Category Archives: Uncategorized

Subprime Mortgages

The TV Sitcom, “How I Met Your Mother” expertly laid out the Platinum Rule last week.  Too bad mortgage company execs didn’t see these around the year 2000.  Some of them may have been able to keep their jobs.

Barney, on the show, came up with the Platinum Rule of dating: Never LOVE thy neighbor because it never ends good.  He then stepped through the eight stages of such a relationship.  Funny thing…the platinum rule applies to subprime mortgages as well.

Step 1 – Attraction:  This is that first moment someone catches your eye.  “Hmm…subprime mortgages.  Sounds sexy.  Have to think about that.”

Step 2 – Bargaining:  Maybe we can make this work.  It seems to make sense.  Others are lending money to people with bad credit scores and getting away with it.

Step 3 – Submission:  All right, all right.  Other companies are killing with these subprime mortgages.  Let’s do it. 

Step 4 – Perks:  Oh Hell!  We’re rolling in reported earnings.  This is fun.  We give money to people who can’t manage their own finances.  Then they give us a note that says that they’ll promise to pay it back.  Then we sell that note to some other suckers and claim a profit. 

Step 5 – The Tipping Point:  Hmmm….interest rates are on the rise, home prices are declining.  These poor credit risks are paying off their debt on a variable interest rate.  This isn’t good…oh wait, more of them aren’t paying.  They’re getting behind.  Yikes.  (Nail biting ensues).

Step 6 – Pergatory:  Crap.  Blew this one.  Looks like we’re resigned taking some losses on these cranks.  Maybe I can sell this junk off to some other sucker.  We can tell everyone that we’ve done a good thing by getting people into houses – one – and getting them into houses that they otherwise couldn’t afford – two.

Step 7 – Confrontation:  Shareholders are pissed.  Hedge funds are coming after us.  Board is getting rid of me.  I’m toast.

Step 8 – Fallout:  Wow.  How did that happen?  I was on top of the world a couple years ago.  Now, I’m out of a job, damaged goods, didn’t even get an enormous golden parachute.  Me a Wall Street titan, a financial genius, bested by the people living paycheck to paycheck.  What went wrong?  Oh yeah.  Maybe I shouldn’t have been lending money to people who couldn’t pay it back. 

Go figure.  Lending money to people who can’t afford to pay it back isn’t such a good business proposition after all. 


Monopoly(tm): Electronic Banking

Hasbro, maker of Monopoly boardgames recently introduced a new innovation to the widely popular game – electronic banking.  No longer do you have to handle money, just insert your game card into the + or – side of the bank computer and enter the transaction.  It does all the math for you.

I have a problem with that.  Much of the good experience that comes from the game is from handling and managing the paper money.  That’s one more thing to think about and keeps lesser players from thinking about strategy as they worry about money flow.  It’s also a great educational tool to help people with math and money management.

I understand Hasbro’s intent.  I’m sure they believe money management is an impediment and this innovation will get more people playing.  That may be true.  But, for Monopoly die hards, it waters down the experience. 

If Hasbro wants to make a useful innovation to Monopoly it should creat a web-based game.  I’d love to be able to play one-roll-a-day Monopoly with my friends. This is what I want:

  • Be able to set up a game room to invite specific people to a game.
  • Game can be played over time.  System would e-mail you when it’s your turn to roll complete with a game progress summary and it would facilitate transactions between players.

Get to work Hasbro.

Fool me once…

“There’s an old saying in Tennessee — I know it’s in Texas, probably in Tennessee — that says, fool me once — shame on — shame on you. You fool me, you can’t get fooled again.” President Bush   

What would you do if your employer asked keep 20% of your pay for the period you just finished working? 

This could bring on a host of consequences.  One of those consequences might be that you become less willing to trade your time for unknown pay.  Others would feel the same, your company might lose employees and find it tough to replace staff once word hit the street that the company isn’t a reliable payer.  

Now, how do you think mortgage investors (the people who provide the money for others to buy homes) feel about the same thing happening to them?  They may be less willing to provide funds in the future, or they’ll at least want more income to compensate them for the risk of having to let borrowers go back on their word. 

Sorry W.  For those of us who try to make responsible decisions such as choosing to live in a home we can afford and financing it with a 30-year fixed rate mortgage to protect us from the pain of interest rate fluctuations, your proposal to freeze interest rates for those who aren’t as responsible is a slap in the face.

Fool me once, shame on you.  Fool me twice, shame on me. 

People who don’t understand the Electoral College

This became an issue for our generation when Al Gore won the popular vote for the 2000 election, but lost the Electoral College.  Voters felt disenfranchised.  I was recently reminded of this by a comment from a family member.

I consider understanding of the purpose of the Electoral College a litmus test of a person’s fundamental understanding of the purpose of the U.S. Constitution.  Most people fail this litmus test, which explains why so many in our country take the freedoms we have for granted. 

