It’s an interesting time to be in the UK, where the Mother of All Parliaments, the House of Commons, has been roiled by infighting and discouraging economic news.
The Chancellor of the Exchequer ignited a firestorm of protest last week: see Chancellor Alistair Darling warns slump could be the worst for 60 years, precipitating a slump in the Pound Sterling and a furious debate over whether he acted irresponsibly or not. In many ways the entire thing -including debating whether government ministers ought to be blunt or Pollyanna-like in their official statements, the reliability or unreliability of official statistics, the question of whether the chief executive should take the fall to prevent the decimation of the party- sounds eerily familiar and because of that, oddly comforting.
The Brits are working through issues not very different from our own and it seems to be there isn’t all that much of a difference between the way British and Filipino politicians are trying to do damage control: orare ignoring public opinion altogether while politicizing previously relatively partisan-free civil service institutions.
The Times in a recent editorial (which came at the heels of the paper’s report that a sacking was in the offing), The twilight of Sir Ian Blair, looked at the controversial head of Scotland Yard and took him to task in all-too-familiar (for Filipinos) terms:
His responses are by now well practised. He believes that near-constant pressure to quit is an occupational hazard to be shrugged off if not actually ignored. And he believes mutinous disloyalty from senior colleagues is an inevitable result of radical reforms of which he is fiercely proud.
The trouble for Sir Ian is that his reforms have not made him indispensable. Nor can he be sanguine any longer about the calls for him to go. His support from the Association of Chief Police Officers and the Home Office has crumbled: his contract will not be renewed in 2010. This makes him a lame duck not only in the view of his many critics, but in fact. If his record were spectacular, this newspaper would back his bid to stay in office until the 2012 Olympics and beyond. Unfortunately, it is not.
What sets the British media apart from our own is the deeper sense of memory, whether institutional, national, and personal, that the media, the politicians, and commentators have. For example, Libby Purves in Why did Alistair Darling choose 1948? points out a fascinating detail, concerning 1948 as a watershed year for Britain despite postwar austerity:
The disreputable anomaly of plural voting was abolished – previously university graduates could vote in two places, and business owners had an extra vote at their place of work.
The odd thing of course being that there are frustrated middle and upper class Filipinos who continue to think plural voting might be a good thing.
The business and finance media, too, write clearly and informatively, something hardly ever seen at home. The Business Editor of The Times pens an analysis: This slowdown has a long way to go yet — so just look forward to the sales. And there are short, but richly informative reports that contextualize the economic news. An article Is the party over for pubs? points out British pubs are closing at the rate of four per day and also ties in the various economic trends (crashing property prices, increasing food and labor costs, etc.) into the uncertain future of a British institution.
In Britain 2028: we need ten new cities, please, Camilla Cavendish looks at the immigration policies of the UK, something that ought to be of interest to Filipinos living and working here.
Just today, Gordon Brown to increase Holyrood’s tax powers focuses on the great Labour project of restoring the Scottish Parliament and increasing its powers over taxation and budgeting: again, this ia a debate erupting in Britain which should be interesting to proponents of Federalism.
Update: Only Blair could save Labour now provides an insight into how more “mature” democracies factor surveys into the political situation, and how past and present leaders can add and detract from their party’s future prospects.
A great pleasure is reading the obituaries published in the British papers. See K.K. Birla: industrial tycoon and philanthropist.
Cat, asan ka ba? This is your forte. I just log in hoping to read something from you in this blog about this issue . Maraming sana akong itatanong sayo . May mga hindi kasi mainitidihan sa mga nababsa ko sa diaryo at napakinggan sa TV eh.
“Lehman was not rescued because it won’t reveal everything and they’re also asking for a high price. Also, the bailout of Bear Sterns did not do much to stabilize the market so why bailout another one. Merrill Lynch’s CEO Thain grabbed the opportunity and talked to BA’s CEO on the side during the Fed sponsored meeting last weekend to avoid the same faith. AIG has a lot of filthy rich subsidiaries. It might survived in some form without a bailout.†– Supremo
I believe its because the government can no longer afford it . they just nationalized the Freddie Mae and Fannie Mac and AIG needs to be rescued than Lehman. US can afford to let go of Lehman but not AIG.
Just as Communism collapsed in 1989, neo-liberal Capitalism [i.e. the part that advocates financial liberalization] is also in danger of collapsing.
