All about Business and management

March 17, 2009

AIG bonuses and corporate America

 

AIG is not the only corporate company which gave away huge amounts to their executives.
Because of public bail out, bonuses to AIG executives became public.
But what about other corporations who already distributed various bonuses to executives in
this rough time when main street is going through difficult time. What so un usual about these executives? what different work do they do other than comman man do?

This is not only about AIG but this is about corporate world. Executives are paid with huge bonuses, money is spent
on unnecessary projects and other spendings. There is no direct oversight on these spendings.

With your hard earned money, any investment you make in stock market, do not count on it, basic assumption is you are gambling. You might get it back or may not, you can not count on it. You do not know how it is been used.

Common man has to decide whether to gamble or keep money for future survival?
Save money for your future.

Jagdish Hiray

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November 24, 2008

Is Mr. Paulson too late?

Filed under: My Opinion — Jagdish Hiray @ 9:40 pm
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            Yesterday first time I noticed US treasury secretary Mr. Paulson started talking about helping consumers and trouble homeowners. Do former CEO of Golman Sachs and supporter of so-called ‘free market’ economy know consumer is important element of economy? Consumer is building block of this economy. This is the consumer who promptly wakes up in the morning, works hard and feeds family. This consumer if ‘atom’ of this economy; this economy is built on millions of atoms ‘consumers’. Not all of these consumers have investment in stock market nor majority of them have 401K accounts. But this ‘consumer’ was ignored, focus was given to stock market and efforts were seen to secure foreign investment in stock market.

 

            Today ‘consumer’ is dead. Money stops flowing in ecosystem of this economy. You do not have to wait for report to come showing banks tighten lending policies, banks stopped lending to consumers… You need to be in mall, in wal-mart, in offices, in restaurants, at gas stations to see how consumer is suffering what is its pain. You need to pass by through towns to see forecloses happening in communities, you need to feel what you feel when you vacant your home with heavy heart …

 

            Too late to rescues … regulators were waited too long to watch economy get recovered, expecting consumer to suffer and stand again to keep life going. Yes, this time consumer will stand up again but with different vision and mission. New born consumer will stop using credit cards and unnecessary spending, will refuse to borrow money from financial institutes, will not invest in stock market to pay for huge CEOs compensation and fund manager’s expensive mortgages, will try to increase savings and refuse to gamble in stock market. Will be happy to get small amount of 401K returns with peace of mind.

 

            There is enough of free market and capitalism. Henceforth consumes will drive market not bankers and traders.

 

November 22, 2008

City of Toledo and $700 billion bailout plan

Filed under: My Opinion — Jagdish Hiray @ 9:02 am
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This is story about the city of Toledo in state of Ohio. In around 1980s, city of Toledo started offering incentives and concessions to attract new businesses as well as to existing business to stay around area. These incentives were ranging from funding these businesses to exceptional tax breaks. In couple of years city has attracted many known industries such as General Motors and Chrysler. When state of Ohio authorized an Enterprise Zone program to create industrial base, city of Toledo was ahead to take advantage. The main goal was to create more new jobs and prosper.

However, in next couple of decades, study found out that new jobs were not created as expected, new jobs were moved to different locations, jobs were outsourced and companies failed to keep their promises. Companies took advantage of tax breaks but failed to create new employment. The government spent over $280 million dollars to bring and keep new Chrysler plant in Toledo; in reality it caused more job losses than creating new jobs.

Study found out that there was no monitoring mechanism setup to monitor how these companies were using incentives and whether they are being appropriately utilized. Companies were not accounted for their promises. Tax breaks were gone to hundreds of companies that closed or reduced their facilities. There was no accounting for how public money was spent.

