347-878-3837

Business

Here are articles on Business

My psyche was just hijacked by a sweet sounding, marketing demoness!

I just received a voicemail from an amazingly sincere, genuine-sounding coaching “guru.” She went on and on about how she wants to give back to me and show her tremendous appreciation. All I have to do is visit her web page for details.

I visited. It turned out to be a long-form sales letter. You know the type: they mix testimonials with sincere-sounding stories and revelations of how the writer was poor, destitute, and reduced to eating their own belt in an attempt to find protein as they lived out of their car. Then suddenly they discovered the secret to everything and now you can have a little bit of their juicy goodness by attending their wonderful seminar for just $X hundred dollars. (Even though they’ve enjoyed a seven figure income for years, they are charging you for the information for your own good, of course.)

Halfway through reading her site, I began to feel the urge to attend the seminar. I realized that I’ve never made seven figures a year. Looking at all the pictures of the people who have attended and now blow their nose into genuine, gold leaf toilet paper made my knees quiver with a mixture of jealousy and painful feelings of inadequacy.

Then I noticed what I was feeling. I noticed the longing to attend her seminar. I noticed the inappropriately intense emotional reaction I was having. I closed the page, added her phone number to my voicemail spam box, and am adding her email newsletter to my spam filter list as well.

Psychologically manipulative long-form sales letters work really well. I highly recommend developing a knee-jerk reaction to them: delete them and consider the seller totally and completely discredited in your mind. If someone has something of value to offer, refuse to listen until they show you in a non-manipulative way. Ask for a sample. Ask for statistics. “How many of your students are now enjoying a 7-figure income? How long did it take them?” Ask for references. “Please give me their phone#s so I may call and verify.”

Anyone who claims to be a multi-gazillionaire who is generously helping you out if you pay them just a few hundred dollars is a scam artist. If you’re rich and want to give back, give. Don’t sell, give. You don’t have to do it as formal philanthropy, just offer your stuff for free. Coach Marshall Goldsmith, one of the most successful and highly paid coaches in the world, gives away everything he does for free at http://www.MarshallGoldsmithLibrary.com. As he once told me, “I have more money than I could ever spend, why should I charge people when what I care about is helping them?”

If you’re using long-form sales letters in your own business, try seeing if you can resort to selling your product on its own merits. If the answer is “No,” improve your product until you can.

It’s important to note, however, that if I send a long form sales letter, you must buy my products, make me a billionaire, pay for mansions for me, lots of  Rolls Royces, and scantily clad models on both arms. I may be outraged, but I’m not stupid…

One Price Doesn't Fit All

,

But offering lots of options can destroy the buying experience.

I’m flying this morning. More accurately, I’m waiting in line after line after line at the airport. Once, I needed my boarding pass. Then I needed my boarding pass and driver’s license. Now, I need my credit card, too. Every line brings a new, extra charge. The check-in kiosk gleefully says it costs $15 for my first checked bag. At the gate, the little headphones cost me. On board, a pillow and blanket—once free free—now cost big bucks. And don’t get me started on the snacks.

Every price tag becomes a separate purchase decision. Every purchase decision makes an impression. The airline has me asking “Is this worth it?” a dozen times during a single flight. And every extra decision risks my deciding “No.”

Any good sales person knows you want your customers crying Yes, Yes, YES! As soon as I think No, they’ve lost me as a customer.

If you offer options, do it at once.

When you have lots of little add-ons that someone can choose up front, that’s fine. Call it “customization.” If I’m buying a new Mini Cooper, I get to run the Mini Cooper customizer. It becomes a game to choose the white racing stripes, chili pepper red paint job, fancy suspension, and cool hubcaps. Will I pay extra to customize? You bet. And since it’s a one-time fantasy fest, I only have to abandon common sense once to sign on the dotted line. Now I have my cool car with lots of options, and I love the chance to go into debt for life for my new tricked out Cooper. But only if it’s a single purchase decision, where the excitement happens all at once. One purchase, and I can enjoy my car forever.

