After reading Jessica M’s post on dividends I disagree with how beneficial they are, and with the current economic crisis companies should shy away toward declaring dividends. Wikipedia criticizes that money that goes toward dividends should be reinvested into the company instead. Also, the company will have more capital on hand when they need it to fund future projects, if needed.
Also dividend income could be subject to double taxation, where you could be possibly be taxed for more than what was declared in the dividend. So the investor could possibly see no gains from dividend income, due to taxes. Sometimes dividends are so small that, that it costs more for the company to send the check, than what the dividend was worth. The larger the dividend the bigger the cost for the company.
Callwriter argues that dividends in a bear market are good because stock prices won’t reach ridiculous values. I disagree with this because the company may not be able to afford to pay every time it thinks the price of its stock is too high. A company shouldn’t focus so much on its stock price. Instead is should it should focus on R&D and future investment opportunities.
Since paying dividends decreases a stocks value, a company loses value through the payment of dividends.
Callwriter states, not paying a reasonable dividend can actually result in harm to shareholders. Hoarding cash can lead to excessive executive compensation, poor management, and employing assets in unproductive ways. One study found that the more cash a company keeps, the more likely it will overpay for acquisitions. Dividend-paying companies tend to be more efficient in their use of capital than similar companies that do not pay dividends and are less likely to engage in funny accounting.
Links:
http://rmi4350jmorse.blogspot.com/
http://en.wikipedia.org/wiki/Dividend
http://www.callwriter.com/newsletter/dividend-basics.htm
Monday, April 20, 2009
Is the smallest choice the smartest choice?
With astronomical fuel prices, auto manufactures are complying with consumer demands by introducing more fuel-efficient cars. The car looks like it has nothing bare essentials, with no trunk or front engine space. Although the car may have passed crash tests at low speeds, crashes at highway speeds could be more deadly than in a mid size automobile.
Crash videos online show the smart car going up against a mid size vehicle. After seeing the results of the crash I would not even want to step foot in a Smartcar. The car was tossed off the hood of the on coming vehicle. It looked like the Smartcar had shattered, while the other car had insignificant damage to the engine only. Since the Smartcar has no hood, there is little protection in a head on crash, or any crash what so ever.
In order to avoid substantial future losses due to lawsuits and loss of income, the smart car needs to have above average safety features. These features need to protect passengers where most cars would not. Thus, consumers would feel the value of driving a smaller car and not have to worry about their safety. If Diemler Benz were to not meet these standards, then consumers would shy away from buying the Smartcar.
Smart cars are popular in Europe, where there are many narrow streets. In contrast this is not the case in American suburban/rural cities, since the roadways are completely different. More traveling is done on highways, and if you are trusting the safety of a small compact car to protect you in a crash thing again. There comes a fine line between getting better fuel economy and passenger safety, and the Smartcar in my opinion is well below this line. Until further improvements in technology (hybrids/electric), that we can have better fuel economy and still maintain the same level, if not better, of safety.
Links:
http://auto.howstuffworks.com/smart-car.htm
http://www.spike.com/video/crash-test-shows/3151924
Crash videos online show the smart car going up against a mid size vehicle. After seeing the results of the crash I would not even want to step foot in a Smartcar. The car was tossed off the hood of the on coming vehicle. It looked like the Smartcar had shattered, while the other car had insignificant damage to the engine only. Since the Smartcar has no hood, there is little protection in a head on crash, or any crash what so ever.
In order to avoid substantial future losses due to lawsuits and loss of income, the smart car needs to have above average safety features. These features need to protect passengers where most cars would not. Thus, consumers would feel the value of driving a smaller car and not have to worry about their safety. If Diemler Benz were to not meet these standards, then consumers would shy away from buying the Smartcar.
Smart cars are popular in Europe, where there are many narrow streets. In contrast this is not the case in American suburban/rural cities, since the roadways are completely different. More traveling is done on highways, and if you are trusting the safety of a small compact car to protect you in a crash thing again. There comes a fine line between getting better fuel economy and passenger safety, and the Smartcar in my opinion is well below this line. Until further improvements in technology (hybrids/electric), that we can have better fuel economy and still maintain the same level, if not better, of safety.
Links:
http://auto.howstuffworks.com/smart-car.htm
http://www.spike.com/video/crash-test-shows/3151924
Monday, April 13, 2009
Critique: Universal Currency
In Unique’s blog about universal currency she states many reasons why there should not be one. I agree with her position, because part of a countries identity is its currency. This is how countries gain reputation among others, by having a strong currency. Also, having different currencies promotes nationalism. For years the US dollar has been a reliable currency, and is commonly used in international markets due to confidence of the government’s ability to back up the USD.
That confidence is now at risk. There’s legitimate fear that the dollar is a less reliable repository of value because of long-standing, growing deficits suddenly compounded by the billions being committed to bail-outs and economic stimulus.
Since the USD has been a staple in the currency market, there has not been a direct alternative to it that has the reach and circulation. Many people have invested in US bonds, so when the USD decreases in value so does the value of their investment. The domestic currency gets stronger while the foreign currency gets stronger(in terms of US).
Globalization has established trade levels that have never been recorded, but is occurring in the absence of broadly based universal currency standards. The largest trading partner of the US, China, use to hold 90% of their reserves in USD, and are now reducing this figure due to the weakening dollar.
Unique also states that with a universal currency there will need to have universal banks and interest rates. If this were to occur, it would be easier to assess risks on loans, because of the same standard set across the board. Creating a universal currency would create more stability, but would make a part of the financial sector become obsolete. With one currency there would no longer be a need for an international currency exchange (FOREX). By using a universal currency there is no further use for financial tools such as foreign FRA’s and swaps, since there will only be one currency. So, as a trader you would no longer be able to speculate on foreign currency markets, where speculating is the main reason why people trade on FOREX. Traders have no intention in taking the currency in which they are speculating in.
According to wikipedia the purpose of FOREX is to facilitate trade and investment. This market is one of the largest and most liquid financial markets in the world, and involves large banks, governments, and currency speculators. Major currencies are traded on the FOREX, as well as lesser familiar currencies. Thus, this market makes it easier for countries to change the currency they are holding. For example, if you are holding yen, you can easily exchange this for USD or British pound sterling. Etc.
Troubled countries that face high inflation rates, and political instability would benefit both economically and financially from a universal currency.
Links:
http://uniquebl0gs.blogspot.com/
http://www.worldtrademag.com/Articles/Column/BNP_GUID_9-5-2006_A_10000000000000563358
http://en.wikipedia.org/wiki/Forex
That confidence is now at risk. There’s legitimate fear that the dollar is a less reliable repository of value because of long-standing, growing deficits suddenly compounded by the billions being committed to bail-outs and economic stimulus.
Since the USD has been a staple in the currency market, there has not been a direct alternative to it that has the reach and circulation. Many people have invested in US bonds, so when the USD decreases in value so does the value of their investment. The domestic currency gets stronger while the foreign currency gets stronger(in terms of US).
Globalization has established trade levels that have never been recorded, but is occurring in the absence of broadly based universal currency standards. The largest trading partner of the US, China, use to hold 90% of their reserves in USD, and are now reducing this figure due to the weakening dollar.
Unique also states that with a universal currency there will need to have universal banks and interest rates. If this were to occur, it would be easier to assess risks on loans, because of the same standard set across the board. Creating a universal currency would create more stability, but would make a part of the financial sector become obsolete. With one currency there would no longer be a need for an international currency exchange (FOREX). By using a universal currency there is no further use for financial tools such as foreign FRA’s and swaps, since there will only be one currency. So, as a trader you would no longer be able to speculate on foreign currency markets, where speculating is the main reason why people trade on FOREX. Traders have no intention in taking the currency in which they are speculating in.
According to wikipedia the purpose of FOREX is to facilitate trade and investment. This market is one of the largest and most liquid financial markets in the world, and involves large banks, governments, and currency speculators. Major currencies are traded on the FOREX, as well as lesser familiar currencies. Thus, this market makes it easier for countries to change the currency they are holding. For example, if you are holding yen, you can easily exchange this for USD or British pound sterling. Etc.
Troubled countries that face high inflation rates, and political instability would benefit both economically and financially from a universal currency.
Links:
http://uniquebl0gs.blogspot.com/
http://www.worldtrademag.com/Articles/Column/BNP_GUID_9-5-2006_A_10000000000000563358
http://en.wikipedia.org/wiki/Forex
GM recalling 1.5 million cars over fire fears
Just when you thought it couldn’t get worse for GM, it continues. While browsing through cnn.com I came across this article stating that GM is recalling 1.5 million cars due to the possibility of engine fires. They may be doing this to avoid future lawsuits, but this could impact GM’s future image, sales, and profitability. However, they are doing the right thing by telling and warning the public of the possibility of engine fires, to avoid the backlash of more serious negative effects.
The recall covers certain mid and full size sedans under GM’s Chevy, Buick, Oldsmobile, and Pontiac brands. This recall shouldn’t affect most consumers, since they have converted to driving gas guzzling SUV’s. One of the engine parts was leaking oil, and was dripping on to another part, which gets very hot and spark a potential fire.
The vehicles involved are:• 1997-2003 Buick Regals.• 1998-2003 Chevrolet Luminas, Monte Carlos and Impalas.• 1998-1999 Oldsmobile Intrigues.• 1997-2003 Pontiac Grand Prix.
Although this is a minor defect in the performance of their engines, GM is taking the initiative by fixing this problem as it has arisen. Hopefully the public will see this action as GM taking corporate responsibility for their actions, and in return buy GM cars. Consumers may feel that if GM finds a problem with their product line, they will do everything to correct the problem.
