Oct 30 2008

Get Back on the Horse!

Published by under Global Economy

“The kind of commitment I find among the best performers across virtually every field is a single-minded passion for what they do, an unwavering desire for excellence in the way they think and the way they work.  Genuine confidence is what launches you out of bed in the morning, and through your day with a spring in your step.” – Jim Collins

 

By this time next week, barring another election disaster like what we experienced in 2000, we will know who the next president of the U.S. will be.  Considering the constant flow of negative economic news over the last several months, I for one am optimistic that November 5 will mark the beginning of a new more positive tone.  I am not suggesting that suddenly everything will be wonderful again, only that possibly we will be allowed to begin our journey back to a more stable economic environment without being constantly reminded how bleak everything is.

 

I am convinced the best course for those of us not responsible for publishing the news is to buckle down and focus on what it is that we do for a living.  Admit it, most of us spend too much of our time fretting over things outside our sphere of influence.  Companies are struggling just to survive and our jobs are truly on the line – these are facts.  So consider it, accept it and then stick it on a shelf and get back to work on what it is you actually do to contribute to the bottom line.  It will get better – believe it!

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Oct 19 2008

What Have We Done!?

“Derivatives are financial weapons of mass destruction carrying dangers that, while now latent, are potentially lethal.” – Warren Buffett (2002)

 

Clearly we are now in the grasp of a financial catastrophe of epic proportion.  Most people sensed the real estate bubble had been going on too long, but few could have predicted the storm we are now experiencing would reach nearly every developed nation in the world.  The fallout is certainly global and it is high time to focus on solutions, but in the U.S., thanks to the pending presidential election, it has become quite the political finger pointing exercise.  The Republicans are blaming initiatives supported by former President Clinton and other Democrates which made it easier for people of lesser means to obtain mortgage loans.  The Democrats are furiously pointing towards the efforts of Republican Phil Graham who pushed through a law that exempted financial derivatives from federal regulation.  There should be little argument that it became far too easy to qualify for mortgage loans, but without credit derivatives we would never have reached the global meltdown that will ultimately reshape our financial future.

 

So who is really to blame?  A whole lot of highly intelligent and clever financial wizards…and everyone else in a position to challenge what they came up with.  In other words, there is plenty of blame to go around.  The focal point, however, should probably be directed at former Fed Chief Alan Greenspan.  He was central in first creating the “easy credit” environment and then allowing the credit derivative to become such a popular form of “insurance” against borrowers defaulting on their debts.

 

I wrote the following in an essay on financial derivatives for a masters course I was taking in February 2006: “Ultimately there is a single major risk to be concerned about when dealing with financial derivatives.  There is the potential to lose a great deal of money over a short period of time on a “wrong” position.  As in the case of Barings, if adequate reserves are not available, this could result in bankruptcy.  Derivatives-related losses can typically be traced to an overly speculative investment strategy, a misunderstanding of how derivatives reallocate risk, an ineffective risk-management audit function and an absence of systems that simulate adverse market movements and help develop contingency solutions.”  I would argue that our current predicament confirms that relaxed mortgage loan requirements combined with the widespread use of credit derivatives was a poison pill the size of Manhatten.  Now we must hope the apparent antidote (which is closer to the size of Great Britain) works in a big fat hurry.

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