Don’t take away what used to be free.

Of course, don’t customize add-ons that are expected as part of the base product. If I had to pay extra to make sure my Mini came with wheels, it would be annoying, not delightful. But since the car comes with wheels, all my attention is blissfully on my Speed Racer fantasies.

For Goodness’ sake, never start charging for something that used to be bundled into the price. People hate losing things. When once my plane pillow and blanket were complimentary, charging extra for them stirs resentment.

You might think airlines have to start charging for the extras or they’ll go out of business. Maybe. But maybe not. If they just tacked $50 onto the ticket prices and announced that they still give “free” blankets, pillows, and checked luggage, I suspect many people would be willing to purchase. All it takes is one nickel-and-dime experience to realize that a low price ticket might be a smokescreen for an expensive bundle of travel “add-ons.”

If airlines want to offer variable pricing, they shouldn’t charge extra fees. Instead, they could frame the choice as a discount: you get $7 off your ticket if you decline a pillow and blanket. More people would take the blanket and pillow (people often just accept the defaults), so the revenues would be higher. Yet those who really care can still get the lower price. Furthermore, people would be imagining their flight with all the goodies, and would be inclined to forgo the discount since it would seem like losing that amenity—and remember, people hate to lose extras.

How many purchase decisions do your customers make?

What’s your product or service? Do you offer it as a series of purchase decisions? Try an experiment: create an all-in-one pricing bundle and offer discounts for unused options, rather than extra charges for extra options. Track how many customers choose to the default options, how many customers purchase again, and how satisfied customers are with their purchase. You just may find that the best way to serve your customers is to charge them more.

[Note: the way decisions are presented to people makes a huge impact in what they choose. This is called “decision architecture.” You can learn all about decision architecture in the book “Nudge.”]

Stephen Wolfram’s “Alpha” isn’t a Google killer; they’re in different businesses.

,

My friend Bob Kerns blogged about Stephen Wolfram’s “Alpha” project. The project aims to take on Google by creating a web-retrieval engine that can answer specific factual questions directly. Type in, “how many angels can dance on the head of a pin?” and it will go out to the Web, retrieve the answer, and tell you. Bob doesn’t think Alpha will be able to challenge Google. I agree.

I’d never heard of Wolfram’s “alpha” before, but the sensationalistic headlines, in my humble opinion, show a total misunderstading of Google’s business model.

Google is in the advertising business, not the search business. Search is one of many distribution channels they have for that advertising. It lets them offer targeted ads, because what people search for can be used to target ads to people who might want to buy a product or service.

They’ve also figured out that if they give away products that involve high information content (mail, word processors, spreadsheets, etc.), targeted ads can be delivered unobtrusively in the margins, deduced from the information a person is working with.

It makes sense for Google to develop better programs in the information-processing space than Microsoft and give them away for free, since that drives eyeballs to Google’s ads. You’ll notice Google isn’t building the G-Box 360; there’s no information content there to be analyzed and monetized.

The Google phone gets you more deeply involved with your Google platform on mobile devices. My guess is that it’s a just-in-case move, anticipating the possibility that mobile devices will develop into a big chunk of the information processing market (and thus advertising eyeballs).

Alpha may be able to answer factual questions directly, but it’s not necessarily even in the same space as Google. Factual questions aren’t likely to be very good at generating enough context to do good ad targeting. If I ask, “what is the tensile strength of steel,” you don’t have much information to use to target ads. You don’t know why I want that information.

When I Google, however, I am typing in words associated with the actual information I need. I type in broader phrases, loaded with context. If I’m searching for “steel for skyscraper construction,” it’s easier for Google to find a host of relevant ads based on the query words and on the content of the top pages matching the query.

It’s the very fuzziness of Google’s search that makes it a good business for monetizing with ads.