Rego (at at 8:42 am), here’s a primer of the subprime crisis (which triggered the current round of institutional failures) from a British comedy show.
rego,
Effect on the broader economy not affordability is the issue.
With so much going on in the world now – beyond our control , cleaning up your personal balance sheet is all within your control. So focus on what you can control and change. Pay off your credit cards debts, car loans, and decrease the balance of your HELOC before interest rates and credit worthiness is being redefined.
While many factors contributed to the financial crisis, it is obvious that lending practices has been too lax in terms of qualifying rules. Almost anyone was able to get a no money down to buy a home, opened credit cards and car loans. Qualifying rules are already changing, and will keep getting tougher in the month ahead. To be honest, this is not a new development. It’s really just going back to the old practices….
dsDon’t worry if you have money less than $100,000 in a bank because it is FDIC insured. For those over that, you will get 50 cents for a dollar..
Understand the financial crisis at personal level. Also be aware of your own career and which industry is vulnerable to job losses.
Assessing you own career and preparing for the worst in the BPO industry….
“Tech firms see bad days ahead”
Lehman Brothers’ bankruptcy filing may well prove to be the last straw for Indian IT firms, which were expecting the second half of FY09 to be better. As a result of the US financial market crisis, analysts do not expect Indian IT firms to sign any significant contracts in the banking, financial services and insurance (BFSI) space in the months to come.
“Consolidation could result in a significant reduction in IT spends, though it won’t happen overnight. The process could be spread over six to nine months,” explains Avinash Vashishtha, CEO and MD of Tholons. “We don’t see any major challenge for providers in the short-term. But in the mid-term, it would result in the reduction in the quantum of work outsourced to services providers,” concurred S Sabyasachi, senior director, neoIT, an offshore advisory firm.
http://www.bpowatchindia.com/bpo_industry_report/msn/technology_firms/september-16-2008/msn_lehman_merrill_tech_india_forecast.html
how would the US financial crisis affect the Philippine economy?
THREAT TO BPO’s may become a reality…
That’s a threat to the likes of the business process outsourcing (BPO) sector, a popular job provider. American clients still account for a big chunk of those that local BPO companies currently serve. BPOs have been a major stimulus for other sectors like real estate, retail, transport, and consumer goods.
http://newsbreak.com.ph/index.php?option=com_content&task=view&id=4305&Itemid=88889053
AIG has just been nationalized….. Keynes lives on…….When the world faces the unknown unknown the state steps in….
They make it a known unknown. The people as a whole will pay in the final analysis. How much will be unknown.
Even the most hardcore of free market zealots become heretics and blaspheme.
Now let us wait for the details of the New New Deal.
When the U.S. Congress struck down Glass Steagal to ave the way for the idea of a universal financial service company (merger of insurance, investment and commercial and retail banking) it was going where no man has gone before.
They said that markets would regulate itself. They struck down regulation of the business model. Minimal market regulation was the answer.
Gramm-Leach and Bliley together with Robert Rubin during the Clinton years wanted the universal model to suit Citigroup.
Both the Republican Congress and the Democratic President Clinton bear responsibility for this massive risk taking by making the financial markets no better than a casino. The rest of the dogmatic free market theologians who made their quantitative analytical theories a religion.
Huge leverage on margin was allowed. If you think I was the only anarchist praying for allowing the markets to fail the U.S. government at first decided to play chicken with the markets and she blinked.
No More Creampuffs
The Government Is Willing to Let Wall Street Firms Fail. That’s Good.
By Kenneth Rogoff
Tuesday, September 16, 2008; A21
“This past weekend, the U.S. Treasury and the Federal Reserve finally made it abundantly clear that they won’t bail out every significant financial firm in America. Certainly this came as a rude shock to many financiers. In allowing the nation’s fourth-largest investment bank, Lehman Brothers, to file for bankruptcy, and by forcefully indicating that they are prepared to see even more bankruptcies, our financial regulators showed Wall Street that they are not such creampuffs after all.”
“The question now: What’s next? Assuming the financial sector continues to melt down over the next couple of months, at what point, if any, should the government get back into the game? It would be a mistake to do so before a great deal more consolidation takes place. During the epic boom of the past 20 years, the financial services sector became badly bloated. At its peak, it accounted for over one-third of corporate profits in the United States, not to mention the staggering billions of dollars in bonuses that Goldman Sachs ($12.1 billion in 2007) and others paid their employees. Now, in the wake of the subprime mortgage debacle, investment banks are seeing some of their most profitable lines of business evaporate. Profits from complex mortgage products are not coming back anytime soon; nor are profits in many other areas that rely on huge borrowing.”
