generates more electricity than it requires) until the cost of the panels and the installation is paid off.
If all this sounds implausible, it is not. “A proposal for $6.4bn of new power lines linking new wind farms with Texas’ public electricity grid, whose cost will be borne mainly by consumers”. Not my words, see article in my links.
See how many houses could be equipped with solar panels with this money. The gross cost for an average but complete solar panel installation is roughly $35,000. So for $6.4 billion roughly 200,000 houses could be provided with solar panels that will feed the grid.
I have not even discussed the amount of money a Texas utility is about to spend to increase its capacity with green power sources! How many more homes could be equipped with these huge amounts of money.
I invite you all in joining me to call for a energy solution that is a win win for all. And vote for power to the people.
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