Hi,
Well yesterday and today the news is out again that the Federal Reserve is changing the plan of how to bail out the financial institutions. Back in October, the Reserve Chairman wanted to use the money of the bailout to buy the devalued assets on the bank's balance sheet. Now the Reserve is saying that his October plan was not good, and he has a new plan. The new plan is to invest the cash in buying shares in the banks- becomign a shareholder in the bank.
Well to give credit to the Chairman of the Reserve, the new plan is 100 times better and safer for taxpayers and government and banks than the October plan. If you are interested to know why, I will write about assets purchases versus equity investment later on today.
But for now, the plan to invest in the equity of the banks will give the banks the needed cash to "deleverage", or pay the loans THEY OWE to other banks and financial insitutions. Since the banks have large debt to equity ratios (sometimes 30 to 1), they need to pay down the leverage in order to have a capital strucutre that is more sound, structurally stable and allows long term investments.
This plan will help the banks to ''deleverage"- which is good- but will not necassrily mean that the recession will end. Nor will it mean the credit crunch will be over and consumers will have ability to take out loans to buy cars, houses, pay for furniture, etc.. The credit crunch is still going to stay with us for a while.
You might ask, why and how and when will the banks be back to normal in running after us to take loans? When will the lending start again for me as a consumer? When can I go shop for a better car loan among competing banks? When will I be able to make banks give me better rates on my home loan? Well this is long way. Why?
The banks are in the business of taking money from investors and depositors and lending them to others people for a higher interest than they pay thier investors or depositors. So, basically the banks have CASH as their primarily asset. Lending cash out in an enviornment of recession is extremely risky business. But of course, if banks honker down and hide their cash, the whole economy will not get out of the recession. So, it is the chicken and the egg dilemma.
Banks have to lend to the businesses to finance their inventory and working capital, but they are afraid the companies will not do a good job in managment and will go bankrupt, thus losing the ability to pay the bank.
Companies need to make a profit to convince the banks to lend them. But they are not able to make a profit with the consumers afraid of losing their jobs and not buying. As consumers hoard cash and stay at home and limit their purchases to the minimum, companies selling non stable services or prodcuts will face declining sales- GM/Ford/Toyota, Starbucks, Circuit City, Retailers of various products. As companies have declining sales, their fixed cost will have to be lowered to keep the company floating. Lowering fixed costs means firing people and closing shops and buying less inventory. As people are fired, less people are buying, and the downward spiral of recession takes a deeper dip and I am forecasting a depression in the coming year.
This is not going to be an easy ride and I recommend that every company and every person save as much as possible in their businesses. Now is the time to close shops that are not profitable. Now is the save on costs of all type.
I have installed Skype in the company and invited all the people I work with and friends to start using SKype to communicate with me. My telephone bill will be cut by more than 70% at least.
The same will go to all expenses in the company. On a personal account, I will only fly with low fare airlines and at the cheapest rates. I will only stay in the lowest rates in hotels. I already started searching the net for the best deals in the cities I ahve to visit on business.
Living the times is an enjoyable experience because it means we are adaptable and we are wise.
But back to the execution of the bailout. I think that the next probelm will be the credit card market. There is more than $1 trillion in credit card debt in the US alone, and much of it is bad credit.
I will talk about this in my next blog. Now I will go have my lunch.
Thursday, November 13, 2008
Tuesday, November 11, 2008
Guess What?
Today the news : $ 2 Trillion Dollars of Loans Was Given by the Federal Reserve (US Central Bank) to companies and banks to bail them out. This is an amount not previously announced and it is additional to the $ 700 Billion Approved by Congress.
So, the total bill so far for the worst financial crisis since 1929 ( i dare those who disagree), is now as we know it :
$ 4.7 Trillion! 10 % of this money could have erdicated poverty in the third world! 10% of this money could have saved millions of childern from starving to death, or dying of thirst.
10% of this amount could have developed water resources for the countries around the world that suffer from shortage of water.
1% of this amount is more than enough to develop a New Green Economy that will save the world!
Just goes to show you how arrogance among so-called smart financial people can lead to waste of resources that otherwise could have helped the world grow rather than shrink. We could have saved the world from CO2 and from Global Warming if we took 10% of this financial loss.
How can someone justify this?