“Instead, “deleveraging” is the buzzword throughout the financial system, as firms prune their borrowing and their positions. As profits come down to more earthly levels, the U.S. financial system is going to shrink. In all likelihood, at least 15 percent of financial employees — including at the high end — are going to lose their jobs. In principle, this shrinkage could take place through all firms and banks trimming their operations proportionately. But that is not how a capitalist economy operates. Whether it is the auto, airline or tech industries, the strong devour the weak. That is why it was inevitable that some banks would either fail or submit to distress mergers, including even some of the largest. That is why it has been quite clear for some months that the trauma to the U.S. financial system was not over.”
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/15/AR2008091502532_pf.html
Creative Destruction on Wall Street
By William Greider
“The epic deflation of Wall Street rolls forward like a blood-spattered steam roller, claiming more important victims. It takes down noble old names like Merrill and Lehman Brothers, destroys the savings of large pension funds and mom-and-pop investors, throws tens of thousands of financial workers out of jobs.”
” An epic deflation of wealth sweeps away arrogant financiers and their fraudulent gimmicks, setting the stage for reform. And the rest of us are doomed to go along for the perilous ride.”
“But let’s not dwell on the downside. This is the process Joseph A. Schumpeter famously described as “creative destruction”–capitalism’s way of clearing away debris from the past so that new flowers may bloom. In this drama, what is being swept away is the monumental arrogance of celebrated financiers, also the fraudulent gimmicks that created lots of new billionaires by selling bad paper to the world’s investors. A great bubble of wealth grew in the canyons of Wall Street–a run-up of falsified financial assets that lasted for roughly twenty-five years. Now the air is rushing out of that balloon, no way to stop it.”
“In the long run, the destruction of concentrated wealth and power is always good for democracy, liberating people from the heavy hand of the status quo. Unfortunately, many innocents are slaughtered in the process. As the US manufacturing economy was dismantled by downsizing and globalization, the learned ones (Alan Greenspan comes to mind) told everyone to breathe easy–ultimately this would be good for the workers and communities who lost the foundations of their prosperity. Now that “creative destruction” is visiting the bankers, we now observe they are not so accepting of their own fate.”
“The destruction of Wall Street’s girth and power is unavoidable, in any case. To switch metaphors, Humpty Dumpty fell off the wall and not even the king’s horses in Washington can put him back together again. It would have been far better if the federal government and national politics had recognized the great deceptions of Wall Street and put a stop to them before catastrophe unfolded. Since that didn’t happen, we are all now doomed to take a perilous ride–the economy, the country, the world–and hope for the best. ”
http://www.thenation.com/doc/20080929/greider/print
Reading the news and thanking myself for getting my 401 K lump sum even though I am not entitled to it yet so penalty and taxes were charged then put it in an AIG backed investment, then withdrew it just in time even though the interest is just starting to become positive after deducting penalty for early withdrawal.
I am one in my told ya so moments to my friends including a very close kin whose houses are being foreclosed left and right. I just hate those fly by night mortgage companies that sprouted during the real estate boom. And the realtors/appraisers who took advantage of the people who thought ARM is an appendage of a body when it means adjustable rate mortgage.
Let me explain to you in layman’s language what’s funny with Fanny Mae and etc. etc. meltdown. next.
Let me talk about subprime mortgage meltdown first because this is the root of foreclosures.
Investigations are going on as the US government is infusing taxpayers’ money to the investment/mortgage companies.Like the Enron case, many heads will fall. They’re doing it quietly unlike in the Phils. when investigation blah blah muna sa Congress tapos wala namang napaparusahan.
The unscrupulous real estate/bank lenders took advantage of the housing industry boom. Actually they were the ones who made the prices of houses skyrocketed because the of the demand created by granting to loans to people who had poor credit ratings…poor credit history. Even their income are not sufficient to pay mortgage payment so that joint equity ownership was encouraged. Parang si A na kumikita ng
malaki lang kaunti sa minimum wage, nakikipartner sa isang kamag-anak o kaibigan para lang maaprubahan ang loan. In exchange for what? A year after, the real estate agent arranges for refinancing when the value of the properties has gone up. May equity nang kinita.
