RISK MANAGEMENT

FOREWORD

In the American culture, risk is the pathway to success,a quick means to achieve the American Dream. Quick success has become the all consuming goal in America and the "failure consideration" of risk has become a minor concern. As a result management decisions are often based more on luck than on good judgment. A thorough understanding of risk management is needed to turn business enterprise from a gamble and depression to an investment and stability.

RISK MANAGEMENT

A risk is a venture into the unknown. Without risk, we would never go anywhere or learn anything new.

Risk brings gain and it brings loss. The greater the risk, the greater the possible gain; AND the greater the possible loss.

We take risks most of the time. We take a risk whenever we walk across the street or drive a car. If there are no cars coming, the risk in crossing the street is minimal (The gain is to reach the other side, the loss would be an accident that prevented one from reaching that goal) If the street has high speed traffic, the risk would be greater. If a car is driven on a crowded highway at legal speed, the risk may be small. If the car is driven on a crowded highway above legal speed with faulty brakes, the risk may be great. Steps can be taken to reduce risks. One might reduce the risk of financial loss, for example, by purchasing accident insurance.

In any action involving risk, all conditions should be considered and weighed; and a decision should be taken to determine the action that is to be taken. This assessment and decision is called RISK MANAGEMENT.

In our democratic, free business enterprise system, risk is the key element. Proper management of the risk increases the possibility of gain and decreases the possibility of loss.
Success to some extent also depends upon luck. Luck is the element over which we have no control.
However, it has been wisely said that the better the risk management, the better the chances for good luck. A risk taken based solely on luck is a gamble. Risk based upon proper risk management is called an investment.

Our Free Business Enterprise system is based upon Supply and Demand. Since it is a Free system,
demand is unknown and consequently Free Business Enterprise System is a system based upon risk.

A VIEW AT 85

Our government is so complex that it is difficult to select one issue but the government subsidy of Banks with a near zero interest rate to secure funds has resulted in a near zero interest rate on personal bank savings accounts, and this is causing a major culture change in our society.

The "old time" moral principle of work hard, save your money and build for the future is becoming as absolete as the horse and buggy. We are now tempted to indulge ourselves to the extent of our credit rating and have, what we hope for a future, now.

It sounds ideal and it might be ideal if everything turns out the way we plan it to be, and if there will not be another 9/11, or costly war or two, or more Barry Madoffs, or a credit crisis or .......
Such an ideal set up could reduce personal responsibility or anxiety for everything. Businesses could exploit each other and those who failed could be bailed out by the government. If we eliminated taxes we could simply keep our policy of deficit spending until an asteroid collides with earth and somehow God could start the whole thing all over again.

The point is that unlimited, irresponsible credit eliminates the need for saving which discourages the practice to work and build for the future. Perhaps an overemphasis on the economy and things
is resulting in a demphasis on the journey and our responsibility to others. The Goverment should stop this cheap credit, windfall profit to Banks!

REPUBLICAN TRANSPARENCY

The embarrassing reactions of many Republicans to the passage of the Health Bill left little doubt in any ones mind that the current Republican Party will do anything to try to win. Their childish decorum in yelling insults and self fulfilling prophecies on the floor of the House did not look like a party dedicated to morals and high standards. The party of independence did not express one individual thought in the historic debate that night. Their loyalty was to the party, not the people.

What has happened to the Republican Party? The former strong defender of the entrepreneur and private business has ended up bankrupting the economy and begging for a government dole to survive. The Bush/Cheney administration with their "yes man" leadership mode has evidently become the party standard operating procedure. Lies and deceit (ie weapons of mass destruction, etc) appear to be the carry over weapons to regain control of the country. Politics, not the welfare of the country and its citizens, is their number one goal. Win at any cost. Democracy be damned. The will of the people (the republican people that is) must prevail to the last letter. The leadership would not even consider debating changes. They would only consider a "start over" doing things their way. They were sure that their previous tried and proven method of lies and deceit would inflict a political defeat on the Democratic Party, and that was the goal. There was little thought for the 32 million without any insurance and those who could not get insurance because of preexisting conditions. They did not want the government to reduce insurance companies profits by forcing them to pay for costs that went beyond their arbitrary limits. Their approach was to persuade those who didn't know any better that voting for health care meant voting for abortion, which was a blatant lie. "Don't let the government take over your life," they cried. (it's better to have the unregulated insurance companies determine what care will be paid for, which of course dictates what care will be given.)

