I found the blog critiques of the US education system to be very interesting and thought provoking. http://jlewis45rmiblog.blogspot.com/2009/03/critique-public-education-system.html While I agree that our education system is lacking in some areas, I feel privileged to have received the education I have in my life. Our system lacks in creating bilingual students at a young age. It lacks in motivating students to do their very best along with staying in school as Jessica states. There are some areas that do not have as quality materials and teachers as other schools, but there will always be areas like that. There are bad areas in cities and states and unfortunately that is just the way it is. We can try to help as much as possible, but it is human nature that some are simply more motivated than others.
If education was like that of other nations or the same for everyone, I don't think you would have as many outstanding people. People need incentives to work harder. That is why when jobs are socialized and people get paid the same no matter how much they produce, everyone just produces what is required. I know when I was in high school our class ranking was provided at the bottom of our report card. I always wanted to compare mine with everyone else and see how I was doing. I always had to be the best. My motivation was the rankings and awards and knowing that I was doing my very best. While I agree that our education system could be improved in some areas, I have to also acknowledge the fact that the United States is the largest power in the world. We did not just get to that position by being slackers. We are obviously doing something right that we have outstanding leadership and technological advances that put us in that position. America has always been the "land of opportunity" and "the American Dream." In some countries, people do not even have the opportunity to receive an education at all. Some have to work at very young ages. The United States works through ministry programs and other philanthropic organizations to help provide educations to those nations. I think that would hardly be feasible if our own system was detrimental to our citizen's learning aptitudes.
This blog is difficult to respond to because I agree that we could use improvement, and it is impossible to ignore factual statistics that state the United States is below average in math and science studies, for example. http://en.wikipedia.org/wiki/Education_in_the_United_States However, the United States has an extremely high literacy rate, comparatively: Literacy Rate It is difficult to crack down more on the education program. There are already so many standardized tests to ensure our students are reaching optimum levels. We go to school for long hours and then require homework. The United States also has a large education budget. Even individual states give scholarship incentives to students with good grades. For instance, with the Georgia Hope Scholarship, students with above a 3.0 GPA can go to school for free. I don't know how it would be possible to improve. Other schools get breaks in places such as Finland: "These breaks provide a clear contrast between Finnish schools and their recess-starved counterparts in the United States" Compare President Obama is focused on improving the education system: Obama for education.“It is time to give all Americans a complete and competitive education from the cradle up through a career,” Mr. Obama said. “We have accepted failure for too long – enough. America’s entire education system must once more be the envy of the world.” President Obama challenged teachers unions, and renewed his support for a merit-based system of payment. He also said adult Americans needed to take responsibility for improving their own education, in addition to improve the education of their children.
I have seen teachers who have not helped students in ways they should or have not taught classes as well as they should. I have seen students drop out of school and then do nothing with their lives. I have seen students fail classes and students with apathetic attitudes. Parents of students even have apathetic attitudes and don't help their children in school or even know what their children are doing in school. It is important that parents help their children decide what they want to be when they grow up and help their children pick colleges and find scholarships. I agree with the blog that an attitude adjustment is necessary. If we do not address this problem, the poor economic state our nation is in could continue. Or in the future, we could become a nation which lacks in human capital.
These reasons are why it is hard to ignore the fact that improvement is necessary in some areas. However, is this improvement feasible? I agree with all the aspects of improving motivation in students so we have more shining stars, but unfortunately there will always be those who do better than others. That is why we have CEOs of companies who make millions and lower down employees who make less. It is the way the world works, survival of the fittest.
Saturday, March 28, 2009
Will we experience a respite in technological advancement?
With the economy in the downturn, many people are eliminating purchases of luxury items, such as cell phones. This lull in new purchases has caused problems for the auto industry as discussed in my previous blog about GM: will we see these same problems occur in the cell phone and technology industries?
http://www.businessinsider.com/2008/5/economy-burns-cellphone-sales-down-22-in-q1
In the past 20 years we have seen technology turn from a large cell phone the size of a landline phone to a small blackberry computer that fits in your hand and pocket. Amazing technological leaps have been made in such a short time. As soon as one piece of technology is released, the companies work on new advances and better products, so that by the time the item goes on sale at a reasonable price for the average consumer, there is a new better product to be had. Our world is so fast paced with hundreds of emails going to individuals each day, text messages being sent, social webpages being checked, instant messaging, and regular phone calls being made. Technology makes it easy to communicate, but are people getting overloaded with messages and technology? I think it adds a lot of stress to people's lives having so much to keep up with, and would anyone be able to function if something happened to these connections? I've been on trips with my friends, camping for instance, and they have gone crazy without service or the internet. People went without it for a long time. I'm only 21 and remember dial-up, which would kick you off the internet if your house received a phone call. Now, if our computer takes more than 3 seconds to get to a webpage we freak out and lose patience. Plus, people barely have landlines anymore because everyone has a cell phone.