Links:http://www.cnn.com/2009/US/04/13/gm.recall/index.html
The recall covers certain mid and full size sedans under GM’s Chevy, Buick, Oldsmobile, and Pontiac brands. This recall shouldn’t affect most consumers, since they have converted to driving gas guzzling SUV’s. One of the engine parts was leaking oil, and was dripping on to another part, which gets very hot and spark a potential fire.
The vehicles involved are:• 1997-2003 Buick Regals.• 1998-2003 Chevrolet Luminas, Monte Carlos and Impalas.• 1998-1999 Oldsmobile Intrigues.• 1997-2003 Pontiac Grand Prix.
Although this is a minor defect in the performance of their engines, GM is taking the initiative by fixing this problem as it has arisen. Hopefully the public will see this action as GM taking corporate responsibility for their actions, and in return buy GM cars. Consumers may feel that if GM finds a problem with their product line, they will do everything to correct the problem.
Links:http://www.cnn.com/2009/US/04/13/gm.recall/index.html
Sunday, April 5, 2009
Critique: Reserves what, how, why?
In Jessica M’s blog about reserves she assesses the importance it is to firms to keep them. Some companies may hold reserves for an individual policy, but in most cases they hold reserves for the group they have pooled. Section 1303 of NY’s Insurance Law requires that insurers maintain reserves for the payment of losses or claims and expenses, incurred on or prior to the statement date, whether reported or unreported. The concept of reserves is basically putting the money you need in a bank account, to fund future expected claims or losses. Insurers generally have to estimate how much they need to hold in reserves, and over time the reserve becomes large enough to fund a policyholder’s loss when incurred.
Considering a life insurance policy, reserves are determined by:
tV = Ax+t – P*a(due)x+t
tV= the reserve at time t
Ax+t = future benefits
P*a(due)x+t = future premium’s paid
I agree with her that it is critical for insurance companies to hold the right amount in reserves to meet its future obligations. However, with recent developments in my family auto policy I disagree with how my insurance company fails to look at the reserves built up on my auto policy. Let’s just say that one person had a really bad year and we have held the same policy with the same company for about 30 years. Over that time my family has had less than 5 total claims, which has worked out for the insurer. Now with this bad year, they have decided to add a surcharge due to the number of points on this person’s license. The insurance company explained the surcharge was for 3 points on your license, which equals one accident. Not to mention that the surcharge is probably equal, if not more than the losses incurred to both cars.
This makes me question the point of insurance, since the person insured has to pay for their past losses in the future. I agree that since this person is a larger risk that they should increase the premium. But why should it increase when there have been almost no claims in the past and the reserves that should have been built up should have covered this year’s losses.
Links:
http://www.ins.state.ny.us/ogco2008/rg080204.htm
personal experience
http://en.wikipedia.org/wiki/Actuarial_reserves
Considering a life insurance policy, reserves are determined by:
tV = Ax+t – P*a(due)x+t
tV= the reserve at time t
Ax+t = future benefits
P*a(due)x+t = future premium’s paid
I agree with her that it is critical for insurance companies to hold the right amount in reserves to meet its future obligations. However, with recent developments in my family auto policy I disagree with how my insurance company fails to look at the reserves built up on my auto policy. Let’s just say that one person had a really bad year and we have held the same policy with the same company for about 30 years. Over that time my family has had less than 5 total claims, which has worked out for the insurer. Now with this bad year, they have decided to add a surcharge due to the number of points on this person’s license. The insurance company explained the surcharge was for 3 points on your license, which equals one accident. Not to mention that the surcharge is probably equal, if not more than the losses incurred to both cars.
This makes me question the point of insurance, since the person insured has to pay for their past losses in the future. I agree that since this person is a larger risk that they should increase the premium. But why should it increase when there have been almost no claims in the past and the reserves that should have been built up should have covered this year’s losses.
Links:
http://www.ins.state.ny.us/ogco2008/rg080204.htm
personal experience
http://en.wikipedia.org/wiki/Actuarial_reserves
CEO’s compensation
Perhaps one contributing factor to the dismal economy is the decisions that top CEO’s make, and the compensation they receive. CNN states, “as the economy melted down, so did CEO compensation.” The average compensation for 200 chief executives at America’s largest public companies fell 5.1% to $10.8 million. This was the first time in five years that CEO compensation shrank.
So why don’t risk managers (shareholders) say that enough is enough, and limit the compensation given to CEO’s. By having so much money tied up into one person, it limits the flexibility of a firm. If you have invested so much money into one person, you expect above average returns from that investment. I feel that companies have continually overvalued CEO’s and are now paying the price for it. Just look at where AIG and all of these investment banks stand now.
If shareholders decided to compensate CEO’s significantly less, it could use this money to compensate lower level workers. This could increase worker productivity, and create more value to the firm than just one person. Thus, workers feel more tied to the firm and create a slower turnover in employees. Is there justification to complain in a pay cut when you are making millions of dollars. One extreme example would be the CEO of McDonalds making $13.4 million in 2006, while you have thousands of people working at minimum wage.
Links:
http://money.cnn.com/2009/04/05/news/top_ceo_pay/index.htm?postversion=2009040514
http://www.networkworld.com/news/2009/033009-sprint-ceo-pay.html
http://www.usatoday.com/money/economy/2007-04-10-3656879995_x.htm
So why don’t risk managers (shareholders) say that enough is enough, and limit the compensation given to CEO’s. By having so much money tied up into one person, it limits the flexibility of a firm. If you have invested so much money into one person, you expect above average returns from that investment. I feel that companies have continually overvalued CEO’s and are now paying the price for it. Just look at where AIG and all of these investment banks stand now.
If shareholders decided to compensate CEO’s significantly less, it could use this money to compensate lower level workers. This could increase worker productivity, and create more value to the firm than just one person. Thus, workers feel more tied to the firm and create a slower turnover in employees. Is there justification to complain in a pay cut when you are making millions of dollars. One extreme example would be the CEO of McDonalds making $13.4 million in 2006, while you have thousands of people working at minimum wage.
Links:
http://money.cnn.com/2009/04/05/news/top_ceo_pay/index.htm?postversion=2009040514
http://www.networkworld.com/news/2009/033009-sprint-ceo-pay.html
http://www.usatoday.com/money/economy/2007-04-10-3656879995_x.htm
Monday, March 30, 2009
Critique: does an improving stock market mean an improving economy?
In Jessica M.’s blog does an improving stock market mean an improving economy, she argues that a variety of factors contributed to the current state of the economy. Some of which were AIG, Ben Bernanke, and rising unemployment. I agree with her, with the following paragraphs.
Reuters states that there are some encouraging signs in the credit markets, and that U.S. economy is facing a prolonged housing market downturn and credit and liquidity problems in the money markets, and high global oil prices are also taking their toll. Also, 130 million Americans will receive tax rebates, which will be more money that the government doesn’t receive, and could further increase the national debt and inflation. Furthermore, why are we so anxious to lend money back out when job market is unstable, and it could create the same problem we are currently in. Why do we want to put money back in the hands that couldn’t pay their past debt. Some of the home buyers are those that lost their home because they couldn’t afford the mortgage. We can now say that we live in a country where debt is encouraged, and when worst comes to worst you just write it off. We give money back to people who can’t manage it in the first place, and they take on so much debt that it eventually consumes them.
Also, the Chicago Fed president expects the economy to recover in the second half of this year. This may sound good, but nothing is set in stone. After all, who would have predicted that the economy would just plummet like it has, when it just seemed to keep increasing in value.
Some things take time to fix, and the stock market didn’t get the way it is overnight. Some of the top economic and financial people are trying to work on how to fix this problem, and are still baffled on what to do. Ben Bernanke isn’t the only one where it got the economy to where it is, and where is Allan Greenspan when you need him. Some of Greenspan’s policies could have contributed this turmoil.
In an age of get rich quick schemes, scams, and identity theft it is fair to say that greed is what motivates these criminals, and greed is what ultimately caused the huge collapse in the stock market. Greed is what have caused investors to lose it all, and what has motivated the desire for instantaneous returns in a short period of time. Just look at Bernie Madoff, how he took money from new investors/clients and paid returns to previous clients with their money.
Ethical business management states that greed has harmed the economy, and it started a long time ago. It began in the nineties with a stock market scheme to make money called “day trading.” Thousands speculated to gamble for quick one day profits. Thousands lost everything. Some also took on too much risk, fueled by greed, and made make or break trades.
Links:
http://www.reuters.com/article/ousiv/idUSBOM20597220080424
http://www.forbes.com/feeds/afx/2008/05/12/afx4996768.html
http://ethical-business-management.suite101.com/article.cfm/an_economic_crisis_bank_failures
Reuters states that there are some encouraging signs in the credit markets, and that U.S. economy is facing a prolonged housing market downturn and credit and liquidity problems in the money markets, and high global oil prices are also taking their toll. Also, 130 million Americans will receive tax rebates, which will be more money that the government doesn’t receive, and could further increase the national debt and inflation. Furthermore, why are we so anxious to lend money back out when job market is unstable, and it could create the same problem we are currently in. Why do we want to put money back in the hands that couldn’t pay their past debt. Some of the home buyers are those that lost their home because they couldn’t afford the mortgage. We can now say that we live in a country where debt is encouraged, and when worst comes to worst you just write it off. We give money back to people who can’t manage it in the first place, and they take on so much debt that it eventually consumes them.
Also, the Chicago Fed president expects the economy to recover in the second half of this year. This may sound good, but nothing is set in stone. After all, who would have predicted that the economy would just plummet like it has, when it just seemed to keep increasing in value.
Some things take time to fix, and the stock market didn’t get the way it is overnight. Some of the top economic and financial people are trying to work on how to fix this problem, and are still baffled on what to do. Ben Bernanke isn’t the only one where it got the economy to where it is, and where is Allan Greenspan when you need him. Some of Greenspan’s policies could have contributed this turmoil.
