Monday, March 23, 2009

Toxic Assets

I have been puzzled by all of this talk about “toxic assets.” Primarily over exactly what one is. I found a pretty good explanation on YouTube:


One of the issues I have been troubled with is why there is such a problem. To hear everyone talk, it is those pesky folks that overbought and are now defaulting. OK, but, according to Time (3/9/09 pg 30) “just 7% of all borrowers are behind on their loans.”

So, how can 7% make that big of a deal for banks? Banks get money to lend from folks like us, depositors. But it is not enough to keep a steady flow of money coming in for which they can lend. So they sell and buy assets from other banks and lending institutes. These, along with their collateral from the loans they make and deposits, give the bank its “worth.”

The trouble with some of these assets, well, a lot of them actually, is that they were poor investments to buy in the first place. They were credit card debt, sub-prime debt, debt of debt, and on and on. They were not normal home loans secured by a down payment for a loan of 80% of the market value. Because of how they were structured the rating companies did not understand them and rated them high – an indication of to all investors (banks & insurers) that there was less risk. AIG then offered to insure the investor for any losses which made them “safe.” (AIG baked this insurance up guessed it... the same type of assets which were valued "high" which made them "worth" more" which means they could back up more and more of these investments.)

The value was the value all these institutions placed on these assets. Everybody was enamored with the high rate of return on these Collateralized Debt Bonds and invested more and more into them, which drove up the demand for more and more debt. It all worked well until…….the chickens came home to roost.

So these assets that gave the banks their worth - for which they used as collateral to make more loan and buy more investments - suddenly start losing their value. Dump them! Which they did, which drove the price for these “assets” even lower. So now the banks worth is lower because the value of the assets are lower. Low demand lowers the value, this lowers the value of the marginal assets causing them to go toxic, and then – since everyone owns toxic assets which have no value (because no one wants to buy them), no one can really move money back and forth. Banking grinds to a halt.

Enter the government. Since no one wants to buy these assets, and the banks need money, we the people will secure them with taxpayer monies because there is, in any situation, always someone out there with money to invest. These super heroes will swoop down and buy them from the banks. The bank will get them off the books – plus – they will get paid for them. Banks will be happy, the wheels will start turning, and commerce will flow again. If the toxic assets over time lose their toxicity the investor wins!, If they stay toxic, the Investor turns it back to the government – the investor wins! Win-win for banks and investors! And the tax payer……..?

Why don’t these investors just buy it directly from the bank? Fire sale baby! Supply and demand has driven the price so low that the banks would probably get the same benefit if they just “zero” the balance sheet. By the government backing them they become more desirable – well in theory anyway. More desirable should raise the price.

Value is in the eye of the beholder. I’ll wait and see how it all comes out.

Tuesday, March 17, 2009

No one has given me a thing.

In the March 16 Letters to the Editor, Jim Bryant, in response to Bob Koestier’s March 11 letter makes the following statement:

I know I have been working extremely hard for the past 23 years and have been increasing my worth each year. No one has given me a thing.

Nancy, my assistant made 1/3 of the salary I do. I make 1/2 the salary of our Division head. Which one of us is working harder for what we are paid? I will contend that I have personally and professionally benefited from the low salary we paid her. And now that she is gone, and has not been replaced, I really know her value. Earnings have little to do with how hard one works and more to do with how your work is valued.

What I take issue with is Mr. Bryant’s belief that “no one has given me a thing,” or, in other words, his increase in wealth is completely the result of his own doing. I beg to differ with you Mr. Bryant. First of all, you are where you are at because of the community in which you live.
Lots of people gave you the things you needed to make the life you are living now possible.

Assuming that you make over $250k a year as you indicate, do you realize that the teachers that taught you, that prepared you and encouraged along the way make 1/5 of that amount? What about the firefighters that put their lives at risk to save your property, thereby allowing you to keep your wealth, did you know they also make about 1/5 of that amount. This also goes for the surgical nurse and anesthesiologist technician that made sure you made it through surgery make less than ¼ of that amount. And let’s not forget all the volunteers that helped you along the way. Those that gave up their free time to coach you, supervise you, or mentor you in an effort to help you succeed later on in life.

No one has given you a thing?

One of the things about material wealth that a lot of folks forget is that it occupies a fixed total amount - a pie so to speak. That is, as one gets wealthier someone else becomes less wealthy. It is simple economics at play. Goods and services are priced at what the market will bear, not at what they are really worth. This means that the hotel maid, taxi driver, cook, waiter, hair stylist, secretary, line worker, or janitor you depend on must have an income substantially less then you in order for you to increase yours. Technically, your wealth increase either directly or indirectly off the backs of others.

No one has given you a thing?

