Leverage

Many big banks in US went out of business recently. If you dig through the reasons for it most of it is attributed to leveraging. I was thinking of the consequence of leveraging in our traditional businesses.

One of the traditional businesses for Chettiars community is money lending. Money is lent to people in exchange for a collateral. Usually only about 60% of the value of the underlying asset(which is usually gold jewellery) is lent. So if the borrower defaults then the lender gets the principle and interest back. Also this is an insurance in case the price of the underlying asset falls. So even if the price of the gold falls 40% the lender could still get back the principle.

I was thinking how one could leverage in money lending business and the following is one way of leveraging that I could think of(and there are many ways you can leverage!!):
Let us say you have $1000 to lend. When a borrower presents the lender with a jewellery the lender lends him the $1000. Now the lender has the jewellery and the borrower has the money. Lender can theoretically mortgage the same jewellery with another lender(Let us call this person the second lender) and get $1000 for it. Also let us assume the first lender can get a lower interest rate from second lender compared to the rate he lends the money to his borrower. So with this additional $1000 he can lend it to another borrower and make the profit on the difference of the interest rates. Also the first lender can mortgage the new jewellery "again" with another lender and can get another $1000 back and the cycle can continue.

On the surface it looks like a good plan. The first lender always lends money against gold. So even if the borrower defaults the first lender can ask the second lender(s) to sell the underlying jewellery and get his interest and principle back. It looks almost too good to be true!!

But the worst case scenario is: If the borrower defaults and at the same time the value of the underlying property falls. For simplicity let us assume all the borrowers of the first lender default and also the price of the gold falls to zero. Now if the first lender has leveraged 3 times it means he has invested $1000 of his own money and also has lent $3000 of borrowed money from other lenders. Assuming the first lender to be a law abiding citizen there are only 2 things he can do:

1) pay the other lenders the other $3000 making his total loss to $4000
2) Declare bankruptcy.

This is one way of leveraging!! There are multiple ways of leveraging in the international financial markets. They are complex to understand too. In the name of innovation all these high risk products have been introduced by these US banks. This just reminds me of a famous quote by warren buffett(this was quoted much earlier to the financial meltdown. I don't remember the words exactly but let me try to recollect the meaning of it!): " I don't understand why many new methods of "losing money" are being invented when the old method work just fine".

I also read somewhere that many of the big investment banks have leveraged in the ratio of 1:30. Meaning for $1 of their asset, they have a potential $30 of liability(meaning if the absolute worst case scenario happens then they owe 30 times their net worth). One thing to note here is that although these wall street firms lost a ton of shareholder money(and brought the western financial system to its knees) they did not do any thing technically unethical.(Although I am pretty sure they will be portrayed as villains just to satisfy the general population. In fact there is a good chance some of these executives might go to jail in the next several months). They reported all their transactions in their annual audit as per the law. But it just turned out that these deals were so complicated that most of the shareholders did not even know what the risk of these transactions were.

In finance I am generally suspicious if somebody comes up with a complex model to explain something. In general if it requires any thing more than high school math(and may be some accounting skills) and common sense I get suspicious. But the funny thing is even now people in wall street are coming up with these insane mathematical models that use calculus and many other complicated math to predict the future market returns!!

DVR

I got a free offer of Digital Video Recorder from Comcast. They told me I can have it free for one year and they will charge me $9.00 per month after that, that is if I wish to keep it after one year. I took up the offer!!

It has been working for the past few days. It is not all I expected but it is not a complete disappointment either. I am able to record some of my favorite shows and play it back when I am free. Also it helps when my wife is cooking with the exhaust on, I can record the show and play it back later when the exhaust is not running. My wife likes Everybody Loves Raymond and she was unable to watch it regularly until the DVR came along. Also I can start watching the show 15 minutes after it begins and fast forward the commercials.

Now the "not so good" part! With a Tivo unlike a comcast DVR you get suggestions for shows. Tivo profiles the show you set it to record and starts automatically recording shows it thinks you might like!! With the abundance of television channel I think it would be a cool tool.

Also I find the user interface not that intuitive. There are many menus to go through to set it to record a show. The user interface does not take that long to learn though. But it feels tedious to navigate it.

So would I keep it after an year? I doubt it. At $9.00 it is pretty expensive. I think for a fancy VCR it is ridiculous to pay $9.00. If I want a DVR that badly I would rather go with a Tivo. After all it is only $3.00 extra per month.

Also some softwares for windows Vista in time might have this capability(who knows may be it is there today!!). Already if you have a TV tuner you can watch television on your computer. You can record shows too. It is only a matter of time(may be it is already there) when there would be a wireless way to "playback" your recorded shows from the computer to the TV(via may be a set top box that interfaces the wireless transmission from the computer to something the TV can understand). Also if they let me control the show with a remote control rather than a computer mouse I don't see the need for a Comcast DVR!!!

Quality of Life in US

It is obvious that in many cases a person working in US would earn much more here than in India.. But I am interested in finding the difference in quality of life.

Income inequality in US is much lower than in India(of course not counting the super rich!!) So it is expensive to hire somebody to help you around the house. Any thing that involves labor is pretty expensive here. If you want to buy a furniture cheap then you must assemble it yourself!! But in a sense it is good because it promotes independence.

But what about the other indicators for quality of life? I define the quality of life by the following factors:
1. Food, clothing and shelter(the basic necessities)
2. Socializing(with friends and family)
3. Medical care.
4. Material comforts(Televisions, internet, camera etc)
5. Environment(quality of air we breathe, traffic)
6. If you have kids - school and friends of your kids

Now let us see how US and India fare against each of the above factors. For food, clothing and shelter I rate US to be the winner. It is true that I dont get some speciality south Indian food in US. But food here is generally cleaner and if you dont want pesticides you can go organic there is more variety etc.

Shelter(housing) is also better here(At least in Seattle). You can live in a comfortable place with out shelling too much money. Even for clothing I think US has better quality(in most cases) and comparable prices to India(little expensive but manageable)

As far as Socializing goes I would have to say India is the winner!! I think it is the mother tongue thing!! I have lots of friends from through out the world here. But I dont feel especially close to anybody other than who speak my mother toungue! Also I never remember planning on things to do for any week end in India.

As far as medical care goes I would have to say both US and India are comparable! Pretty much India has the same technology as is found in US(At least the expensive hospitals do). However there are certain differences. But both of them have advantages and disadvantages cancelling each other out.

For material comforts I would have to rate US as the winner. It is true that the same technology is available in India. But in most cases I think it is more affodable here than in India.(I mean compared to your salary)

Environment - I would have to say US as the clear winner here.

School - I would rate India as the winner here. It is pretty expensive in India to get into a good school. However it is usually possible to find good schools where they take special care for your kids. But in US not all shcools are good and you dont have much choice either.

So is there a clear winner? I would have to say No. At least I find that both places are in a tie!! But it is possible that for somebody some of the things are more important than others in which case they can pick a winner!!