In an age of get rich quick schemes, scams, and identity theft it is fair to say that greed is what motivates these criminals, and greed is what ultimately caused the huge collapse in the stock market. Greed is what have caused investors to lose it all, and what has motivated the desire for instantaneous returns in a short period of time. Just look at Bernie Madoff, how he took money from new investors/clients and paid returns to previous clients with their money.
Ethical business management states that greed has harmed the economy, and it started a long time ago. It began in the nineties with a stock market scheme to make money called “day trading.” Thousands speculated to gamble for quick one day profits. Thousands lost everything. Some also took on too much risk, fueled by greed, and made make or break trades.
Links:
http://www.reuters.com/article/ousiv/idUSBOM20597220080424
http://www.forbes.com/feeds/afx/2008/05/12/afx4996768.html
http://ethical-business-management.suite101.com/article.cfm/an_economic_crisis_bank_failures
Should GA 400 continue to have tolls?
Recently there has been question on whether the tolls on GA 400 should be lifted due to excess reserves held by the state. CBS news has continued to cover this story, and is asking why are we still paying these tolls considering the bad economy. If you lift the toll 400 will become more congested, and the state or the GOT will lose a source of income. This extra money that it is collecting now could be put forth to expand roads where needed, instead of only paying for GA 400. As a result the state could reduce its future risk of having to raise funds for road work, as well as not increase traffic on an already busy road.
Even though I don’t use the road I believe that drivers should continue to pay the tolls. Once you remove the tolls then there will be increased traffic due to the people that avoid 400. In due time there will need to be construction to expand the road, and the future toll money would fund this expansion and plan for the future. After all, Georgia’s roads aren’t the greatest, and we all know when 5 o’clock comes around its impossible to go anywhere.
Links: CBS news
Even though I don’t use the road I believe that drivers should continue to pay the tolls. Once you remove the tolls then there will be increased traffic due to the people that avoid 400. In due time there will need to be construction to expand the road, and the future toll money would fund this expansion and plan for the future. After all, Georgia’s roads aren’t the greatest, and we all know when 5 o’clock comes around its impossible to go anywhere.
Links: CBS news
Monday, March 23, 2009
Critique: Increasing Importance of the Weather Man
After reading Jessica L’s post on weather derivatives I had some mixed feelings on the whole concept. I agree with her that there is still some uncertainty with pricing this type of financial tool. With very uncertain climate conditions it is a good idea to hedge by using this financial tool. Using this derivative will insure a farmer’s profitability and reduce risk associated with adverse or unexpected weather conditions according to wikipedia. However, the buyer of the derivative could not be fully protected since the contract is triggered on a regional basis rather than on an individual basis.
Also there are many other companies that can use weather derivatives to protect seasonal profits. These companies may be theme parks, sports teams, or power companies that depend on the weather to remain profitable. Jessica states that “98-99% of derivatives traded are based on temperature.” Since temperature is related to precipitation the derivative is triggered by one of the two. So pricing this model would be easy using stochastic processes, where probabilities are determined by which state you are in. So the insurer should study the probability for consecutive rainy and rain free days. Based on this the model to price this type of derivative should be very complex, since you have to consider each day until maturity.
The insurer should also account for the land, the crop being grown, and the location. If either one of these is unsuitable for favorable crop growth then the price of the derivative should be higher than some one buying a derivative in a more favorable climate for a crop. For example a weather derivative for an orange grove in Florida will be cheaper than for an orange grove in New York due to more favorable conditions.
The Chicago Mercantile Exchange currently trades weather derivative contracts for 18 cities in the United States, nine in Europe, six in Canada and two in Japan. According to investopedia, weather risk is also unique in that it is highly localized, it cannot be controlled and despite great advances in meteorological science, still cannot be predicted precisely and consistently. If you buy a weather derivative in a city that is somewhat close to your farm, you may have different weather conditions even though you are so close. As we stated in class one person may gain or lose depending on what happens in the region around the city you are hedged against. So these contracts are not fully customized to every local farmer’s needs, they are only protected when the city that is insured has bad weather conditions.
Links:
http://jlewis45rmiblog.blogspot.com/
http://en.wikipedia.org/wiki/Weather_derivatives
http://www.investopedia.com/articles/optioninvestor/05/052505.asp
http://www.usatoday.com/weather/forecast/2008-06-09-weather-derivative_N.htm
Also there are many other companies that can use weather derivatives to protect seasonal profits. These companies may be theme parks, sports teams, or power companies that depend on the weather to remain profitable. Jessica states that “98-99% of derivatives traded are based on temperature.” Since temperature is related to precipitation the derivative is triggered by one of the two. So pricing this model would be easy using stochastic processes, where probabilities are determined by which state you are in. So the insurer should study the probability for consecutive rainy and rain free days. Based on this the model to price this type of derivative should be very complex, since you have to consider each day until maturity.
The insurer should also account for the land, the crop being grown, and the location. If either one of these is unsuitable for favorable crop growth then the price of the derivative should be higher than some one buying a derivative in a more favorable climate for a crop. For example a weather derivative for an orange grove in Florida will be cheaper than for an orange grove in New York due to more favorable conditions.
The Chicago Mercantile Exchange currently trades weather derivative contracts for 18 cities in the United States, nine in Europe, six in Canada and two in Japan. According to investopedia, weather risk is also unique in that it is highly localized, it cannot be controlled and despite great advances in meteorological science, still cannot be predicted precisely and consistently. If you buy a weather derivative in a city that is somewhat close to your farm, you may have different weather conditions even though you are so close. As we stated in class one person may gain or lose depending on what happens in the region around the city you are hedged against. So these contracts are not fully customized to every local farmer’s needs, they are only protected when the city that is insured has bad weather conditions.
Links:
http://jlewis45rmiblog.blogspot.com/
http://en.wikipedia.org/wiki/Weather_derivatives
http://www.investopedia.com/articles/optioninvestor/05/052505.asp
http://www.usatoday.com/weather/forecast/2008-06-09-weather-derivative_N.htm
AIG and spending
The American government should take full responsibility for this economic downturn. They should have better regulated the financial sector, so that if one company failed the whole financial system failed. The government has placed too many eggs in one basket, and in return is paying the price for it. The stock market is plummeting almost everyday, due to a lack of investor confidence.
When you invest $170 billion as a federal bailout into one company you are very committed to that investment. It seems like the government just handed over the money to AIG without any regulations on how it should be used. Why is this if they continue to do what got them in financial distress in the first place.
The $165 million in paid bonuses was part of a larger total payout valued at $450 million. Although AIG reportedly lost $61.7 billion for the fourth quarter of last year (the largest corporate loss in history), the financial products division felt this bonus was needed as compensation for their good work. Most of AIG’s losses came from the financial products division, which sold risky credit default swaps. If AIG was contractually obligated to pay these bonuses, future bonuses should directly account for the performance of the company. By giving these bonuses it has hurt the public’s image of the company, and because of this customers will shy away from doing business with AIG in the future.
So why should taxpayers pay to bailout a company that is so focused on greed, that it lacks the sense for what it right or wrong. Why would you even accept a bonus, when you know that your company isn’t doing well and that it received money from the government in order to survive.
With this said taxpayers should have a say in where bailout money should go, instead of the government investing in companies that could eventually fail (AIG and GM). In order to survive both companies need to restructure and have more regulations. With these two companies being in the news so often, we are depending on them to get us out of this economic crisis. However, I feel that the public’s perception of these companies hasn’t changed and AIG and GM will have trouble recovering.
Links:http://www.foxnews.com/politics/2009/03/16/lawmakers-target-aig-executive-bonuses/
The American government should take full responsibility for this economic downturn. They should have better regulated the financial sector, so that if one company failed the whole financial system failed. The government has placed too many eggs in one basket, and in return is paying the price for it. The stock market is plummeting almost everyday, due to a lack of investor confidence.
When you invest $170 billion as a federal bailout into one company you are very committed to that investment. It seems like the government just handed over the money to AIG without any regulations on how it should be used. Why is this if they continue to do what got them in financial distress in the first place.
The $165 million in paid bonuses was part of a larger total payout valued at $450 million. Although AIG reportedly lost $61.7 billion for the fourth quarter of last year (the largest corporate loss in history), the financial products division felt this bonus was needed as compensation for their good work. Most of AIG’s losses came from the financial products division, which sold risky credit default swaps. If AIG was contractually obligated to pay these bonuses, future bonuses should directly account for the performance of the company. By giving these bonuses it has hurt the public’s image of the company, and because of this customers will shy away from doing business with AIG in the future.
So why should taxpayers pay to bailout a company that is so focused on greed, that it lacks the sense for what it right or wrong. Why would you even accept a bonus, when you know that your company isn’t doing well and that it received money from the government in order to survive.
With this said taxpayers should have a say in where bailout money should go, instead of the government investing in companies that could eventually fail (AIG and GM). In order to survive both companies need to restructure and have more regulations. With these two companies being in the news so often, we are depending on them to get us out of this economic crisis. However, I feel that the public’s perception of these companies hasn’t changed and AIG and GM will have trouble recovering.
Links:http://www.foxnews.com/politics/2009/03/16/lawmakers-target-aig-executive-bonuses/
Monday, March 16, 2009
Critique: what caused this crisis
I agree with Anna in her blog “what caused this crisis.” She says that “we have discussed in class that risk management is key to maximizing profits when done correctly.” The news seems to focus on the negative effects of the recession, and what caused them.
With the current economic situation there are numerous companies in the spot light that have practiced bad risk management. However, there are those that have used good risk management receiving no national attention.
Wikipedia defines risk management as assessing, mitigating, and monitoring risks.