More News:
Circuit City Filed for Bankruptcy. A 60 years old company is now bankrupt.
General Motors the largest automaker in the world, is now saying it needs help ASAP or it will go bankrupt.
Starbucks net profit drops by 96% compared to last year. Closes down 600 outlets!
Circuit City Filed for Bankruptcy. A 60 years old company is now bankrupt.
General Motors the largest automaker in the world, is now saying it needs help ASAP or it will go bankrupt.
Starbucks net profit drops by 96% compared to last year. Closes down 600 outlets!
I am a doomsayer. I am reflecting the facts as they are. The world will suffer for few more months, more people will die of hunger while we save the financial institutions who started this. No problem.
I think the outcome of this problem will be a economy that is less leveraged and more sane financially.
I also see more young people working on green technology and buying green. I see a bhealthy future for Green Economy. Lets start now.
Today the news : $ 2 Trillion Dollars of Loans Was Given by the Federal Reserve (US Central Bank) to companies and banks to bail them out. This is an amount not previously announced and it is additional to the $ 700 Billion Approved by Congress.
So, the total bill so far for the worst financial crisis since 1929 ( i dare those who disagree), is now as we know it :
$ 4.7 Trillion! 10 % of this money could have erdicated poverty in the third world! 10% of this money could have saved millions of childern from starving to death, or dying of thirst.
10% of this amount could have developed water resources for the countries around the world that suffer from shortage of water.
1% of this amount is more than enough to develop a New Green Economy that will save the world!
Just goes to show you how arrogance among so-called smart financial people can lead to waste of resources that otherwise could have helped the world grow rather than shrink. We could have saved the world from CO2 and from Global Warming if we took 10% of this financial loss.
How can someone justify this?
More News:
Circuit City Filed for Bankruptcy. A 60 years old company is now bankrupt.
General Motors the largest automaker in the world, is now saying it needs help ASAP or it will go bankrupt.
Starbucks net profit drops by 96% compared to last year. Closes down 600 outlets!
Circuit City Filed for Bankruptcy. A 60 years old company is now bankrupt.
General Motors the largest automaker in the world, is now saying it needs help ASAP or it will go bankrupt.
Starbucks net profit drops by 96% compared to last year. Closes down 600 outlets!
I am a doomsayer. I am reflecting the facts as they are. The world will suffer for few more months, more people will die of hunger while we save the financial institutions who started this. No problem.
I think the outcome of this problem will be a economy that is less leveraged and more sane financially.
I also see more young people working on green technology and buying green. I see a bhealthy future for Green Economy. Lets start now.
Monday, November 10, 2008
Starting Out
This is my first blog, so bear with me while I get my feet wet.
Why do I want to write a blog on whats going on? Because I want to learn. Simple but true. I will learn by sharing with you whats on my mind, and you can choose to react, proact, or simply to turn the page and move on. I hope you react by writing back your thoughts and your experiences on the subject.
Two things took over me today. The first is my continued analysis of the financial crisis and the second is the my continued analysis of my relationship. As you might expect, my relationship is much more difficult to understand than the financial crisis of the 21st century. Sad but True.
First lets get the financial crisis analysis out of the way. With the passing of every day, I am more convinced than ever that the problem will only worsen before it gets better. The bottom is still to be seen, and the bankruptcies among large non financial companies are in the making.
We all know how this started, right? Well, maybe some of you out there still do not. The simple matter is that it started in the financial departments of the banks and financial institution. They were sitting around the meeting table thinking of ways to increase the profits of their company and withit their bonuses. And as they like to play around with numbers and simple mathmatical equations, someone started speaking about selling the risk that the bank takes when it gives a mortgage to "Joe the Plumber" (as an example) to another bank. The idea is he created a product to sell. This product is risk of the mortgage. Well, if you have a product, you need to find a customer. So the financial wizards in the financial departments of the financial institutions, started looking at insurance companies and investment banks who like to look smart by investing in things they do not understand or worse, in things they understand and know is a broken product.
Anyway, now we have a product to sell, and a customer who is willing to buy. Well, once the first bank sold the first product and made a profit, news got around the financial market, and the kitchens started cooking similiar products and selling them to each other. Before you know, you had so much of these products changing hands that no one actually knows how many are in the marekt now. Which means they still do not know how much more losses will be coming! Surprised? Do not be. AIG, the largest insurance company in the world, has asked for a SECOND bailout package in less than one month. Total Bill by US TAx Payers for AIG Bailout to Date= $150 Billion.
