Risk vs, Reward

Hi All,
Wow, what a crazy few weeks it has been! Let's get to the point of what is really a risk vs. a reward in 3 parts. Today's finance article says it best, but first let's start with with a picture that is worth a million words.

That is a number only good for today, remember that interest is added daily.

-----Reward, part 1
from yahoo finance:

ap
UK plans to scrap annual bonuses for bankers
Britain's Treasury chief pledges to scrap automatic annual bonuses for bankers

* By David Stringer, Associated Press Writer
* On Monday September 28, 2009, 8:26 am EDT

BRIGHTON, England (AP) -- British Treasury chief Alistair Darling said Monday that automatic annual bonuses for banking executives will be outlawed in an attempt to curb excessive risk taking in the country's huge financial sector. (ed comment - actually if they would tie reward to risk and success, that would be smarter.)

Darling told the governing Labour Party's annual conference that new legislation to scrap the payments will be put to Parliament within weeks.

Leaders of the G-20 rich and developing countries agreed last week to limit executive bonuses, but didn't set specific caps. Darling said bankers in Britain will in future be offered bonuses for their performance over several years, rather than over 12 months. (Editorial comment - it's about time! how about a clawback for negative performance?)

"We won't allow greed and recklessness to ever again endanger the whole global economy and the lives of millions of people," Darling said. (That right will be reserved only for the politicians! - my editorial comment)

He told the rally that new laws would include a claw-back provision and help to "end the reckless culture that puts short term profits over long term success." (spoke too soon)

"It will mean an immediate end to automatic bank bonuses year after year, it will mean an end to immediate payouts for top management," Darling said. (ed comment - now if only we could get a shareholder's and US voter's Bill of Rights! Oops,never mind, we have one, sorry, forgot)

The plans, to be included in a new Business and Financial Services Bill, will be proposed formally in the Queen's Speech in December, the annual announcement of the government's legislative program. (December - wow, what speed!)

Darling told the rally that Britain's economy has not yet recovered from the financial crisis, but predicted the U.K. is likely to come out of recession by the end of the year.

"Germany, France and Japan are showing signs of growth. There are many independent forecasters now believing too that the U.K. is coming out of recession," he said. "I think it is too early to say so with total confidence."

Prime Minister Gordon Brown's Labour Party trails badly in opinion polls ahead of a national election that must be called by next June. (ed comment, by the way, their average citizen trails badly in prosperity...)

Brown said Sunday that his party could recover if the economy rallies and the public give him credit for averting a worse financial crisis. ( - who cares if the citizens recover?)

"When the history of this period is written, this country and this party will be proud. Proud that the people who led the way in stopping recession turning into global depression were our government and our Prime Minister Gordon Brown," Darling told delegates.

In recent weeks Brown has acknowledged that the government will need to cut public spending to reduce mounting government debts -- but insists his Labour Party would protect key services. (and I have lovely lake front property in Arizona..)

Darling said the main opposition Conservative Party -- which is widely tipped to win Britain's next election -- would put the country's economic recovery at risk by making fast and sweeping cuts to spending. (only a pol would think that cuts in gov't spending are "risky".)

"If we followed the Tory route now, recovery would be put at risk, prospects for growth damaged, borrowing would in the long run be greater. We cannot and must not let that happen," Darling said.

-----Reward, Part 2
OK, back to reality - Reward is defined as follows: as a verb - "to recompense or requite (a person or animal) for service, merit, achievement, etc."

Wall St and execs in general forgot the "merit" or "achievement" part. "achievement, noun, defined as "something accomplished, esp. by superior ability, special effort, great courage, etc.; a great or heroic deed: his remarkable achievements in art. act of achieving; attainment or accomplishment: the achievement of one's object."

contrast this with the word accomplishment - "an act or instance of carrying into effect; fulfillment" curiously, there is only one antonym word - "failure".

Unless I am wrong, losing billions of dollars is an "accomplishment" at best, not an "achievement". Just because the firm closed its books does not justify an automatic reward for anyone. Survival may be an accomplishment, but it is not an achievement. The reward is you keep your job until tomorrow.

Fortunately, there is hope. last month, very quietly, Shell Oil Netherlands FIRED its top exec compensation officer because of many shareholder complaints! He recommended a full bonus plan to all execs even though they FAILED to meet their performance goals. What evil shareholders they are. It's a start, now if we can only fire the failed execs.....