Obviously financial companies that have gone bankrupt failed to follow some, if not all, of these steps. In terms of options and derivatives, companies should not rely on making greater bets on riskier bets to make up for their losses. This defeats the purpose of risk management, since you are disregarding the risk associated to try to make up for your losses. Instead, companies should try to make up their losses gradually over time. Doing so, companies will profitable over time and have financial stability.
Anna also states that “risk management is not the problem, it is people and companies that think they can do without risk management or do so much management that they have negative profits.” The point here is, what is the optimal amount of risk management to use. Dong Hyun Ahn from the University of North Carolina states that the optimal amount of risk management you should forego is the amount that minimizes a firm’s value at risk.
We discussed in class that it is too costly to completely hedge your risks, and buying insurance is the most common solution for people and companies to do so. For smaller companies and lower income families insurance may be unaffordable. However, if more people had insurance, the insurance companies could slightly lower premiums by pooling more risk. Thus, the insurance companies would be collecting more money, as well as reducing their risk of incurring large losses.
Links:
http://act-alr.blogspot.com/
http://en.wikipedia.org/wiki/Risk_management
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=225921
With the current economic situation there are numerous companies in the spot light that have practiced bad risk management. However, there are those that have used good risk management receiving no national attention.
Wikipedia defines risk management as assessing, mitigating, and monitoring risks.
Obviously financial companies that have gone bankrupt failed to follow some, if not all, of these steps. In terms of options and derivatives, companies should not rely on making greater bets on riskier bets to make up for their losses. This defeats the purpose of risk management, since you are disregarding the risk associated to try to make up for your losses. Instead, companies should try to make up their losses gradually over time. Doing so, companies will profitable over time and have financial stability.
Anna also states that “risk management is not the problem, it is people and companies that think they can do without risk management or do so much management that they have negative profits.” The point here is, what is the optimal amount of risk management to use. Dong Hyun Ahn from the University of North Carolina states that the optimal amount of risk management you should forego is the amount that minimizes a firm’s value at risk.
We discussed in class that it is too costly to completely hedge your risks, and buying insurance is the most common solution for people and companies to do so. For smaller companies and lower income families insurance may be unaffordable. However, if more people had insurance, the insurance companies could slightly lower premiums by pooling more risk. Thus, the insurance companies would be collecting more money, as well as reducing their risk of incurring large losses.
Links:
http://act-alr.blogspot.com/
http://en.wikipedia.org/wiki/Risk_management
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=225921
AIG bonuses
Just when you thing AIG’s situation couldn’t get any worse, it does. With today’s discovery that AIG gave $165 million in bonus money to executives, which was funded by bailout money, have caused massive uproars from the president, Ben Bernanke, and taxpayers. After the government injected billions of dollars into AIG, AIG feels that some of the executives that got them into their situation deserve and need bonus compensation. It makes you wish that all jobs were like this, where you get compensated for negative results.
Resulting from this greed will put AIG into a worse position than it already is. The public that is disgusted by AIG’s actions may not want to do business with the company in the future. This decision ultimately has affected AIG’s image and will have a negative impact on future cash flows. This could further prolong the financial instability, since the government bailed out AIG to save the financial institution.
Links:
http://www.foxnews.com/politics/2009/03/16/lawmakers-target-aig-executive-bonuses/
http://online.wsj.com/article/SB122156561931242905.html
Resulting from this greed will put AIG into a worse position than it already is. The public that is disgusted by AIG’s actions may not want to do business with the company in the future. This decision ultimately has affected AIG’s image and will have a negative impact on future cash flows. This could further prolong the financial instability, since the government bailed out AIG to save the financial institution.
Links:
http://www.foxnews.com/politics/2009/03/16/lawmakers-target-aig-executive-bonuses/
http://online.wsj.com/article/SB122156561931242905.html
Tuesday, March 10, 2009
Public education system
The public education system has long been deteriorating, and the government continues to do very little to fix this problem. At times the government wastes time and money on bad projects, and the money could be invested into the public education system. What got us into this economic crisis was the demand for instantaneous positive short-term returns.
When I was in high school it seemed like teachers would just pass students in order to get them through the system, without learning anything. When I sat in on some technical classes, it seemed like there was no teaching going on and the teachers were just there to baby-sit. The people in these technical classes account for the majority of the graduating class, and now we just let them into the real world with no financial knowledge. They will need housing, and thus they entered into bad loans. Thus, causing the housing market to suffer.
To fix the economy we need more than just money. The government needs to focus on public school systems in order to create better industries and jobs. If we lack the education for better jobs, companies will forego the US and look somewhere else to invest their capital. Although investing in education will not see immediate short-term results, but the US needs it to be successful in the future.
Links:
http://www.foxnews.com/politics/first100days/2009/02/24/raw-data-excerpts-obamas-prepared-remarks-congress/100days/
http://www.foxnews.com/politics/first100days/2009/03/09/economic-crisis-obamas/
When I was in high school it seemed like teachers would just pass students in order to get them through the system, without learning anything. When I sat in on some technical classes, it seemed like there was no teaching going on and the teachers were just there to baby-sit. The people in these technical classes account for the majority of the graduating class, and now we just let them into the real world with no financial knowledge. They will need housing, and thus they entered into bad loans. Thus, causing the housing market to suffer.
To fix the economy we need more than just money. The government needs to focus on public school systems in order to create better industries and jobs. If we lack the education for better jobs, companies will forego the US and look somewhere else to invest their capital. Although investing in education will not see immediate short-term results, but the US needs it to be successful in the future.
Links:
http://www.foxnews.com/politics/first100days/2009/02/24/raw-data-excerpts-obamas-prepared-remarks-congress/100days/
http://www.foxnews.com/politics/first100days/2009/03/09/economic-crisis-obamas/
GA tax revenues down
According to reports on the news last night, GA’s tax revenues were down by about 30% (not sure). This should be no surprise, considering the current state of the economy. Of course people are spending less, due to unemployment and insecurity, so the tax revenue stream is uncertain. So right now we have politicians making budgets with money they don’t have. This emphasizes the point that there is something wrong with our government system. Politicians are constantly spending money they don’t have. As a state government there is no sense of responsibility for their actions, because they believe that the federal government will help them out when they need help. But if all 50 states rely on this ideology then the losses will start adding up quickly.
As a nation we should not leave the responsibility of the economy in the hands of the government. Most of the politicians running for office are unqualified for the position in the first place. Then when they are elected they have cabinet positions to give them advise for things they have no expertise in. The government at all levels should reduce the number of cabinet positions in order to reduce their costs, but citizens need to elect politicians that are most qualified for the job.
There are also slow seen effects from government actions. So instead of a bailout, we should let the free market economy fix its own problems. Just look at General Motors, the federal government gave them billions of dollars as a bailout, and they are still asking for money. Then it turns out that GM might have to file for bankruptcy anyway. Taxpayers will have to pay for the government’s actions for giving GM billions of dollars, which will not help GM.
Links: http://www.legis.state.ga.us/legis/2009_10/house/budget/reports/AFY_2009_Bill_House_Version.pdf
As a nation we should not leave the responsibility of the economy in the hands of the government. Most of the politicians running for office are unqualified for the position in the first place. Then when they are elected they have cabinet positions to give them advise for things they have no expertise in. The government at all levels should reduce the number of cabinet positions in order to reduce their costs, but citizens need to elect politicians that are most qualified for the job.
There are also slow seen effects from government actions. So instead of a bailout, we should let the free market economy fix its own problems. Just look at General Motors, the federal government gave them billions of dollars as a bailout, and they are still asking for money. Then it turns out that GM might have to file for bankruptcy anyway. Taxpayers will have to pay for the government’s actions for giving GM billions of dollars, which will not help GM.
Links: http://www.legis.state.ga.us/legis/2009_10/house/budget/reports/AFY_2009_Bill_House_Version.pdf
Hyundai assurance
Hyundai’s Assurance Plan could get the automaker through these tough economic times. The plan states that if you buy a new vehicle from them, and you lose your income, Hyundai will let you return the car. This plan will let you walk away from the loan without having to worry about negative equity. The plan will cover up to $7,500 in negative equity. Under this plan you are covered in case of involuntary unemployment, physical disability, loss of driver’s license due to medical reasons, international employment transfer, self-employed personal bankruptcy, and accidental death.
This could benefit the company by generating cash flows they wouldn’t have received if they were to let the cars sit on their lot. Hyundai is increasing their cash flows by getting more than they would if they weren’t selling the cars. It seems like Hyundai is taking all the risk out of having the car buyer pay future payments. If you were to default on your loan Hyundai would credit up to $7,500 for the remaining balance of the loan, and I guess you would be responsible for the difference.
If this were the case when you buy a $20,500 vehicle, and you were to default on the loan you would still be responsible for $13,000-payments of the remaining balance. I may have this wrong, but if this were the case then it seems like this plan is more beneficial to Hyundai than consumers. Hyundai would be making: (market value of the car-$7,500). Then they could resell the car you returned to them, and still make profits from that.
After looking at this plan, there is almost no benefit to the consumer, because they would be losing more than they are gaining from the Assurance Plan. For the above example of $20,500 the consumer would be paying $13,000 no matter what happened. So they would be paying for more than half of the car. It doesn’t make any sense to just return the car and lose the $13,000 along with the car. They might as well just pay the remaining $7,500 since they are obligated to pay $13,000.
Links:
http://www.hyundaiusa.com/financing/HyundaiAssurance/HyundaiAssurance.aspx
http://hyundaiassurance.walkawayusa.com/pdfs/HyundaiAssuranceLeaflet.pdf
http://archives.chicagotribune.com/2009/jan/07/business/chi-talk-carjan07
This could benefit the company by generating cash flows they wouldn’t have received if they were to let the cars sit on their lot. Hyundai is increasing their cash flows by getting more than they would if they weren’t selling the cars. It seems like Hyundai is taking all the risk out of having the car buyer pay future payments. If you were to default on your loan Hyundai would credit up to $7,500 for the remaining balance of the loan, and I guess you would be responsible for the difference.