 

Today we have similar situation. In today’s economical crisis, we as people of this democratic country represent the city of Toledo. We have public bail out money $700 billion dollars approved by congress on behave of tax payers. Auto makers and various other well know companies of this so called ‘Capitalist’ system are coming forward to ask for help to keep their businesses running and hence to keep jobs for thousands of workers. Toledo (here we people) has second and probably last chance. If we want to help these industries to keep our jobs and keeps economy flowing, we have to get answer for some basics questions.  Are we going to have monitoring mechanism this time? Who is going to monitor this mechanism? Who is going to review their business plan (may be industry experts)? What if they do not use people’s money as promised, what will be penalty? Who is going to take personally responsibility? …

 

Toledo has money to fund but still fighting for survival … dark side of ‘Capitalism’.

 

 

August 7, 2008

Financial intermediaries

Filed under: Business management — Jagdish Hiray @ 9:56 pm
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With advances in computer technology, one can transfer money instantly, anywhere in the word, you can trade your funds across major stock exchanges online, you can use your credit card across the globe and so on. Lending and borrowing of money is made simple by financial institutions called financial intermediaries. Financial intermediaries such commercial banks, credit unions and brokerage funds carryout these transactions on your behalf. A financial intermediary is a financial institution that borrows from savers and lend to individuals or firms that need resources for investment. The investments made by financial intermediaries can be in loan and/or securities. Basic role of financial intermediaries is transforming financial assets that are less desirable for a large part of the public into other financial asset, which is preferred more by the public. This transformation involves at least four economical functions: providing maturity intermediation, risk reduction via diversifications, reducing the costs of contracting and information processing and providing a payment mechanism.

 

Without financial intermediation we must not have seen revolution in financial services in past couple of decades. Financial intermediation is responsible for creation of institutional investors in financial market. Modern world would not have been so modern without financial intermediaries. Financial intermediation has won savers confidence by protecting their asset while providing efficient services to help manage their asset. On contrary, with pool of household savings from savers, they emerged as one large lender who can lend money to businesses and various other borrowers. Financial intermediaries are vital part of our economic system and they help to maintain constant flow of money in economy.

 

If there were no intermediaries, individual savers would have to directly purchase the securities of borrowers. There would have been incompatibility of the maturity needs of lenders and borrowers since most savers want to lend funds at short maturity, while borrowers want to borrow at longer maturities. It would have been difficult to match small amounts of individual savings to the larger loan amounts desired by borrowers. This would have cause borrowing more difficult and more tedious. Financial intermediaries perform important function of maturity intermediation to make investment from savers and money borrowing for borrowers seamless. Maturity intermediation involves a financial intermediary issuing liabilities against it that have maturity different from the assets it acquires with the fund raised. An example is a commercial bank that issues certificate of deposit and invests in assets with a longer maturity than those liabilities. Maturity intermediation offers more choice concerning maturity for their investments to investors and reduces cost of long term borrowing for borrowers. Financial intermediaries issue their own debt claims to the saver in forms more attractive to savers, and in turn, lend to borrowers on terms satisfactory to the borrowers.

 

Financial intermediaries bears risk on behalf of investors by investigating their savings across various sectors of business. They transform risk-by-risk spreading and risk pooling; they can spread risk across a range of institution. In turn institutions can pool risk by spreading investment across firms and various projects. Diversification allows a financial intermediary to allocate assets and bear risk more efficiently. Financial intermediaries do risk screening, risk monitoring and risk evaluation; it is more efficient for institution to screen investment opportunity on behalf of individuals than for all individuals to screen the risk. It helps individual saver to save time and money and offers low risk investment opportunity. One of the common example of this function is; a dollar deposited in a checking or savings account, it is not redeemed at less than a dollar but in turn one get paid interest on it over period of time. Therefore without financial intermediaries it would really have been difficult for individual investor to screen prospect borrower or investment opportunity, which would have discouraged individual savers from lending money and would have affected economical developments.

 

Financial intermediaries provide convenient and safe way to store finds and creates standardized forms of securities. It also facilitates easy exchange of funds. Due to high volume it is able to bear transaction and information search cost on behave of savers. Therefore, individual saver enjoys financial services that enable them to deposit and withdraw funds without negotiation whereas borrower avoids having to deal with individual investors. Since it has information available for both lenders and borrowers, it minimizes information cost for analyzing their data. Without financial intermediaries lenders and borrowers would have to pay higher transactional and information costs.