Kagaya ng kaibigan ko, after a year tumaas na ang value ng bahay niya ng 90,000. Nagrefinance sila, split sila noong joint equity oqwner nila, tapos waive na ng right of onwership yong isa. So sinong naiwang magbayad ng mortgage na for subprime credit, for the first three years, interest lang ang binabayaran, nothing for the principal–yong minimum wage earner lang.
The ARM which is fixed for the first three years (ito ang indi naiintindihan ng mga homebuyers na nasisilaw sa low interest rate for the first years then adjust to variable rate…yong tipong kung ano ang floating rate plus a margin
so from 3 per cent puwedeng tumaas yon to 8 percent.
Ang mga inosenteng home buyers did not know what hit them. A friend of mine whose house is on shortsale up to October was paying less than 2,000 a month for her interest only mortgage for the first three years can no longer afford a close to 3,000 monthly payment after the variable rate took effect.
So they defaulted in payment. The shortsale will net the lender 80 per cent of the original value of the house….tax abatement is being granted to my friend. But there are no takers. The inventory of house in their places is high that new houses can be bought at much lower price so why buy an old one not unless the price is floored.
How has this affected Fannie Mae and Freddie M.
The mortgage companies/lending institutions who approved the loans to these subprime creditors have to convert the mortgages into cash, so they sell these to either to Ginnie Ginnie Mae is short for Government National Mortgage Association.( This is an agency by HUD, which is the US Department of Housing and Urban Development) or to Fannie Mae and Feddie MAC (Federal Home Loan Mortgage which though operated independently in the past enjoy the support of the government in terms of investment.
How do the Fannie Mae and Freddie Mac make money from these mortgage loans? They bundle the mortgages into securities backed investments and sell them to investors.
The investment companies bundle them into “Funds something something” and offer them to 401 K holders, pension fund and other investments where the future of the employees working hard are invested.
I saw how my 401 K dwindled as returns from these investment choices by our financial whiz holding our kitties
when the homeowners can no longer make the monthly amortizations.
Investment companies tried to window dress their financial statements by deferring reports of expenses so that net income is overstated , otherwise, their stock would plummet in the stock market.
Some attempted to get the assistance of the government; others tried merger but ultimately, they are forced to show that they are in the RED.
The world is affected by the US subprime meltdown because foreign banks bought these mortgages and sold them to investors.
How will this affect the BPO.
The upside is the MNCs may continue to outsource some of their operations to countries where labor is cheap. HP is downsizing, terminating personnel in their human resources, finance and accounting. These are the backroom offices which have been outsourced in the past years, contributing to the high unemployment in the country.
When before, the accounting function is mostly done in the US office, now with the use of the Accounting software, the whole department is outsourced to the Philippines where CPAs are aplenty
Even payroll and credit evaluation is done either in India and Philippines.
So rego what is your question?
And you belive ypu are better than the americans. Your reaction above showed very limted understanding of the whole issue.
I never said I was. Nor would I say you’re right. If you only read all the links I put in the comment, you’d probably conclude your own comment was simply stupid and irrelevant.
If you disagree with my comment, are you saying Bush and his “PPT” are now manipulating the markets?
oh cat, natulog ako kaagad after my last comment. Anyways, I was reading this new paper columnist in my subway ride going home today. He mentioned something about leverage as one of the culrpit of the meltdown. ( the others were greed and government monitorting body like SEC)
Se said something like: ” then there is leverage…. for example, The company borrowed $30 for $ 1 equity. If the there value of there asset is lowererd to just 3 % They would be bancrupt already…”
What is leverage? My gues is its overborrowing more than what you have ( assets?) Am I right?
or he is just saying that when a company over borrowed more than ther real asset, they have very thin or narrow leverage to play on.
and Cat, do you agree on the Greed theory? The CEO and upper management of these finacial institutions loosened the subprime market to make it appear that their company has more assets so they can get more commision out of it?
The White House has just announced that an urgent bill will be sent to Congress to change the name of the United States of America to the People’s Republic of the United States of America.
Way to go….
with all the panic,DOW Jones closes UP 122 points at end of Tuesday after a manic Monday. what does it tell you after the 85B bridge loan from federal reserve?
For those who have cash, good time to shop for a good bargain.