Cause and Effect in Current Events

, ,

Don’t be surprised when you get the expected result.

Stupidity is running rampant, world wide. It’s frustrating, because the mistakes aren’t rocket science. They’re really simple stuff. People forget their actions have consequences. Let’s explore some cause/effect you should keep in mind, through the lens of current events. Think how these apply to you, so you aren’t surprised by the utterly predictable.

(This is going to be a provocative article. If it offends you, recommend me to all your friends. The provocation may cause many unsubscribes from my list from people who would rather indulge in knee-jerk responses than think for themselves. Oops!! That sentence just lost a dozen, right there…)

Ignore the competition and you’ll lose. Detroit has been whining about how they couldn’t have forseen the current downturn. In business school in **1989**–twenty years ago–we did cases about how uncompetitive the car companies were, and how they were ignoring foreign competition, etc. Anyone who lived through the gas lines and 50+ mpg Honda Civics of the late 70s and hears Detroit complain that they can’t get 30mpg by 2020 should have nothing but utter contempt for the executives running the Big Three.

If you hit people, they won’t sit there and take it. Hello, Israel and Hamas. Are you listening? Kids beat me up in grammar school. It didn’t make me like them. And if I’d been bigger and stronger, I would have hit back. When Hamas broke a cease-fire and sent rockets into Israel, what did they expect to happen? It isn’t a matter of history, or who deserved what. Just that simple question: what did they expect to happen, other than violent retaliation? (Terrorists knocked down two of our office buildings seven years ago, and we started two wars over it, with a body count that some say is over 100,000 civilians. Clearly, if you swat someone who has more firepower, they just might swat back.)

Debt is bad if not managed wisely. Learn this: if you spend $10 today that you don’t have, how can you expect to have $12 to repay it with interest tomorrow? This only makes sense if you invest the $10 with the expectation of making $12 or more. Thinking of credit cards as free money is dumb. Thinking of a $1 trillion yearly budget deficit being used to fund expenses (e.g. war) rather than investment (e.g. R&D, research, education, infrastructure repair) is dumb.

Deliberate get-rich-quick stupidity will be appropriately rewarded. Banks have a thousand-year history of how to evaluate good credit risks. When they write mortgages to people they would never lend to under prudent guidelines, they shouldn’t be surprised when it all collapses. And by the way, every manager involved should be fired. I’d rather have a high school student running the bank than someone with proven bad experience.

Pay current expenses with current dollars. People get so upset and angry about tax levels. Get over it, people. Borrow-and-spend is _more_ toxic than tax-and-spend; you have to pay back with interest. Unless you are spending on investment that will generate a return, tax-and-spend is a much, much healthier policy. In any event, tax vs. borrow is just a financing detail. The problem is *spend*. (And anyone who still believes either party is more fiscally responsible than the other needs to have their head examined. As far as I can tell, the Repubs are abhorrently irresponsible, while the Dems are despicably irresponsible.)

Don’t borrow if you can’t repay. See the previous paragraph. This applies to credit card holders, home owners, governments, and investment banks. If you borrow $100, you have to pay back $110 next year, or even more in following years. Borrowing gives you the illusion that you have a higher standard of living than you can afford. The world will happily correct that misapprehension.

People do what you pay them for, especially if there are no perceived consequences. I’ll let you find the examples for this one. Just look at politicians, lobbyists, and CEOs of failed banks. (Why, please remind me, are any of those people still there? Aren’t we supposed to fire people who demonstrate beyond a shadow of a doubt their utter, complete, and total incompetence to run a solvent business?) This applies to politicians, too. If we connected their pay and career paths to desired national outcome measures, you would likely suddenly see a whole different set of conversations in Congress.

A modest proposal for rescuing the auto industry

,

You know, I just can’t help feeling outrage, depression, and cynicism at the Big Three auto companies asking for a taxpayer bailout. Twenty years ago, we read cases in business school about how American auto manufacturers had already fallen behind foreign imports in production capability, cost structure, and market responsiveness. At the time, this was not new information.