With this poor current economic situation, people are keeping their old phones, granted still advanced, but people have less money to spend on new high end advancements in cell phones. "The U.S and European markets are just about full-up on cell phones, which have become as ubiquitous in households as toasters or televisions. But with the struggling economy, cell phone consumers are hunkering down, often switching to flat-rate, lower cost models that allow them to keep a lid on monthly phone bills. It’s a prickly issue for Apple and Research in Motion, makers of the iPhone and the Blackberry, in particular" http://www.daniweb.com/blogs/entry3311.html The cell phone companies may not develop new cell phones as often during this time and may focus more on making money through new plans with lower end models and focus less on upgrades. I think this would be a nice break for our society. We always talk about not having enough time and going going going every day that this could be just the rest we need.
http://www.businessinsider.com/2008/5/economy-burns-cellphone-sales-down-22-in-q1
In the past 20 years we have seen technology turn from a large cell phone the size of a landline phone to a small blackberry computer that fits in your hand and pocket. Amazing technological leaps have been made in such a short time. As soon as one piece of technology is released, the companies work on new advances and better products, so that by the time the item goes on sale at a reasonable price for the average consumer, there is a new better product to be had. Our world is so fast paced with hundreds of emails going to individuals each day, text messages being sent, social webpages being checked, instant messaging, and regular phone calls being made. Technology makes it easy to communicate, but are people getting overloaded with messages and technology? I think it adds a lot of stress to people's lives having so much to keep up with, and would anyone be able to function if something happened to these connections? I've been on trips with my friends, camping for instance, and they have gone crazy without service or the internet. People went without it for a long time. I'm only 21 and remember dial-up, which would kick you off the internet if your house received a phone call. Now, if our computer takes more than 3 seconds to get to a webpage we freak out and lose patience. Plus, people barely have landlines anymore because everyone has a cell phone.
With this poor current economic situation, people are keeping their old phones, granted still advanced, but people have less money to spend on new high end advancements in cell phones. "The U.S and European markets are just about full-up on cell phones, which have become as ubiquitous in households as toasters or televisions. But with the struggling economy, cell phone consumers are hunkering down, often switching to flat-rate, lower cost models that allow them to keep a lid on monthly phone bills. It’s a prickly issue for Apple and Research in Motion, makers of the iPhone and the Blackberry, in particular" http://www.daniweb.com/blogs/entry3311.html The cell phone companies may not develop new cell phones as often during this time and may focus more on making money through new plans with lower end models and focus less on upgrades. I think this would be a nice break for our society. We always talk about not having enough time and going going going every day that this could be just the rest we need.
Monday, March 23, 2009
Critique of AIG bonuses
I read this blog and decided to critique how the bonuses and case with AIG are being handled.
http://kpatel53.blogspot.com/
Obama anger at AIG bonus payouts
The blog states that it is AIG's responsibility to know in this current economic state that taxpayers money should be going in the right places and not into high paying executives. I believe the government should only intervene if they feel AIG is not being responsible with their bailout package. The government has intervened because AIG has used bailout money to pay bonuses. So according to the blog, this is right.
In my opinion, the government should have researched better where the bailout money for AIG was going to go. The government also knew about the bonuses beforehand, according to the Republican view. In my opinon, whether the Republicans are correct or not, the government should have figured out whether there were bonuses to be paid or other "frivilous" uses for the money were to be made. There is no restriction against paying bonuses with bailout money in the stimulous package: as ABC News' Capitol Hill Correspondent Jonathan Karl reported, in February, the Senate unanimously approved an amendment restricting bonuses over $100,000 at any company receiving federal bailout funds, but during the closed-door House and Senate negotiations the provision was stripped out and replaced with a measure by Dodd exempting bonuses agreed to prior to the passage of the stimulus bill on February 11, 2009. In my opinion, there should be a provision that bailout money is not used for bonuses, but there is not restriction against it. Therefore, the AIG executives should get the bonuses the government gave them indirectly through the bailout money. The bonuses should not have to be repaid because the government made the mistake of not researching where such a large amount of money was going.
Another opinion is that maybe if the government did know about the bonuses, the amount of money given wass such a small proportion of the governmental budget that it did not matter. Also the amount paid in bonuses was small compared to the actual amount AIG received (top individual bonus was more than $6.4 million, and the top seven received more than $4 million each. The Obama administration proposed a budget in the trillions of dollars. AIG only paid a few million to the executives in bonuses. I don't think that small percentage is going to make a difference in the budget or the deficit for that matter if they are paid back. And by the way, they will never get paid back. It will be impossible for them to pay it back because I guarantee you they actually do not have the money to pay back. So the government is going to spend all this extra money on a lawsuit when they could just admit they made a mistake and potentially break even rather than spending even more on lawsuits. The government could have been fine with the small percentage being paid to executives in bonuses, but the fact that the public found out and is now enraged, has made the government try to make it better. Their way of making it better is pretending like they didn't know about it in the first place.