 

            Modern world would not have been so efficient, aggresive and progressive without financial intermediation.

 

August 1, 2008

Functions of investment banker

Filed under: Business management — Jagdish Hiray @ 7:04 pm
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When corporation sells new securities to raise funds, the offering is called a primary issue. The agent responsible for finding buyers for these securities is called the investment banker. The investment banker purchase primary issue from corporation and arranges immediate resell of these securities to the investors. Merrill Lynch & Co., Goldman Sachs are some examples of well-known investment banking firms. Broadly investment bankers (investment banking firms) perform three functions: Investigation, Analysis and Research (Origination), Underwriting (Public Cash offerings) and Distribution. Most of time a single investor banker performs all functions, however some investment bankers are specialized in certain functional areas only.

 

Investigation, Analysis and Research (Origination):            Origination includes the subsidiary operations of discovery, investigation, and negotiation. Discovery is the finding of a prospective issue of securities; investigation is the testing of the investment credit of the prospective security issuer, and the intrinsic soundness of the issue; negotiation is the determination of the amount, the price, and the terms of the proposed issue. Investigation usually involves an analysis of the financial history of the corporation by accountants, investigation of legal factors, a survey of its physical property by engineers, and in-depth review of operations. The purpose of investigation and analysis is to determine whether a proposed issue has sufficient merit to be offered to investment community. In other words, function of investment banking is careful analysis of the soundness and reliability of the corporation whose securities are seeking the investment market. The task of investigation and analyzing the numerous factors, which govern the value of investment securities, varies considerably with the different types of issuing bodies.

 

Underwriting (Public Cash offerings): When a corporation wishes to issue new securities and sell them to the public, it makes an arrangement with an investment banker whereby the investment banker agrees to purchase the entire issue at a set price, known as underwriting. Underwriting also refers to the guarantee by the investment banker that the issuer will receive a certain minimum amount of cash for their new securities. The investment banker buys a new security issue, pays the issuer, and markets the securities. The underwriter’s compensation is the difference between the price at which the securities sold to the public, and the price paid to the company for the securities. Underwriting can be done either through negotiations between underwriter and the issuing company (called negotiated underwriting) or by competitive bidding. A negotiated underwriting is a negotiated agreed arrangement between the issuing firm and its investment banker. Most large corporations work with investment bankers with whom they have long-term relationship. In competitive bidding, the firm awards offering to investment banker that bid the highest price.

 

In certain cases, for large or risky issues a number of investment bankers get together as a group, they are referred to as syndicate. A syndicate is a temporary association of investment bankers brought together for the purpose of selling new securities. One investment banker is selected to manage the syndicate called the originating house, which does underwriting of the major amount of the issue. There are two types of underwriting syndicates, divided and undivided. In a divided syndicate, each member group has liability of selling a portion of offerings assigned to them. However, in undivided syndicate, each member group is liable for unsold securities up to the amount of its percentage participation irrespective of the number of securities that group has sold.

 

Distribution: Another function of investment banker it to market the security issues. The investment banker acts as a specialist to distribute securities efficiently for the corporation. It can be very expensive and ineffective for a corporation to sell an issue by establishing marking and selling organization by its own. Investment banker has established marketing and sales network to distribute securities. For a reputed invest banker, with its past history of selecting good companies and pricing securities builds a broad client base over time, and further increases the efficiency with which securities can be sold.

 

            Invest banker offers security to both corporation issuing securities and investors buying securities. For corporations investment banker offers definite price guaranty on a certain date for securities to offer. The corporation runs no risk of the uncertainties of the market and do not have to spend on resources with which it is not equipped with.

To the investor, the responsible investment banker offers protection against unsafe securities. The offering of a few unsound issues can caused serious loss to its reputation, and hence loss of business. Therefore, investment banker play very important role in issuing new security offerings.

 

June 29, 2008

Oil crisis and we!!