And now, the Detroit top brass are showing up to Congress, hats in hand, for mega-billion-dollar cash flow loans that they project will last them … oh, a few months. And they’ll do what, exactly, in those few months? Why in the world should we believe that the same people who willfully ignored their competitive situation for two generations have any relevant skills, abilities or motivation to fix any of the problems? Aren’t they exactly the people we know won’t solve the problem?

Yeah, they’re saying they’ll reduce their salary to $1 until the mess is cleaned up. How generous of them. Are they taking huge stock grants instead (Iacocca did, back when he reduced his salary to $1 when saving Chrysler. That part of the story doesn’t sound as noble, so it’s often glossed over)?

Even if they’re genuinely giving up their compensation, they’ve taken home seven- or eight-figure salaries for years. They’re way, way past the point of needing another dime as long as they live. What a sacrifice, to reduce their salaries. I say they’re not going nearly far enough. How about giving back a big chunk of what they’ve been paid over the last twenty years, since it’s now apparent they did a piss-poor job at CEOing.

Startups can’t afford the luxury of incompetent, overpaid CEOs

In the startup world, we don’t have much money to pay CEOs. So we look for CEOs who are passionately committed to the success of our idea, our customers, and our company. We give them stock options, sure, but honestly, that’s not what we count on to motivate them. We count on them loving what they do enough to go the extra mile. And not in a private jet. In fact, founder-CEOs often put in their own money to fund the company and work for free until the company is proven viable.

So here’s my proposal…

I’m happy to have taxpayers bail out Detroit, but with a condition: we auction off the CEO jobs at Ford, Chrysler, and GM. The highest bidder gets the job. They receive a total compensation package equivalent to a shift supervisor at one of their plants. No stock, no options, and no bonuses. If they want better health insurance, for example, they pay for it themselves. Why would anyone take this job? Simple. It’s the chance of a lifetime to do something that almost no one in the world will ever have the chance to do: reshape an industry.

It’s pretty clear to me that the logic of “pay the CEO big money” isn’t getting competent, committed people into the position. It’s getting incompetent leeches whose main interest seems to be in feeling self-important while relieving the company of the burden of millions of dollars of vaule.

By having people ante up real money to take the position, we would quickly narrow the playing field to people who genuinely care, are excited by the opportunity, and who are being driven by the challenge or the love of the industry, not by personal greed. And remember, this isn’t the string bean industry, it’s the auto industry. There are many superbly successful businesspeople in the world who are passionate about cars as an industry. I’ll bet we would be surprised at the number of excellent candidates who stepped forth.

I’ve had enough with this absurd logic that says, “you can’t motivate people unless you pay them.” That’s bull pucky. It may be true for assembly line workers, because those jobs are mind-and-body-numbingly dehumanizing, but when it comes to C-suite jobs, I’ve met hundreds of people in those jobs whose motivations have everything to do with passion, challenge, creating, and doing a job well-done. Most of them are already rich enough that they don’t need to work, anyway.

In fact, even Warren Buffett acknowledges this. He points out that the CEOs of Berkshire Hathaway subsidiaries are extremely successful, already independently-wealthy people. They don’t need money and aren’t motivated by it. That’s why they do such a good job.

The least we can do is take Buffett’s example and get CEOs motivated by passion, superb skill, and challenge to turn around an industry that’s had none of the above for a long time.

Be Thankful; It’s All in Your Mind

Be Thankful; It’s All in Your Mind

(A Financial Tailspin sucks! Don’t compound it.)

We’re going through some … interesting … times, financially. People feel insecure, established institutions are in desperate need of bailout (funny how attractive socialism becomes when you’re the one who needs the handout) and the world economy seems to be teetering on the brink. Now’s a great time to realize: it’s all in our minds.

