Bankruptcy and Valuations explained… for the common man
Saturday, October 11th, 2008 Posted in Random | No Comments »I got an interested email forward yesterday, which did a really good job of explaining the concepts of bankruptcy and valuations. The mail uses a very simple yet comprehensive approach to explain these concepts to the financial dummy such as myself. Have some patience, and read through it, it’s definitely worth it!
Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was 2 dollars as there were only two pieces of 1 dollar coins circulating around.
1) There were 3 citizens living on this island country. A owned the land. B and C each owned 1 dollar.
2) B decided to purchase the land from A for 1 dollar. So, now A and C own 1 dollar each while B owned a piece of land that is worth 1 dollar.
* The net asset of the country now = 3 dollars.
3) Now C thought that since there is only one piece of land in the country, and land is non producible asset, its value must definitely go up. So, he borrowed 1 dollar from A, and together with his own 1 dollar, he bought the land from B for 2 dollars.
*A has a loan to C of 1 dollar, so his net asset is 1 dollar.
* B sold his land and got 2 dollars, so his net asset is 2 dollars.
* C owned the piece of land worth 2 dollars but with his 1 dollar debt to A, his net residual asset is 1 dollar.
* Thus, the net asset of the country = 4 dollars.
4) A saw that the land he once owned has risen in value. He regretted having sold it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollars from B and acquired the land back from C for 3 dollars. The payment is by 2 dollars cash (which he borrowed) and cancellation of the 1 dollar loan to C. As a result, A now owned a piece of land that is worth 3 dollars. But since he owed B 2 dollars, his net asset is 1 dollar.
* B loaned 2 dollars to A. So his net asset is 2 dollars.
* C now has the 2 coins. His net asset is also 2 dollars.
* The net asset of the country = 5 dollars. A bubble is building up.
(5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 dollars. The payment is by borrowing 2 dollars from C, and cancellation of his 2 dollars loan to A.
* As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 dollars.
* B owned a piece of land that is worth 4 dollars, but since he has a debt of 2 dollars with C, his net Asset is 2 dollars.
* C loaned 2 dollars to B, so his net asset is 2 dollars.
* The net asset of the country = 6 dollars; even though, the country has only one piece of land and 2 Dollars in circulation.
(6) Everybody has made money and everybody felt happy and prosperous.
(7) One day an evil wind blew, and an evil thought came to C’s mind. “Hey, what if the land price stop going up, how could B repay my loan. There is only 2 dollars in circulation, and, I think after all the land that B owns is worth at most only 1 dollar, and no more.”
(8) A also thought the same way.
(9) Nobody wanted to buy land anymore.
* So, in the end, A owns the 2 dollar coins, his net asset is 2 dollars.
* B owed C 2 dollars and the land he owned which he thought worth 4 dollars is now 1 dollar. So his net asset is only 1 dollar.
* C has a loan of 2 dollars to B. But it is a bad debt. Although his net asset is still 2 dollars, his Heart is palpitating.
* The net asset of the country = 3 dollars again.
(10) So, who has stolen the 3 dollars from the country ? Of course, before the bubble burst B thought his land was worth 4 dollars. Actually, right before the collapse, the net asset of the country was 6 dollars on paper. B’s net asset is still 2 dollars, his heart is palpitating.
(11) B had no choice but to declare bankruptcy. C as to relinquish his 2 dollars bad debt to B, but in return he acquired the land which is worth 1 dollar now.
* A owns the 2 coins, his net asset is 2 dollars.
* B is bankrupt, his net asset is 0 dollar. ( he lost everything )
* C got no choice but end up with a land worth only 1 dollar
* The net asset of the country = 3 dollars……….
There is however a redistribution of wealth.
A is the winner, B is the loser, C is lucky that he is spared.
A few points worth noting -
(1) when a bubble is building up, the debt of individuals to one another in a country is also building up.
(2) This story of the island is a closed system whereby there is no other country and hence no foreign debt. The worth of the asset can only be calculated using the island’s own currency. Hence, there is no net loss.
(3) An over-damped system is assumed when the bubble burst, meaning the land’s value did not go down to below 1 dollar.
(4) When the bubble burst, the fellow with cash is the winner. The fellows having the land or extending loan to others are the losers. The asset could shrink or in worst case, they go bankrupt.
(5) If there is another citizen D either holding a dollar or another piece of land but refrains from taking part in the game, he will neither win nor lose. But he will see the value of his money or land go up and down like a see saw.
(6) When the bubble was in the growing phase, everybody made money.
(7) If you are smart and know that you are living in a growing bubble, it is worthwhile to borrow money (like A ) and take part in the game. But you must know when you should change everything back to cash.
(8) As in the case of land, the above phenomenon applies to stocks as well.
(9) The actual worth of land or stocks depends largely on psychology.
What is with these telemarketers??
Saturday, February 9th, 2008 Posted in Random | No Comments »The other day, I got a call from a telemarketer (who, I later learned was an Airtel telemarketer). When I picked up the call, the only thing I heard was [translated] “Is this Vivek Hegde, do you have a Vodafone Billing Account?”. Our office has very poor network coverage. And as usual any call picked up inside the office gets dropped too quickly. This call dropped right after he said the above. I thought that was the end of it. I din’t know who he was or what he called for. But I didn’t really care - I knew he was some silly telemarketer.