So, what is the purpose of the Constitution?  It’s an insurance policy against tyranny.  It’s a Balance of Power.  It’s a design to keep absolute power from forming in any one political group.  The Founders understood the dangers of tyranny.  They understood that there are those among us who are narcissistic and those are the people attracted to power.  And they understood that tyranny can take several forms that are dangerous to the population on whole.  Tyranny can take the form of a dictator like Hitler.  But it also can take the shape of a simple majority rule.  The Roman Empire was run for the benefit of Rome, which led to its demise as those outside of Rome grew tired of being pawns to serve the city.  It’s the “two wolves and a sheep deciding what’s for dinner” scenario.

You’ll notice this country is called the United States of America (emphasis added).  It’s not called the United Peoples of America.  It’s not a pure democracy.  There’s a geographic balance of power granted to the states to help prevent the tyranny of majority.

That balance of power shows up in several places.  It shows up in the Senate, which grants each state two votes on legislation – no matter the size of the population of the states.  It shows up in the Electoral College which gives each state one set of votes for president based on population and then two additional votes from each state to mirror the power structure of the Senate.  It’s these two additional votes from each state that makes people mad.  Finally, the Constitution grants certain powers to the state governments. 

The House of Representatives is the pure democracy part of the Federal government.  We elect Representatives based on popular vote and the number of representatives from each state is based on state population.  So, the population of California with it’s 53 Representatives has a lot more power in the House than Iowa with its 5 Representatives.

However, we balance that popular power of the House with in the Senate and the President.  We elect Senators based on popular vote, but each state has equal power in the Senate so the California population can’t steamroll the Iowa for its own gain.  Finally, we balance the people power in the House and the state power in the Senate with a President that is elected that is based on a combination of the power of people and the power of the states. 

In summary, popular vote elects our Representatives and our Senators.  It does not elect our President.  

For all of those wanting to abolish the Electoral Collge, I haven’t yet heard one cogent argument to support their position.  But, that’s understandable.  To have a cogent argument you would first have to understand the purpose of the Electoral College. 

A cogent argument would first have to convince me that there isn’t a danger in the tyranny of majority and if it were successful at doing that, then to be consistent we may need to consider abolishing the Senate as well, or explain why it’s important to reflect the State power in the Senate but not in the Presidential election.

Gore wins Nobel Peace Prize?

Really?  He beat out a Polish woman who saved the lives of 2,500 Jewish children during WWII.  That’s remarkably stupid.

Another CEO gets rich for failing

I’m a strong advocate for the free markets.  Free markets are built on voluntary and willing win-win exchanges between individuals.  I buy the hamburger from the butcher because it’s worth more to me than the $3 I give in exchange.  Likewise, the butcher values my $3 more than a rotting hunk of meat.  A free market is a great feedback system.  Which means, if you aren’t producing anything of value, survival is going to be rough for you.  But, if you produce something others do value, you’ll do fine.  

Something is inhibiting that free market system when a failing CEOs is paid handsomely for destroying value.  Gary Foresee, former CEO of Sprint-Nextel, resigned under pressure from the Board for his poor performance and it’s estimated that his failure will enrich him by $50+ million. 

The Board of Directors that allow such things should be promptly removed by shareholders.  They aren’t doing their jobs.  Paying failing CEOs well has been a growing trend.  Directors defend this remarkable stupidity by blaming it on the market rates for CEO.  Hogwash.  If you offer rich rewards for a failure, you’ll get a failure.  

The problem is with the Boards.  They’ve bought a faulty bill of goods from compensation consulting companies.  The incentive structure is broke.

 If they want to a model on how to pay their managers, they should read up on Warren Buffett, or just think how they might pay a manager of a single retail location that they might own. 

Michael Moore

I will give Michael Moore some credit for figuring out how to monetize his stupidity.  But, it’s hard to believe that someone who’s been around as long as he doesn’t seem to have a clue on how markets work.

“But fire and police departments are socialist.  We shouldn’t have profit in life and death matters.” Seems to be Michael Moore’s stance.

Sorry Michael.  Bad comparison on several levels.  Nobody has an incentive to use fire and police resources when not needed.  In cases where overuse was occuring – like responding to false burglar alarms – many police departments started charging a fee to cover the cost of the wasted resources.  In Micheal’s health care system, would he charge a fee for somebody going to the doctor when they didn’t need to?    

Fire and police departments are locally controlled – usually at a city or county level.  Which means there’s a free market element in police and fire units that Michael doesn’t see.  If police or fire protection in my town are bad, I can choose to live elswhere.  Imagine local police and fire protection provided by the Federal government.  I wouldn’t have that choice. 

Likewise, with thousands of independently run police and fire departments out there, you get the benefits of free market innovation.  Each individual department is a lab experiment on how to provide the best protection.  When one group in Cedar Rapids, IA discovers a better practice, other groups can adopt that practice.  How would that work in a Federally controlled system where everything was dictated from the top?