I mean this quite literally. Have you seen “Money as Debt?” It’s an excellent 47-minute video on where money comes from. It tells how our current system came to be. It highlights flaws in the system and offers some alternatives, all with a tasty dose of conspiracy theory thrown in here and there(*). You can watch the video here: https://www.steverrobbins.com/r/moneyasdebt

Money is literally nothing more than an idea. It’s a promise we make to deliver a good, a service, or more money at a later date. Why is Bill Gates a billionaire? Because the rest of us agree that he is. We also agree to give him our stuff if he gives us enough money. But it’s all an agreement. Because it’s an agreement, we take action on it, and it’s our actions that have real-world consequences.

“Don’t worry, be happy.”

Bobby McFerrin’s song, “Don’t Worry, Be Happy” is right on the money. At any given moment, you may or may not be able to control what’s actually happening around you. But you can always choose your attitude about it.

I was in a meeting earlier this year, discussing a key feature of entrepreneurship: the ability to see opportunity where others see problems. Just for jollies, I decided to try spending a week deliberately asking, “Where’s the opportunity here?” every time a problem cropped up. Every single time I asked the question, I was able to find an answer. Often, in mere seconds.

The housing bubble gave many time in an elevated lifestyle

Then I asked, “What’s the upside of the financial crisis?” You know, one answer is this: millions have had the chance to live far beyond their means for many years. While we don’t much care for the consequences, at least they got to enjoy a standard of living they couldn’t have otherwise afforded. I’m serious about this, by the way. Of course it’s natural to be upset when losing your job, your credit, your home, or your car. But being upset won’t change anything. It will just make you feel bad. You can also choose to feel thankful that you had those things to begin with.

Be a Thanksgiving Gratitude Geek

Are there problems in the financial world right now? Yup. And we can live through those problems giving all our attention to the downside or giving all our attention to the opportunities and the upside.

My suggestion to you: spend this Thanksgiving dwelling on the upside. Ask yourself, “what do I have to be thankful for?” and make a big long list. Help everyone around you do the same thing. They say what we need is more optimism in the economy. Optimism isn’t something “out there,” it’s one of the few things we have control over. So let’s exercise that control and see the glass as 10% full, not 90% empty. Because we can’t always change the outside reality, but we can certainly choose our inner reality.

Have a Happy Thanksgiving. Here are some of the things I’m thankful for:

  • Friends and community
  • Hot running showers
  • Democracy
  • My four-year-old iPod that still works great
  • The chance to teach high school students at an after-school program
  • Zipcar
  • My podcast
  • Friends and community

(*) I love conspiracy theories! I always like to remind myself that just because someone’s paranoid doesn’t mean the conspiracy doesn’t truly exist.

Nightmare or Hope? Your decision.

, ,

You have only yourself to blame for the quality of your decisions. Improve it. Start today.

Are you committed to becoming a spot-on decision-maker who can make great decisions that actually guide your world? Because chances are, your personal decision-making process is no guarantee of that.

We’ve just finished two years of hate-filled, vitriolic lies and attacks. Most of us were swayed, one way or another, by the election rhetoric and talking heads. One thing is certain: few of us went to the candidates web sites, read their platforms and policies. Even fewer then consulted a range of economists, industry professionals, and others to figure out whether the policies were realistic, whether we have any data on that kind of policy, or whether they would even lead to the kind of world we want.

Pretty much all of us relied mainly on charisma (or lack thereof) and ideology (or lack thereof) and knee-jerk logic to make our decision. And yes, this means you, my above-average-intelligence friends! Intelligent people seem to believe that they understand things better, even though when it comes to politics, there’s no reason to believe that. Smarts are no defense against relying on shallow, biased media reports and cherry-picked statistics.

The challenge: improve your decision making!

Here’s my challenge to you: actually learn from this experience.

