Dave Spicer: AIG Not a Result of Mortgage Meltdown, It Was a Cause!

What does AIG, an insurance company, have to do with the mortgage meltdown?

Why did we bail out AIG and not Lehman Brothers?

How do we avoid a mortgage-meltdown repeat in the future?

These are just some of the questions being asked and what I think you’ll be surprise to learn is that AIG was not a result of the mortgage meltdown, it was a cause.

Banks have been writing risky mortgages for a long time, at least since Bill Clinton promoted the idea of loosening credit requirements to make home ownership available to more Americans. On the surface, it may have sounded like a good idea, but like an iceberg, the dangers lie beneath the surface.

Once the rules for lending softened, the creative juices of mortgage lenders began to flow resulting in subprime loans, teaser rates, and what some of them called “ninja” loans (No Income, No Job, no Assets). Clearly, these were risky loans, and where there’s risk, there’s a desire for risk-avoidance.

Enter the Credit Default Swap or “CDS.” The media likes to call these “exotic derivatives” and tries to put the blame there. A CDS is nothing more than an insurance policy purchased by a creditor who agrees to pay a periodic premium for the right to collect on the policy if their customer defaults on the loan. So who would write such insurance policies? Insurance companies, of course, and the largest insurance company, AIG, would write the most.

Is there anything wrong with writing a CDS? Only if there’s something wrong with writing an insurance policy on your house or car. However, there is one significant difference between the two. When it comes to your home, since you take a personal interest in protecting that asset, your insurance policy becomes a backstop that you will do everything in your power to avoid collecting on. By comparison, when a bank bundles up a hundred mortgages under one insurance policy, there is no personal association with those assets calling into question whether they care if they default or not since they are covered by a CDS. Also, as with all insurance companies, underwriters need to look at individual policies and decide if the risk of writing the policy is worth taking…apparently, the underwriters at AIG were sleeping at the switch—or maybe “texting at the switch.”

Once mortgage lenders realized they could transfer the risk of ninja loans to AIG for a portion of the premium being paid by their riskiest customers, they also realized that these payments were cutting into their profits. What do you do when your margins get thinned? Easy, make it up in volume!

So by having the ability to dump the risk of bad loans onto AIG, lenders were incented to write as many loans as they could, knowing that they were insulated from defaults! Everyone was making money until the real estate bubble burst and then AIG was left holding the bag unable to pay the claims of their mortgage bank clients. When the music stopped, AIG didn’t have a seat.

Why bailout AIG and not other companies like Lehman Brothers.

First we should be aware that the $85B that is going to AIG is not a gift. It’s a two year bridge loan at 11% interest for which we (the US government) receive 80% ownership of the company. This means that if we (since we are now the owners) are able to turn AIG around, we could make a hefty profit.

Next, we need to consider what would have happened without this loan. If AIG was allowed to go under, they would not have been able to pay the insurance claims made by their customers, the banks who bought these policies to mitigate their risky loans. That would have caused all these banks to go under resulting in a much bigger and diffuse problem. While the world can exist with one less investment banking company (Lehman), it can’t exist without the far-reaching global tentacles of AIG. While I’m not for propping up private companies with public funds, in this case I believe it was the lesser of two evils…but I’m left with the nagging concern: was $85B enough?

What we need to do to avoid this problem in the future.

We obviously need stricter regulations in the mortgage market; ninja loans should not be happening. Also, with proper underwriting, banks would not be able to insure their mortgages as easily and they might be more inclined to scrutinize the loans they make.

Ultimately, we need to recognize the root cause of our economic/security/environmental issues is that $700B is being sucked out of our annual economy for the import of oil, from which we receive choking pollution and fund terrorists who want to kill their customers—primarily us. Fortunately we have the technology available today if we really want to solve the problem, and it would be self-funding. All we have lacked is the leadership in the White House and Congress—my distain is bipartisan—for the last seven years to make it happen.

Imagine the benefit of keeping that $700B within the “friendly confines” of the “US of A” every year where it would wind up as income and savings for our families who would then be able to afford legitimate mortgages.