It was impossible to prevent the contractual bonuses from being paid and said it may be difficult to recoup the payments. The government would "impose on AIG a contractual commitment" to repay the 165 million dollars to taxpayers.---http://www.business-standard.com/india/news/aig-boss-faces-grilling-in-angry-congress/56835/on
These bonuses were also guaranteed through contractual agreements, which were due even if bankruptcy occurred. Therefore, the executives should be paid these bonuses. They were promised before hard times occurred and were guaranteed. http://www.msnbc.msn.com/id/29739834/ Contracts written last March guaranteed employees 100 percent of their 2007 bonus amounts for 2008.The company and some federal regulators have said it was obligated by contract to make the payments. There is no restriction against paying bonuses with bailout money, I will state again. "It is also noteworthy that everyone who is complaining obivously didn't read the bill they voted for. This nation is in real trouble when congress passes laws to punish private citizens. Those bonuses were legal contracts made before the government bailout and legally must be fulfilled, like it or not" --http://blogs.abcnews.com/politicalpunch/2009/03/obama-adminis-1.html These bonuses are guaranteed to these executives at anytime, whether in good economic standing or poor. “These bonuses are payable regardless of performance and are calculated at 100 percent of 2007 compensation for all employees except senior management, who receive 75 percent of 2007 compensation. The amount is payable unless they are fired with good cause, resign without good reason or fail to meet performance standards. For those hoping that these employees could now be fired, “good cause” is defined in the agreement as a very high standard. This is normal for these agreements.“ There is no cause. And “failure to meet performance standards is another hard test to meet. If you could meet this latter standard, the contract provides that the employee still keeps his or her 2008 payments, just not next year’s. So even if the employee fails to meet performance standards this past year, they still keep the money paid this past weekend.”--http://dealbook.blogs.nytimes.com/2009/03/18/dissecting-the-aig-bonus-contract/
http://kpatel53.blogspot.com/
Obama anger at AIG bonus payouts
The blog states that it is AIG's responsibility to know in this current economic state that taxpayers money should be going in the right places and not into high paying executives. I believe the government should only intervene if they feel AIG is not being responsible with their bailout package. The government has intervened because AIG has used bailout money to pay bonuses. So according to the blog, this is right.
In my opinion, the government should have researched better where the bailout money for AIG was going to go. The government also knew about the bonuses beforehand, according to the Republican view. In my opinon, whether the Republicans are correct or not, the government should have figured out whether there were bonuses to be paid or other "frivilous" uses for the money were to be made. There is no restriction against paying bonuses with bailout money in the stimulous package: as ABC News' Capitol Hill Correspondent Jonathan Karl reported, in February, the Senate unanimously approved an amendment restricting bonuses over $100,000 at any company receiving federal bailout funds, but during the closed-door House and Senate negotiations the provision was stripped out and replaced with a measure by Dodd exempting bonuses agreed to prior to the passage of the stimulus bill on February 11, 2009. In my opinion, there should be a provision that bailout money is not used for bonuses, but there is not restriction against it. Therefore, the AIG executives should get the bonuses the government gave them indirectly through the bailout money. The bonuses should not have to be repaid because the government made the mistake of not researching where such a large amount of money was going.
Another opinion is that maybe if the government did know about the bonuses, the amount of money given wass such a small proportion of the governmental budget that it did not matter. Also the amount paid in bonuses was small compared to the actual amount AIG received (top individual bonus was more than $6.4 million, and the top seven received more than $4 million each. The Obama administration proposed a budget in the trillions of dollars. AIG only paid a few million to the executives in bonuses. I don't think that small percentage is going to make a difference in the budget or the deficit for that matter if they are paid back. And by the way, they will never get paid back. It will be impossible for them to pay it back because I guarantee you they actually do not have the money to pay back. So the government is going to spend all this extra money on a lawsuit when they could just admit they made a mistake and potentially break even rather than spending even more on lawsuits. The government could have been fine with the small percentage being paid to executives in bonuses, but the fact that the public found out and is now enraged, has made the government try to make it better. Their way of making it better is pretending like they didn't know about it in the first place.
