Ok, I think it was last week, I bought 10 shares of GE and 10 shares of Google.  I did this for purposes of helping me teach the class.

So, where do we stand today? 

GE Profit: $1.40
Google Profit: $142.90

Actually, I don't think this is too bad with the sell off we had yesterday.

Hey Everyone,

We had our finance class last night and it was pretty good!  We talked about operation and financial leverage.  Basically, I explained it like this.  You have different auto engine configurations: 4 cylinder, 6 cylinder, 8, 10 and 12 cylinders.  Ok?

Now, operation leverage looks at the difference percentage change between net income and percentage change difference between volume.  When you crunch the calculations you come up with a number.

It's the same thing with financial leverage, except it has to do with interest mainly.  I'm not going to put the formulas down for the sake of space.  However, this calculation will give you a number as well.

So, what does it tell us?  Well, remember the engine configurations I gave earlier?  Let's say you are comparing two companies.  And for the sake of this short example, one company gives an operation leverage of 2.2 and the other one gives you 1.8.  The 2.2 is like 8 cylinders and the 1.8 is like 6 cylinders.  So, basically, the 8 cylinder will go faster than the 6 cylinder.  Sounds logical.  After the companies break even the company with 2.2 factor will make more money faster than the other one.  That may sound all good and dandy, except for the brick wall.  The brick wall is an unforeseen disruption in the economy aka recession.  Since the 8 cylinder is running faster than the 6 cylinder, when the economy slows down and hits the brick wall, the 8 cylinder is going to hurt more when it hits the brick wall.  It is the same with financial leverage.

That's what the American economy is going through now.  We borrowed a lot of money and put it into operations, thus raising our leverage figures (moving up from 8 cylinders to either ten cylinders or 12 cylinders) and then we hit the brick wall!  Now, we know how much it hurts.

Yes, the bigger the number the better, but not all the time.  Be careful.

Talk to you soon.

Now, there is a chance that Fiat and Chrysler can hook up.  In effect, Fiat can merge with them...for FREE.  And in order to make it happen, Fiat has told Chrysler to get their labor costs in line with the Europeans.  What do you think about Fiat taking over Chrysler?

Hey Everyone.

I'm teaching a new finance class now.  I'm changing up some things to make it more interesting.  If you remember, my previous classes I used Coke and Pepsi as my companies to analyze.  They were so close in products, international presence and everyone in the class knew who they were.  So, that was cool and quite successful.

Now, I am trying some thing different.  I have a friend at the gym and he gave me the idea of using General Electric and Google for my companies to analyze.  I thought this was a great idea.  Why?  Look at it this way.  If you look at the sales and assets of GE, they dwarf those of the same of Google. So, why is GE's stock trading about $10/share and Google is over $300/ share?

I think this is going to be FUN!!!

Hey Class,

I read that KPMG, the auditing firm, is being sued over the subprime failure of New Century Financial.  They are blamed for giving rosy audit reports that allowed the firm to borrow more money to expand their business. 

They blame the auditors for allowing mis-statements in the financial statements that were presented BY MANAGEMENT and owned BY MANAGEMENT.  They are also saying that KPMG shut up their own auditors, even though they new better. 

Ok, let's look at both sides of this. 

Side 1)  If KPMG would have presented to management the recommended changes to the financial statements, the company would have had to increase their reserves for bad debts due to the subprime loan exposure.  If that was done, the value of New Century would have fallen, investors would have been upset, and maybe KPMG would have been fired. 

Since they didn't do that, investors were happy, in the short term.  Now they are upset at the bankruptcy filing of New Century.  Also, New Century is in bankruptcy court. 

Side 2) Management says they would not have done what they did if the auditors had done what they were supposed to do.  So, who is running the company?  Management or the auditors? 

Management had the ability (and they probably already knew) the value of the subprime loans.  It doesn't take a rocket scientist to know the value of the loans has dropped significantly.  All you had to do was turn on the news in any country, in any language.  So, let's assume that management knew about the  reduced value of the subprime loans.  So why would management want to take out loans to expand the business?  The auditor's are running the company, management is? 

So, here are the questions?  Who is responsible for management of the business?  Are the auditor's truly to blame? 

So, how is everyone doing?  As for me, I'm doing great and getting better!

I thought out about playing an April Fool's joke, but passed on it. 

Ok, let's get down to business.

General Motors (GM) new chief executive officer, Fritz  Henderson, is playing around.  He's already stated that he has no problems putting GM into a pre-arranged bankruptcy.  Also, he's looking at laying off more people, closing more plants, etc.  How many plants does GM have? 

I remember back in the day when GM had 60% of the market.  When GM sneezed, the United States caught a cold.  I remember reading a book by the late John Z. Delorean, "On A Clear Day You Can See General Motors."  Wow, so much has changed!!!