V1.2

Dave Spicer: Let's Stop Whining and Solve the Problem

We’ve become a debtor nation of whiners, complaining about pollution, climate change and energy shortages along with our not unrelated growing national debt. Add to that our angst over terrorism and wars purported to defeat it, and you’re looking at a country that has made very little progress against any of these or the domestic issues like health care that they distract us from. While we’re all glad there have been no further terrorist attacks in this country, in a very real way terrorism has taken its toll on the advancement of our society for the last six years. Osama must be sitting back in his cave enjoying this.

Now, add to these the future concerns posed by unstable leaders in Iran and Venezuela who can hold a good portion of the world’s energy hostage, and ultimately a conflict with China over the earth’s dwindling resources and perhaps it’s time to look for a root cause.

So what do these seemingly solutionless issues have in common? They are all manifestations of the same problem that can be solved: our addiction to burning fossil fuels, primarily oil, for their energy content.

We could be free of Middle East oil in 4-5 years, defeat terrorism without firing another shot, and bring our troops home with the honor they deserve!

Geopolitics of Energy is a blog dedicated to solving one of the more vexing problems of our time: the establishment of a carbonless energy society, an Electric Economy as envisioned by Doc Davidson in Deadly Freedom. Solving this problem will alleviate many of the seemingly solutionless symptoms that plague our nation. The solution will also reestablish our country as a trusted leader of today’s global society, turn our massive trade deficit into a trade surplus, and allow us to focus our resources on other real problems like healthcare and improved education for our children.

This post is meant to be a roadmap or navigation aid for the other posts you will find here. This blog is now open to everyone for moderated commenting. Everyone can register here for free email updates when new articles are posted or current ones updated.

A bit about my background. I have a dual degree in Electrical Engineering and Computer Science from the University of Illinois, and a Masters Degree in Computer Science from Northwestern University. I have 30 years of industry experience beginning with IBM Research, AT&T Bell Laboratories, Oracle Corporation, and three startups. My knowledge and experience build on a foundation of mathematics, physics, and chemistry. I have spent the last two years vigorously researching a variety of energy technologies and the geopolitics of energy as it relates to the foreign policies of the largest industrialized nations.

I’m convinced we are still a nation of innovators who can produce the right idea(s) to overcome some very knotty problems. After two years of research I believe the ultimate solution is a strategy for this country with multiple moving parts that are more fully described in my novel. This is your chance to voice your opinion on such a strategy. The rewards for establishing a carbonless energy future will go to our children and theirs; it’s our turn to do the right thing.

The founders of this country did not allow themselves to be bullied by those who would dictate their lifestyle. They certainly would not want us to buckle under similar pressure from those who hold us hostage with their energy resources. One result for them was the Boston Tea Party. Perhaps it’s time for a “Boston Oil Party.”

It’s time to stop whining and solve the problem.

V1.9

Dave Spicer: DEADLY FREEDOM

We have been held hostage to our fears of terrorism, the Iraq War, pollution, global warming, climate change, and energy shortages for many years, paying untold billions of dollars combating them, not to mention the cost in human life. In fact, these fears are really unsolvable symptoms of a common solvable problem to which we pay just lip-service: our continued dependence on oil.

Clean, renewable energy is nature’s “Rubik’s Cube,” and arguably the most commercially valuable puzzle to solve. After years of research, Professor Jason “Doc” Davidson and his team of university researchers have cracked the code, but bringing their solution to market must overcome the challenges of those who see renewable energy as a threat.

DEADLY FREEDOM weaves fiction and fact into a tapestry of intrigue and conspiracy between OPEC, the oil and automotive industries, and our own government. Threats to this conspiracy are dealt with through strategic eliminations carried out by “The Club,” an assassination squad of rogue CIA double agents. As Davidson is going to find out, freedom comes at a cost, a cost justified by a country’s return to greatness.

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DEADLY FREEDOM, available here, is a techno-thriller based on the technology and geopolitics of energy uncovered during two years of research. Click here to see the cover (front and back) full size.

It would be nice to think that solving our core energy issue is strictly a technology exercise along the lines described in my post An Electric Economy. Unfortunately, there are many players in today’s fossil fuel world who will be adversely impacted by a carbonless energy future, including but not limited to: the oil industry, the automotive industry and its supply chains, OPEC countries and terrorists who feed off our current oil addiction—as a rule of thumb, if you subtract 80-cents from a gallon of gasoline, the remainder is what is going to OPEC. They have trillions of dollars of oil resources at risk.

