Self-Identity Recognition Not Segmentation: Relationship between Mortgage Backed Securities Market and Segmented Assimilation Theory (My Response)

The United States of America was founded upon the principles of individual freedoms and collective interests to escape historical oppressions. On census data and most other documentation, citizens and fellow countrymen (and women) self-identify for purposes of monitoring equality, fairness, and non-discriminatory practices guaranteed in the Constitution with Amendments and the evolved, supportive constitutional laws. Given such, it is important to gather the information not for separation but for inclusion.

Segmented Assimilation Theory, in my opinion, assumes that generational success can be achieved through a self-identified community pooled interest outside the collective US society. Aside from the contradiction of terms (segmented and assimilation), my position is that humanity and citizenship are not successfully segmental. Differences such as opinions, generational origins, race, and religion at this level can coexist. It is the original vision of the United States of America and its continued progress toward collective individual constitutional freedoms. History has shown that increased integration reduces discrimination, society trends toward greater equality, and provides a check on fairness provided that constitutional freedoms are upheld. Additionally, most successful socioeconomic development requires investment and capital levels which exceed the resources of a segmented community to provide benefits for the entire country.

Pooled risk and prosperity have been essential to the development of the U.S. economy and society. Inclusion has always increased overall prosperity. This concept is found in the insurance industry, mutual fund investing, and social security. The mortgage backed securities (MBS) market initially operated on this basis and the separation-dilution of pooled risk and return created the financial crisis. Mortgages from properties across America were pooled into large securities (bonds) sold by banks onto the global market. To increase the value of the securities, the collateralized mortgages were separated into tranches (risk and return segments) thereby increasing the sales price of the MBS and providing more income to the banks. The increased return expectation (higher mortgage interest rates) attracted more buyers from around the world which increased the supply of funds available for mortgages. More mortgage backed securities (MBS) were created as more banks offered the products. The tranches increased bank financial performance without an adequate impact assessment of the proportional separation of the risk profile.

Banks and investors with the ability to properly assess the riskier securities and market conditions bought insurance (credit default swaps) with an improperly, low priced premium. When mortgages began defaulting, holders of the MBS began losing value as default rates exceeded projections. As the value of the securities fell due to excessive defaults, there were no additional buyers for securities of assured risk of loss (out of the money call option of a deflating asset). Banks with purchased insurance began calling in claims that exceeded the “assessed risk pool value” and total premiums paid. This collective call on the credit default insurance policies caused liquidity issues for the insurer(s) along with the potential reputation damage to the U.S. financial industry for investment losses of workers' savings from around the world.

Essentially, banks around the world purchased American mortgages (using, in some cases, retirement funds from their country's workers) fueling the accelerated growth and excessive investment of the housing market. The securities were segmented which diluted “risk sharing” to increase value (bank income and cash flow). This financial strategy can be effectively executed provided that necessary control evaluations and diligence are in place to properly identify the risks. The bailout of banks and insurance provider was essential due to the source of some funds used to purchase the mortgage backed securities.

The separation of pooled risk and return evidenced in the MBS segmentation crisis is similar to the issues I associate with the social science Segmented Assimilation Theory referenced in a previous post: Gatekeepers and Modes of Incorporation. Following a social philosophy of Segmented Assimilation Theory, in my opinion, will lead back to the failed separate but equal policy of the past. The common issues between the social theory and financial segmentation include:

• Equal access to development resources (capital allocation problem);
• Improper assessment of risk due to the lack of pooled interest;
• Imbalance in capital accumulation to certain investments creating market "bubbles";
• Improper capital investment decisions due to underestimated risk and return.


An economic agenda for Shared prosperity is essential for healthy societal development.