STIMULUS, ANOTHER NAME FOR MONEY SCHEME

Leaders of the "Trickle Down" economic policy decided that they could make a bundle in the housing market if we had a housing boom. There were a lot of people who wanted expensive housing but there were limited funds available. They figured that if these people could get credit they would start buying. The first thing to do was to get banks to give sub prime loans. (These are loans that are higher than the collateral backing the loan.) To encourage the banks to make these loans the two "Mac Agencies) would buy the loans from the banks, giving them a commission without any risk. Both good loans and sub prime loans were sold to the Macs. When the the Sub Prime loans overwhelmed the Macs, Goldman Sacks and some lesser firms packaged the loans into huge confused bundles and sold them to AIG, charging a hefty commission of course. When the mortgage payments stopped coming through, The Mac's stopped receiving their share of the payments and AIG stopped receiving their share as well, and when AIG ran out of available funds to pay off on the failed mortgages, the crisis started. Usually when there is a foreclosure on a failed mortgage, the sale of the property reimburses the Insurers (AIG ultimately in this case) and the loosers are the mortgagees who failed on the loan. In the case of the sub prime mortgages the sale of the property was much less than the amount owed, and both mortgagees and Insurance companies suffered the loss.

The government decided that the Insurance Company (AIG in this case) was too big to fail and Goldman Sacks either confirmed this or advised them of their decision. Immediately, the Government Official in The Bush Administration that used to be with the Investment Companies got together an enormous STIMULUS package to bail out the insurance companies (AIG in particular.) Reportedly, AIG was then able to pay the bonuses owed to their officers and also to pay Goldman Sacks for their "services"

When the new administrtion took office, the Stimulus action continued with the new Secretary of the Treasury (who also was a former officer in the Federal Reserve System) promoted the strategy that the financial institutions were too big to fail. As a result, the bail out continued; bonuses have been paid, and Goldman Sacks and some lesser investors have made billions while Main Street continues to be in Crisis.

In all fairness, some other things have been done to ease the pain on Main Street but continued
Stimulus (or pay out) of the financial investment companies who caused the crisis, will not solve the problem. It will mostly just add to our enormous debt.

BACKBONE OF AMERICA

The government civil servant workers have recently been called the "Backbone of America." The reference is to the Policeman, Firemen, Department of Public Works Workers, Public School Teachers, Social Service Workers and the thousands of workers in the many government agencies that fill the needs of the public from issuing driver's licenses to inspecting the meat we eat to make sure that it is fit for human consumption. These people truly provide the vital services that are needed for the civilized existence we have come to expect. For the most part, they are people who have dedicated their lives to serving the needs of others. They are human beings and of course they have selfish desires and being American they are competitive, but they tend more to be cooperative and socialistic.

The people in the private business sector on the other hand tend to be most competitive and self centered. They are the people who consider themselves independent with their idea of the "American Dream" to gain riches and rise above others. They also are human beings and of course have compassion for others in varying degrees. They produce the fuel that makes America run, but the thrust is more for personal achievement than it is for the general welfare of others, and they tend to be more conservative in a political sense.

Then there is the military. They have great self pride of course, but they are dedicated to their country and its people. They are prepared to make the supreme sacrifice if necessary. They are
outwardly independent and more conservative in a political sense but basically cooperative and
socialistic in nature.

All three groups might lay claim to being the "Backbone of America" and within each group there
are individuals who are indeed the backbone of America. These people are distinguished by their attitude. They strive to be self sufficient yet acknowledge their interdependence on others. They have self pride and struggle to become all they are capable of being, but they can be cooperative and believe in fair play. They are the kind of people that most religions used to try to develop. The label, Backbone of America, is an arbitrary title and is determined by the individual or individuals expressing the label. Our decision is that the title belongs to the Government Civil Service Workers.

BALANCING THE BUDGET

When government or a government agency spends an amount equal to the amount they take in, they are said to have a balanced budget. When the government or a government agency spends more than they take in, they are said to have a deficit. To resolve a deficit budget,a government or a government agency can 1)increase taxes, 2)borrow by issuing bonds, 3)cut spending or 4) print more money.