DEADLY FREEDOM is a fictitious story about a real cause. The novel draws on the human drama associated with the financial upheaval of the industrialized world and those who feed our addiction brought about by the introduction of a carbonless energy solution. The story pits those who will benefit against those who will not. Which side will you be on?

V 1.6

Dave Spicer: First Atlanta Book Signing

I’m having my first book signing in Atlanta:

Saturday, September 20^th
From 3:00pm to 5:00pm

Barnes and Noble (at “The Forum”)
5141 Peachtree Pkwy
Norcross, GA 30092
Phone (if you need it): (770) 209-4244

Here’s a link to a map.

Given our recent experience with $4/gallon gas, our two presidential candidates have begun to push their energy plans. Unfortunately, they don’t understand that focusing on the energy problem should be our highest priority. In discussing their energy policies they both use the standard line, “let’s do ‘em all,” to which the republican likes to add, “keep drill’in!” Unfortunately, when it comes to energy, attempting a multiple-choice solution of incompatible technologies will result in doing none of them. I guess to get elected, candidates must tell the electorate what they want to hear and avoid offending the special interests.

Now T. Boone Pickens has gotten into the act and while his plan will make him a lot of money, it won’t help us at all.

Since my character, Doc Davidson, isn’t running for office, he doesn’t care if he offends special interests with his “Carbonless Electric Economy” that not only solves the problem, but pays for itself!

I would enjoy meeting each of you to discuss the characters and plot lines as well as the ideas in the book and what they could mean to the future of our economic and political well-being.

Look forward to seeing you at “The Forum.”

Dave Spicer (Book, Website, FaceBook)

Dave Spicer: A Carbonless Electric Economy

Our fossil fuel economy has failed us. The world has hit its Peak Oil point where the energy required to retrieve a barrel of oil is close to exceeding the energy in that barrel of oil. This fact, along with the sharp increases in demand from recently energized economies like those of China and India, has caused oil prices to jump past the point where OPEC can pump enough oil to regulate them. We have placed our future into the hands of those who don’t want us to have one. Before proceeding, you may want to watch the video below for some background:

Carbonless Electric Economy from Dave Spicer on Vimeo.

We need a wholesale replacement of our existing fossil fuel economy with an alternative energy economy. What is an energy economy? It’s the network of energy sources, distribution, and consumption that underlies the macro economies of the world. The good news is that we have at least 100 combinations and permutations of alternative technologies to eliminate our dependence on foreign oil. The bad news is that most of them don’t work. What does an energy economy have to provide to succeed?

No “Science Projects” Required – We need a solution that we can begin to implement immediately given the length of time it will take to deploy enough technology to significantly offset our oil dependence. All solutions will entail serious engineering projects, but none should require scientific breakthroughs. Thus, for example, solutions depending on nuclear fusion or “clean coal” should not be considered.

Scalability – It must be able to provide enough capacity to offset our entire use of imported oil.

No Side-Effects – It must not shift the problem from one scarce natural resource to another, e.g., from oil to natural gas.

Improve the Environment – The environmental impact of implementing the alternative must at least be no worse than what we have today.

Economic Viability – It must have an economic payback that justifies the billions of dollars of expense.

When graded against these metrics, many of the popular alternatives being discussed fail miserably, including: The “Pickens Plan,” ethanol, biofuels, the “hydrogen economy,” clean coal, and conservation.

Fortunately, there is one combination of technologies that does meet all these criteria, a Carbonless Electric Economy.

Electricity is our cleanest form of energy. It is also universal in that it can be used to power our factories, heat and cool our homes, cook our food, and power most of our transportation. We also have a significant amount of existing electricity distribution infrastructure in the form of the national electric grid that will lessen the amount of additional infrastructure required.

Since all energy economies require sources, distribution, and consumption, so must the Electric Economy. Starting with consumption, we can see again that electricity is universal. The missing piece had been transportation, but given recent advances in Lithium Ion battery technology, driven by the popularity of laptop computers, we now have electric vehicles with ranges up to 250 miles on a charge and we are on a technology curve that will take us above 400 miles soon. The most important part of electric vehicles that makes the electric economy viable is their efficiency.