Filed under: My Opinion — Jagdish Hiray @ 12:43 am
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                     In last few months oil price at pump suddenly gone up and we do not see any signs of coming it down. It made life essentials expensive forcing people to make choice between food and commute to work. Every smallest news affecting oil supply was considered to hike crude oil prices but major drop in oil consumption in past 17 years by people, increase in price of oil in major oil consuming countries to cause decrease in oil consumption, and decision to increase production of oil by major oil producers, did not caused a penny of decrease in the price of crude oil. Is it not mysterious? No body has explanation nor wants to explain people why it is so? Regulators once again failed to avoid ‘oil boom’ created by so called ‘capitalism’. Once again common has to pay price for it.

                  

This reminds me people on ‘AXIOM’ space cruise from WALL-E movie. People’s life depicted on “AXIOM” space cruise is very much synonymous with our lives today; our lives are no more independent. This movie not only gives strange glimpse about our future but uncovers truth of our current lives.

 

How? Take couple of seconds to think, compare our lives with those on space cruise shown in the movie. Our lives are totally dependent on oil driven transportation, we are used to large luxurious cars sold by motor companies as per their business profitability model, and we are hypnotized by easily available loans and paralyzed by accumulating debt. For generations we are traditionalized by junk food chain. We are trapped in the web woven by corporate world under name of ‘capitalism’.

 

Our social position is not at all different than people on space cruise shown in the movie. Those people lost their existence, lost their thinking and could not think of anything else other than their own comfort. Are our lives different than those people from space cruise?

 

 

 

 

 

May 23, 2008

Mutual funds and their investment objectives

Filed under: Business management — Jagdish Hiray @ 5:48 am
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Mutual funds control a significant portion of US financial assets. Mutual funds offer investment diversification, professional management and convenience to investors. Every mutual fund has an investment objective, which it describes in its prospectus. The fund’s name often reflects its investment objective; for example, a fund that seeks a balance of growth and income might call itself the Growth and Income Fund. Most fund objectives are designed to provide a particular type of return. As a result, the fund objective has a major impact on the types of securities that dominate the fund’s portfolio. The Investment Company Institute classifies mutual funds into various categories according to their objectives.

There are six broader categories of Mutual funds according to their investment objectives: Common Stock Funds (also known as Equity funds, Stock funds), Special purpose funds, Income Funds, Bond Funds, Balanced Funds and Money Market Funds.

Common Stock Funds: In this type of Mutual funds, funds are invested almost entirely in common stock of companies, although their objectives vary considerably. Some of the different types of stock fund are: growth funds, aggressive growth funds, growth and income funds, Income-equity funds and Option income funds.  

Growth funds are seeking capital appreciation by selecting companies that should grow more rapidly than the general economy. The primary objective of these funds is capital appreciation rather than current dividend income. Growth funds hold the common stocks of more established, large growth-type companies. Aggressive growth funds invest in small or more speculative growth companies for maximum capital appreciation. The primary investment objective of these funds is capital appreciation, however, the investment policies tend to be more aggressive and riskier that for growth funds. These funds may hold common stocks in startup companies, new industries, and regular growth-type stocks. Growth and income funds seek long-term capital appreciation with income. Funds are invested in common stocks of well-established companies that are expected to show reasonable growth of principal. Their risk level is moderate. Index funds, a popular type in recent years, buy representative stocks to simply match the market indices. Income-equity funds (Dividend Yield funds) tend to invest in common stocks of companies with stable and good dividend returns. The emphasis is on secure and reasonable dividend yields and not on capital appreciation. Investment in this type of funds carries relatively low risk. Option-income funds invest in common stocks of companies to seek maximum current return by writing call options on the stock they hold. Option income funds sell option contracts against the stocks they buy. Large Cap funds invest in stocks of large companies, such as General Motors, and General Electrics which have strong business background, large market and lower business risk. Small Cap funds invests in stocks of smaller companies. Smaller firms have comparatively greater business risk than larger firms, but they have greater potential for profit.