Whether you’re feeling fear, anger, hope, or happiness today, grab a piece of paper. Write down all your fears. ALL of them. If you are convinced our President-elect is a terrorist whose greatest desire is to bring down America, write that down. If you’re convinced he’ll raised your taxes, write that down. If you’re convinced that taxes a worse financing decision than debt when you’re running a deficit, write that down, too.

If you believe that America will become a hotbed of corrupt moral practices, write that down.

Now write down your hopes. If you believe we will magically become debt-free in an economic prosperity paradise brought on by a single change in President, write that down. If you believe that America will become a multicultural paradise of acceptance and love, put it on paper.

For both your fears and your hopes, jot down the basis (or lack thereof) you have for those beliefs. You are the ONLY ONE who will see this, so be honest. Expect to have fairly little evidence for any of this.

You know now what you’re projecting on this candidate, good or bad. You could be wrong about a lot of what you’ve written. In fact, you probably are. And you’ve done this with every election you’ve ever voted in.

Now is the time to learn, instead.

Arrange to re-evaluate your decision-making in 2012

Head over to TimeCave.com, and schedule an e-mail to yourself to be delivered in July, 2012. Type in everything you’ve written. Also paste in the following debrief form. Then in 2012, you may be able to make an even higher-quality decision than you did this year.

DEBRIEF OF MY 2008 DECISION
1. Where was I right in my ability to project the candidate’s results?
2. Where I was right, how much of that was due to the candidate’s efforts, and how much of that was external factors that the candidate couldn’t control?
3. Where was I wrong?
4. How much of *that* was under the candidate’s control?
5. Where did I get my information about the candidate?
6. Am I using the same or different sources this time?
7. Do I know how high-quality the sources are? Why do I believe they are high (or low) quality?

When you receive the email in 2012, spend some time thinking through the questions. You may discover that your fears were misplaced. The world didn’t come to an end. You may discover that your hope was a bit overblown. The world didn’t become paradise.

Either way, you’ll discover that you can find ways to improve your decision-making in 2012. That’s a good thing. You will begin to be more nuanced and more thoughtful in your vote, which is one of the most important decisions you’ll ever make.

And why not start now? Campaign 2012 starts in about three weeks…

What problems are markets the answer to?

I am a proponent of free markets for the things that markets are good at. Markets are great at pricing things whose future attributes are relatively predictable by the market players, and that don’t require a decision-making time horizon greater than the market trade horizon. For example, markets are great at pricing stocks, because companies are ongoing entities and the market can judge performance over time (both past and possible future) to do the pricing. Furthermore, it’s not critical to society (or wasn’t prior to the current mess!) that any one company continue to exist.

When it comes to something like oil, however, I believe markets are a really bad mechanism. The time horizon for market pricing is far, far shorter than the lifespan of the world’s oil supply. So pricing becomes based at best on marginal cost to produce, rather than on anything relative to the actual value to society. For example, according to the book “The Omnivore’s Dilemma,” about 1/3 of the world’s population only gets fed because we have genetically modified corn that requires special petroleum-based fertilizer. I would suggest that the market price of oil (to the extent that it’s a market and not simply OPEC’s arbitrarily-set price) doesn’t include any component that has to do with the future of the world’s food supply. Most (all?) market players just don’t know enough about the full supply chain of which oil is a part to price it properly.

This, in my mind, is where Government comes in. I consider the role of government to adjust the playing field so prices and practices result in what’s best for overall society long-term. Government is the only entity that can change things around to align the individual incentives (“how do I get rich?”) with the community incentives (“how do we do what’s best for us as a society?”)

Sadly, I’m not sure there’s anyone in Government who thinks that way. As far as I can tell, most politicians in Congress believe their job is to grab as much of the common pie as possible for their constituents, rather than representing their constituents in determining how to spend our community-wide fund on projects to benefit the entire community.

Global meltdown: Bush saves the day! (in 40 minutes!)

Meetings! I just love meetings … no, I don’t. I hate meetings. But perhaps that’s just because I’m no good at running them.