It was impossible to prevent the contractual bonuses from being paid and said it may be difficult to recoup the payments. The government would "impose on AIG a contractual commitment" to repay the 165 million dollars to taxpayers.---http://www.business-standard.com/india/news/aig-boss-faces-grilling-in-angry-congress/56835/on
These bonuses were also guaranteed through contractual agreements, which were due even if bankruptcy occurred. Therefore, the executives should be paid these bonuses. They were promised before hard times occurred and were guaranteed. http://www.msnbc.msn.com/id/29739834/ Contracts written last March guaranteed employees 100 percent of their 2007 bonus amounts for 2008.The company and some federal regulators have said it was obligated by contract to make the payments. There is no restriction against paying bonuses with bailout money, I will state again. "It is also noteworthy that everyone who is complaining obivously didn't read the bill they voted for. This nation is in real trouble when congress passes laws to punish private citizens. Those bonuses were legal contracts made before the government bailout and legally must be fulfilled, like it or not" --http://blogs.abcnews.com/politicalpunch/2009/03/obama-adminis-1.html These bonuses are guaranteed to these executives at anytime, whether in good economic standing or poor. “These bonuses are payable regardless of performance and are calculated at 100 percent of 2007 compensation for all employees except senior management, who receive 75 percent of 2007 compensation. The amount is payable unless they are fired with good cause, resign without good reason or fail to meet performance standards. For those hoping that these employees could now be fired, “good cause” is defined in the agreement as a very high standard. This is normal for these agreements.“ There is no cause. And “failure to meet performance standards is another hard test to meet. If you could meet this latter standard, the contract provides that the employee still keeps his or her 2008 payments, just not next year’s. So even if the employee fails to meet performance standards this past year, they still keep the money paid this past weekend.”--http://dealbook.blogs.nytimes.com/2009/03/18/dissecting-the-aig-bonus-contract/
Risk Tolerance Confusion
With the recent AspenTech case, the class had some confusion on the definition of risk tolerance. I know I was one of those class members who had the trouble. So I decided to research this subject more.
http://www.investopedia.com/terms/r/risktolerance.asp
According a definition I found on investopedia, risk tolerance is the degree of uncertainty that an investor can handle in regard to a negative change in the value of his or her portfolio. An investor's risk tolerance varies according to factors such as age, income requirements, and financial goals. For example, a 70-year-old retired widow will generally have a lower risk tolerance than a single 30-year-old executive, who generally has a longer time frame to make up for any losses she may incur on her portfolio. Risk tolerance is how tolerant you are of risk. If you are tolerant of risk you can afford to take more risk. For example, if the Beta of your company is low, you can take on more risk if you want to. You don't have to, however.
When you are risk tolerant, you can pursue more risk for higher returns. A risk tolerant investor will pursue higher potential reward investments even when there is a greater potential for a loss. A risk tolerant individual might not sell his stocks in a temporary market correction, while a risk averse person might panic and sell at the wrong time.
http://www.investopedia.com/articles/financial-theory/08/three-risk-types.asp
However, just because you can take risk does not mean that you should. For instance, gambling could potentially lose all your money. You have the money to lose, but do you really want to lose it? The measure of risk tolerance for judging an investment is not enough. When taking on investments 2 questions to ask are Question 1: How much risk can you handle psychologically? and Question 2: How much risk should you take on? These are 2 completely different questions as I hinted at before. Question 1discusses risk tolerance, and question 2 potentially deals with asset allocation in your portfolio. A blend of three factors should be considered when creating a long-term investment strategy: risk tolerance, the financial capacity for risk and the optimal risk. You should combine these risks and make your risk tolerance match an efficient financial portfolio as well. Higher risks provide higher returns. If you are after higher returns, you must take on higher risks. But, not everyone has the ability or capacity to take on such risks. This is your risk tolerance. The higher returns, the more risk, and the more capital you would need to invest and could lose. Be careful to assess your risk tolerance before making investments. However, do not just use risk tolerance as your one measure. Assess risk in other measurements such as VaR and other risk measures.
http://www.investopedia.com/terms/r/risktolerance.asp
According a definition I found on investopedia, risk tolerance is the degree of uncertainty that an investor can handle in regard to a negative change in the value of his or her portfolio. An investor's risk tolerance varies according to factors such as age, income requirements, and financial goals. For example, a 70-year-old retired widow will generally have a lower risk tolerance than a single 30-year-old executive, who generally has a longer time frame to make up for any losses she may incur on her portfolio. Risk tolerance is how tolerant you are of risk. If you are tolerant of risk you can afford to take more risk. For example, if the Beta of your company is low, you can take on more risk if you want to. You don't have to, however.