Also, GE is pitching their vision of the world's future health care needs.  We'll see.

So, here is the question.  Should GM go into bankruptcy? 

I apologize for the delay.  I was in St. Louis last week on business and just got back.  I didn't have my computer with me, so I wasn't able to update my blog.

So, let's get into it.

First let's look at GM.  Wow!!!  The new Obama administration is playing hard ball with GM and Chrysler.  On Sunday, the administration asked that the GM CEO Wagoner to step down.  Why?  The turn around package wasn't good enough. 

Do you think this is in the right direction?  Do you think it's right that Washington ask a CEO that is receiving bail out money to step aside?  I mean, why not?  If I lend someone a couple of billion dollars, wouldn't I want to have a say in how it is invested?  Look what happened with the Madoff investors.  There are a lot of people regretting those decisions right now. 

Anyway, Ok, if the White House can and did ask for the CEO's resignation, what about the resignations of AIG's CEO and Citi's CEO?  Why not those guys? 

Wagoner's problem was that the turnaround plan wasn't good enough.  And AIG's CEO?  They allowed a couple of hundred million dollars to go towards bonuses.  Which one is worse? 

Is the game fair? 

Now, what about GE?  Their CEO of GE International, Nani Beccalli says they are starting to see "glimmers of hope".  Oh, man I like to hear that!!!  Yea, I own some Jan 2010 Call contracts, so I'm partial to good news from GE. 

So, has the market begun to bottom out?  Has it bottom out? 

We'll  see.  But I think these are some great times!  I think there are some great opportunities in the financial markets.  But, I must qualify that statement.  I'm not a professional financier or trader or anything like that.  However, I am THE ETERNAL OPTIMIST!!!

Last night I heard on NPR (National Public Radio) that those in Washington DC are absolutely irate about AIG and the bonuses they took.  Also, since it does appear that they (AIG/Washington DC) can't stop the bonuses, that Washington may put through special legislation that will tax the bonuses as high as 90%.  Ouch!!!  I guess that is one way of getting the money back.

So, what do you think about that?

What happened in the world of finance!!!

Let's talk about the $165M in bonuses that the executives were paid a couple of days ago.  Was it right or wrong?  You decide.

Let's look at a couple of things.  First of all, I don't know anyone that works for AIG, so I am basing this on what I have heard on the news and read about.

Fact:  The executives received about $165M in bonuses.
Fact:  AIG received a whole lot of money in government bail out monies.
Fact:  The first couple of bail out monies distributed didn't have any stipulations on them.
Fact: AIG is stating that these bonuses were already earned and contractually liable to pay.
Fact:  I heard on the news that AIG said these bonuses were retention bonuses halting individuals from leaving AIG and going to competition.
Fact:  AIG says they are contractually liable for these payments.
Fact:  American taxpayers are really, really mad!
Probable Fact: If AIG had not received the funds, they probably would have gone bankrupt and the courts would probably have not released the bonuses.
Probable Fact:  They paid the bonuses with the received government bailout.
Probable Fact: The individuals due to receive the bonuses, would have sued AIG had they not received them.
Probable Fact:  If it was YOUR bonus YOU would demand it.

So, based on that, what would you do?  Tell the Obama administration to get the bonuses back?  Call the bank loans?  Call back or stall the latest loan? 

I'm not going to lie to you.  I don't know what to do.  There is so much I nor anyone else is privy to.  If I did start saying what I would and wouldn't do, I would be like everyone else....just guessin'

One of my students, Raghu, brought in a guest speaker to class.  The guest speaker was A. Ramanathan.  He just retired from Nabard, in Mumbai.  He was the Chief General Manager. 

He gave an incredible presentation on microfinance.  For those interested, microfinance is very, very small loans given to poor individuals.  Usually, it is community based.  By that I mean, the community saves their money and puts it in the "kitty" for the loans.  Then the community decides who will get the loan, how it will be paid back, interest, etc. 

It has become big business of late.  There is a microfinance company in Mexico that just went public.  Now bear in mind that even though this is a worthwhile act, there are those that take advantage of the poor.  But for every poor horror story, there are success stories as well.

I became interested in microfinance when one of my students two semesters ago wrote a paper about it.  It was real interesting to learn that most of the loans are to women.  There is a 99.9% successful payback rate.  Now, they have microcredit, microinsurance, etc.  This is becoming a real interesting business. 

If you want more information a good place to start is www.kiva.org.  If you want to get in touch with Mr. A. Ramanathan, send me your email address and pertinent information and I'll forward it to him. 

Again, Mr. A. Ramanathan, thank you for your presentation.  Raghu, thank you for inviting him.