If this were the case when you buy a $20,500 vehicle, and you were to default on the loan you would still be responsible for $13,000-payments of the remaining balance. I may have this wrong, but if this were the case then it seems like this plan is more beneficial to Hyundai than consumers. Hyundai would be making: (market value of the car-$7,500). Then they could resell the car you returned to them, and still make profits from that.
After looking at this plan, there is almost no benefit to the consumer, because they would be losing more than they are gaining from the Assurance Plan. For the above example of $20,500 the consumer would be paying $13,000 no matter what happened. So they would be paying for more than half of the car. It doesn’t make any sense to just return the car and lose the $13,000 along with the car. They might as well just pay the remaining $7,500 since they are obligated to pay $13,000.
Links:
http://www.hyundaiusa.com/financing/HyundaiAssurance/HyundaiAssurance.aspx
http://hyundaiassurance.walkawayusa.com/pdfs/HyundaiAssuranceLeaflet.pdf
http://archives.chicagotribune.com/2009/jan/07/business/chi-talk-carjan07
Sunday, February 22, 2009
Stimulus Plan
Although everything sounds good with the current stimulus plan, just how long will the long-term effects catch back up to us. This plan could be prolonging the future economic pain.
According to the Washington Post, the Obama administration is seeking ways to reduce the number of foreclosures and spur demand as the housing recession enters its fourth year. Part of the plan calls for the federal government to match reductions that lenders would make in interest rates aimed at lowering borrowers' payments to 31 percent of their monthly income.
Last week, Obama also signed a stimulus package including an $8,000 tax-credit for first-time homebuyers. If this plan is aimed at primarily at graduating college students, then it might not be as effective due to the current job market. People might also see this tax credit as a way to get a bigger house than they had originally planned. Then if they cannot afford the payment then the whole housing crisis will start all over again.
Also since there is so much uncertainty in the job market people are shying away from buying houses and cars. Without job security they may not be able to make future payments.
We are relying too heavily on the government to get us out of this financial crisis. By trying to stimulate the economy, they could incur greater costs than they had expected. They could also hurt unintended markets and cause serious long-term damage. The government is absorbing too much cost, and won’t have an immediate way to finance them. The costs outweigh the benefits, and will cause the US to slip as being a major world power. Just how can we survive, when the government cannot operate without incurring a loss.
As of Feb. 22, 2009 the current outstanding public debt is $10.8 trillion. The estimated population is 305.7 million, which gives each citizen $35,370.19 in national debt that they haven’t directly caused. Since September 28, 2007 the national debt has increased an average of $3.52 billion per day. So you could say that the stimulus is just pennies compared to our current national debt.
Links:
http://www.washingtonpost.com/wp-dyn/content/story/2009/02/20/ST2009022002635.html
http://www.brillig.com/debt_clock/
According to the Washington Post, the Obama administration is seeking ways to reduce the number of foreclosures and spur demand as the housing recession enters its fourth year. Part of the plan calls for the federal government to match reductions that lenders would make in interest rates aimed at lowering borrowers' payments to 31 percent of their monthly income.
Last week, Obama also signed a stimulus package including an $8,000 tax-credit for first-time homebuyers. If this plan is aimed at primarily at graduating college students, then it might not be as effective due to the current job market. People might also see this tax credit as a way to get a bigger house than they had originally planned. Then if they cannot afford the payment then the whole housing crisis will start all over again.
Also since there is so much uncertainty in the job market people are shying away from buying houses and cars. Without job security they may not be able to make future payments.
We are relying too heavily on the government to get us out of this financial crisis. By trying to stimulate the economy, they could incur greater costs than they had expected. They could also hurt unintended markets and cause serious long-term damage. The government is absorbing too much cost, and won’t have an immediate way to finance them. The costs outweigh the benefits, and will cause the US to slip as being a major world power. Just how can we survive, when the government cannot operate without incurring a loss.
As of Feb. 22, 2009 the current outstanding public debt is $10.8 trillion. The estimated population is 305.7 million, which gives each citizen $35,370.19 in national debt that they haven’t directly caused. Since September 28, 2007 the national debt has increased an average of $3.52 billion per day. So you could say that the stimulus is just pennies compared to our current national debt.
Links:
http://www.washingtonpost.com/wp-dyn/content/story/2009/02/20/ST2009022002635.html
http://www.brillig.com/debt_clock/
GM success: Chevy Volt
GM’s future success primarily depends on the success of the Chevy Volt and the Camero.
The Volt is said to go on the market in late 2010, as a 2011 model year. Since conception GM has been working hard to develop a battery to power the car. Since this will be such a revolutionary car GM plans to sell the Volt at $30,000, but first versions might be $40,000. The battery will last the first 40 miles and then a gas generator will kick in, that can be driven 400 miles on a full tank of gas. This type of technology will save consumers money on gas in the long run. Thus, once more electric powered cars are on the road, the cost of gasoline will decline and lessen our dependence on foreign oil.
Since the Volt will be the first full electric car, it will boost GM’s image and customer appeal. Customers today want “green” products that will reduce pollution, and this car will affect driver’s daily impact. Having an electric engine, the car will not produce harmful fumes that escape into the atmosphere.
I haven’t heard of any other GM competitors trying to develop a concept like this. So in order for GM to emerge from bankruptcy it might be strategic for them to release the car for a few years, and then sell their design to its competitors. They should make a contract, so they will a get a percentage of the sales of the cars. Thus they will be profiting from their own sales and also making a small profit from its competitors. This portion of GM’s small profit could be put forth towards research and development for future models and consumer surveys, to develop the quality of their cars.
Links:
http://gm-volt.com/chevy-volt-faqs/
The Volt is said to go on the market in late 2010, as a 2011 model year. Since conception GM has been working hard to develop a battery to power the car. Since this will be such a revolutionary car GM plans to sell the Volt at $30,000, but first versions might be $40,000. The battery will last the first 40 miles and then a gas generator will kick in, that can be driven 400 miles on a full tank of gas. This type of technology will save consumers money on gas in the long run. Thus, once more electric powered cars are on the road, the cost of gasoline will decline and lessen our dependence on foreign oil.
Since the Volt will be the first full electric car, it will boost GM’s image and customer appeal. Customers today want “green” products that will reduce pollution, and this car will affect driver’s daily impact. Having an electric engine, the car will not produce harmful fumes that escape into the atmosphere.
I haven’t heard of any other GM competitors trying to develop a concept like this. So in order for GM to emerge from bankruptcy it might be strategic for them to release the car for a few years, and then sell their design to its competitors. They should make a contract, so they will a get a percentage of the sales of the cars. Thus they will be profiting from their own sales and also making a small profit from its competitors. This portion of GM’s small profit could be put forth towards research and development for future models and consumer surveys, to develop the quality of their cars.
Links:
http://gm-volt.com/chevy-volt-faqs/
Risk modeling
Perhaps one contributing factor to the current economic crisis is that the models used by risk managers and employees did not model the correct risk. With so many methods to model one thing, you could possibly get two different outcomes by using different models. Considering a continuous number of methods and probability distributions, there is a good chance that the model you are implementing does not match the distribution. Even though the choice of method depends significantly on the amount and type of historical data available, each method has its advantages and disadvantages. Each method also requires varying analytical skill and experience.
There are 3 broad categories of modeling methods presented by the CAS:
Methods based primarily on the analysis of historical data
Methods based on a combination of historical data and expert input
Methods based primarily on expert input
I believe that models that represent both historical data and expert input should be more accurate. You don’t always want to base assumptions on models, since they don’t always represent real life situations, and if they did we wouldn’t be in an economic crisis.
One process that falls into this category is stochastic processes. This process expresses the difference in the value of a variable at time t and the value one time period later (t+1). This process is probably one of the more accurate processes since its probabilities consider the past, but future probabilities depend on the present state. Thus, stochastic processes predict random change looking into the future. However, there could be thousands of possible outcomes, which may get complicated to decipher.
Links:
http://www.ucop.edu/riskmgt/erm/documents/overview.pdf
There are 3 broad categories of modeling methods presented by the CAS:
Methods based primarily on the analysis of historical data
Methods based on a combination of historical data and expert input
Methods based primarily on expert input
I believe that models that represent both historical data and expert input should be more accurate. You don’t always want to base assumptions on models, since they don’t always represent real life situations, and if they did we wouldn’t be in an economic crisis.
One process that falls into this category is stochastic processes. This process expresses the difference in the value of a variable at time t and the value one time period later (t+1). This process is probably one of the more accurate processes since its probabilities consider the past, but future probabilities depend on the present state. Thus, stochastic processes predict random change looking into the future. However, there could be thousands of possible outcomes, which may get complicated to decipher.
Links:
http://www.ucop.edu/riskmgt/erm/documents/overview.pdf
Sunday, February 15, 2009
Stimulus package
Before President Bush left office he had implemented a stimulus package that was supposed to soften the blow on the economy. He also gave stimulus checks to people in order to jump-start the economy.
Since then there has been little to no effect, as we can see from the current economy. Now President Obama wants to spend $787 billion to help soften the blow again. He also says “that things are going to get worse before they get better.” However this stimulus package could make things a lot worse. We could be spending millions of dollars that will never affect the economy. I believe that he should wait until everything settles down, before he implements such a large stimulus plan. Then he could accurately pinpoint what is wrong with the economy and how to fix it effectively. Rather than just prolong the situation and continue the same bad habits that got us into this mess, we should not rely on the government to solve this problem. After all when government gets involved in things they screw things up. Considering our growing national debt, just how much is too much, and when will the spending stop. It has been justified that since we stimulate other economies that being in debt constantly is ok. However, this debt has finally caught up with us. The government has crippled the nation, since we constantly borrow on credit from other nations.