Sector funds/Special purpose funds: Funds in this category have objective or limit their investment to a specialized industry or sector such as energy-related firms or companies that produce precious metals. These fund permits investors to concentrate on a specific investment segment. These funds can also use futures and options and short selling to meet more aggressive objectives.

Income Funds: Income funds are portfolios consisting of bonds and common stocks as well as preferred stocks. Income fund managers try to obtain satisfactory interest and dividend income for the shareholders.

Bond Funds: Bond funds seek high income and preservation of capital by investing primarily in bonds and selecting the proper mix between short term, intermediate-term, and long-term maturities. A bond fund may restrict its investments to certain categories of bonds, such as corporate, municipal, or foreign bonds. In recent years, tax-free municipal bonds funds have been popular.

Balanced Funds: Unlike most of mutual funds that make investment exclusively in one asset class, balanced funds invests a portion of its assets into each of major asset classes: cash and cash equivalents, government securities, corporate bonds, and corporate stocks. Main object behind is that if one asset class were to fall in value, another would rise to compensate, thus giving investor a balanced rate of return.

Money Market Funds:  Money market funds are a special form of mutual funds. Main investment objective of these funds is to provide more safety of principal or investment. The investor can own a portfolio of high yielding CDs, T-bills, and other similar securities of short-term nature, with a small amount to invest. Their investment portfolio covers investment in short-term government securities, commercial papers, and certificates of deposit. Each share has a net asset value of $1, however, yield fluctuates daily. 

 

 

 

 

 

December 1, 2007

Housing market crisis

Filed under: My Opinion — Jagdish Hiray @ 1:23 pm
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            Housing market crisis was very well expected, however everybody tried to took advantage of this boom. I got introduced to this market first when I was looking for my first house to buy. What I had seen, experienced was unbelievable as most of us would had. This article is based on my true observations and real facts I came across in this line of business.  

            Many of loan agents and realtors were totally unaware and lacking basic knowledge of rules and regulations of California’s Department of Real Estate. Many of them never passed license exam from state. Some of them were even not eligible to work legally in this line of business. Brokers were hiring people without proper eligibility and state license requirements. There was solid chain of loan agent, broker, and account executive from lenders and underwriters. These people can do anything to get loan done or deal get done for monetary benefits. They used to charge high fees and loan program for their benefits. Fees in turn used to get added into homebuyer’s principal amount of loan. Everything was well set to extract money from homeowners’ loan amount. Realtor’s created hypothetical conditions to increase bidding on houses during boom to get maximum highest bid possible to get higher commission. 

            These people sold loan program, which benefited them not homeowners, to get more commission from these deals. Many lenders came with 1% interest rate program to lower monthly payments, which was very popular because loan agents were getting more rebate on those programs from lenders. There was no limit to the grid. Many young people got attracted towards this business because of this easy money. There were thousands of people appearing for real estate license exams every weekend. Poor homebuyer was confused and was surrounded by these greedy people, was helpless only to fulfill dream of life: owning own home.  

            Due to hypothetical increase in home prices, they were constantly pressured by real estate advertisers to refinance their loan amount to refinance and to spend particularly during holiday seasons and for remodeling. That caused increase in loan amount and in turn more burden on homeowners. But it was benefited to real estate community; they were becoming richer and richer day-by-day, spending money on their expensive vacation and expensive cars at expense of common man’s loan amount.           

            Surprisingly, not a single regulatory organization took steps to research the cause for this boom and took proactive preventive steps to control these behaviors. Once more, common man in this country suffered under the name of ‘Capitalism’. This is very similar boom as we have seen in 2000, so-called regulations and rules were implemented after boom busted, however not sure how many of them responsible for that really got punished.  

            Real estate boom and its effect are worst than ever. Even decrease in short-term rate is not going to help. Increase in oil prices had made this situation worst, and made common man’s life more challenging than ever. 

            This time common man has to be very careful. Save as much money as you can to face future financial challenges, time ahead is very promising and one should not expect any honest and positive efforts from so called ‘Capitalist’ economy, to think about common man.

 

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