------Reward, Part 3
The US taxpayer "reward" for Cash for Clunkers is now calculated - pass it along to all you know-

A vehicle at 15 mpg and 12,000 miles per year uses 800 gallons a year of gasoline.
A vehicle at 25 mpg and 12,000 miles per year uses 480 gallons a year.
So, the average clunker transaction will reduce US gasoline consumption by 320 gallons per year.

They claim 700,000 vehicles – so that's 224 million gallons / year. That equates to a bit over 5 million barrels of oil.

5 million barrels of oil is about ¼ of one day's US consumption. And, 5 million barrels of oil costs about $350 million dollars at $75/bbl.

So, we all contributed to spending $3 billion to save $350 million (one year). The payback period is roughly 10 years, which by gov't standards is actually good.

How good a deal was that ??? Do you feel rewarded yet?

Economic Buffoons

HI all,
My head is swimming with ideas, mostly around the idiocy of so called experts. The next several posts will be dedicated to exposing blatant hypocrisy and stupidity of some "leaders" of our nation.

Let's start with - I was right!! Remember I wrote about the idea of collective thought processes - I coined the phrase "collective consciousness". Well, I was more than right - I recently found a National Geographic article, July 2007. pg 130.

The article describes ant colonies and the scientific term is "Swarm Theory". They describe what happens when stupid individual ants somehow behave very intelligently and efficiently when in a colony. They call it "swarm intelligence". This was supposed to be a nature lesson, but it should also apply to people, politics and economics.

The writer says, "Even with half a million ants, a colony functions just fine with no management at all." As George Carlin once said, two words that don't go together - "government intelligence". How did our country survive the first 100 years? Seems to me they may have been more difficult than the second 100 years.

That brings me to my discussion point about a four letter word - RISK. (The next post will be about Reward, then after that about EVA - economic value add, sure to be a winner.)

Our troops RISK their lives every day in battles, and even during peacetime in training exercises (on the Potomac?). Sadly, the 3000 people who died in the WTC didn't even know they were taking a risk going to work. For the record, I lost 28 alumni from my high school that day, and 4 colleagues from Compaq as well. I remember.

Since that day, our USA has never been put right, still not there. We have a blundering TSA checking (actually frisking!) my 100 yr old Grandmother in a wheel chair at airports, fortune 500 firms paying huge bonuses for negative stock performance, while hiring "contractors" for some 5 plus years ( can you say Tax advantages?)

Now our biggest risk is the feds actually trying to help us - STOP! We don't want or need your help. The ants have shown us the way. "Help? We don't need no stinking help!"

We RISK their help with spending our money - today a federal judge ruled that the $33 million SEC fines against banks (bonus scandal) were wrong - they violated the most basic rules of fairness - the shareholders who were victims were being asked to pay for a mistake by management, making them a victim twice. What was really going on was a government shakedown for more money. Luckily, a judge has common sense. Fine the wrongdoers , not the victims!

Risk is indeed a funny word. Follow the money and you will always determine a risk. There is surely no such thing as no risk as there is not life without air.

What do each of us risk right now? - Social Security and Medicare are going broke, Do we risk re-funding them, or risk letting them go bust? Do we as taxpayers risk getting paid back by Wall st. and GM, now , later, or ever?

The National debt is not just a number, it is our own personal, individual debt to the Chinese. Math, unlike politicians, does not lie. The tea party in DC was estimated at 1.7 million people "with no leader' as CNN reported. Hmmm. Could it be swarm intelligence?

Perhaps we should take a risk on believing in the individual person who really runs this country, without any management help. It seemed to work well the first 100 or so years.

My excellent idea!

Hi all,
I had a bright idea the other day, apparently a few other parents did too.

I strongly objected to the Obama indoctrination speech to school children, so I wrote letters excusing my children and in its place, I gave my son a pocket copy of the US Constitution to read in study hall!

I asked him to read it in its entirety and report back to me what it means. I asked him to pay attention to the tenth amendment and explain to me its meaning. I am sure my readers are all experts, but just in case:
http://en.wikipedia.org/wiki/The_U.S._Constitution

The Tenth Amendment = "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."

for a full legal discussion, knock yourself out =
http://en.wikipedia.org/wiki/Tenth_Amendment_to_the_United_States_Constitution

Here's why this is so important - nowhere is the health care debate discussed in terms of this amendment - the federal government is prohibited from controlling my health care based on this law. They cannot FORCE people to buy insurance, nor FINE them for not doing so. (also Eighth and Ninth Amendment!)