The next time you fly Mr. Bryant, ask yourself when you are at 30,000 feet how much you value that pilot’s skill, knowledge, and experience. We as a society value it at less than half of $250k, this is good because it means you keep more of your money when you travel which increases your wealth. And when you land safely and jaunt off to further increase your wealth in some other endeavor repeat to yourself one more time:

No one has given you a thing.


Saturday, March 14, 2009

Backroom Shenanigans

John Stewart’s interview with CNBC’s Jim Cramer elicited an interesting observation of the current financial situation we are in. Stewart took exception with CNBC over one of their hosts, Rick Santelli, ranting at the NYSE on “loser mortgage holders” unable to pay their loans while staying moot about banks and financial institutions and their 35 to 1 leveraged loans.

John Stewart commented to Jim Cramer that there appears to be two markets; one sold to us as long-term, leave it alone. The other market – the real market – is in the backroom playing fast and dangerous. This other market hurts the long term market we have all been told to support.
So, in essence, we are capitalizing their adventure, their game.

That’s how it started to look to me too, way before all the current problems manifested themselves. I did not understand it then, and I am still trying to better understand it now. Maybe that is how their plan is supposed to work. Make it difficult and complicated enough so that we naturally avoid it, then make it a necessary part of our lives. They control it, and as long as they through us a bone, in the form of a statement showing that our long-term investment is going up-up-up, we sit there quietly trusting in them even more.

As I see it, one part of the game started out based on a real need, the need for banks to have more money to loan. At the bank level, the money is made from the processing of the loan, not the 30 years worth of interest. The goal of the bank is to loan more; once it is loaned they can only rely on the interest and money deposited as their source for new money to loan.

Enter the investment mechanism of mortgage bonds. Investment bankers pool thousands of home loans and sell the bonds to generate capital. If I am looking for a long-term investment I can afford to wait so these bonds are attractive to me. I get an investment based on the continued payment of these mortgages that have been pooled. Win-win and the economy moves forward.

The problem with this system is that it is slow and is limited to the amount of fixed assists that can be used as collateral for the loan. That’s the problem with this model, you can only make a loan if there is collateral and the higher the value of the collateral the more the loan – they feed off each other. So who needs to borrow money? Traditionally it was those that wanted to buy a house or a car, or a business that wanted to buy property or equipment. With this model there are a finite number of folks needing a loan. I mean think about it, once the business buys the land and equipment they will not need to secure a loan for a number of years. Same with a homeowner, if the average stay is five years, then you will not see that person for five years. Too long to wait.

Enter the investment mechanism of collateralized debt (CDOs). What if we take the lowest rated pieces of bonds from other mortgage bonds, the risky ones, bundle them up together and sell them? Why would I want to buy a risky bond? Because everyone is doing it – you don’t want to miss out fool! This then requires that you have risky debt, enter home equity loans

Enter the investment mechanism of CDO–squared. If a CDO is selling like hot cakes, why don’t we take the even riskier parts of the CDOs, bundle them and sell them to investors? Why would I want to buy an even riskier bond? Because everyone is doing it – you don’t want to miss out fool! This then requires that you have even riskier loans, enter in sub-primes.

So if there is a good market for these CDO-squared bonds, I wonder if………Yes, there is a third CDO out there that bundled the riskiest parts of the CDO-squared and sold that to investors. Its OK, everyone is doing it - houses are selling right and left, which means these risky loans are being paid off, ride it baby ride it! Oh, and lets rate these bonds as high and we will get insurance through AIG to cover our loss. Only a fool would pass up on this opportunity! We need more loans! We need more people to buy houses - to sell houses!

Blame the homeowner or blame the investors who found these CDOs just too hard to resist. The investors wanted CDOs and the CDOs needed debt. Credit cards, sub-primes, leverage, flipping houses – all were designed to feed the CDOs. That’s where the money was being made and that’s where the energy was spent. That’s the backroom John Stewart is speaking about. They played fast with our future hoping to get out right before the bubble burst. Some people made a lot of money off this model, even if they lost money – they still came out ahead. It’s us little guys, the 95% that are paying the price for this.

The chickens would come home to roost and they knew it. You want to blame the guy that overbought or speculated, go ahead, but you had better also blame the ones that put the system in motion, the ones, like Cramer and CNBC, that perpetuated it or looked the other way.

source: Time March 9 page 30

Tuesday, March 10, 2009

Family in name only

Ok, so first of all, let me get this out in the open. I am not a prude. I don’t care for shock for the sake of shock (yea you Janet Jackson) and I don’t find little kids cussing a la Talladega Nights funny. Other than that you are free to do what you want…..with exceptions.

Now my kids are grown and my youngest was warped a long time ago through forced watching, by me, of the Simpsons. I never could get into the sugary-sweetness of all this “family friendly” stuff but understand that it is important to some parents. So, if you are going to attach the word “family” to your channel then I think, you know, it should be….let me think here….oh, yea family type entertainment. Otherwise, lop of the word family and I will tell these folks to turn it off or use a V chip.

