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Monday, January 14, 2008

"The Case of the Punk Driver"

Imagine yourself the parent of a young teen. You have enrolled that teen in the best of driver training programs. Spent additional time riding with that teen in teaching to merge to the speed of I90. Maybe occasionally clutching the door handle. You have been lucky. No accidents. And today is the day of the driver test. The great news. Your child has passed. You are both relieved and anxious. You make the insurance call and add the driver and put the additional premium on your Mastercard or Visa. Now you are ready for the trip home. You decide to let the new driver drive.

As you leave the city limits, and get up to speed on HWY 14, or HWY 90, ( insert your own highway here) you notice that something has changed. Your new driver accelerates up to 85 mph and ......very quickly. And seems almost giddy in the way and style that he/she changes lanes. Finally. Noting a little chest pain. You simply say: "Please pull over. I will drive the rest of the way"

All the way home, you ask that young driver what was in his/her mind. The youngster simply says, "Dad, you have the risk insured. What is the big deal? We have it covered!!!!!"

You then go over the simple truth, one that all of us know....maybe......that paying auto insurance for the risk, is not a substitute for prudent driving.

This mistake has also been made in our banking system--in our mortgages, in our securities,.....well in everything. The banks simply took some low grade mortgages and got insurance on them, and then marketed them.....with additional leverage....so that while the junk was 10%, with leverage, the entire investment was endangered. This strategy....the strategy that all of our best financial minds are trying to lie their way out of with successive notices of write offs of bad loans and then cell calls to the Asian or Saudi nations to get additional loans....is shameful....But the key point is that the original "DUE DILIGENCE" was not done. That was a point that our Federal Reserve Chairman Ben Bernanke made over a month ago. The audio is on the blog.

Now locally---some very well educated pundits have said that with respect to building on a flood plain---it is really "No Problem. "Just buy the insurance." However----just remember the Punk Driver.

"DUE DILIGENCE" and "Insurance RATING" are different. One of the major problems in America, from Malibu to locally, is building in locations where development should not happen. And also one of the major problems nationwide, is governments unable to say NO.

So--there it is. The story of the "Punk Driver." Who did not know the difference between insurance premiums and sane driving. Ditto mortgage banking....Ditto site selection for major public projects. Boards know that due diligence requires more than simply getting an insurance quote. Stay tuned.

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