The CEO and upper management of Fannie and Freddie… are Obama’s economic and financial advisor. Good luck democrat? McCain is ahead on electoral college of 200 over 197 of Obama. I so love this old WHITE guy.. lol
McCain has the experience needed to help right the US economy. He is calm and collected — witness his latest proposal which is to have a congressional commission investigate the reasons underlying the Lehman brothers/AIG debacle and to make a recommendation within 2 months. With a follow-up commission to determine the best-practice solutions to such debacles, and for this second commission to submit their report no later than April Fool’s Day 2009.
Sidenote: Peso-to-US-dollar now at P47.20-to-1 as mentioned in an Inquirer article.
Can’t undersand what this means because this is too high a leverage.
a leverage is some form of trading on equity, that is the corporation borrows long tern debts for expansion at an interest lower than its ROE or ROA.
ROE IS DEFINED AS RETURN ON EQUITY
which is computed as Earnings after tax over Stockholder’s equity
ROA is defined as REturn on Assets
which is computed he same way except that the divisor is the total assets
To be considered a high leverage, the expansion should generate a RETURN On EQuITy higher than the interest rate.
So kung ang interest rate on borrowed funds is 12 per cent, and the return on equity is 20 per cent, the net is 8 per cent.
put in a simple language–
nangutang ka sa banko, interest ay 6 per cent, inilagay mo sa negosyo na kumikita ka ng 10 per cent, okay ba? di ba okay.
ano ang problema ng mga corporation?
Ang return on equity nila ay pwedeng doctorin sa pamamagitan ng pagpostpone ng mga charges or expenses sa kanilang income statement. kagaya ng nangyari sa Enron. so kung mababa ang expenses, mataas ang income, pag mataas ang income, mataas ang EPS (earnings per share) na siyang nagiging basehan ng ibang investment companies to determine the prices in the stock market (other factors are rumors, stock manipulations) The price of the stock market for this kind of company is overpriced until the corporations can no longer window dressed their financial statements.
SEC is responsible to see these manipulations because it is the agency which checks whether the financial statements are according to GAAP. hindi rin nila naprotektahan ang public.
What is leverage? My gues is its overborrowing more than what you have ( assets?) Am I right?
A leverage is measured by the debt-equity ratio which together with the EPS should considered by investors in putting their money in stocks.
This is a measure of stability of the company.
Kunwari ang corporation ay may ganitong balance sheet.
Assets……….1,000
Liablities…….. 700
Equity …………300
Liabilities over Equity gives you the picture that the exposure of the creditors to the corporation is more than twice the exposure of the owners. Pag bankrupt ang corporation, ang babayaran muna ay ang mga utang. kung may matira saka lang babayaran ang mga stockholders.
Liabilities over Assets- most of its assets are financed by long term loans.
Pag nabankrupt ito kawawa ang banko o lender, walang mahihilang assets para bawiin ang kanilang perang pinautang.
Paano iapply ang Greed theory dito?
from the viewpoint of the stockholders, the high debt ratio is favorable for them. the finance whiz in the corporate management is using other people’s money instead of their equity for their dividends –cash or stock .
from the viewpoint of the investing public, this is not good, this is high risk but these people rely so much on the credibility of investment companies which claimed that they have been in business for a long time disregarding that management people change decades after decades.
The greed theory encourages the people at the helm to hire people which have virtually no conscience, no loyalty, no emotion,as long as they make money for the company and they were mostly the fastest rising stars in the last few years until their efforts result into destruction of the economy and the lives of people then they cry for the help of the government which they hate in monitoring and controlling some of their activities.
“from the viewpoint of the stockholders, the high debt ratio is favorable for them. the finance whiz in the corporate management is using other people’s money instead of their equity for their dividends –cash or stock .” — the cat.
equity is never used to pay dividends – cash or stocks. only earnings or profits are used to pay dividends.
“”McCain has the experience needed to help right the US economy. ”
Whoever the next president is, ke McCain o ke Obama, he will be quickly hated because he has to put in place some very tough belt-tightening measures. This is generally minus -10,000 pogi points..
wawa naman the next usa president.
nash,
‘wawa naman the next usa president’
Someone should ask McCain and Obama if they still want the job.
C at is right.