You might ask, why does the government bail out a private sector company with so much money? And here is the simple truth that is still hidden: AIG, as an insruance company, has insured the above "products" for all the banks and companies who bought and sold them. Since these products have no value anymore ( becuase of the default rate of mortgage holders), AIG has to pay the insurance to the banks and companies who insured their products with AIG.
So, by bailing out AIG, the government is actually bailing out all the banks and the companies who have invested in these "products'.
Total bill todate= AIG is $150 Billlion + TARP $ 700 Billion+ UK $ 2 trillion+ Germany $ 700 Billion+ China $ 500 Billion + France $500 Billiono+Korea $100 Billion. Total until now= $ 4.7 Trillion Dollars was spend just injecting money in the companies that bought the "product".
Now, this must be the most expensive "product" in world! I want to see the man behind this "prodcut" and have a little talk with him. Where is he? I think he is the guy who got $2 million bonus last year and who is now hiding somewhere in his own little beach.
Look at these stories coming out from Blue Chip Companies:
GE thought they have a strong position one day in October, and in less than 7 days they were asking for bailoout cash injection from private investors- Warren Buffet came to the resuce, along with Abu Dhabi Investment Fund. GE could not see seven days ahead!!
I am a financial person. And a damn good one as well, as I am told by the people who worked with me. But I always despised the arrogance of corporate finance bankers and professionals who start their conversation selling me products that they do not understand. Talking about swaps, derivatives, securatization of everything from property to "Air"..yes there was a guy who wanted to securitize fresh air and sell it on the commodities market! Unbelievable! Pure insanity!
You know what is worse, that they sound intelligent and know what they are talking about. And many CEO's fall in the trap and give them money! It seems the ego's of some Top Guys sitting in the corner office will not allow them to say: "I do not understand a word you said, and therefore, get the hell out of my office, thank you very much! " You know, the CEO must be saying, if he is from XYZ bank, and his business card says Senior Managing Director Corporate Banking Division International Department, MBA, CPA, CFA, NCCA (joke), then he must be right and I should shut up and smile back while he explains to me this wonderful "producty" that is magic= it produces profit without any risk:) What a wonderful world he says!
Anyway, so now the banks are bankrupt:) And the companies that actually product "Real Products" like cars and tables and toys do not have cash because the consumer is afraid to buy since he hears that smart people (banks) are going bankrupt and firing people, so he thinks well my turn is coming, so let me keep my cash. He does not buy the new car, the car company sits on inventories of cars that they can not sell. After one or two month of no sales, the car company has no more cash in bank to pay salaries and it starts firing its hard working employees.
Well, these employees go back home, tail between their legs, low morale, no job and start eating their leftover to save money. They decide to stay home and not go to the movies or the mall, so the cenima and the shops in the mall start losing sales, and before you know it, they start firing more people. Ooops, now the car company guy is fired, and the toy shop guy is fired, and the movie popcorn guy is fired! Oops, they can not pay the rent or the mortgage, the landlord kicks them out. But he can not find someone else to rent too, so he loses money. To save, he start cutting on cleaning and maintenance work in the property and its value goes down. He loses all his tenants. And down it goes. The spiral continues.
So, where is the bottom? I do not know. But there is more to come.
Why do I want to write a blog on whats going on? Because I want to learn. Simple but true. I will learn by sharing with you whats on my mind, and you can choose to react, proact, or simply to turn the page and move on. I hope you react by writing back your thoughts and your experiences on the subject.
Two things took over me today. The first is my continued analysis of the financial crisis and the second is the my continued analysis of my relationship. As you might expect, my relationship is much more difficult to understand than the financial crisis of the 21st century. Sad but True.
First lets get the financial crisis analysis out of the way. With the passing of every day, I am more convinced than ever that the problem will only worsen before it gets better. The bottom is still to be seen, and the bankruptcies among large non financial companies are in the making.