Note to Disney: There is an understanding out there in TV watching land that the word “family” implies a certain understanding that the content shown is designed for young children – tame, non-controversial, safe.

So there I am watching Funniest Home Videos with the “ABC Family” logo at the bottom of the screen. I hardly watch any TV, and it is usually with my wife using DVR so we can fast forward through the advertisements. But the “family” room TV has no such device. So like a mindless robot I sit there waiting for the show to start back up only to come face to face with:

“Monday March 23rd your new roommates are moving in! All aboard the love train! Four bedrooms, one bath, zero boundaries……”

Huh? On a “family” network?

Turns out that "ABC Family" started out first as the the “Family Channel,” which was started by Pat Robertson’s Christian Broadcasting Network (CBN). It was then sold to that bastion of good ol' Christian conservative values (Fox) News Corporation which changed the name to "Fox Family" This was then then sold to Disney owned ABC and renamed “ABC Family.”

Now “family” friendly Disney wanted to revamp this “family” cable channel to target a more hip audience of college students and young woman and went about changing the name to “XYZ” channel. Apparently, however, Pat Robinson stipulated in the sale of the Family Channel that the word “family” be in the name forever regardless of who owned the channel. To create XYZ channel would require the demise of the “family” channel along with terminating all existing cable TV contracts a risky move since cable companies are not obligated to put the new XYZ channel in the old “family” channel spot. So ABC gave up on the XYZ channel Idea.

What to do...what to do…….

Brilliant! Let’s make it a “new kind of family” and show whatever we want regardless of what that silly word “family” is considered by some parents to mean. Pat Robinson gets his word, ABC gets viewers, and Disney gets advertising bucks because a young hip audience is now watching.

At one time ol’ Walt would not let Annette Funicello where a two piece bathing suit in the Beach Blanket Bingo movies.

What a difference a “for only profit” corporation makes.

Caveat Emptor!

Source (Roomates Promotion)

See Annette in a one piece!

Monday, March 9, 2009

Seven ways to respond

As I see it, there are only two directions one can go when offering a statement of fact on a subject. Since I am interested in how to adequately respond to what is commonly referred to as an “entrenched belief” an understanding of how we respond is in order.

Basically, in my opinion, there are seven possible mechanisms that will drive your support or condemnation of a particular entrenched belief. Four have to deal with the “belief” in the stated fact while two require neither belief in, or acceptance of, the fact(s) behind the statement being made (self-serving). How one will respond will be based on the dominant attitude about the topic at the time the response is given. It is, in my opinion, possible to move from belief to self-serving or from self-serving to belief.

Anyway – here they are:

You have no opinion one way or the other.
  • Ignorant of the topic
  • Uniformed of the parameters involved in the topic
  • Too little information to form s statement of fact
You believe their statement to be true based on a correct analysis of the facts
  • Plants get their energy from photosynthesis.
  • The surge in Iraq worked.
You believe their statement to be true based on an incorrect interpretation of the facts
  • Saddam had weapons of mass destruction to justify going to war
  • Babies are born without kneecaps
  • Hair and fingernails continue to grow after death. (optical illusion caused by retraction of the skin after death)
You benefit from their statement being believed as true
  • Saddam has weapons of mass destruction
  • Santa knows if you are naughty or nice.
  • Obama is a Muslim
  • McCain fathered a black child
You benefit from their statement being believed as false
  • Fossil records support the theory of evolution.
  • Modern Nuclear power plants are very safe
  • The risk of cancer posed by this site is extremely low
You believe their statement to be false based on a correct analysis of the facts
  • Saddam had weapons of mass destruction to justify going to war.
  • The earth is less than 10,000 years old.
You believe their statement to be false based on an incorrect interpretation of the facts
  • Man landing on the moon in 1969 (Flag moves as if in the wind – proved possible in a vacuum on Mythbusters).

Saturday, March 7, 2009

Ibid an Idiot!

If you are going to comment on other people’s blunders and stupidity you had better be able to dish it out to yourself……….

I have been working on a behavior model based on the idea of what I call "entrenched behavior". It sounded like a great term to explain my point, but, like I have found out before, it may have already been used. So I performed a Google Search and there it was.


Well out of curiosity I wanted to see how they used it. The web page I went to was a PDF that looked at teaching a science curriculum. In the paper it used the term “entrenched behavior” and cited a “Chinn and Brewer” and then further on down, someone named “Ibid.”

I could find the reference in the back to Chinn and Brewer’s paper called “The role of anomalous data in knowledge acquisition A theoretical framework and implications for Science Instruction” (an interesting read by the way) but I could not find the name of the paper written by this person named “Ibid.”

