What are Derivatives?

This Washington Post article contains a concise explanation of what derivatives are. It also explains why the Agriculture Committee is putting this legislation together. A question I have is, what prevents a large financial institution from buying some other type of company so that they can get around a ban on trading in derivatives?

Digging past the trash to get to the rot

The SEC is investigating Goldman Sachs for fraud...because the United States Government HATES America! We'll see if that's an adequate defense, not that we should expect anything truly impressive to come of this.

We will find in the next few months that most if not all of the biggest financial players were doing something similar to Goldman's scheme of setting up a portfolio that was designed to implode. The awful thing about it is that they sold that portfolio to their own clients, meaning they had to misrepresent their knowledge of how that portfolio would function.

Just so I can pat myself on the back later for making an obvious prediction: It's likely Tim Geithner will resign his post shortly after the midterm elections: he began his job in a caustic environment, then proceeded to consistently handle situations in the ugliest possible way from the view of the public's interest versus the industry from whence he came. He's the closest thing to Ashcroft/Rumsfeld/Cheney this administration has.

On the Origins of Corporate Morality

Some thoughts on Vision for a company and what the loss of that Vision can do

How do most people respond when Life has no meaning for them?

As individual investors, we must have verbal goals, such as "get my kids through college," "retire at 45 and travel the world," "make it so my children never have to worry about money," etc. Our verbal goals center around the human life cycle.

Though a company will have a verbally-stated character in the form of its mission and how it makes its money, these things only have a meaning by their individual connections with people. The businesspeople who created those statements may be long gone before a company vanishes, and generations later, perhaps after the advances of technology have rendered the original vision long obsolete, the basic meaning of the company remains the same: its share value or the money it otherwise earns. Yes - all obvious.

Shareholders attach individual meanings to company shares through their personal goals, and such meanings are statistically eliminated because they all meet in the dollar value of the stock. So as time passes, all human values other than dollars will disappear from the behavior of the company - perhaps those values may take some form as part of the vision that is sold to the public (Green products, for example), or through the mortals who guide the company; but these cannot stand up to Stock Price in the context of a publicly-traded company.

Is this too cynical? If it's true, maybe it means that larger private corporations that are held by "benevolent dictators" are better than publicly-traded ones led by CEO's who shift from company to company like mercenaries. Maybe it means that smaller companies, regional or local ones, are more likely to remain "human" and maintain the company's Vision, maintaining boundaries of right and wrong in their efforts to grow in monetary terms.

This reasoning is too trite to be a real answer, but it seems to be most of what we take sides about in our politics. It should make you suspicious of totally-unregulated Capitalism, where dollars by themselves would rule without any of the goodness of people.

Now, I'm no Commie. So don't worry about Fair and Balanced or other false dichotomies. Just beat on these ideas and see what of them survives.

A Banking Joke

Did you ever hear the one about the [insert group you're discriminating against here] -ish bank robber who walked into a bank, held a gun to his own head and said, "Gimme all your money or the [insert group you're discriminating against here] -er gets it." (You can see a much better version of the joke in Blazing Saddles, but it's not quite on the mark for our purposes here)

That is exactly how the government policy "Too Big to Fail" works. Right now the 12 largest banks in the US hold 50% of total deposits. And by its complex nature, banking needs experts to properly regulate it. In this article an expert steps forward.

I wouldn't expect something like this to actually happen, but it sounds great: it's good for local businesses to have local banks able to compete, it's better for you the consumer when a cartel of giant banks can collude to erode your dollars with high fees; and it's good for investors (regardless of what they may tell you while they are getting high on artificial, short-term returns) to experience true, steady returns over the long-term in an environment of few or no bubbles in financial sectors created by the irresponsible actions of enormous players like Lehman Brothers (Rest in Peace), Bank of America, etc.

More "Good Faith"

"Strategic foreclosure" is an interesting concept: deciding to stop paying your mortgage or mortgages because the value you see in your home, in dollars and whatever else, plus the hit to your credit (and perhaps your reputation, as discussed in this article), are not enough to keep you paying even though you still have the ability. The fact that you have the option is what makes it strategic.

When I try to judge this situation, I have a very hard time giving a certain weight to the moral component of paying this particular debt, a mortgage. So much deception was involved in bringing about a real estate bubble; so much incompetence, or at least reckless haste, was involved in keeping the financial system from collapsing, that I wind up with this set of questions:

1) How much of the value of your home was ever real?

2) What did you do with the money, if you extracted equity from your home by refinancing?

3) How much consideration should we give to the honesty (well, I'm really bringing up the dishonesty) of each of the parties involved: the lender, the borrower, loan officers, appraisers, Realtors...

4) Are corporations bound by the same rules of honesty and decency, of right and wrong and reputation, as individuals, or do they actually have a better (or at least more flexible) bundle of rights than human beings?

5) In light of questions #3 and #4, how much weight should we give "let the buyer beware"?

6) If I felt I were ripped off by my government leaders, the professionals who assisted and advised me in the purchase of a home, and I had not yet paid in full, what would I do?

In that same article there is a fantastic quote from Brent T White at the bottom of the page: “A lot of the moral condemnation is driven by people’s own self-interest.” Read Brent's paper, if you have some extra time. Certainly lenders and collection agency exploit our culture as a part of their normal course of business, though strategic defaulters do as well: if there weren't so much Indignation at The Big Guys - Populism is almost as big a part of American culture as Bad Debt/Broken Promise Guilt - this wouldn't even be a story angle for the press. I have to say, our moral condemnation of lenders is driven by exactly the same self-interest.

By the way, lenders theoretically have the option to forgive mortgage debt, or some portion of it. Call it "strategic debt forgiveness." I'm still waiting to see those articles and papers start appearing. There is simply no upside for lenders in doing it, and nothing but benefit from dragging their feet and being as uncooperative as they are allowed to be.

Perhaps individuals should do exactly as corporations, banks in this case, are doing: make your decisions based strictly on the numbers, and use every bit of law, morality, and the press to protect your own interests. We can examine this a little more very soon.

Good Faith?

I have been considered a bitter little man for stating out loud that lenders were absolutely not working in good faith with their borrowers. This was probably made worse by their sense that they would be helped if things got too severe. This article is some evidence, though we have to be careful about making anecdotes too strong. But the things this family says are just too much like what I have heard so many times from struggling borrowers to be garbage.

As of this writing 24% of mortgages in the US are larger than their collateral. I would like to see this broken down between owner-occupied and non-owner-occupied homes.

"Good faith" and "reasonable" are two of my favorite legal terms. They're real money makers.

Starting

There is so much going on and so much to think about, it doesn't make sense to me to completely bind myself to a single topic. It also doesn't make sense to have a handful of different blogs to update; better to have one place to collect thoughts for the people I know, and to provide great resources on all kinds of things - that interest me - for those who visit. Maybe in the future, if certain themes emerge that are compelling enough, like offspring sent out to thrive or perish, I will separate things more clearly.