In one sentence: leveraging is using debt (borrowing instead of issuing new stock which would dilute or lessen stockholder’s equity or share in the profits) to magnify profits i.e. if you are earning 10 cents (after debt repayment) per dollar of capital, borrowing 10 dollars would earn you 1 dollar which all goes to the shareholders which is good in boom, low-interest times but very bad in bust, high-interest times like today that’s why the highly leveraged investment banks like Lehman, AIG, etc. without cheap sources of capital as commercial banks (for example Bank of America will only pay 3 percent to its depositors versus merril Lynch which will have to pay 10 per cent) , will tank.
@supremo
incidentally, I disagree with UP n when he says McCain has the éxperience’ if only to be pedantic because McCain has never been president (so has Obama) so neither has ANY experience (especially economic experience)
…but if experience means age, then lamang na lamang si McCain dahil naka tatlong recession cycles na siya.. and I’m sure he is used to rationing from the days when you only had spam and not fairtrade pampas beef. I’m just not sure about the consumerist americans doing ala-south koreans and giving up some creature comforts..baka mag-riot sila or, heaven forbid, siphon off Iraq’s money…
AIG is an insurer, not an investment bank. It is different from Lehman, Merril Lynch etc.
Its troubles are due to writing insurance for lenders when borrowers can’t pay for their home mortgage.
With so many borrowers going on default on their properties, the company became cash strapped. When the shit hit the fan, everyone started dumping their AIG shares, which further impaired the company’s ability to raise cash. Now the Fed has given it a credit facility to borrow against in case it needs more cash.
Click here for how tne New York Times describes the underpinnings of the AIG-failure.
http://seattletimes.nwsource.com/html/businesstechnology/2008184339_aigworldwide17.html
AIG is living exhibit of what can happen under the McCain’s economic philosophy of the past 12 years —– laissez fairre and emasculation of government oversight and regulations over large American businesses.
If one has a political bias everything is wrong with the way the Feds had bailout the insurance giant AIG. But in times of national crisis, the government has to act. AIG has to many product lines that can impact even the low-income people. Government’s intervention is made to avert that financial catastrophe. Many people would fault the government for this rescue in the same way that they would fault the government if it did not act at all.
AIG CEOS has to go and Federal regulators will replace the entire management. The 85 billion dollars fed money has to infuse into the company is the quid pro quo for such “hostile takeoverâ€Â.
Taxpayers’ money is being used to rehabilitate a company but the taxpayers are not entirely at a loss because the feds had determined that the money it will infuse approximates more or less the assets of the company. And even if it less, the stake of letting this distressed financial institution go down and knock everyone on the way is too high a price compared to $85 billion feds money or taxpayers’ money.
earnings at the end of the year are closed to retained earnings which is part of equity.
Are you challenging me again mr. Lawyer. i cannot teach you accounting here in this forum. rego would not ask me the question of it is not my forte. I do not open my mouth whene I am ignorant of the subject. magpapayabang ka na naman?
if retained earnings at the close of the year are considered equity already, they are no longer part of surplus which can be declared as dividends…. in some countries there are time limit where you can refunnel your retained earnings to dividends but once you classified earnings as equity, they become part of the assets of the company and no longer treated as “surplus earnings” or as earnings available to pay up dividends.
you do not have to refute my argument with “ad hominem” at the end… i think it is you you who were trying to be “mayabang”.
one of the reasons why a company would retain a surplus at the close of the year because the company would like to flow back the earnings as part of company assets (expansion plans perhaps). the company may declare stock dividends on these retained earnings, but never “cash dividends”.
your post claims that retained earnings turned equity is still available for cash dividends.
just educate me on this and you do not have to be saarcastic and be an “ad hominem” expert aside than being a financial expert. 🙂
Mr. PI,
I am a CPA mr. PI so would you like me to teach you accounting. i won’t , waste of time. if you like to become dumdum king, reputing whatever i havesaid in this comment box, go ahead.
About the 30:1 leverage ratio question…
“Investment banks rely heavily on borrowed money, called “leverage” in financial lingo. Lehman was typical. In late 2007, it held almost $700 billion in stocks, bonds and other securities. Meanwhile, its shareholders’ investment (equity) was about $23 billion. All the rest was supported by borrowings. The “leverage ratio” was 30 to 1.”
“Leverage can create huge windfalls. Suppose you buy a stock for $100. It goes to $110. You made 10%, a decent return. Now suppose you borrowed $90 of the $100. If the price rises to $101, you’ve made 10% on your $10 investment. (Technically, the price has to exceed $101 slightly to cover interest payments.) If it goes to $110, you’ve doubled your money. Wow.”