The Great American Business Incubator

As America and the rest of the world work through the current recessionary period, reflection back on the methods of development which created our strongest economic base is necessary. Contrary to some positions communicated on TV talk shows, the government has historically always been involved with the vast expansion of economic developments beneficial to our society. If the government is not considered one of the initial “investors” in the technological development with infrastructure, funding the university system, and providing grants for research, then it is the creator of the evolving American marketplace. Alexander Graham Bell and Thomas Edison are credited for the telephone and electricity, respectively. However, it was the national installation of the wire line and electric grid that provided for the product application with benefits of immense growth to society. Aside from the current struggles in Detroit, the highway and interstate infrastructure really contributed to the success of the automobile industry. The same argument can be made for the railways and aircraft industry with airports.

The necessary market developments that induce mass adoption of a new technology or invention do not always compute in the financial analysis from business (ROI, ROA, Payback, and Cash Flow). It is the forward looking recognition and contribution of the government that make the difference. This is why it matters where and how the government spends its money. Wise investments for one industry’s infrastructure could possibly spawn two or three other industries. When industry will not spend money and invest during times of declining employment levels, it appears to me that two options are available: 1) Government makes the investment [possibly creating and developing the business with unemployed business people for later sale to other investors] or 2) Change industry rules and standards for the current businesses to invest in change to adopt.

Many good ideas have been published on where best to spend stimulus to create jobs. I do not intend to duplicate so any repeat is coincidental with similar thinking. The following is just a personal list of items of where I think the country should focus for development and I will attempt to place in the order I believe to have the most immediate impact:

1. Construction, repair, and inspection of the nation’s bridges and roadways.

2. Small Business Lending institutions for grants to business creation by entrepreneurs not served by the current banking system (An addendum to the SBA activities and agenda).

3. Sponsorship of the razing of abandoned buildings throughout the country not suitable for future usage. Although not the same emotional value as constructing a new building, it will reduce despair by passersby and remove the negative image. Maybe Hollywood would be interested in the destruction of some buildings and could offset costs [referring to abandoned industrial buildings no longer in use].

4. Sponsorship for the installation of electric charging stations for current and upcoming hybrid automobiles. Hotels and motels appear to be obvious locations but maybe there are other ideas to consider.

5. Introduce regulations and standards for safe, efficient, and universal maintenance of medical records with patient portability.

6. Adopt the standards conducive to the development of a “green” infrastructure:
a) Increase vehicle fleet mileage standards;
b) Improve fuel efficiency and gasoline octane standards;
c) Pollution limits, adopt "cleaner" coal standards, improve electricity generation efficiencies (similar to average fleet mileage standards – reduce average generation costs including cost of pollution).

7. Continue investment in university and college research toward targeted fields such as “green” energy, non-biodegradable plastics alternative, targeted biomedical projects, and new uses for the future abandoned telephone wire lines.

I am sure there will be other opinions because not many want to change the current way business is conducted until the model does not earn as expected. However, when the model stops earning as expected it is usually a sign of the end and is often too late to avoid dissolution or restructuring. I also realize that financial measures such as return are not totally applicable to management of government affairs, but another way to look at the arguments against government involvement is to question whether or not industry has returned in taxes the equivalent to expected return on investment/equity for its benefit from infrastructure development and maintenance.

Retaliation and Hackers

reference update 5/7/2013: Statements are a reference to digital telelcommunications connectivity internet technology.

Not everything I say is popular in this part of the country. I am certain that I have recently been hacked because information and spellings in some documents and emails have changed. For some reason(s) to be revealed, someone has devised a strategy of discredit through spelling/grammar. It reminds me of a line in the John Mayer song "Waiting on the World to Change."

When you own the content and distribution (personal modification) of information
They can bend it all they want.

Corporate Structure and Governance

Reflecting on recent corporate failures, Banking and other industry, the charges of accounting fraud make me think of the current environment and how improvements in management structure could help mitigate some occurrences. Considering the enormity of the impact that finance has on the economy within all industries, there appears to be more tolerance for ethical lapses and sole autonomous leaders. Current incentives have encouraged immediate results at almost any cost. The end result in these cases has been the enrichment of the executive class in the short-term, growing societal inequality, and corporate failures endured by the rest of the employees in the longer-term.