Links:
http://www.nytimes.com/2009/02/16/us/politics/16talkshows.html?_r=1&hp
Since then there has been little to no effect, as we can see from the current economy. Now President Obama wants to spend $787 billion to help soften the blow again. He also says “that things are going to get worse before they get better.” However this stimulus package could make things a lot worse. We could be spending millions of dollars that will never affect the economy. I believe that he should wait until everything settles down, before he implements such a large stimulus plan. Then he could accurately pinpoint what is wrong with the economy and how to fix it effectively. Rather than just prolong the situation and continue the same bad habits that got us into this mess, we should not rely on the government to solve this problem. After all when government gets involved in things they screw things up. Considering our growing national debt, just how much is too much, and when will the spending stop. It has been justified that since we stimulate other economies that being in debt constantly is ok. However, this debt has finally caught up with us. The government has crippled the nation, since we constantly borrow on credit from other nations.
Links:
http://www.nytimes.com/2009/02/16/us/politics/16talkshows.html?_r=1&hp
Steroids in Baseball
Lately baseball has been to focused on records being broken, that it has failed to look back on those individuals achieved those records. Although you may attribute the increase in muscle mass to better technology and harder work ethics, there seems to be a fine line of natural and enhanced muscle development. There raises suspicion when a player gains 15-20 pounds in muscle in the off-season, roughly a 5-month period.
Back in the 1900’s when the game first began there were no performance enhancing drugs, and players didn’t play just for the money. To them it was a summer job, and they made nothing compared to today’s players. Now it seems like everyone is in it for the money, and not for the passion of the game.
In order to standout among the hundreds of players in the league, you need to put up above average numbers. This has produced so much pressure from players that they are willing to do anything to get a big contract, even if it means putting their own health at risk. In the era of Hank Aaron, there were probably very few players that had 40-50 homerun seasons. While today you cannot have a good year unless you have at least 30 homeruns.
With the recent investigation many of the star players in the 1990’s have been found to use performance-enhancing drugs in their career. With names like Arod, Clemens, Bonds, Tejada, Mcgwire, and Sosa it is hard to say that they would have accomplished what they did without enhancing drugs. This has tainted baseball’s image and will hurt future player’s reputations. Whenever someone breaks another record, they will have to answer the questions of whether it was legitimate or not. Ultimately the steroid era has produced illegitimate players, and has hurt baseballs reputation. There will be harsh long term effects, because people don’t want to pay money for cheaters to play the game. To correct this problem by engaging in risk management baseball needs to implement a harsher drug penalty, and test players on a regular basis. They also need to stay ahead of the latest new drugs that become available on the market.
Links:
ESPN
Back in the 1900’s when the game first began there were no performance enhancing drugs, and players didn’t play just for the money. To them it was a summer job, and they made nothing compared to today’s players. Now it seems like everyone is in it for the money, and not for the passion of the game.
In order to standout among the hundreds of players in the league, you need to put up above average numbers. This has produced so much pressure from players that they are willing to do anything to get a big contract, even if it means putting their own health at risk. In the era of Hank Aaron, there were probably very few players that had 40-50 homerun seasons. While today you cannot have a good year unless you have at least 30 homeruns.
With the recent investigation many of the star players in the 1990’s have been found to use performance-enhancing drugs in their career. With names like Arod, Clemens, Bonds, Tejada, Mcgwire, and Sosa it is hard to say that they would have accomplished what they did without enhancing drugs. This has tainted baseball’s image and will hurt future player’s reputations. Whenever someone breaks another record, they will have to answer the questions of whether it was legitimate or not. Ultimately the steroid era has produced illegitimate players, and has hurt baseballs reputation. There will be harsh long term effects, because people don’t want to pay money for cheaters to play the game. To correct this problem by engaging in risk management baseball needs to implement a harsher drug penalty, and test players on a regular basis. They also need to stay ahead of the latest new drugs that become available on the market.
Links:
ESPN
Saving General Motors
Perhaps one of America’s oldest businesses, General Motors is celebrating its 100th anniversary. However, it may be close to extinct within the following year without help from the government. Some argue that this is the first time that GM has asked the government for help in its 100-year history. Over the last few years GM’s market share has declined steadily. There is evidence that the CEO’s have repetitively lied, by saying that “things are going to get better.” Yet they almost always failed to keep their promises. In order for GM to survive another 100 years it needs to restructure its business plan, and to diversify their investments. Instead of only focusing on production of larger vehicles (SUVS), and many model options. This hurt them the last few years when oil prices were very volatile. They should follow the business models of its competitors, which have been more successful.
CNBC described GM as a house of cards, since it seems like they are all full of talk and don’t address issues to fix their business problems. For the last few years Honda and Toyota have been ahead of GM by introducing better technology to consumers faster. Over the last few years everyone had an electric car in the making, and Chevy has yet to introduce one that is better than its competitors. In 1993 they had an electric car in the making, but cut its development without reason.
Part of GM’s problem lies within its retirement plan. They have so much fixed cost tied up in retirement money, that they cannot achieve an adequate profit margin. They sometimes had to make a loss on a car to produce them. Then they would rely on the services that the dealership offered to make up on this loss. This might have worked if they had the most cars on the road in North America. This wasn’t the case, and they had produced negative earnings for a while. They have even bought out experienced workers, in efforts to reduce cost and hire less experienced workers. I feel that this will reduce the quality of their product, and cause them further problems.
Even though GM has its share of problems, some of its suppliers have directly depended on the success of this giant. If GM goes down, so do most of its suppliers. CNBC found that one small business provides a percentage of their work to GM, and the rest goes to other suppliers of GM. So if GM fails then it may affect hundreds of firms that supply GM with all of their parts.
Links:
CNBC Saving GM inside the crisis
http://www.nytimes.com/2008/11/12/business/12auto.html?_r=1&scp=5&sq=general%20motors%20bailout&st=cse
http://www.bloggingstocks.com/2007/07/31/general-motors-profits-again/
CNBC described GM as a house of cards, since it seems like they are all full of talk and don’t address issues to fix their business problems. For the last few years Honda and Toyota have been ahead of GM by introducing better technology to consumers faster. Over the last few years everyone had an electric car in the making, and Chevy has yet to introduce one that is better than its competitors. In 1993 they had an electric car in the making, but cut its development without reason.
Part of GM’s problem lies within its retirement plan. They have so much fixed cost tied up in retirement money, that they cannot achieve an adequate profit margin. They sometimes had to make a loss on a car to produce them. Then they would rely on the services that the dealership offered to make up on this loss. This might have worked if they had the most cars on the road in North America. This wasn’t the case, and they had produced negative earnings for a while. They have even bought out experienced workers, in efforts to reduce cost and hire less experienced workers. I feel that this will reduce the quality of their product, and cause them further problems.
Even though GM has its share of problems, some of its suppliers have directly depended on the success of this giant. If GM goes down, so do most of its suppliers. CNBC found that one small business provides a percentage of their work to GM, and the rest goes to other suppliers of GM. So if GM fails then it may affect hundreds of firms that supply GM with all of their parts.
Links:
CNBC Saving GM inside the crisis
http://www.nytimes.com/2008/11/12/business/12auto.html?_r=1&scp=5&sq=general%20motors%20bailout&st=cse
http://www.bloggingstocks.com/2007/07/31/general-motors-profits-again/
Sunday, February 8, 2009
Overview of ERM
This article was written by the CAS describing just about everything regarding ERM. The beginning of the article relates to what was on the first exam. They state that organizations have practiced ERM for a long time by prioritizing their risks. To counter their risks two common tools have been a transferred of risk or through financial tools.
With increasingly pure competition by means of globalization, ERM may become more important than ever before to companies. This may also contribute to companies facing more complicated risks that may be impossible to hedge against. Risks that are relatively new may not have enough people to insure to adequately pool their risks. Thus, the insurer would have to charge a percentile premium that could hurt the company if the insured incurred a catastrophic loss, since there are no past models to follow.
One of these new risks is exchange rate risk. This was one contributing factor to the failure of Enron and Barings Bank. The advancement in technology, accelerating pace of business, globalization, increasing financial sophistication and the uncertainty of irrational terrorist activity all contribute to the growing number and complexity of risks. These risks are anticipated to increase in the future.
With these increasing risks investors still want stable cash flows. To protect against such an event, a company could purchase some kind of earnings insurance that will make up the difference in expected income and actual income. If a company performs at a sub-par level, the insurance will make up for the difference in expected cash flows.
Links:http://www.ucop.edu/riskmgt/erm/documents/overview.pdf
With increasingly pure competition by means of globalization, ERM may become more important than ever before to companies. This may also contribute to companies facing more complicated risks that may be impossible to hedge against. Risks that are relatively new may not have enough people to insure to adequately pool their risks. Thus, the insurer would have to charge a percentile premium that could hurt the company if the insured incurred a catastrophic loss, since there are no past models to follow.
One of these new risks is exchange rate risk. This was one contributing factor to the failure of Enron and Barings Bank. The advancement in technology, accelerating pace of business, globalization, increasing financial sophistication and the uncertainty of irrational terrorist activity all contribute to the growing number and complexity of risks. These risks are anticipated to increase in the future.
With these increasing risks investors still want stable cash flows. To protect against such an event, a company could purchase some kind of earnings insurance that will make up the difference in expected income and actual income. If a company performs at a sub-par level, the insurance will make up for the difference in expected cash flows.
Links:http://www.ucop.edu/riskmgt/erm/documents/overview.pdf
Economy and stimulus plan
During campaigning President Obama said something along the lines that he wouldn’t let lobbyists control the agenda of Washington. Then he puts someone that’s a lobbyist on his cabinet.