If one were to assume that the budget is an honest statement of the amount needed to run the government or a government agency, the pragmatic way to balance the budget would be to raise taxes.

If the majority rejects raising the taxes, a cut in spending may be the answer. The question "What to cut" then becomes the problem.

Step 1 would be to review the new expenditures proposed and eliminate those that are not absolutely necessary for the operation of the government or government agency.
If the budget is still not balanced,

Step 2 would be to review the old expenditures approved in last year's budget. (Old expenditures would be salaries and costs at last year's levels. Raises and increase in costs would be considered along with other new expenditures)
If the budget is still not balanced,

Step 3 would be to to either print new money or borrow more money. To print new money would cause inflation and the people would have to spend more money for their purchases in the coming year. To borrow money would postpone the cost (plus iterest) to the future.

Borrowing would quite likely postpone the costs which would be greater in the future and perhaps unfair to the people in the future.

Inflation would result in the people sharing the extra cost according to the amount of their purchases in the coming year.

Increased taxes would result in the people sharing the extra cost according to the amount of their income in the coming year.

What do you think would be the best way to balance the budget?

MIND OVER MATTER

IN THE CASE OF MIND OVER MATTER; IF YOU DON'T MIND IT DOESN'T MATTER!

Back in the 1980's, Bankers and Accountants were the most boring but most honest and respected people in the free world. They were the guardians of our money in business and the check on the government. "Full Disclosure" was a sacred trust; cover up was a deceitful crime. Somehow since then, the two, working with global investors, were responsible for the most outrageous plunder since Aegis Khan.

To understand this deceitful fraud, one would have to understand the accounting equation. It is a simple formula - Assets minus liabilities equals net worth. In layman terms this means "What you own minus what you owe equals what you are worth." This is important in finance because nobody can borrow more than they are worth. Accountants prepare statements called Balance Sheets that clearly, and honestly report the Net Worth of a business or government. (Government reports are a little different and basically report how much is received {Income} and how much i paid out.)

For example, if a government had a budget that listed 5B of income and 5B of Appropriations (money to be paid out) it would have a balanced budget. If only 3B were collected in taxes, fees, etc, the accounting report would show a 2B deficit. However, if the government made a "Dervee" with a
bank to receive 2B for the income on Port Shipping Fees for some period of time in the future, and this Dervee was recorded as income; the report would show a balanced budget of 5B income and 5B spent. The responsibility (liability) to pay the Bank on the Dervee could be burried in other official documents. Nothing illegal or unethical here as long as full disclosure and transparancy are not part of your ethics.

Accountants and politicians in government roles sold out to "big business" well before "Dervees" came on to the scene. Accountants deferred some expenses and capitalized others to manipulate the profit figure to allow excessives bonuses to Corporate Officers who hired them. To look at another simplified example, If Company A had 5B in Assets and 1B in Liabilities, one could compute their
net worth at 4B. In 19XX, Company A only made 1M in profits and decided to hire a new CEO who hired a new accountant and signed an agreement to increase profits and that he would receive a bonus of 20% of any profits over 1M. During the year the Company hired an adverising company to run a campaign for 1B greatly increasing sales. Total sales for the year were 2B with operating expenses of 1 1/2 B, and Advertising Cost of 1B, decreasing the total Assets by 1/2 B and an operating loss for the year of 1/2B.

The CEO and Accountant decided to capitalize Advertising Expense as Goodwill (An intangilbe Asset) at 1B which increased Assets by 1B, decreased the operating expenses by 1B and changed the 1/2 B loss to a 1/2 B profit, giving the CEO a bonus of 80M (500M minus 100M X 20%

Financial Statements before "innovative" accounting.

Assets 4B 500M Liabilities 1B O00M Income 2B 000M
Oper Exp 2B 500M
Net Worth 3B 500M LOSS 500M


Financial Statements after "innovative" accounting. Income 2B 000M
Oper Exp 1B 500M
Assets 6B 420M Liabilities 1B 000M Profit 500M
CEO Bonus 80M
Net Worth 5B 420M Net Profit 420M