So I Googled “Ibid entrenched behavior” and looked at the documents, of which all cited this guy named “Ibid” but, for whatever reason, failed to put the name of his or her article in the references.

Strange I thought.

I then went to my University’s library web page and searched for the same parameters. Nothing for any author by the name of “Ibid.”


Well maybe there is a Wikipedia entry for the guy and they will list the papers written. So I started to type in Google Search “Ibid” when I noticed it gave me a search parameter of “Ibid definition.” I’ll try that and see where it takes me.....

Ibid: used in referring again to the book, page, etc. cited just before.


Feeling really stupid and wanting company in my stupid boat, I went to my wife and asked her if she knew what “Ibid” meant.

She gave me that look…... and I knew.

……..first comes the knife! “Yes” she replied

……and then the salt! “I learned that in High School”

She just stared at me with that look of “God you are an idiot”

Damn! I hate it when she is right!

Monday, March 2, 2009 a nut shell

I am currently taking a social and behavioral class as part of my Masters in Public Health. I have always been interested in sociology, especially why people behave differently based on groupings I have often claimed that it was my belief that all people problems are social in nature. So last week was Chapter 6, dealing with different health based models, in particulars, Bandura Social Cognitive Theory (SGT).

Dr. Thomas Tai-Seale, my professor, has written his own text book “Planning Health Improvement through Behavioral and Social Change.” For me I like all this thinking about the why. There is a why, find the why and you can understand and make change.

Bandura’s SGT was responsible for the concept of “self-efficacy", which he defined as a “conviction that one can successfully execute the behavior required to produce the outcome” or as Tai-Seale states “a self-assessment [that] one can do x – given all other relevant factors."

Pretty interesting stuff. Then I get to page 104 and it explains to me why I am the way I am. Me, in a nutshell. Damn, I have high self-efficacy!

  • Goal Setting: people with higher self-efficacy choose and act on loftier goals.
I was made fun of by my friend Travis (a former Scout in my son’s Troop) for always stating “Why can’t we….” Well Travis, I have high self –efficacy (it’s not a disease big guy!) it’s just the way I am. I look at every situation I am in and ask how it could be better. I hate the status quo, staying under the radar, stagnating. I invent things in my head, I write future novels, I want to do this and do that. To others they seem pie-in-the-sky but to me they really are achievable. Unfartunately high self-efficacy does not mean high skill level.

  • Anticipatory Scenarios (outcome expectations) people with high self-efficacy visualize success scenarios (positive cognitive stimulations) that are motivating. Those with lower self-efficacy visualize failure and are not motivated.
Yep – that’s why I would say “why can’t we….” I am motivated by the opportunity to make it work, I only say it if I see it in my head, if I can work it out step-by-step. That’s why I have been fairly successful on the jobs I bid and manage. I don’t go after them unless I can see it move from start to finish in my head.

  • The ability to predict probabilistic outcomes (to engage in analytical thinking/strategies) People with high self-efficacy remain on task longer in thinking through the probable outcomes of action and view their ability as an acquired skill which they get better at with practice. Thus they persist and improve in performance.
Bingo! I spend a lot of time looking at the outcomes on projects that are stretching my physical limitations, that is my ability to afford a solution. This is why bureaucracies and me do not get along, they are not the problem per say, they just get in the way of thinking through solutions to problems that may be encountered.

  • Belief in the extent to which their environment is controllable.
My Achilles' heel is my inability to work with people who for reasons only they know, do not want to find a solution to the problem. Bureaucracies become a difficulty because problems, which are just a normal result of forward movement, must be attached to a particular person within the organization. It is in the persons best interest to never step out of the box for fear of being chastised if a problem happens. “If I let you use this tool and you hurt yourself, I will get reprimanded for the accident.” Mistakes do not bother me as long as I don’t repeat them, all I care about is a successful outcome in the task at hand. Just like all people problems are social, all problems can be engineered out. It takes will, attitude, and an understanding that stuff happens, move on, move past.

So there it is. 51 years I have been wondering why I look at things differently than my peers. I am not highly skilled in anything particular; I can’t remember things I just heard a minute ago. I can’t play a musical instrument, sing, or dance. I suck at sports, mathematics, spelling, texting, and recalling your name. I am mediocre or average in most everything my peers seem to do with ease.

On the other hand I am passionate about my belief that a positive outcome is achievable when my head, gut, and heart says it is. I will stick something out until I have exhausted all plausible ways to fix it. I don't quit when the going gets tough as long as I can see a path in my head. I am an optomist grounded in reality. The reason I say "Why can't we..." is because I believe we can Mr. Travis!

My name is Jeff and I am a person with high self-efficacy!

I can’t pronounce it, but I is one!