Its sad that people the president nominates for a position has to withdrawal their nomination due to tax reasons. After all, aren’t our tax dollars contributing to their salaries.
This just proves that politicians aren’t the same as they used to be. Throughout school we learn about the great leaders and politicians that have built this country, and just how great they were. Now, all you hear about is how corrupt they are. It seems like they are just holding their seat for the title and fame, instead of acting in the best interest of the people that elect them.
Through the Bush era we were encouraged to spend. However now people are scared to because of the lack of stability in the economy. We have seen little effects to what the stimulus checks and first stimulus plan were set out to do. I’m not sure on how much money was injected into the economy, and the return from it. However, just how much longer can the government prolong this downfall. While they are living in luxury, thousands of people are losing their jobs daily. There is also a fine line on where to stop this stimulus plan. I’m sure we are already dealing with inflation from the war, and by putting $820 billion into the economy it will continue to grow.
President Obama seemed so confident that his plan would work before he was elected, but it been 2 weeks and there still hasn’t been any gains in reaching an agreement. Currently the House and the Senate are in debate over the contents of the stimulus package. The stimulus money from the House plan will go towards aiding state and local government, tax provisions, and education, health and renewable energy programs. Both plans are intended to blunt the recession with a combination of fast-acting tax cuts to help increase spending by consumers and businesses, and slower long-term government spending on public works projects and other programs to create more than 3 million jobs.
President Obama’s middle class tax cuts are intended to lift consumer spending and help jump-start the economy. Hopefully consumers have learned their lesson, by not over indulging and end up with more debt than they can handle. If this trend were to continue, the cycle will just prolong the recession and cause demand for a second wave of a stimulus package.
Whatever the final figure may be the plan needs to be very structured and not allow state and local governments slack to waste money. There is argument that only a small percentage of the stimulus money will directly impact the economy, and the rest is just thrown into the bill to satisfy old democratic promises.
Links:http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/02/07/MNEV15PJKT.DTL&type=politics
Its sad that people the president nominates for a position has to withdrawal their nomination due to tax reasons. After all, aren’t our tax dollars contributing to their salaries.
This just proves that politicians aren’t the same as they used to be. Throughout school we learn about the great leaders and politicians that have built this country, and just how great they were. Now, all you hear about is how corrupt they are. It seems like they are just holding their seat for the title and fame, instead of acting in the best interest of the people that elect them.
Through the Bush era we were encouraged to spend. However now people are scared to because of the lack of stability in the economy. We have seen little effects to what the stimulus checks and first stimulus plan were set out to do. I’m not sure on how much money was injected into the economy, and the return from it. However, just how much longer can the government prolong this downfall. While they are living in luxury, thousands of people are losing their jobs daily. There is also a fine line on where to stop this stimulus plan. I’m sure we are already dealing with inflation from the war, and by putting $820 billion into the economy it will continue to grow.
President Obama seemed so confident that his plan would work before he was elected, but it been 2 weeks and there still hasn’t been any gains in reaching an agreement. Currently the House and the Senate are in debate over the contents of the stimulus package. The stimulus money from the House plan will go towards aiding state and local government, tax provisions, and education, health and renewable energy programs. Both plans are intended to blunt the recession with a combination of fast-acting tax cuts to help increase spending by consumers and businesses, and slower long-term government spending on public works projects and other programs to create more than 3 million jobs.
President Obama’s middle class tax cuts are intended to lift consumer spending and help jump-start the economy. Hopefully consumers have learned their lesson, by not over indulging and end up with more debt than they can handle. If this trend were to continue, the cycle will just prolong the recession and cause demand for a second wave of a stimulus package.
Whatever the final figure may be the plan needs to be very structured and not allow state and local governments slack to waste money. There is argument that only a small percentage of the stimulus money will directly impact the economy, and the rest is just thrown into the bill to satisfy old democratic promises.
Links:http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/02/07/MNEV15PJKT.DTL&type=politics
Risk free rate and CAPM
From CAPM the risk free rate is probably the most second important factor. The bigger the difference in the risk premium the greater the expected return. Since the risk free rate changes constantly, you need to pay close attention in case the risk premium becomes negative. When this happens it is better to invest in a risk free asset such as a bond instead of taking a risk and potentially never regain your money. Just remember to buy low and sell high, to possibly see immediate gains from you investment.
E(Ri)= b(rm-rf)+rf
E(Ri)= b(rm-rf)+rf
Sunday, February 1, 2009
Guantanamo Bay
President Obama said that he will close Guantanamo Bay as soon as possible. However, is this message consistent with what George Bush implemented in his 8 years. Although US intelligence has not been 100% accurate lately, there is probably a good reason why they are holding these detainees that are extremely dangerous. Now there is a greater risk that acts of terrorism will be committed in the US and worldwide.
There is a concern that once released they will continue to engage in terrorism in the future. Before Obama took office there was a report that 18 former detainees are confirmed to have participated in attacks, and 43 are suspected to be involved is attacks. Once someone has engaged in activities and developed habits, it is hard for them to break them. I saw on the news that former detainees were being cleansed by coloring and drawing pictures. Just exactly how is this helping them not commit acts of terror.
What was the point of the “war on terror” when we are just going to release them and run off into the sunset? Just exactly what kind of message is this sending to the people fighting in Iraq, and to those that have lost their lives in the process. Why have we spent time to capture these people, and then just release them.
The main concern is that why all of a sudden we need to play God by sending a message to the rest of the world, while the terrorists the US are holding want to hurt our people and destroy our country. Why are we putting ourselves in a riskier situation. Since September 11, 2001 there have been no terrorist attacks on the US. With the release of the detainees we are now more vulnerable to attacks. This is a bad move on behalf of the president that will create more problems than rewards in the future. The president has enough to manage currently with the financial situation, and he does not need any more issues to complicate the matter.
As of yet there have been no economic decisions made by President Obama, while daily thousands of people are losing their jobs.
Links:
http://www.cnn.com/2009/POLITICS/01/26/gitmo.next/index.html?iref=newssearch
http://www.cnn.com/2009/POLITICS/01/28/obama.first.week/index.html?iref=newssearch
http://www.cnn.com/2009/POLITICS/01/28/US.Iran.change/index.html?iref=newssearch
There is a concern that once released they will continue to engage in terrorism in the future. Before Obama took office there was a report that 18 former detainees are confirmed to have participated in attacks, and 43 are suspected to be involved is attacks. Once someone has engaged in activities and developed habits, it is hard for them to break them. I saw on the news that former detainees were being cleansed by coloring and drawing pictures. Just exactly how is this helping them not commit acts of terror.
What was the point of the “war on terror” when we are just going to release them and run off into the sunset? Just exactly what kind of message is this sending to the people fighting in Iraq, and to those that have lost their lives in the process. Why have we spent time to capture these people, and then just release them.
The main concern is that why all of a sudden we need to play God by sending a message to the rest of the world, while the terrorists the US are holding want to hurt our people and destroy our country. Why are we putting ourselves in a riskier situation. Since September 11, 2001 there have been no terrorist attacks on the US. With the release of the detainees we are now more vulnerable to attacks. This is a bad move on behalf of the president that will create more problems than rewards in the future. The president has enough to manage currently with the financial situation, and he does not need any more issues to complicate the matter.
As of yet there have been no economic decisions made by President Obama, while daily thousands of people are losing their jobs.
Links:
http://www.cnn.com/2009/POLITICS/01/26/gitmo.next/index.html?iref=newssearch
http://www.cnn.com/2009/POLITICS/01/28/obama.first.week/index.html?iref=newssearch
http://www.cnn.com/2009/POLITICS/01/28/US.Iran.change/index.html?iref=newssearch
Risk pooling and life insurance.
When you pool risk then the probability for everyone in that pool to incur higher losses decreases. Also when you have about 20 or more people in the pool, the distribution of the losses becomes normal. So the more people you add the closer you get to a true normal distribution. Also, as you add more people the mean might increase a little but the standard deviation will decrease. This will create a slimmer normal distribution (with different size and scale parameters), that have most of the losses occurring around the mean, and a smaller probability of being in the tail.
From the central limit theorem:
E(Xi) = n*E(X)
Var(Xi)= n*Var(X)
You then use the new variance and the expected value from a given distribution to standardize the distribution into a normal distribution. Then you can use the Z score table to find percentiles that you are interested in.
Z=(X-E(X))/standard deviation
From the central limit theorem:
E(Xi) = n*E(X)
Var(Xi)= n*Var(X)
You then use the new variance and the expected value from a given distribution to standardize the distribution into a normal distribution. Then you can use the Z score table to find percentiles that you are interested in.
Z=(X-E(X))/standard deviation
Why does it make sense for a company to purchase insurance or to hedge its risks?
A company should do whatever strategy that will minimize its risk at the lowest cost. If a company hedges its risks through the stock market or by options, it will constantly have to rebalance its portfolio daily. Each time they do this they would pay transaction costs. Most of the time you hedge to prevent against price increases in the market. Not all of hedging is preventable by means of the stock market. Depending on what you are hedging against then it may be necessary to buy some type of insurance. For example if you want to protect yourself from a fire loss then you would buy fire insurance, because there are no financial instruments that will protect you from a fire loss.
If hedging reduces diversifiable risk, then hedging will not reduce the opportunity cost of capital. Hedging and insurance reduce systematic risk (nondiversifiable risk) will reduce the opportunity cost of capital.
When a company purchases insurance they pay a premium, which consists of the expected loss that the insurer calculates plus some loading. Since the company already expects to lose the calculated expected loss there is no need for the company to pay for the additional cost of loading. However through the purchase the company buys the insurer’s services that may save the company time, money, and aggravation. Insurance benefits you the most when you actually do have a really big loss.