Electric vehicles travel 5 miles on a kilowatt hour of electricity that typically costs 10 cents, that’s 2 cents per mile. This is made possible by the fundamental property of electric motors; they are 90% efficient as compared to the 10% efficiency of internal combustion engines, regardless of the fuel they’re burning. Another use for electricity is in the area of home heating. Today, people in the northeast use mostly heating oil to heat water that is then circulated around their homes. This winter these people will be faced with $1,000/month heating bills and many will not be able to afford them. These heaters can be replaced with electric heaters and use the existing water pipes.

As for distribution, we already have a massive amount of electricity distribution in place to every home and business. Electric vehicles can be recharged by plugging them in to a standard 120v electrical outlet.

While we already have enough electrical capacity to charge about 10% of our existing LDV fleet when it becomes electric vehicles, we will need to add capacity to support the entire fleet. We are fortunate to have what amounts to a “solar furnace” in our desert southwest with enough capacity to power 15-20 countries our size, and that includes the current one-terawatt of capacity we have today, plus the additional capacity to power all 200M electric LDVs. While our first target should be providing enough solar power for our LDVs, we should not stop there, we can also replace all the coal, natural gas, and nuclear generated power with the same technology.

Now we need to see how the carbonless electric economy measures up against the metrics we spoke of above:

No “Science Projects” Required – While implementing the Electric Economy will certainly entail some large engineering projects, all the core science for generation, distribution, and consumption is in place.

Scalability – As mentioned, we have enough solar thermal power in our desert southwest to power 15-20 countries our size. Capacity will not be a problem.

Side-Effects – Ultimately the electric economy can completely offset our current fossil fuel generation of electricity.

Environment – Solar thermal energy is powered by the sun. There is no carbon required for generation, and none is produced by the electric motors and heaters that consume this electricity. The electric economy is carbonless from end to end.

Economic Viability – The electric economy is the hands-down winner when it comes to economic benefit for this country. Not only will the electric economy pay for itself, the technology will become a key export for our country’s rebirth as an economic leader.

To understand the economics of this solution, we need to begin with electric vehicles. The internal combustion vehicles we drive today get, on average, 20 miles per gallon. At $4 per gallon, it costs 20-cents per mile for fuel alone. As discussed, electric vehicles can be operated for 2-cents per mile for a savings of 18-cents per mile. Given the average light duty vehicle travels 13,000 mile a year, this means an electric vehicle will save the owner $2300 per year. And these savings are for energy only, they do not include savings from the elimination of: oil changes, tune-ups, emission checks, etc.

The picture above summarizes the economics of the Electric Economy. We have an LDV fleet of 200M vehicles that turn over at the rate of 20M, or 10%, per year. When 10% of our fleet are electric vehicles, it will take an investment of $25B in solar thermal generation of 10 GW to support the additional charging capacity required with $600M per year to operate and maintain the facility. However, these 20M vehicles will each be saving $2300 per year resulting in a savings of $46B per year! And these savings are cumulative! The next 10%, or 20M vehicles will save another $46B per year for a total of $92B per year, while requiring another $25B in construction.

When fully implemented with electric LDVs, we will be saving $460B per year with an annual outlay to operate and maintain our generation investment of $6B annually, an annual net benefit of $450B—imagine what this country could do with that kind of surplus. As for energy costs, solar thermal fuel, the sun, is free and carbonless. This has been the case for the last 4.5 billion years and it will be for the next 7 billion years. After that, let’s agree to leave what we do next to future generations.

We are fortunate to have a “solar furnace” in our desert southwest, but we are not alone. As the picture above shows, there is a “belt” of solar intensity around the globe extending about 30 degrees either side of the equator. Each 120 square miles of this space is worth $25B in revenue to the country that can export its Electric Economy technology.

Shouldn’t that be us?

Mr. Spicer is the author of Deadly Freedom, a novel based on the real science of clean, abundant energy provided by a carbonless electric economy.

V 1.7

Dave Spicer: Pickens Picks a New Horse - the Wrong One

Our current fossil fuel-based energy economy is broken and no amount of drilling will have an appreciable long-lasting impact on oil prices. The world’s economies are sliding inexorably down the slope of the global Peak Oil curve that was predicted by a Shell Oil geologist back in the 1950’s.