According to an MSNBC article today, Bush met with the leaders of 20 countries Saturday night. To quote the article:

“After the almost 40-minute meeting and his six-minute statement, the president left the White House for a nearly two-hour mountain bike ride in the nearby Virginia woods.”

Jeez. I really wish I had his meeting facilitation abilities. At a meeting with 20 world leaders, all of whom are undoubtedly known for their keen wit, brevity, and ability to grasp huge honkin’ financial issues in seconds, it would still take me 10 minutes to do introductions. After all, I like to spend about 30 seconds having each person state their name, the country they lead, and their form of government (“Parliamentary,” “Representative Democracy,” “Puppet Dictatorship,” etc.)

That would leave only 30 minutes for the meeting itself, clearly not enough time to lay out the mess, explain the economic issues and how policy can resolve them, etc. Whatever his other problems, it seems Bush is able to resolve a 20-country, unprecedented global financial meltdown in 40 minutes, just by talking for six minutes… astounding! Perhaps it’s the two-hour bike rides? They send enough oxygen to his head that he can think super-clearly.

This is what passes for world leadership.

We have the most advanced technology in history and the ability to feed every man, woman, and child on the face of the planet. Yet we’re still plagued by poverty, famine, gross wealth inequality, and violence. Our human abilities simply aren’t up to coping with issues of this magnitude. We’ve created systems so complex that even the major player (e.g. Paulson) can’t understand them. And our leaders? They’re as clueless as the rest of us, it seems.

So this whole meeting brings up only one major question: Where can I get a job that lets me take two-hour bike rides while the country—ostensibly my responsibility—melts down around me?

My biggest concern about Bush in 2000 was that every company he’s ever run, he’s run into the ground. That concerns me. Past behavior is, alas, the best predictor of future behavior.

“Shrub,” by Molly Ivins, recounted the messes prior to his being elected. At the time, I imagined he and his policies wouldn’t be the best for the country, but I honestly didn’t believe they could screw up an entire country.

And to be fair, he and his policies only exacerbated structural problems that had been in the works for years. Heck, Clinton’s the one who lowered Fannie Mae mortgage standards allowing the subprime mortgages to start to take hold. And the financially illiterate actually took out the mortgages. And the further financially illiterate (the financial and banking sector, as it turns out) bought the repackaged mortgages.

But at the end of the day, it’s the leader who needs to be seeing farthest. As is common knowledge by now, they didn’t bother to read the report entitled ‘Bin Laden Determined to Attack Inside the United States.’ And even though such minor folks like Warren Buffett have been warning about derivatives for years, their market ideology got well in the way of noticing that the numbers didn’t add up.

There’s not much I can do about it from where I sit. Except vote.

Why the finance industry should accept much more blame for the crisis.

If what we want to do is point fingers, there’s plenty of blame to go around. At the end of the day, though, I hold the creators of the securities as being far more responsible than the home buyers.

Professionals should be held to higher standards

First off, the financial companies are supposedly professionals. That means they understand far more about how all this works. Bluntly, I hold them to a higher standard. If they’re going to take home billions in pay, I expected them to think through their investing decisions and security formation very, very carefully.

The financial community has gone wild in abstracting away risk and reward from underlying securities. And they’ve gotten very, very rich from that. But they’re professionals. If they buy a mortgage-backed security and are surprised that people can default on the mortgage, then they need to take full responsibility for that. Period.

Stocks and bonds and mortgages all represent actual entities in the world who are actually doing stuff. If you remember this, you can make intelligent decisions. Warren Buffett became the richest man in the world by doing this intelligently and sharing with everyone who cares to listen how he does it. When others in the finance community choose to ignore that underlying reality because it’s convenient, I can’t have much sympathy when the house of cards collapses.