When you are risk tolerant, you can pursue more risk for higher returns. A risk tolerant investor will pursue higher potential reward investments even when there is a greater potential for a loss. A risk tolerant individual might not sell his stocks in a temporary market correction, while a risk averse person might panic and sell at the wrong time.
http://www.investopedia.com/articles/financial-theory/08/three-risk-types.asp
However, just because you can take risk does not mean that you should. For instance, gambling could potentially lose all your money. You have the money to lose, but do you really want to lose it? The measure of risk tolerance for judging an investment is not enough. When taking on investments 2 questions to ask are Question 1: How much risk can you handle psychologically? and Question 2: How much risk should you take on? These are 2 completely different questions as I hinted at before. Question 1discusses risk tolerance, and question 2 potentially deals with asset allocation in your portfolio. A blend of three factors should be considered when creating a long-term investment strategy: risk tolerance, the financial capacity for risk and the optimal risk. You should combine these risks and make your risk tolerance match an efficient financial portfolio as well. Higher risks provide higher returns. If you are after higher returns, you must take on higher risks. But, not everyone has the ability or capacity to take on such risks. This is your risk tolerance. The higher returns, the more risk, and the more capital you would need to invest and could lose. Be careful to assess your risk tolerance before making investments. However, do not just use risk tolerance as your one measure. Assess risk in other measurements such as VaR and other risk measures.
Friday, March 13, 2009
Response to The Auto Industry
http://enterpriserisk-jonf.blogspot.com/
The Auto Industry blog from Jon F discusses the request for bailout funds by auto companies such as GM and Chrysler. On one hand denying the bailout money would cause these auto companies to go bankrupt, costing thousands of people their jobs in a time of increasing unemployment. His other viewpoint is that if the US government does provide bailout money, they will be helping these companies that seem to be failing regardless of their numerous attempts to cut costs. In a system of survival of the fittest companies, the help could be useless. The blog states, "If you were a manager at a company still attempting to sell gas guzzling SUVs, within the past 5 years I have a feeling that the you and the other managers of your company failed to look around and analyze the current market." I understand that the auto company bailout will be saving companies that are failing and will continue to fail in the future, but many jobs are at stake. I agree with the idea that it seems wrong to help a failing company when it is going to continue to fail and drain taxpayers money, but I do not think the company is in bankruptcy for avoiding the needs of the current market. I think GM and Chrysler should be given bailout money and maybe be encouraged to use some of the money to switch a few production lines or design a few more mid sized cars.
Too many jobs are at risk with these major auto companies. An article in Forbes backs my opinion that allowing America's largest auto manufacturer, the employer of hundreds of thousands of people, to fold could start a recession all by itself.
-Saving GM
I think in just 5 years it would be extremely difficult to change your company product line. You can add new compact cars but you cannot completely abandon the makes and models of SUVs that have been a part of the company since conception. Chrysler has been around since 1925. GM was created in 1908. It is challenging to change the strategy of old companies like them. The auto companies would have to get new equipment to build cars and not mostly SUVs. Jobs would be affected in this way as well because people on the assembly lines have different specialties.
Because these companies are so old, they also have older employees who have seniority and special pensions that can be very expensive to the company. This is another reason for GM's bankruptcy which has nothing to do with avoiding the current market. GM has been in business a long time, meaning it has lots of old workers and retirees, which means doctor bills and pensions. If it had started 15 years ago, it wouldn't have this problem. GM has an $86 billion pension fund. If just half of this amount could be spent on developing new cars or engines, GM would have been able to begin to prepare for the current crisis.
-http://www.forbes.com/global/2005/0314/029.html?boxes=custom
The costs of changing the company's products from SUVs to environmentally friendly cars that are good on gas mileage could put the auto company into bankruptcy as well, maybe even more quickly than the loss of car purchases due to people no longer having a preference for SUVs. If they had changed their strategy to making compact cars, they would incur the costs of that change. I researched approximate costs of switching your manufacturing to cars and found Ford as an example. Ford decided to start to switch due to increased gas prices and SUVs remaining on lots longer. Ford decided to switch a few of its truck plants into car plants. The switchover is going to cost the automaker $75 million bucks just for a new bodyshop. The total cost to retool the plant will be in the hundreds of millions.
- From AutoCar
Also, car purchases are decreasing in general, not just SUV car purchases. Due to the economic crisis, people are trying to save money and one way to do so is to keep the car you already have, keep a lower or nonexistent car payment on the car you already own. People have been deciding they can make do with the car they already have. There is no need to make a large new car purchase when they are hurting financially. Luxury items are the first to go when in a financial crisis. Moreover, increasing unemployment is another reason for the decline in car sales. Spain is experiencing the same problem as in the US. Due to job cuts, people are unable to purchase cars. Decreasing disposable income is also reducing the car sales.
-Car Sales on the Decline
We see these same reasons affecting car purchases in the United States. What are auto industry companies supposed to do to prepare for fewer purchases? This reason is not GM or Chrysler's fault. GM has been trying to analyze the current financial situation, but maybe they think it will get better. Gas prices have gotten lower, but I'm sure they will change again.
Many reasons, not to the fault of the auto companies, have caused them to need bailout money. Too many jobs are at risk to neglect these major companies. Hopefully, after the crisis when money is more readily available for these companies, the auto industry's risk managers can assist the companies in changing their product lines to better prepare for a future financial crisis.