What is an energy economy? It’s a network of energy sources, distribution, and utilization that today is dominated by oil wells and coal mines; oil pipelines and tankers; and cars and trucks respectively. We need a replacement energy economy that will sever our dependence on unstable governments who care only for our money to fund terrorists bent on our destruction. We need a replacement that will strengthen our economies and not weaken them, and lastly, we need a replacement that will clean our fouled environment.

It’s refreshing, then, that a tycoon like T. Boone Pickens is backing a replacement for the commodity which made him a billionaire, oil. It seems Mr. Pickens invested heavily in natural gas in the late nineties and just last year invested heavily in wind farms. His solution—not surprisingly based on wind and natural gas—is to develop massive wind farms to generate enough electricity to offset the electricity we currently generate from natural gas—about 20% of our total electrical generation capability—and utilize the saved fuel to power natural gas-driven vehicles.

There are many candidate architectures for replacing our current fossil fuel economy and when you enumerate all the possible combinations of energy sources, distribution, and utilization, they number about one-hundred, most of which don’t work. Mr. Pickens’ proposal is one of these, and unfortunately, it’s one that doesn’t work for a variety of reasons:

Wind turbines generate electricity, but wind, by its very nature, is unpredictable, which makes the electricity generated unpredictable. Wind energy is currently being used successfully by farmers and even small communities, but in all cases, these applications rely on the existing electric grid during times of insufficient wind. But Mr. Pickens proposal is to use wind for utility grid generation, for which there is no backup. Inconsistency by itself is not a deal-breaker. As long as you have the ability to store the energy generated you can generate enough excess energy such that the average output is sufficient to power the loads from storage. Storing electricity requires batteries, and while there have been important breakthroughs in battery technology to power electric vehicles with capacities of 40-50 kilowatt hours, storing enough electricity to power the grid would require batteries millions of times larger, a technology we do not possess.

Mr. Pickens has been an advocate of natural gas fueled vehicles for some time. Unfortunately, natural gas vehicles are still powered by internal combustion engines that are only ten-percent efficient, regardless of the fuel they’re burning. In 2006 we imported 20% of our natural gas. Also in 2006 we consumed 21 Trillion Cubic Feet and had reserves of 193 Trillion Cubic Feet and our consumption has been increasing by 6.5% per year since 2006 . This means that if we could somehow find a way to eliminate natural gas imports completely, we would have enough reserves to last only 9 years, after which we would be importing all of a commodity which the Pickens Plan would have committed us to. Any attempt to move a significant amount of our transportation to a natural gas platform will result in massive importation of a commodity that we import too much of already. In effect, we would be shifting our dependence on unstable oil producers to unstable natural gas producers, which in many cases are one and the same. And being carbon-based, burning natural gas in our vehicles would do little to mitigate the carbon dioxide generated.

Lastly, the economics behind Mr. Pickens proposal, while obviously beneficial to his companies, do not make sense for our country. It will take many billions of dollars to create enough wind farms to offset our electric generation from natural gas and convert our cars to run on natural gas. How will we pay for this investment? Nothing in his architecture provides any savings since we would just be shifting our expenses from oil to natural gas. In addition, there would be infrastructure expenses in getting enough natural gas to our current gas stations, not to mention funding the natural gas refueling devices that would be needed at thousands of stations.

Fortunately, of the hundred possible energy economy architectures there is at least one that does make sense, and that is moving to a Carbonless Electric Economy, one that leverages our new battery technology for electric vehicles, our existing electric grid infrastructure, and the development of solar thermal electricity generation in our desert southwest that would be completely funded by the 90% efficiency of electric vehicles when compared to their 10% efficient internal combustion counterparts.

Our politicians, especially the two running for the highest office, like to tell us that the solution is “do them all” and quickly rattle off biofuels, solar, geothermal, wind, etc. Of course they’re in the business of telling people what they want to hear, not what they need to hear. The danger is that any attempt to do all of these will result in none. We have neither the time nor money to attempt multiple incompatible paths, which means we need to do the careful analysis it takes to pick the right one.

Mr. Pickens has a new horse in this race, unfortunately he’s riding the wrong one. He’s competing with the Carbonless Electric Economy that will: provide carbonless electricity generation with no fuel costs, utilize our existing electric grid distribution infrastructure and be self-funding given the efficiency of electric vehicles.