(Upcoming crisis: if they buy a credit swap from someone who can’t actually guarantee the underlying loan, then again, they absolutely deserve whatever they get. Especially if they’re the ones who lobbied for non-regulation in the credit swap market!

My solution involves using eminent domain to reclaim every penny and every asset paid to every employee of the i-banks who created, traded, and sold these entities. then the taxpayers pay for the remainder of the bailout. Aren’t you happy I’m not in charge?)

Selling a financial product to numerically illiterate customers is bad business

Second, innumeracy. You can say all you like that it’s the dumb mortgage holders who bought dumb mortgages. And I agree. Only they weren’t dumb; they were simply ignorant. We don’t teach people anything about financial literacy in school. Even when I got my MBA, it took quite a while for the group of very bright (but non mathematical) students in the room to understand how to calculate simple financial concepts like “net present value.”

Most people don’t really understand the math of a variable rate mortgage, and certainly aren’t good enough at budgeting and forecasting future scenarios to realize what is and isn’t a good financial decision.

Again, the mortgage underwriters were professionals. For them to say, “we sold these to people who couldn’t pay, it’s their fault,” is simply absurd.

If you’re in the business of making loans and then carrying those loans on your books, it’s YOUR responsibility to make sure the loans can be paid off! Not because you owe the customers anything, but because Accounting 101 GAAP rules say that you don’t count on an asset’s value unless you’re highly certain it’s going to be worth that much.

If a bank writes a mortgage and chooses to relax its standards under the theory that it can sell the mortgage before the borrower defaults, then the bank is being irresponsible (not to mention implicitly defrauding the folks it sells the mortgage to).

The “2nd tier” buyers can also be smart about what they’re buying

The 2nd-tier people buying that mortgage from the bank are buying an asset they don’t understand. They’re free to ask for a payment guarantee from the bank to accompany the mortgage. They didn’t, and are then surprised that the default rates were higher. (These people clearly missed the whole Junk Bond crisis that had all these same elements.) If I have to buy insurance on my house in case there’s a fire, then the 2nd-tier buyers should also be smart enough to demand the bank guarantee the default rate that they claim their mortgages will produce. Or if the banks won’t do that, then the 2nd-tier buyers should at least look at the mortgages to make sure they’re as high-quality as the bank believes them to be.

Rating agencies don’t exempt finance professionals from due diligence

“But the rating agencies…” you begin to cry. Screw the rating agencies, people. If a buyer of a mortgage-backed security decides to trust a rating agency’s evaluation of a security that everyone admits is hard to value, then again, you’re consciously deciding to allow your business’s integrity to reside in the hands of the rating agency.

You could take a random statistically valid sample of mortgages and hire a bunch of interns to re-run credit and income checks to make sure the mortgages are sound. You could further ask whether you believe the borrowers can still repay after rates increase. It’s called “due diligence” but it requires admitting that there’s a physical reality that might get in the way of your free money-printing machine. It also requires doing legwork in the physical world, which the finance people were understandably loathe to do.

It wasn’t the consumers who came up with the idea that these mortgages were affordable

And lastly, the marketing of these mortgages were designed to persuade people to take them out. Well, it worked. And for banks and lenders to be shocked that their marketing worked, and then further shocked that their own lax standards put them in a position where their borrowers couldn’t repay is just hubris beyond belief.

So yeah, many consumers should have made better decisions. But they’re not professionals, they’re not financially literate, and they’re being subjected to $100,000,000 of marketing and sales tactics.

The mortgage writers and derivative creators are financially literate professionals who chose to ignore their own historical underwriting standards and sell mortgages that couldn’t be repaid. They then took these bad mortgages, repackaged and resold them to other institutions that didn’t bother to do real due diligence.

To me, the case is clear: if I have to blame someone, I’ll blame the industry of “professionals” who ignored the financial realities of their customers, invested in bad quality securities, eschewed due diligence, and generally took the profits when times were good and are now trying to shove away responsibility for their own decisions now that times are bad.