We all know how this started, right? Well, maybe some of you out there still do not. The simple matter is that it started in the financial departments of the banks and financial institution. They were sitting around the meeting table thinking of ways to increase the profits of their company and withit their bonuses. And as they like to play around with numbers and simple mathmatical equations, someone started speaking about selling the risk that the bank takes when it gives a mortgage to "Joe the Plumber" (as an example) to another bank. The idea is he created a product to sell. This product is risk of the mortgage. Well, if you have a product, you need to find a customer. So the financial wizards in the financial departments of the financial institutions, started looking at insurance companies and investment banks who like to look smart by investing in things they do not understand or worse, in things they understand and know is a broken product.
Anyway, now we have a product to sell, and a customer who is willing to buy. Well, once the first bank sold the first product and made a profit, news got around the financial market, and the kitchens started cooking similiar products and selling them to each other. Before you know, you had so much of these products changing hands that no one actually knows how many are in the marekt now. Which means they still do not know how much more losses will be coming! Surprised? Do not be. AIG, the largest insurance company in the world, has asked for a SECOND bailout package in less than one month. Total Bill by US TAx Payers for AIG Bailout to Date= $150 Billion.
You might ask, why does the government bail out a private sector company with so much money? And here is the simple truth that is still hidden: AIG, as an insruance company, has insured the above "products" for all the banks and companies who bought and sold them. Since these products have no value anymore ( becuase of the default rate of mortgage holders), AIG has to pay the insurance to the banks and companies who insured their products with AIG.
So, by bailing out AIG, the government is actually bailing out all the banks and the companies who have invested in these "products'.
Total bill todate= AIG is $150 Billlion + TARP $ 700 Billion+ UK $ 2 trillion+ Germany $ 700 Billion+ China $ 500 Billion + France $500 Billiono+Korea $100 Billion. Total until now= $ 4.7 Trillion Dollars was spend just injecting money in the companies that bought the "product".
Now, this must be the most expensive "product" in world! I want to see the man behind this "prodcut" and have a little talk with him. Where is he? I think he is the guy who got $2 million bonus last year and who is now hiding somewhere in his own little beach.
Look at these stories coming out from Blue Chip Companies:
GE thought they have a strong position one day in October, and in less than 7 days they were asking for bailoout cash injection from private investors- Warren Buffet came to the resuce, along with Abu Dhabi Investment Fund. GE could not see seven days ahead!!
I am a financial person. And a damn good one as well, as I am told by the people who worked with me. But I always despised the arrogance of corporate finance bankers and professionals who start their conversation selling me products that they do not understand. Talking about swaps, derivatives, securatization of everything from property to "Air"..yes there was a guy who wanted to securitize fresh air and sell it on the commodities market! Unbelievable! Pure insanity!
You know what is worse, that they sound intelligent and know what they are talking about. And many CEO's fall in the trap and give them money! It seems the ego's of some Top Guys sitting in the corner office will not allow them to say: "I do not understand a word you said, and therefore, get the hell out of my office, thank you very much! " You know, the CEO must be saying, if he is from XYZ bank, and his business card says Senior Managing Director Corporate Banking Division International Department, MBA, CPA, CFA, NCCA (joke), then he must be right and I should shut up and smile back while he explains to me this wonderful "producty" that is magic= it produces profit without any risk:) What a wonderful world he says!
Anyway, so now the banks are bankrupt:) And the companies that actually product "Real Products" like cars and tables and toys do not have cash because the consumer is afraid to buy since he hears that smart people (banks) are going bankrupt and firing people, so he thinks well my turn is coming, so let me keep my cash. He does not buy the new car, the car company sits on inventories of cars that they can not sell. After one or two month of no sales, the car company has no more cash in bank to pay salaries and it starts firing its hard working employees.
Well, these employees go back home, tail between their legs, low morale, no job and start eating their leftover to save money. They decide to stay home and not go to the movies or the mall, so the cenima and the shops in the mall start losing sales, and before you know it, they start firing more people. Ooops, now the car company guy is fired, and the toy shop guy is fired, and the movie popcorn guy is fired! Oops, they can not pay the rent or the mortgage, the landlord kicks them out. But he can not find someone else to rent too, so he loses money. To save, he start cutting on cleaning and maintenance work in the property and its value goes down. He loses all his tenants. And down it goes. The spiral continues.
So, where is the bottom? I do not know. But there is more to come.
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