Business, Politics

There Outta Be A Law

03.31.08 | Permalink | 1 Comment

I’m guessing a few of you may have heard that phrase before, usually uttered in disgust “There outta be a law!”

Not more laws please!

Well friends, that’s pure horse hockey. In fact, we don’t enforce the laws we have on the books – what makes anyone think a new law is going to make a difference? Those of you who read this blog frequently will ask, “I wonder what’s set him off this time?” The answer is of course, the sub-prime mortgage crisis and specifically the Bear Stearns collapse. What is the response to this crisis? Let’s write some laws to prevent this from ever happening again and along the way, let’s save those poor people who are caught in the middle of this mess with public funds.

Let’s take a trip to the way-back machine to the beginning of this decade shall we? OK, I guess it’s not that far back, but you get the point. California was in the throes of an “energy crisis” resulting in rotating blackouts, Enron’s stock was climbing through the roof on the back of nefarious “round trip” energy transactions, and their independent auditor, the venerable Arthur Anderson is too busy counting “money” to notice that the entire company is, in fact, a ponzi scheme designed to take advantage of the poorly executed deregulation of the energy market in California and elsewhere. We all know what happened, Enron went boom and took Anderson with them (though not before the consulting arm escaped morphing into Accenture.)

Core message of Sarbanes-Oxley

On the heels of this robbery writ large, our noble law makers launch themselves into action to enact Sarbanes-Oxley (SOX,) laws so strong, criminals won’t ever try to hide their activities behind the facade of corporate America ever again. Laws so strong, they require deodorant to simply stand in the same room with them. Laws so strong, they distort the basic truism that if you sell something for $1, it cost you $0.50 to make it, $0.10 to sell it, and another $0.10 in supporting corporate functions that you no longer have a net income before taxes of $0.30, it must go through the GAAP rules and that net income may be any number GAAP dictates! Now all public corporations report earnings in two ways, on a “real cash” and GAAP basis and then gamely attempt to connect the two methods. All hail the new transparency!

Is it surprising that companies are now earning less due to the army of accountants and attorneys they’ve hired to ensure they’re complying with SOX? If SOX were effective and transparent, wouldn’t company’s need only report the SOX inspired GAAP number? And, more to the point, wouldn’t the shareholders of Bear Stearns seen through the magic transparency of SOX reporting that the company had taken on a huge amount of risk in the subprime market and could be vulnerable to liquidity concerns? And if that were the case, wouldn’t you have expected investors to run from the stock well in advance of it’s collapse to $2 a share?

This subprime mess bothers me greatly. It starts with the individuals who take subprime loans – there’s nothing particularly wrong with subprime loans as an instrument, and when used appropriately, they provide great leverage for an individual borrower. But my sympathy for these individuals is very limited. Why? Have you signed loan documents? I have. There are summaries, disclosures, payment schedules, amortization schedules, and untold pages of legal disclaimer. All of which must be signed and initialed by the borrower.

Perhaps I’m weird, but I actually read those documents before I sign them and if I don’t understand them, I ask for clarification and/or correction. That a borrower finds trouble down the road tells me that they took a risk and suffered the negative outcome of that risk. And no one could ever say that a borrower was coerced or didn’t have access to the information to judge the situation into which they were entering. No, these borrowers took a calculated risk. Now, do I believe that these folks should lose their homes, nope. Read what I wrote about that a few weeks ago. It’s in everyone’s best interest for the institution who holds the paper to find a payment scheme that works provided that the book value of the asset and the outstanding value of the financial instrument are reasonably close.

Now, let’s go to the mortgage companies. Sure, subprime loans were a hot product and of course you would want to get in on the gravy train of processing fees and interest that was going to roll in. But these are businesses who also know about risk. In fact, their entire business is predicated on judgment of good risks and escalating compensation for taking on higher risks. Were the mortgage and lending companies ability to judge risk impaired by some sort of institutional mickey? With all the transparency provided by SOX, didn’t these risks stand out prominently in public reporting?

Now, what about the financial institutions that purchased groups of these loans from the mortgage brokers and lenders? Did their judgment go south too? It’s pretty standard to package these things with a mixture of risk and market them that way. The higher risk instruments have higher reward typically. Why did these institutions (like Bear) fall for high risk packages?

GREED! Big Dollar Signs.

Well, the answer is simple: GREED. The old saying goes, “Bears make money. Bulls make money. Pigs get slaughtered.” That my friends is what we’re seeing today coupled with complete lack of common sense comparing asset value to book value and if possible, working out some reasonable compromise such that the mortgage doesn’t default, the bank still has income, and people stay in their homes.

