9/11

9/11 is the saddest day in our history.  It is very well presented in numerous documentaries.  One of the best is "On Native Soil" which clearly shows the failure of our government.  It answers the question of how this could have happened - at least for me.

Unfortunately many citizens who lost loved ones in New York, Washington D.C., or Pennsylvania  had to struggle with spineless government officials who didn't do their jobs ( all the way up to presidents of both parties) to get meaningful reforms. Sadly the same government officials never apologized for their ineptness - except, of course, for one--Richard A. Clarke.

At the end of "On Native Soil," a plea is made to overcome complacency in America.  After all, the families of 9/11 victims gave up much of their lives to  push the 9/11 Commission to make meaningful reforms and they, in fact, are asking it of us.

I know it is a completely different area, but politicians and many others haven't done their job in the economic arena; and it is wrecking lives.  Posturing and vote-getting continue to be put ahead of doing the right thing for the American people.  And it is reaching dangerous levels.

Unfortunately, those responsible for the housing crisis have never accepted responsibility; and many are still in power.

From 9/11, we have learned what happens when people are complacent.  If you are bothered by the bickering going on in D.C., email your Congressman and let him or her know.  If you are bothered by bankers receiving million dollar bonuses after a taxpayer funded bailout, let your Congressman know.  If you are bothered by zero responsibility taken by those manipulating our economy, let your Congressman know.

One thing 9/11 clearly proves is that those in charge are completely inept at carrying out their responsibilities.

Total Return Equity Swaps/WMDs

How many times can a man turn his head And pretend that he just doesn't see
The answer, my friend, is blowing in the wind The answer is blowing in the wind - Dylan

Suppose you wanted to get a loan, but your balance sheet is looking a bit shaky. You come to me and we make an agreement. I buy your 100 shares of Johnson & Johnson stock, you get the dividends, and each quarter we settle up on the gain or loss in the stock. This removes the stock from your balance sheet and you have increased your liquidity. There has been no change - you've moved the stock, in effect, off balance sheet but you still participate fully in the movement of the stock. You've engaged in a "Total Return Equity Swap".

These swaps are what Buffett was referring to when he called derivatives weapons of mass destruction.

It would seem that anyone with at least a 3rd-grade education could see that this type of swap increases leverage, is designed to manipulate balance sheets, and is dangerous. Unfortunately, our former Chairman of the Federal Reserve didn't grasp the danger of these types of derivatives. His view was that derivatives spread risk to those that can handle it.

This it does. But there are typically at least two sides to an economic action. They do spread risk in a beneficial manner; but they also increase speculation, potentially to dangerous levels. This, of course, is being kept simple - you can imagine the potential abuses in the bond area. If I have too much debt, I can't get a rating on the borrowing I need to do. No problem - let's do a swap and lower my debt/equity ratio.

The big problem, in my opinion, is that there are people who see the dangers of these kinds of instruments (I'm talking broadly now - not just about swaps and derivatives) but they "pretend he just doesn't see" because of short-term economic gains.

To realize our potential as we move into a new decade, we need at some point to stop looking the other way and pretending we don't see.