If hedging reduces diversifiable risk, then hedging will not reduce the opportunity cost of capital. Hedging and insurance reduce systematic risk (nondiversifiable risk) will reduce the opportunity cost of capital.
When a company purchases insurance they pay a premium, which consists of the expected loss that the insurer calculates plus some loading. Since the company already expects to lose the calculated expected loss there is no need for the company to pay for the additional cost of loading. However through the purchase the company buys the insurer’s services that may save the company time, money, and aggravation. Insurance benefits you the most when you actually do have a really big loss.
How does the risk premium reflect beta?
From the equation E(ri)=beta*(rm-rf) + rf , the expected return on any stock, the rick premium is the quantity (rm-rf). So, if the risk premium is small changes in beta become insignificant. Since you are multiplying beta by a really small number close to zero, then beta*(rm-rf) goes to zero, and you are left with the risk free rate.
The opposite is true for large risk premium. The larger the risk premium, the closer you get to beta. This will result in a higher expected return. The risk premium only depends on nondiversifiable risks, which include market and systematic risk.
The opposite is true for large risk premium. The larger the risk premium, the closer you get to beta. This will result in a higher expected return. The risk premium only depends on nondiversifiable risks, which include market and systematic risk.
Sunday, January 25, 2009
What happens to E[r] when beta increases or decreases?/CAPM
The capital asset pricing model (CAPM) is used to determine the expected return on any asset. The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systemic risk or market risk), beta (β), as well as the expected return of the market and the expected return of a theoretical risk-free asset.
This gives you the equation . From a direct interpolation, as beta increases the E[Ri] increases, and as beta decreases E[Ri] decreases.
When beta equals 1 then the asset moves diectly with the market. Thus, for every 1 increase in the market the asset will also increase by 1.
When beta >1 then the asset moves more than 1 for every 1 increase in the market.
When beta <1, the asset move in the opposite direction with the market. So, every 1 increase in the market the asset decreases by a factor of beta.
Also, Betai= Cov(Ri,Rm)/Var(Rm)
A downside of CAPM is that it assumes normal returns, and wouldn’t be effective today with great fluctuations in the market.
CAPM also influences the optimum portfolio, and the capital allocation line (CAL). These measure the optimum amount for you to invest in the asset under consideration and a fisk free asset.
Links:
http://en.wikipedia.org/wiki/Capital_Asset_Pricing_Model
This gives you the equation . From a direct interpolation, as beta increases the E[Ri] increases, and as beta decreases E[Ri] decreases.
When beta equals 1 then the asset moves diectly with the market. Thus, for every 1 increase in the market the asset will also increase by 1.
When beta >1 then the asset moves more than 1 for every 1 increase in the market.
When beta <1, the asset move in the opposite direction with the market. So, every 1 increase in the market the asset decreases by a factor of beta.
Also, Betai= Cov(Ri,Rm)/Var(Rm)
A downside of CAPM is that it assumes normal returns, and wouldn’t be effective today with great fluctuations in the market.
CAPM also influences the optimum portfolio, and the capital allocation line (CAL). These measure the optimum amount for you to invest in the asset under consideration and a fisk free asset.
Links:
http://en.wikipedia.org/wiki/Capital_Asset_Pricing_Model
Risk Mismanagement:
Even tough value at risk is a valuable tool to assess risk of a trader’s portfolio, it only works when the market it behaving normally. Now risk managers cannot use VAR because of the current market fluctuations. Thus, risk managers cannot use the main tool that they have relied on for the last 10-20 years or so. The risks that VAR measured did not include the risk of a financial meltdown, which was the biggest risk of all.
David Einhorn states “VAR is a relatively useless as a risk management tool and potentially catastrophic when its use creates a false sense of security among senior managers.” Companies in the future should not rely so heavily on VAR to check its risky investments. They should use other methods, and then use VAR as a final check to evaluate their position.
The keyword here is risk itself, nothing is really risk free when there are so many complexities of the market. After all markets could change daily in how efficient they are, which effects how normal they behave. With all this training we are taught to look for inefficiencies of the market, and capitalize on them. So if just about everyone is looking for these, it is hard to say that the market is truly behaving “normally.”
Links:http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?_r=2&emc=eta1
David Einhorn states “VAR is a relatively useless as a risk management tool and potentially catastrophic when its use creates a false sense of security among senior managers.” Companies in the future should not rely so heavily on VAR to check its risky investments. They should use other methods, and then use VAR as a final check to evaluate their position.
The keyword here is risk itself, nothing is really risk free when there are so many complexities of the market. After all markets could change daily in how efficient they are, which effects how normal they behave. With all this training we are taught to look for inefficiencies of the market, and capitalize on them. So if just about everyone is looking for these, it is hard to say that the market is truly behaving “normally.”
Links:http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?_r=2&emc=eta1
Saturday, January 24, 2009
Enterprise Risk Management (ERM):
Although enterprise risk management is important to avoid potential threats that will affect the well being of a company, it is sometimes hard to quantify. The idea may seem simple, but there are many ways one can reduce risk through the use of insurance, forwards, options, and contracts. So, which one is the most effective/optimal way to reduce the uncertainty?
It depends on the company under consideration. What works for one company, may not satisfy the risk tolerance for a similar company. According to the Risk and Insurance Management Society (RIMS), “ERM is a comprehensive view of risk from both operational and strategic perspectives and is a process that supports the reduction of uncertainty and promotes the exploitation of opportunities.”
Once a business is established for a few years then it should consider investing in some type of risk management. For smaller start up business’s risk management will be harder to target, since they may not have finances to use effective risk management tools. Considering that most new business’s success depends heavily on how it does in the first year, they may not be able to benefit from their investment in risk management. There may also be some mismanagement in the first year, because a new business owner may not know what to expect in the first year.
Links:
http://en.wikipedia.org/wiki/Enterprise_risk_management
It depends on the company under consideration. What works for one company, may not satisfy the risk tolerance for a similar company. According to the Risk and Insurance Management Society (RIMS), “ERM is a comprehensive view of risk from both operational and strategic perspectives and is a process that supports the reduction of uncertainty and promotes the exploitation of opportunities.”
Once a business is established for a few years then it should consider investing in some type of risk management. For smaller start up business’s risk management will be harder to target, since they may not have finances to use effective risk management tools. Considering that most new business’s success depends heavily on how it does in the first year, they may not be able to benefit from their investment in risk management. There may also be some mismanagement in the first year, because a new business owner may not know what to expect in the first year.
Links:
http://en.wikipedia.org/wiki/Enterprise_risk_management
Foreseeing The Current Financial Crisis: a domino effect.
Even though bailout money distributed by the government was intended to lessen the financial burden of the housing market and to help banks start lending money again, the effects are non-existent. According to Global Property Guide “house prices continue to plummet, despite the government bail out packages. The 10 major cities have averaged an 18.6% drop in prices.
However, these catastrophic events could have been foreseen years ago when the housing market was weakening. I believe that there was no real value being added to accommodate the increase in prices, just a rapid increase in demand. Many of the homes there are very old, and had their own set of problems that come with age. Some were so severe that people would buy an old house for the land, demolish it, and then rebuild. Also, some people were buying homes just to fix them up and resell them. The housing market in Miami for 2006 had a median price of $377,000.
The city of Miami had such a prime housing market, that you could say that it is one of the biggest in the United States. So when the largest housing market is having problems, the rest will soon fall in due time.
In 2005 the housing market in Miami was booming with sky-high prices, yet everyone was still buying everything up. Everything was being developed and any piece of vacant land was being built upon. Even though Miami is a major city I felt that construction workers were building so many houses, strip malls, and high rises that they had over developed the city faster than it could handle. A year later when I went back the housing market had declined and realtors were discounting houses by a couple of thousand dollars to try to get rid of them.
From 2005-2008 I believe that the housing market was falsely inflated and over valuated, to promote higher prices. As the prices continued to rise, the wages of homeowners remained level. To make matters worse banks were approving loans, when they knew the potential homeowners could never afford mortgage.
Links:
http://www.globalpropertyguide.com/North-America/United-States/Price-History
http://www.miamism.com/2007-miami-dade-county-real-estate-market-conditio
http://money.cnn.com/2006/05/15/real_estate/NAR_firstQ2005_home_prices/index.htm
However, these catastrophic events could have been foreseen years ago when the housing market was weakening. I believe that there was no real value being added to accommodate the increase in prices, just a rapid increase in demand. Many of the homes there are very old, and had their own set of problems that come with age. Some were so severe that people would buy an old house for the land, demolish it, and then rebuild. Also, some people were buying homes just to fix them up and resell them. The housing market in Miami for 2006 had a median price of $377,000.
The city of Miami had such a prime housing market, that you could say that it is one of the biggest in the United States. So when the largest housing market is having problems, the rest will soon fall in due time.
In 2005 the housing market in Miami was booming with sky-high prices, yet everyone was still buying everything up. Everything was being developed and any piece of vacant land was being built upon. Even though Miami is a major city I felt that construction workers were building so many houses, strip malls, and high rises that they had over developed the city faster than it could handle. A year later when I went back the housing market had declined and realtors were discounting houses by a couple of thousand dollars to try to get rid of them.
From 2005-2008 I believe that the housing market was falsely inflated and over valuated, to promote higher prices. As the prices continued to rise, the wages of homeowners remained level. To make matters worse banks were approving loans, when they knew the potential homeowners could never afford mortgage.
Links:
http://www.globalpropertyguide.com/North-America/United-States/Price-History
http://www.miamism.com/2007-miami-dade-county-real-estate-market-conditio
http://money.cnn.com/2006/05/15/real_estate/NAR_firstQ2005_home_prices/index.htm
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