VISTA, Calif. — Tribes can use diversification to help protect their
wealth. Before setting up a policy and committing any money, tribes must
assess each investment opportunity against its risks and potential returns.

Risks exist at every level. Foremost is the safety of principal. Second is
liquidity (how easily an asset can be converted into cash). Third is loss
of buying power due to inflation. Fourth is market conditions.

In the U.S. economy, wealth flows among the categories of real estate (and
natural resources), businesses (stocks), money lending (bonds) and cash.
This issue deals with cash and bonds, the two most conservative categories
of investments.

Remember the saying, “nothing ventured, nothing gained?”

In general, cash is the most conservative investment. Cash doesn’t lose
face value, but it doesn’t earn interest in that form.

For example, if someone put away a $100 bill 50 years ago and found it
again now, the $100 bill is still $100.

The principal was safe in a way, because it is the same $100 face value as
before. Cash is perfectly “liquid” because it can be spent right away.

Had the $100 gone into a savings account earning 3.5 percent, the value in
the account would be about $700 today.

The difference is in the purchasing power. Fifty years ago, $100 could buy
two months’ worth of groceries for a family of four. In 2005, $100 could
barely cover the same size family for just one week.

That’s why it’s important for tribal leaders to make their money earn
interest and work for them.

In the investment industry, cash is a place to temporarily park your money
while you look for an attractive opportunity.

Usually, people think it’s safe to put their money in the bank. However,
there are risks.

When depositors put money into the bank, they are lending money to the
bank. The bank pays the depositor some interest and lends money out at much
higher rate. It’s a zero sum game because the less banks pay on their
deposits, the more banks make.

Just look at bank statements. Chances are that checking accounts earned 1
— 3 percent, while mortgage and credit card accounts charge between 6 —
25 percent.

Banks can make bad loans. When that happens, federal regulators shut them
down.

Regulators require banks to carry federal deposit insurance coverage to
protect depositors against insolvency. But the insurance only covers
$100,000 of deposit per taxpayer account at each bank, no matter how much
was deposited.

A tribe can get this coverage for all its money by putting under $100,000
in different banks. A tribe can also ask banks to put up collateral for
their deposits.

If a bank were to go under, the tribe can take the collateral. Not all
banks will do this because they make less money this way.

Banks lend money to different entities in order to reduce the chances of
default. (They diversify to reduce their risk, too.)

Oftentimes, banks lend money to government entities to finance projects
(like war and schools). Banks also lend money to businesses to finance
operations or homeowners for mortgages. They also lend money to each other,
sometimes just overnight.

In financial lingo, an IOU issued by the government is called a “bond.”

The federal government is the most creditworthy. When push comes to shove,
the federal government can wield its unlimited borrowing power to repay a
bond when due.

Credit analysts assess and rate major borrowers’ ability to pay interest
and repay loans on time. The strongest are rated AAA (A3 or A+++).

States with strong cash flow and few outstanding debts are also rated AAA.
But credit ratings can change.

Just two years ago, when the state of California was running a horrendous
deficit, its credit rating dropped down to BBB (barely investment quality).
But Gov. Arnold Schwarzenegger brought the budget back in line. Now
California is back up to AA.

Investors (lenders) charge a higher interest rate for entities with bad
credit. So when a credit rating drops, the value of an existing bond (IOU)
will go down.

Tribes can cut out banks as the middleman. By investing directly in bonds,
such as those issued by the federal government and its agencies, a tribe
could have earned close to $50,000 on a $1 million portfolio last year.

What if a tribe needs to cash out early? There is an active market where
investors trade bonds daily. The stock market is well-known, but in fact,
the bond market is about 1- times the size of the stock market. The U.S.
bond market is open every day when banks are open, but trades actually take
place continuously internationally.

The amount that can be received back depends on the interest rate of
comparable issues, according to credit quality, term and size of the
investment.

Even if tribes don’t know it, they already participate in the U.S. bond
market. By going direct, they can earn more for themselves.