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Full partnership is not the end of the road. As we develop more trust with our partners, as we achieve predetermined worthwhile goals, as our desire to benefit personally from the arrangement is sustained, our commitment deepens. Partnerships can revert to earlier stages— back to reassessing needs and redefining what we want from our partners.

Just as we reestablish a Norm stage following a return to the Storm stage, we can recommit to a partnership that we have chosen to redirect. In both cases, the establishment of trust sustains the partners through setbacks and potential turmoil.

Our commitment to a full partnership, therefore, is not a final destination, but an ongoing process. The relationships are performing, the synergies are generating mutual benefits, and the partnership becomes increasingly well-established. Sustaining its growth is the challenge. At this point we may want to do some strategic planning. This planning can be done within the boundaries of the partnership to create a mutual future, or it can be done in a larger arena. Many companies present organizationwide “future search” conferences where they invite their partners to try to envision what their partnerships will look like five or ten or twenty years down the road. The more mutual the planning, the deeper the relationship. Trust is a catalyst propelling people into the creative zone.

As if it is not difficult enough to deal with employees siphoning off profits and market forces you cannot control, stocks are bought through a commissionhungry broker. A broker can be an individual you talk to, a telephone system, or a Web site. Nevertheless, your relationship with a broker can be troubling.

A broker makes money each time you buy or sell a stock. The broker profits from both commissions and the spread between the buy and sell price. For example, if you sell 1,000 shares of DUD for $10 each, you pay a commission ranging from $5 at a deep discount online broker to $200 at a full-service broker. The buyer of your shares pays anywhere from $10.02 a share to $10.20 a share. The difference between your selling price and the purchaser’s buying price is the spread. The broker and others pocket the spread in addition to your commissions and the purchaser’s commissions. It is in your broker’s interest for you to make as many transactions as possible.

It is not in your interest, because every transaction costs you money.

Compared to the risks of scientific discovery, financial risks seem mundane. A banker would be concerned about a risk of total loss that is worth 10 basis points, or 0.1 percent. The R&D director of a pharmaceutical company knows that the chances of commercial success for a new molecule are from 10,000 to 1 to 100,000 to 1. The probabilities of success implied by these risks of total loss are 99.9 percent versus as little as 0.0001 percent. Because the chances of loss are much lower in relative terms, there is a mismatch in vocabulary and in processes among those managing the risk. But the absolute values at risk for the bankers may be very large (for example, billions of dollars of U.S. investments in the Far East), whereas those for the R&D director are relatively small—perhaps writing off a $100,000 project. In brief, R&D managers address risks that are often a thousandfold greater than those addressed by the bankers; the latter in turn deal with investments that are often a thousandfold larger than R&D investments.

The financial community has identified and dealt with a host of transactional risks and has appropriated the term risk management to encompass its methods. This term is unfortunate because it masks the ability to turn risk to economic advantage.

Legal risk is an especially important case of unique risk in the United States, affecting companies of all sizes. First, a transaction on which one is relying may prove unenforceable in law. It may be a contract with a supplier, an insurance policy, or a regulation. Long-term supply contracts that seem to lock in a price may be difficult to enforce if the price moves significantly out of line with the market. The copyrights of publishers and musicians may be contested in the courts. Employment agreements can be challenged and often prove unenforceable in practice.

A second set of risks is exposure to lawsuits. There are many classes of suit that arise in the normal course of business. For the vast majority, the stakes are not material and are sometimes insurable. They arise from differences over contracts, auto and truck accidents, complaints against supervisors, and the like.

Collectively, these are an element of risk and an ongoing cost of business, but usually not a major concern for investors.

Excess interest represents the difference between the collateral weighted average mortgage rates and the weighted average cost of the liabilities, net of fees and expenses. Generally, the mortgage loans are expected to generate more interest than required to pay the liabilities.

To the extent that excess interest (net of fees, expenses or derivative payments) is positive, it is used to absorb losses on the mortgage loans. After the financial obligations of the trust are covered, excess interest is used to maintain overcollateralization at the target level.

Several factors could affect the extent to which excess interest is available to maintain overcollateralization:
Full or partial repayments and defaults may reduce the amount of excess interest. This is because borrowers with mortgage loans carrying higher WACs have a greater tendency to repay. This, in turn, reduces the weighted average rate of the underlying mortgage loan pool (this is commonly referred to as WAC drift).

If the rates of delinquencies, defaults or losses turn out to be higher than expected, excess interest will be reduced by the amount necessary to compensate for any shortfalls in the cash available to make required distributions to the senior and mezzanine certificates.

The following four property types constitute the majority of CMBS collateral—apartment buildings, shopping or strip malls, office properties and industrial properties. Other asset types included in CMBS pools are hotels, manufactured housing, self-storage, and healthcare properties.

One appealing factor for borrowers is that the loans are nonrecourse (or limited recourse) to the borrower. Ultimate repayment comes solely from the collateral and not the borrower. There are exceptions for fraudulent borrower activities or representations, and the like. Borrowers typically make their borrowing decisions either on price (which conduit or other lender is offering the cheapest financing) and/or proceeds (which lender is willing to lend the largest amount of proceeds—that is, allowing the borrower the greatest leverage).

In exchange for nonrecourse and favorable rates, the loans come with prepayment restrictions, making it possible to create bonds that have excellent call protection and average life stability. Most loans amortize over a 25-to 30-year period. However, most loans also balloon at 10 years and must be paid in full. Since 2004, the amount of loans with IO periods (where no amortization is taking place) has been increasing. For many years, IO periods as a percentage of a loan’s term has hovered around 5%. This percentage has grown to nearly 70%.