My children asked me what was so bad with the pres' speech after he highly modified it this week - I told them point blank - he is a liar. Sorry, the truth hurts.
He said many good and conservative things in the final version, which is commendable, but his ACTIONS are exactly the opposite of what he says. If someone says one thing and does exactly the OPPOSITE, what are they? To a child, it is simple, he is a liar. I cite the Tenth Amendment, he is not allowed to take over the health care market. Ms. Pelosi - how exactly is this distortion and mispromotion? Have you ever READ the Constitution? Seriously?

Then I got another idea - the next time you are at a town hall meeting, please ask your rep if THEY have ever read the Constitution.!!! Simple.

The Constitution has a total of 27 Amendments , the first TEN are called the Bill of Rights. That's it - Ten and only TEN "rights".

Our country was founded based on a few simple documents, starting with the Magna Carta, the "great charter", created in 1215. It states that the Kings did not get their governing power from God, but rather God gives His power to the people, and they in turn give some of that power to the Kings and governing class. It influenced the creation of the US Constitution.

The Declaration of Independence was ratified on 7/4/1776, and the US Constitution was created on Sept 17. 1787, so Happy Birthday next week to the US Constitution!

Please read it. I bet you can find several recent attacks on these real rights from the current congress.

* First Amendment: addresses the rights of freedom of religion (prohibiting Congressional establishment of a religion over another religion through Law and protecting the right to free exercise of religion), freedom of speech, freedom of the press, freedom of assembly, and freedom of petition.

* Second Amendment: guarantees the right of individuals to possess firearms. See District of Columbia v. Heller.

* Third Amendment: prohibits the government from using private homes as quarters for soldiers during peacetime without the consent of the owners. The only existing case law regarding this amendment is a lower court decision in the case of Engblom v. Carey.[17]

* Fourth Amendment: guards against searches, arrests, and seizures of property without a specific warrant or a "probable cause" to believe a crime has been committed. Some rights to privacy have been inferred from this amendment and others by the Supreme Court.

* Fifth Amendment: forbids trial for a major crime except after indictment by a grand jury; prohibits double jeopardy (repeated trials), except in certain very limited circumstances; forbids punishment without due process of law; and provides that an accused person may not be compelled to testify against himself (this is also known as "Taking the Fifth" or "Pleading the Fifth"). This is regarded as the "rights of the accused" amendment, otherwise known as the Miranda rights after the Supreme Court case. It also prohibits government from taking private property for public use without "just compensation," the basis of eminent domain in the United States.

* Sixth Amendment: guarantees a speedy public trial for criminal offenses. It requires trial by a jury, guarantees the right to legal counsel for the accused, and guarantees that the accused may require witnesses to attend the trial and testify in the presence of the accused. It also guarantees the accused a right to know the charges against him. The Sixth Amendment has several court cases associated with it, including Powell v. Alabama, United States v. Wong Kim Ark, Gideon v. Wainwright, and Crawford v. Washington. In 1966, the Supreme Court ruled that the fifth amendment prohibition on forced self-incrimination and the sixth amendment clause on right to counsel were to be made known to all persons placed under arrest, and these clauses have become known as the Miranda rights.

* Seventh Amendment: assures trial by jury in civil cases.

* Eighth Amendment: forbids excessive bail or fines, and cruel and unusual punishment.

* Ninth Amendment: declares that the listing of individual rights in the Constitution and Bill of Rights is not meant to be comprehensive; and that the other rights not specifically mentioned are retained by the people.

* Tenth Amendment: reserves to the states respectively, or to the people, any powers the Constitution did not delegate to the United States, nor prohibit the states from exercising.

Subsequent amendments (11 to 27)
Search Wikisource Wikisource has original text related to this article:
Additional amendments to the United States Constitution

Amendments to the Constitution after the Bill of Rights cover many subjects. The majority of the seventeen later amendments stem from continued efforts to expand individual civil or political liberties, while a few are concerned with modifying the basic governmental structure drafted in Philadelphia in 1787. Although the United States Constitution has been amended 27 times, only 26 of the amendments are currently in effect because the twenty-first amendment supersedes the eighteenth.