The Auto Industry blog from Jon F discusses the request for bailout funds by auto companies such as GM and Chrysler. On one hand denying the bailout money would cause these auto companies to go bankrupt, costing thousands of people their jobs in a time of increasing unemployment. His other viewpoint is that if the US government does provide bailout money, they will be helping these companies that seem to be failing regardless of their numerous attempts to cut costs. In a system of survival of the fittest companies, the help could be useless. The blog states, "If you were a manager at a company still attempting to sell gas guzzling SUVs, within the past 5 years I have a feeling that the you and the other managers of your company failed to look around and analyze the current market." I understand that the auto company bailout will be saving companies that are failing and will continue to fail in the future, but many jobs are at stake. I agree with the idea that it seems wrong to help a failing company when it is going to continue to fail and drain taxpayers money, but I do not think the company is in bankruptcy for avoiding the needs of the current market. I think GM and Chrysler should be given bailout money and maybe be encouraged to use some of the money to switch a few production lines or design a few more mid sized cars.
Too many jobs are at risk with these major auto companies. An article in Forbes backs my opinion that allowing America's largest auto manufacturer, the employer of hundreds of thousands of people, to fold could start a recession all by itself.
-Saving GM
I think in just 5 years it would be extremely difficult to change your company product line. You can add new compact cars but you cannot completely abandon the makes and models of SUVs that have been a part of the company since conception. Chrysler has been around since 1925. GM was created in 1908. It is challenging to change the strategy of old companies like them. The auto companies would have to get new equipment to build cars and not mostly SUVs. Jobs would be affected in this way as well because people on the assembly lines have different specialties.
Because these companies are so old, they also have older employees who have seniority and special pensions that can be very expensive to the company. This is another reason for GM's bankruptcy which has nothing to do with avoiding the current market. GM has been in business a long time, meaning it has lots of old workers and retirees, which means doctor bills and pensions. If it had started 15 years ago, it wouldn't have this problem. GM has an $86 billion pension fund. If just half of this amount could be spent on developing new cars or engines, GM would have been able to begin to prepare for the current crisis.
-http://www.forbes.com/global/2005/0314/029.html?boxes=custom
The costs of changing the company's products from SUVs to environmentally friendly cars that are good on gas mileage could put the auto company into bankruptcy as well, maybe even more quickly than the loss of car purchases due to people no longer having a preference for SUVs. If they had changed their strategy to making compact cars, they would incur the costs of that change. I researched approximate costs of switching your manufacturing to cars and found Ford as an example. Ford decided to start to switch due to increased gas prices and SUVs remaining on lots longer. Ford decided to switch a few of its truck plants into car plants. The switchover is going to cost the automaker $75 million bucks just for a new bodyshop. The total cost to retool the plant will be in the hundreds of millions.
- From AutoCar
Also, car purchases are decreasing in general, not just SUV car purchases. Due to the economic crisis, people are trying to save money and one way to do so is to keep the car you already have, keep a lower or nonexistent car payment on the car you already own. People have been deciding they can make do with the car they already have. There is no need to make a large new car purchase when they are hurting financially. Luxury items are the first to go when in a financial crisis. Moreover, increasing unemployment is another reason for the decline in car sales. Spain is experiencing the same problem as in the US. Due to job cuts, people are unable to purchase cars. Decreasing disposable income is also reducing the car sales.
-Car Sales on the Decline
We see these same reasons affecting car purchases in the United States. What are auto industry companies supposed to do to prepare for fewer purchases? This reason is not GM or Chrysler's fault. GM has been trying to analyze the current financial situation, but maybe they think it will get better. Gas prices have gotten lower, but I'm sure they will change again.
Many reasons, not to the fault of the auto companies, have caused them to need bailout money. Too many jobs are at risk to neglect these major companies. Hopefully, after the crisis when money is more readily available for these companies, the auto industry's risk managers can assist the companies in changing their product lines to better prepare for a future financial crisis.
Insurance Contracts
In class we have been discussing insurance policies. I decided to research insurance contracts and discovered Investopedia.com. The webpage has articles about how insurance was developed. It was developed to spreak risk among many people that could handle the risk. There is also a link to a page about personalizing your risk tolerance, which is what we determined for the AspenTech case.