Mr. Spicer is the author of Deadly Freedom, a novel based on the real science of clean, abundant energy provided by an electric economy.

V 1.2

Dave Spicer: A Message to the "Facebook Generation"

My daughters have been after me to join Facebook for some time. A year ago, while still in the throes of writing my novel, I got a Facebook ID but could find very few members of my generation and my login sat essentially idle. Finally finishing the novel, I realized that the target audience for Deadly Freedom IS the Facebook Generation—and beyond, and that I was communicating across generations. What better way to continue this communication than Facebook.

Here’s why this is important to you: Every generation picks up where the last leaves off and inherits the state of the world at that point. My parents were called the “Greatest Generation” by Tom Brokaw and given that they grew up surviving the depression and still managed to win the last real war worth fighting, they probably deserve that title and will for some time. They left the “Baby Boomer” generation, mine, with a world that was in reasonably good order and with an economy that I and my “Baby Boomer” friends took advantage of. The end of World War II did leave us with the Cold War and they sent us off to fight in Viet Nam…seems every generation needs its war, even if it’s a mistake.

For our part, we Boomers had a good run for a long time. We brought you the PC, relational databases, the Internet, and Cell Phones. We had an economy that was booming and it looked like we were going to hand you a legacy on which you could build—until September 11, 2001.

9/11 was a pivotal moment. It exposed to us our vulnerability. It put a very fine point on how dependent we had become on oil imports from countries that were, ironically, willing to literally kill their own customers. We had quickly gone from globalizing individual companies, to a global economy, to a global society in which everything from jobs and crime could now cross international borders. It also gave us the opportunity to make the next great decision—how we would react to the 9/11 event.

At first we did the right and logical thing by going after Al Qaeda in Afghanistan. Then, when we should have been focusing on the root cause of the issues that were suddenly confronting us, namely our addiction to oil, we made what may turn out to be the biggest mistake in the history of Western Civilization—we invaded Iraq.

I assure you that I am not anti-war. We always need to be prepared to defend our country from real threats. I am, however, anti-mistake, and certainly anti-“not learning from our mistakes.” The Viet Nam war was a mistake. It cost us 50,000 citizens to realize that not every country needs to be a democracy. Democracies, like our own, need to be developed from the inside, and ours is a marvel of circumstances revolving around an alignment of genius at the right point and at the same time to make it come about. Our involvement in Viet Nam began in 1955 with our role as advisors. Between 1965 and 1975 we became active participants and at the end of those ten years we pulled out having lost 50,000 people. By 1995 we had restored diplomatic relations with the now-communist Viet Nam, and since 2005 they enjoy full economic relations with us and the West, recently hosting international beauty contests. So what was the point?

Invading Iraq became an obsession with an administration that was looking for a reason to do just that. If you’ve read my book, you may have picked up on this issue. They needed a reason and conveniently, one surfaced—or was made to surface. Weapons of Mass Destruction became our new bogey-man and our Texan president violated the “Make sure you’re right, then go ahead” philosophy of a real Texas hero, Davy Crockett, and invaded. So instead of facing the real issue, eliminating our dependence on oil, our oilman administration decided it was worth 4,000 lives and $12B a month to somehow protect our oil interests in the Middle East in an attempt to prolong our day of reckoning.

And of course, it’s done nothing but exacerbate our problems. You, the Facebook Generation, are now bearing the cost of our lack of leadership, and it’s going to get worse until we do something about it. You are the people doing the fighting and dying in Iraq. You are the people who will realize that our $12B per month expense for the war is being funded by the $12B we borrow monthly from China. You are the people who will be saddled with repaying that debt.

And the problems of terrorism, wars purported to defeat it, declining dollar and economy will continue until we face the real issue, eliminating our dependence on foreign oil. Doc Davidson and his team of researchers have an approach called an Electric Economy that will not only eliminate our oil imports and their carbon aftereffects, but will pay for itself and leave you with an exportable capability that will make you the Saudi Arabia of clean energy.

As for my generation, while we won’t be the Greatest Generation, it’s not too late to be great.

Enjoy the read. Remember, while the story is fiction, the science is not.