“…the short-term rewards blinded them to the long-term dangers. Inevitably, these surfaced. Mortgages went bad. The powerful logic of high leverage went into reverse. Losses eroded firms’ tiny capital bases, raising doubts about their survival.”
-Robert J. Samuelson, Newsweek 9/17/08
it is unforunate that you are a CPA who claims that retained earnings already classified as equity can still be declared and distributed as cash dividends to stockholders.
i will agree with you if they are declared as “stock dividends”…. 🙂
mr. cat,
i am sorry about that. next time you post, all i have to say is amen! ! ! 🙂
dividends is still part of equity
you do not declare dividends out of the current earnings of the company. they have tobe closed to Retained earnings account.
When dividends are declared the entry is made to earmark or to reduce retained earnings (aka accumulated earnings for the years of its existence.
Debit Retained earnings ……500
Credit Dividends Payable………..500
this is for dividends intended to be paid in cash.
once dividends are paid, the entry is made…
Debit Dividends Payable ….500
Credit….Cash ………………………..500
If the dividends are in the form of stocks. the entries are as follows;
Debit Retained earnings ….500
Credit Stock dividends Payable …500
when the shares of stocks are issued, this entry is made:
Debit stock dividends Payable …500
Credit common stock or Preferred …500
depending the kind of shares of stock issued.
Shareholders or Stockholders Equity are composed of two items:
The Paid-in Capital which are the paid up subscriptions of stocks
Retained Earnings-the account where accumulated earnings of the corporations are reflected.
It can be reduced by the net loss of the corporation for a particular year and or by the declaration of the dividends.
especially cash dividends.
Stock dividends may reduced retained earnings but not the total shareholders equity since there will be only be a transfer.
Effect of dividends declaration to the shareholders’ equity:
cash divdends are declared for 5.00
before declaration;
Paid in Capital …….20
Retained earnings..10
total SE………………….30
after declaration and payment of cash dividends
Paid in Capital …….20
Retained earnings….5
total SE…………………25
cash divdends are declared for 5.00
before declaration;
Paid in Capital …….20
Retained earnings..10
total SE………………….30
after declaration and issuance of stock dividends of 5.0
Paid in Capital …….25
Retained earnings….5
total SE…………………30
Who build AIG? He was Mr. Greenberg, who was ousted from A.I.G. in 2005 amid an accounting scandal, lately has been a vocal DEFENDER of the insurance company he built into a colossus..
why? Mr. Greenberg is also a major stakeholder in A.I.G. He has seen the value of his holdings plummet as A.I.G. shares have sunk. He holds about 39 million A.I.G. shares directly and an additional 243 million through his private equity firm, Starr International. The shares were worth about $15.8 billion at the beginning of this year, but just $1.3 billion as of Monday.
ouch….
http://dealbook.blogs.nytimes.com/2008/09/16/what-is-greenberg-mulling-for-aig/
In an extraordinary turn, the Federal Reserve was close to a deal Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan, according to people briefed on the negotiations.
In return, the Fed will receive warrants, which give it an ownership stake. All of A.I.G.’s assets will be pledged to secure the loan,
these people said. …
“So you as a taxpayer now have a large stake in AIG.”
really? to pay food stamps by democrats and believing that healthcare should be free for all even if a person is lazy and looting the system? it’s great to live a life for free, investing using other people’s tax money at AIG
vote democrat…
what a joke. 🙂
…more on leveraging…
In a way, the US mortgage industry was working quite similarly. Loans were easily obtained and profit was quick and plentiful.
During the better times…
Imagine buying a $300,000 house. After a lax credit-check by a (subprime) mortgage company, you get yourself the whole $300,000 loan (no downpayment required, no closing cost) and pay for the house. The loan you get is one of those complex interest-only/ARM/etc. kind so you will need to pay only about let’s say $1,800 a month.
Since a lot of other people are doing/able to do it, demand for houses becomes very high thus home prices skyrocket. In a span of a few months, your $300,000 house is now worth $400,000.
Now you can either sell it for a profit, or get your loan refinanced (the bank will give you most of your $100,000 “profit†in cash). So for your $1,800 investment (times how many months it took for you to either sell or refinance) you get about $100,000. And if you were renting an apartment before all of this (and used the house as your residence instead) then that $1,800/month cost becomes negligible.