Now, getting back to the core thesis of this post, with all due respect to our Congress, the Bush Administration, and the Candidates on both sides of the aisle. Don’t you dare bail these people and companies out. Don’t you dare go write a bunch of new laws that add to the complexity and cost of our society and fail to prevent the core behavior. Here’s news: you can’t legislate greed and judgment. It’s impossible. The borrowers were greedy extending themselves beyond what they, and the lenders knew, was reasonable risk. The mortage brokers and lenders were greedy trying to cash in on low interest rates and high fees boosted by high volume enabling borrowers to take unreasonable risk. The core institutional banks were greedy believing that what the mortgage brokers were selling them was legit, they have smart people who know risk and know when something sounds too good to be true it usually is. Laws aren’t going to fix that behavior.

In fact, let’s do everyone a favor and simplify the legal framework of the country. Let’s reset and have a more permissive, but more accountable society. Accountability means you understand the possible outcomes of your decisions and that you are ready to stand by the negative as well as the positive potential outcomes. Our society is degrading and it’s not because of TV, violent video games, and the breakdown of the nuclear family, it’s because we, as a society are tolerant of bad behavior of our leaders, our celebrities, and ourselves. Rarely do you hear someone stand up and say “Yes, I made that decision. The reasons I made the decision were … Now, in retrospect, I was wrong and I accept responsibility for my decision. Here’s what I’ll do to learn from the decision, share with others what I can to help them benefit from the bad decision, and here’s why I won’t repeat that mistake.”

It starts with us and no law is going to fix our problem.

Energy, Innovation, Technology & Science

One Hot Bike

03.31.08 | Permalink | Comments Off on One Hot Bike
Zero Motorcycle, all electric on road or off road 250cc equivalent.

Scotts Valley, California based Zero Motorcycles is now shipping an all-electric 250cc equivalent motorcycle for a list price of $7,450 complete. These nifty little bikes are available in on- and off-road configurations and really fly (check out the videos hosted at their website.) The standard configuration has a duration of 2 hours and/or range of 40 miles and accelerates from zero to 30mph in less than 2 seconds.

Some interesting and distinguishing characteristics about this offering are the programmable interface allowing for different personalities to be exhibited from easy to sport. This is critical because the bike has 100% of torque available throughout the power range and is capable of delivering 300A at peak power. The storage system consists of an array of 168 second generation lithium-ion cells designed to avoid thermal incidents seen in other electric vehicles. The entire bike weighs only 140lbs (without the rider) and has successfully made 65 foot jumps, so it’s sufficiently tough for the task at hand.

Innovation

Most People Can’t Solve a Rubik’s Cube

03.30.08 | Permalink | Comments Off on Most People Can’t Solve a Rubik’s Cube



This homemade robot can do it in 60 moves and less than 5 minutes on average. Wow. What a use for Lego MindStorms…

Humor

Kegger!

03.30.08 | Permalink | Comments Off on Kegger!



This is great, the kids throw a kegger and the police arrive. When they start testing for alcohol, there is none. It’s a root beer kegger! The authorities were not amused…

Politics

Hillary, Patrick is Right

03.29.08 | Permalink | 1 Comment

Earlier this month, MftC led the pack calling for Hillary Clinton to concede the nomination to Obama as it is no longer possible for her to win the nomination. What she can do, is help the Republicans find the chinks in Obama’s armor to attack in the general election and that is reason enough for her to concede, if she truly cares about getting the country back on the right track. It’s been my view for some time that Clinton’s naked ambition for the Whitehouse is driven by a personal agenda for power almost exclusively and that she’ll do anything required to win. That’s not to say Obama is pure of heart, but his motives appear to be a least a bit more altruistic and geared toward a better future than a personal power play.

Vermont Senator Patrick Leahy

Last week, Vermont Senator Patrick Leahy called for Clinton to concede. He’s right, now is the time Hillary for you to step aside if you care about change. You can have a leading and impactful role in the next Administration if only your ego will allow that. In fact, with your experience and education, you would make a fine Attorney General. Consider that as a way you could serve your country and utilize your knowledge, skills, and experience. But don’t drag the entire Democratic ticket into the mud in a fight that is unwinnable.

Concede, now. It’s the honorable and right thing to do. Check with John Edwards, that’s what he did and it showed great character. I want to believe you have it in you to do the right thing, but I’m not optimistic. Prove me wrong, please.


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