When the class was asked how we choose an insurance policy, we said based on which policy is the cheapest. This seems like a logical way to choose since you try to minimize your bills, but the insurance company could not be very reliable, or they could even be tricking you in some other way. I looked on Investopedia.com to learn more about insurance, how to choose it, and what you are getting from a policy. I found that Under-Insurance and Excess are things to look out for when choosing an insurance policy. Under-Insurance is when you have a house which is valued at $100,000 but the insurance only covers $80,000. If there is a partial loss to your house, the insurance company will pay only a portion of the $80,000. An example of excess is when you are insured at a value of $5000. Then your car has damage of $7000. The insurance company will pay you the full $7000 which is great, but if there is partial damage less than $5000, the insurance company will pay nothing. These are just a few of the important terms you should learn about when deciding on an insurance policy. A lot of times, people just get a cheap policy and then put it in a pile with all their other bills and paperwork and know nothing about it. But, I think we should learn more about our policies. As a soon to be senior in college, I will be on my own soon with my own career. I would like to know how to choose my policies to get the most coverage and benefits for a bargain. I think everyone should learn about the risks associated with choosing companies without learning about them first.
Here is the link to the Investopedia webpage to learn more about insurance.
http://www.investopedia.com/articles/pf/06/insurancecontracts.asp
I also found this cool website Insurance 101 with information about every type of insurance policy you are able to purchase and which ones you could do without.
http://www.investopedia.com/features/insurance-101.aspx
I found an article, Five Insurance Policies Everyone Should Have
by Lisa Smith, which states the 5 insurance policies everyone should have are long-term disability, life insurance, health, home, and auto insurance. I agree with this list because these are the basic needs and assets which most people own. The list provides basic coverage because you never know what will happen to you. People think that "This will never happen to me," but sometimes accidents happen, and you need insurance. The insurance will ensure that you can cover your costs and will not have to go bankrupt. Insurance is there to ensure you remain in the same financial situation you were in before the accident.
When the class was asked how we choose an insurance policy, we said based on which policy is the cheapest. This seems like a logical way to choose since you try to minimize your bills, but the insurance company could not be very reliable, or they could even be tricking you in some other way. I looked on Investopedia.com to learn more about insurance, how to choose it, and what you are getting from a policy. I found that Under-Insurance and Excess are things to look out for when choosing an insurance policy. Under-Insurance is when you have a house which is valued at $100,000 but the insurance only covers $80,000. If there is a partial loss to your house, the insurance company will pay only a portion of the $80,000. An example of excess is when you are insured at a value of $5000. Then your car has damage of $7000. The insurance company will pay you the full $7000 which is great, but if there is partial damage less than $5000, the insurance company will pay nothing. These are just a few of the important terms you should learn about when deciding on an insurance policy. A lot of times, people just get a cheap policy and then put it in a pile with all their other bills and paperwork and know nothing about it. But, I think we should learn more about our policies. As a soon to be senior in college, I will be on my own soon with my own career. I would like to know how to choose my policies to get the most coverage and benefits for a bargain. I think everyone should learn about the risks associated with choosing companies without learning about them first.
Here is the link to the Investopedia webpage to learn more about insurance.
http://www.investopedia.com/articles/pf/06/insurancecontracts.asp
I also found this cool website Insurance 101 with information about every type of insurance policy you are able to purchase and which ones you could do without.
http://www.investopedia.com/features/insurance-101.aspx
I found an article, Five Insurance Policies Everyone Should Have
by Lisa Smith, which states the 5 insurance policies everyone should have are long-term disability, life insurance, health, home, and auto insurance. I agree with this list because these are the basic needs and assets which most people own. The list provides basic coverage because you never know what will happen to you. People think that "This will never happen to me," but sometimes accidents happen, and you need insurance. The insurance will ensure that you can cover your costs and will not have to go bankrupt. Insurance is there to ensure you remain in the same financial situation you were in before the accident.
Sunday, March 8, 2009
Risk Maps
In class we discussed creating risk maps for different companies and industries. Professor Grace said his graduate students must create risk maps. We asked what is an example of a risk map, but Professor Grace does not give examples because he would receive a carbon copy of exactly what he provided. He said there are many ways to create a risk map, whether it be a chart with different sized dots on it representing the risks of the company or something like a graph with the risks represented by the bars. I do not know very much about risk mapping and was confused when the question arose about how to create a risk map. I decided to research more about types of risk maps and how they help companies.
I found this pdf file explaining how to use maps to show risk and how to calculate the risk.
http://www.agenarisk.com/resources/Using_Risk_Maps.pdf
These are 4 steps to define a risk map.
1. Consider set of events from given
perspective
2. For each event identify triggers and
controls
3. For each event identify consequences and
mitigates
4. Define probabilities for risk nodes
Companies use risk heat maps and calculate the risk by multiplying the likelihood by the impact. There are also causal models which show all the possible causes of the risk and link them together based on which have a stronger correlation. The only problem I see with this approach is some things that may be classified as causes may not be actual causes. The season and car fatalities could be seen as correlated or could also not be correlated. The only correlation I see is with weather not the season. For instance, snow and ice are characteristics of winter and they can cause plenty of accidents, but I would say the aspect with more correlation is weather. Looking at other seasons, I don't see how they could cause accidents or fatalities:just the weather, snow, sleet, rain, storms, etc.
