09/20/2008 Sports car vs. school bus.

I have recently received a question from one of the housing managers of a City that we have been proposing the SwapRent (SM) Project to for quite some time.

“Just checking with you on any update with SwapRent. With all the recent turmoil in the financial markets and comments by a financial analyst recently on tv/radio that part of the problem has been the esoteric and complicated derivative securities that companies invested in, do you think that SwapRent in it s purest form still a viable financing tool for housing? Seems that people right now would want to avoid any type of complicated financing alternatives???”

He is quite right in pointing out that the damages the leveraging effect of complex derivatives could potentially cause. To set the matter straight, a quick answer is that the root cause for these spectacular collapses is the over-leveraging abuse, not just the complexity of complicated derivative instruments themselves. The issue regarding why complex derivatives may be easily abused and why simple and non-leveraging effect of non-complex and transparent derivatives such as SwapRent (SM) are good have been adequately discussed in the FAQs #15 and #16 at the http://www.SwapRent.com home page already. I will not repeat them here.

The challenge is that for people who do not have financial background knowledge they all may appear to be the same thing. Those people could not intelligently tell the good ones from the bad. When they heard of the headline news mentioning the word derivatives they by association immediately think all of derivatives are bad, without even knowing what they are. It is as though a man from the Amish village saw a car accident and got further convinced that all automobiles are bad. They would not be able to tell that the recent bloodbath on Wall Street is quite similar to an over-dosed drug addict driving a turbo-charged sports car at over 100 mph into a side walk cafe on a busy street in NYC. Many other benign consumer financial products that have incorporated fail-safe and simple derivative concepts such as SwapRent (SM) and HELM do not carry any remote similarities.

To extend the same analogy, SwapRent (SM) and HELM may be analogous to a school bus specifically designed to be driven no faster than 30 mph on the suburban streets by 40 plus year old mothers with their own children on board. Since day one the design of these consumer financial products were created to be simple and safe, without any over-leveraging abuse possibilities by any kind of the end users. These simplicity and safe features designed for unsophisticated homeowners were a major part of the main reasons why they were invented to begin with, away from those institutional complex derivative structures. Again these issues have been fully explained in those FAQs mentioned above.

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