A couple of hours later, while I was standing outside ‘chatting’ with colleagues, I got another call. This guy asks me “Sir, did you speak to someone earlier today about an Airtel Billing card”. WTF? I told him I did no such thing, and why on earth would I want an Airtel connection while I still have my Vodafone connection. This guy just “Okay” and let me be.
Another half hour or so later, I got another call. This time, the guy on the other end says…
Him: “Sir I need some clarification on your address”
WTF again!!
Me: “What address, what is this regarding?”
Him: “Sir, you had spoken to me to come meet you regarding a new Airtel phone connection”
Me: “WTF, I did no such thing. I never spoke to anyone. I already have a phone connection, why would I need another one”
Him: “No, you spoke to me in the morning. You told me to come meet you, since you wanted a new connection.”
Me: “Balls, I did no such thing. What’s the address you have anyway?”
Him: [ Mentions some vague address ]
Me: “I don’t know who’s address that is, I don’t know where that is, I don’t even work/live there. You’re just talking nonsense.”
Him: [A little agitated now] “What do you mean sir, you asked me to come here. THis is your address. I have come so far for this. Why are you now saying you don’t want a card”
Me: “If you think that is my address, go right inside, and sell me all your Airtel cards”
Him: “What?”
Me: Hung up the phone
What I don’t comprehend from the situation:
1) How did they get my number?
2) How did they know my name?
3) How did they know I had a Vodafone Billing Connection?
4) What makes them think I would need an Airtel connection when I already have a connection?
And the show stealer…
5) How in the world did he get that address, when I did not even speak to him. Some entity between me and him continued to talk to him while the first call was dropped, and gave him some ghostly address. Maybe someone from beyond the grave wanted him to get to that address with a whole load of Airtel forms, you know, those “Last wish unfulfilled” things. He needed to get an Airtel connection just before he passed away, and now he can’t pass through to the other side till he gets one.
How silly can telemarketers get? Or rather, how desperate??
The worst…
Saturday, February 9th, 2008 Posted in Random | No Comments »Had been having a few ‘Blue screen of death’ issues with my ‘OEM’ version of XP lately. Didn’t pay too much heed to it. It’s Windows afterall. We all grew up worshipping those blue screens. Incidentally, it just so happened that HP had to tell me about a BIOS update for my Compaq lappy while this was happening.
As usual, I woke up, did my early tasks from home, and started the BIOS upgrade.
Sector 17 installed, Sector 18…..19…….21…..22…..POOF…there comes the blue screen of death again. The worst has happened. My BIOS was installed half way, and my ssytem hung. I thought it was the end of it all.
But it was only the beginning.
It so happened, that, either the BIOS successfully installed, or my system managed with the old BIOS. I restarted, successfully into windows. I thought it was all over.
Till my 7th click.
There comes the blue screen again.
Another mandatory restart, more hope, but 5 clicks this time, and another blue screen.
Aaaarghhh.
The same sequence continued for the remainder of the day. Passed the lappy to Ravi (who admins all in office) and picked up an Acer to continue working. But I was missing my Laptop.
After I finished most my work, tried again. This time tried to do a ‘Compaq PC restore’, which basically restores my lappy to the original form. The system shut down, restarted into restore mode, with the Compaq logo et all, and there you go, ANOTHER blue screen of death.
The same procedure went on for atleast another 20 times till I gave up. Either XP gave me a blue screen of death or the PC restore screen hung on me.
We then took out the RAM and cleaned it,and started up. Worked well. Seemed to be working in perfect condition. TILL we tried to complete the BIOS update.
Started the HP update, the program started, 19—20—21—22…POOF…Blue screens again!
This was the last. No more. Not by choice. The BIOS was corrupted. Nothing we can do now.
I had officially spent all the day trying to fix a f&^$%ed up XP system. Wasted my time thoroughly.
To top it all, the night before, I probably slept in the wierdest posture - since I woke with a stinging back ache. Followed me the whole day. Even while I tried to fix the lappy.
And following that, I had Citibank calling me to try and secure a credit card payment. One which I had already paid, but was rejected due to some minor issue with the cheque. I have been paying religiously since the last 7 months, but the last delayed payment made them twitch. The only reason the last payment was late was because I was on vacation in the US.
There goes my card, It’s now blocked. Bye Bye Citibank, I don’t need a bank like yours, HSBC treats me like God. You have one more month to please me.
To top that off, I learn that my car’s security system is F&^$%ed. The lock button no longer locks the car. It just beeps.
AAARRGHHH.
I would’ve done something drastic if it wasn’t for HP to come to the rescue.
My laptop is actually 1.5 years old. Warranty was for a year. I paid for a 3 year extention. Now apparently they might have to replace the Laptop.
Believe me, It’s the only thing that kept me sane so far.
Finally there is something to see here…
Thursday, February 7th, 2008 Posted in Random | No Comments »Welcome to the Vlog, otherwise known as Vivek’s Log. I don’t think I’ll call it a Blog. I haven’t had too much luck with my previous ‘blogs’. Maybe if I call this one a ‘Log’, it might actually be populated more often than not. None the less, I think a ‘Log’ sounds much cooler anyway.
Anyways, nothing much to read yet. It’s 1:10 in the morning, and the only thought I have is sleep. So if you want to be left with a thought - start counting sheep!
Signin’ off on my first entry,
Vivek