So basically, no money out, lots of money in. Cycle continued, circle grew.
Now, manure hits the fan.
Since you didn’t really use money to begin with, and have no means of paying that $1800/month payment that is now $3000/month, and with no price appreciation in sight (so you can refinance or sell) why wouldn’t you foreclose? You just go back renting that apartment you left, and walk away knowing that at least you tried.
De-regulate here and de-regulate there and remove oversight here and remove oversight there — McCain’s economic mantra of past 16 years.
AIG would not have been able to go into the risky business-sector that brought it down, except a few years ago, McCain and the Republicans backed Phil Gramm (who is now McCain’s economic adviser). The result : Gramm-Leach-Bliley Act which was aimed to make the country’s financial institutions competitive by removing the Depression-era walls between banking, investment and insurance companies.
That bill allowed AIG to participate in the gold rush of a rapidly expanding global banking and investment market. But the legislation also helped pave the way for companies such as AIG and Lehman Brothers to become behemoths laden with bad loans and investments.
McCain — economic guru for the 21st century!!!
…on my previous post…
“US mortgage industry” – I meant US real estate industry
Dear CPA’s—-
AIG’s market capt was over $150B sometime back. It hit $10B just recently……The institutions that hold stocks or bonds of AIG know a stinck before everybody else. They refused to grant any more credit. Those that are collaterilized don’t care but those unsecured ones are dead ducks.
The Federal Reserve is now accepting equity repos to pump more liquidity into institutions. The state took over 80% of equity of AIGas collateral for the loan with veto power over corporate decisions on assets sales. They replaced top management. That effectively means the degree of state ownership in banking is growing to save the system from collapsing from a lack of private institutional confidence. For a pinoy culture that is still unaware of institutional frames it is normal to be clueless of the real picture.
If it were allowed to fail what would happen to the balance sheets of all the lenders that bought credit default swaps as per their reserve requirements as banks??????
Banks are quasi public companies because they are allowed to leverage their fractional reserve system to create credit. By statute they are allowed to leverage the most to create credit………
If together many financial instituions would have impaired balance sheets as per their reserve requirments they would have to call in loans to meet their reserve requirments.
That would be like a thundereing herd all heading for the exits at one time.
What you are witnessing is the deleveraging process. Positions are being unwound. Margin calls are all being put out. Financial markets are still being squeezed.
The Implicit message of the forced takeover of AIG is yes this is for real. Asset deflation leading to credit contraction to more asset deflation to more credit contraction.
Deflationary forces are in command. That is why they call it command economies. The state has to step up to the plate to combat the forces of fear to instill confidence.
The manic bi-polar nature of capitalism that devours it own children is moving towards a depression after a high. Manics have less serious bouts of highs and lows (boom and bust) but sometimes there comes a time when you get a serious boom followed by a serious bust.
Hello is anyone awake out there????????
Whe one wants to account quantity one also has to account for quality…
Quantitative Analysis must always come with qualitative analysis.
Layman’s Qualitative Analysis of AIG, Bear Stern and Lehman Brothers.
“Lehman Brothers was like the little kid pulling the tail of a dog. You know the kid is going to get hurt eventually, and so no one is surprised when the dog turns around and bites the kid. But the kid only hurts himself, so no one really cares that much.
Bear Stearns is the little pyro — the kid who was always playing with matches. He could harm not only himself, but burns his own house down, and indeed, he could have burnt down the entire neighborhood. The Fed stepped in not to protect him, but the rest of the block.
AIG is the kid who accidentally stumbled into a bio-tech warfare lab . . . finds all these unlabeled vials, and heads out to the playground with a handful of them jammed into his pockets.
The Fed is the babysitter who gave the kids the dog and the matches and forgot to lock the door to the Lab. The politicians hired the baby sitter.”
Layman’s Quantitative Analysis:
On AIG… the kid will not retire at 65 but 80..:)
AIG is a national asset explained by former chairman CEO..
“It’s not a solvency issue but a liquidity issue. AIG has assets it could sell to raise capital. AIG can go bankrupt if cannot raise money from private investments, Fed bridgeloan or wealthy Individual. ”
http://video.on.nytimes.com/?fr_story=c4466e197baef868e9984152a6e41ee1ea2fe92e