Some failures that come to mind include Enron, WorldCom, Lehman, and AIG. While the causes of failure are quite different among various industries, banking has a greater economic impact in terms of asset losses. Moreover, the reasons for failure among the other industries differ dramatically and in a 2004 paper, McKinsey and Company suggested changes that would improve corporate governance. The report is entitled “Investor perspectives on corporate governance – a rapidly evolving story” and lists 6 themes of importance:

1. Rapid extension of worldwide governance codes;

2. Increased focus on board professionalism;

3. Selective redesign of corporate leadership roles;

4. Re-assessment of corporate reporting needs;

5. More intensive external scrutiny of governance; and

6. Increased attention to corporations’ impact on society.

An addendum to the McKinsey list, or even within, I propose a greater check/separation of the CEO-CFO relationship. The CFO would also report to the Board of Directors through the Audit Committee to minimize the possible influence to alter the appropriate reporting of performance results and financial/strategic risks. This organizational structure is no different than the Matrix Management structure used by most large corporations usually at mid- to low-level management and can be applied at the Executive level. The BOD’s Audit Committee would serve as a steering council to ensure effective financial reporting recognition of activity and risks in addition to improved strategic decision making. However, no corporate hierarchical, structural change will matter if no one knows the true value or risk of the assets on the books (mortgage backed securities).

Current State of the Union?

Here are a few excerpts from American Theocracy by Kevin Phillips, a former Republican Strategist, published in 2006. I find his assessments compelling and insightful into the current political protesting and outcries.

In Fundamentalisms Observed, Marty and Appleby had explained the “family resemblances” between the different strong religions around the world. To begin with, “Fundamentalisms arise in times of crisis, real or perceived. The sense of change may be keyed to oppressive and threatening social, economic or political conditions, but the ensuing crisis is perceived as a crisis of identity by those who fear extinction as a people.”

Ch 6, The United States in a Dixie Cup. P205.

Bruce Lawrence emphasized five symptoms of fundamentalism. Among them were a predilection to impose God’s will – the one true faith – on other peoples, an intolerance of dissent, and a central reliance on errant scripture for ideology and authority. These, too, seemed characteristic of the post-September 11 White House.

Charles Kimball identified five principal perverse fundamentalist tendencies: (1) claiming absolute truth (when “people presume to know God, abuse sacred texts and propagate their particular versions”); (2) seizing upon an “ideal time,” as in claims for imminent cataclysms or fast-approaching end times; (3) fostering blind obedience; (4) using ends to justify means (as deaths or acceptance of collateral damage); and (5) pursuing “holy war” as in Crusades (and to some extent the 1991 Gulf War).

Ch 6, The United States in a Dixie Cup. P205.

The Southern Baptist Convention, as we have seen, is regarded by some as more or less the unofficial state church in Dixie… Moreover, since the 1990s the SBC’s moderate-liberal opposition faction has criticized the dominant conservatives for getting too close to Washington and soft-pedaling the church’s historic commitment to separation of church and state.

Ch 6, The United States in a Dixie Cup. P213.

The SBC, Mormon, and Lutheran churches are the three Protestant denominations in the United States with the sort of strong regional preeminence that in itself breeds a powerful clerical closeness to everyday community governance and political authority. It is in their core strongholds … that U.S. churches have their highest ratios of adherence. Community pressure and conformity would be substantial.

Ch 6, The United States in a Dixie Cup. P214.

A cultural adjunct to these ambitions, end-times theory and literature, with its audience of fifty to one hundred million Americans, emerged as a big business in the United States during the 1990s, turning dozens of fundamentalist and charismatic preachers into multimillionaires, thanks to their best selling books, video, televised sermons and Bible hours, TV stations, and broadcast networks. Not surprisingly, most are ardent supporters of tax cuts and reduced economic regulation, as their faithful flocks concentrate on morality, salvation, biblical guidance, a possible rapture, and the countdown to Christ’s return. These believing constituencies, in turn, want more of their “government” – over whatever time may be left – to come from religious institutions…

Ch 6, The United States in a Dixie Cup. P217.