* Eleventh Amendment (1795): Clarifies judicial power over foreign nationals, and limits ability of citizens to sue states in federal courts and under federal law. (Full text)
* Twelfth Amendment (1804): Changes the method of presidential elections so that members of the Electoral College cast separate ballots for president and vice president. (Full text)
* Thirteenth Amendment (1865): Abolishes slavery and authorizes Congress to enforce abolition. (Full text)
* Fourteenth Amendment (1868): Defines a set of guarantees for United States citizenship; prohibits states from abridging citizens' privileges or immunities and rights to due process and the equal protection of the law; repeals the Three-fifths compromise; prohibits repudiation of the federal debt caused by the Civil War. (Full text)
* Fifteenth Amendment (1870): Forbids the federal government and the states from using a citizen's race, color, or previous status as a slave as a qualification for voting. (Full text)
* Sixteenth Amendment (1913): Authorizes unapportioned federal taxes on income. (Full text)
* Seventeenth Amendment (1913): Establishes direct election of senators. (Full text)
* Eighteenth Amendment (1919): Prohibited the manufacturing, importing, and exporting of alcoholic beverages (see Prohibition in the United States). Repealed by the Twenty-First Amendment. (Full text)
* Nineteenth Amendment (1920): Prohibits the federal government and the states from forbidding any citizen to vote due to their sex. (Full text)
* Twentieth Amendment (1933): Changes details of Congressional and presidential terms and of presidential succession. (Full text)
* Twenty-first Amendment (1933): Repeals Eighteenth Amendment. Permits states to prohibit the importation of alcoholic beverages. (Full text)
* Twenty-second Amendment (1951): Limits president to two terms. (Full text)
* Twenty-third Amendment (1961): Grants presidential electors to the District of Columbia. (Full text)
* Twenty-fourth Amendment (1964): Prohibits the federal government and the states from requiring the payment of a tax as a qualification for voting for federal officials. (Full text)
* Twenty-fifth Amendment (1967): Changes details of presidential succession, provides for temporary removal of president, and provides for replacement of the vice president. (Full text)
* Twenty-sixth Amendment (1971): Prohibits the federal government and the states from forbidding any citizen of age 18 or greater to vote on account of their age. (Full text)
* Twenty-seventh Amendment (1992): Limits congressional pay raises. (Full text)

In closing, let me try to make you laugh - a recent Libertarian spokesperson said they would like to see Congress have a 2 Term limit - one in Congress and the second in JAIL!

There is a God

And He has a sense of humor!

Friends:
I just heard more news on the radio this morning, one story about Cash for Clunkers, another about our military. The Cash for Clunkers (C4C) system has "mixed" results, I am not sure whether I should be rolling on the floor laughing, (for those who text, ROTF LMAO)or crying.

To begin, last week I was told that the C4C system was closed, but a day or two later, apparently under cover of night, the IRS, yes..... our friends the Feds, made an announcement that the $4500.00 "incentive" would be considered TAXABLE income!!

Amazing, I was almost speechless. Pity the poor person who financed their purchase. Now come next April, they will most likely owe another $1,000.00 or so, or simply not get a refund which they were anticipating. This is a VERY IMPORTANT lesson for all businessmen - CASH FLOW IS KING.

A good friend and mentor once told me this. You can finance your heart away, but if the cash flow dries up you are dead. Cash flow means more than margin or any other measure. This cash these folks will have to come up with will be technically after tax dollars , hopefully from savings - not- or they can just turn around and use their credit cards all over again to finance the IRS taxes due. Hey, what's the big deal about 18% interest between friends? This is a big deal because it is an unexpected hit to the projected cash flow of this person's monthly budget.

Of course you already know that many car dealers have not yet been paid on their promised C4C transactions. (remember our lesson on transaction cost - policing cost) One dealer today indicated that he was owed over $3 million, going on 6 weeks overdue accounts receivables. What's the big deal here?

You guessed it - cash flow. Many don't know this, but here is how an auto dealer works. They technically rent the cars from the manufacturer, paying a daily fee. They get that money from a bank which charges them interest. If they go over 30 days, most could be subjected to increased rates or penalties. Once they sell or trade a car, it is financially gone - on a daily basis.

But wait! It gets better. On the news this morning a woman called in who worked at a dealer. Better sit down now.

She said that she has seen cases where the C4C payments may be diverted from the dealer if the buyer had outstanding student loans or owed child support. D'oh! Now the dealer's cash flow is affected three ways - no or reduced payment, delayed payments over 30 days, and increased interest paid to the bank. We should all take a moment and feel very sad for these dealers, who, God Bless them, are businessmen just trying to make a living.

Let's contrast this story to one much closer to my heart - our wonderful US military. Apparently there is a transcript somewhere - A US pilot was flying his plane over Iraq when a voice came over the radio - "Unidentified aircraft you are flying in Iranian air space, depart immediately or we will send up a strike force....."

To which the pilot replied, " This is a US aircraft, we are flying in Iraqi airspace, not Iran..." The other controller again made the same threat and demand, leave or we will shoot you down.... etc. etc. The US pilot calmly replied, " This is a US Marine F18 hornet fighter jet, send them up, I'll wait." Semper Fi.