Risk maps have many applications for assessing risks. Here is a website I found to build your own risk map.
www.agenarisk.com
I found this pdf file explaining how to use maps to show risk and how to calculate the risk.
http://www.agenarisk.com/resources/Using_Risk_Maps.pdf
These are 4 steps to define a risk map.
1. Consider set of events from given
perspective
2. For each event identify triggers and
controls
3. For each event identify consequences and
mitigates
4. Define probabilities for risk nodes
Companies use risk heat maps and calculate the risk by multiplying the likelihood by the impact. There are also causal models which show all the possible causes of the risk and link them together based on which have a stronger correlation. The only problem I see with this approach is some things that may be classified as causes may not be actual causes. The season and car fatalities could be seen as correlated or could also not be correlated. The only correlation I see is with weather not the season. For instance, snow and ice are characteristics of winter and they can cause plenty of accidents, but I would say the aspect with more correlation is weather. Looking at other seasons, I don't see how they could cause accidents or fatalities:just the weather, snow, sleet, rain, storms, etc.
Risk maps have many applications for assessing risks. Here is a website I found to build your own risk map.
www.agenarisk.com
What caused the crisis?
I have never heard of risk management being discussed on a daily basis in regular conversation. The only way I hear is talked about is when I am trying to explain my major to people who do not know what Actuarial Science is. To my surprise, I heard risk management brought up in conversation on Thursday before Spring Break. I gave a speech for scholar's day to persuade prospective scholarship recipients to choose Georgia State. After I spoke, President Becker gave a speech as well and happened to come across the current crisis. He was talked about our renowned risk management program at GSU and how they have grown from a small program to one of the most well known and successful programs in the United States. Georgia State is a large research university and the professors participate in research as well.
Here is part of the risk management website to find all the accomplishments of GSU and all the RMI professors' published work.
http://robinson.gsu.edu/news/99/rmi_ranking.html
President Becker continued with the thought that before the crisis, not many people thought of risk management as a major or profession. Now with the crisis, we see that risk management is the problem. I started to get a little frustrated with the statement since we have discussed in class that risk management is key to maximizing profits when done correctly. Therefore, 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. To my delight, President Becker continues with, "the lack of risk management, I should say, is the problem." I find this much better because now people realize they need to take risk management seriously.
Here is part of the risk management website to find all the accomplishments of GSU and all the RMI professors' published work.
http://robinson.gsu.edu/news/99/rmi_ranking.html
President Becker continued with the thought that before the crisis, not many people thought of risk management as a major or profession. Now with the crisis, we see that risk management is the problem. I started to get a little frustrated with the statement since we have discussed in class that risk management is key to maximizing profits when done correctly. Therefore, 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. To my delight, President Becker continues with, "the lack of risk management, I should say, is the problem." I find this much better because now people realize they need to take risk management seriously.
Aspen Technology Case
We recently researched the Aspen Technology case. Aspen Tech sells its software in the US but also abroad in Germany and China to name a couple. When companies sell their products in other countries they come in contact with currency exchange risk. Countries have different currencies which depreciate or appreciate against other currencies. With the US crisis, the dollar is not doing very well against other currencies. Europe tried to eliminate some currency exchange with the Euro. It helps with exchange rates and people losing money with exchanges in Europe, but the rest of the world still has issues with trading currencies. I know when I went to Costa Rica if I paid for anything with American dollars I could buy it cheaper because the locals only wanted dollars and they would do anything to get them. They could trade the dollars for more money for themselves. The dollar had more purchasing power for them.
In Aspen Tech's case, they were short on some currencies and long on others. For instance they were short on US dollars because most of their expenses were declared in US dollars. Another problem they had with currencies is when people made purchases in their native currencies, which they were more likely and willing to do. For instance, if someone bought the software with yen, but paid the money in installments rather than all in the beginning, Aspen Tech ran the risk of the yen losing value against the dollar. Therefore, it is important for Aspen Tech to hedge against currency risk.
Here is a website that defines currency hedging.
http://www.wisegeek.com/what-is-currency-hedging.htm
Wikipedia also discusses currency hedging.
http://en.wikipedia.org/wiki/Hedge_(finance)
In Aspen Tech's case, they were short on some currencies and long on others. For instance they were short on US dollars because most of their expenses were declared in US dollars. Another problem they had with currencies is when people made purchases in their native currencies, which they were more likely and willing to do. For instance, if someone bought the software with yen, but paid the money in installments rather than all in the beginning, Aspen Tech ran the risk of the yen losing value against the dollar. Therefore, it is important for Aspen Tech to hedge against currency risk.
Here is a website that defines currency hedging.
http://www.wisegeek.com/what-is-currency-hedging.htm
Wikipedia also discusses currency hedging.
http://en.wikipedia.org/wiki/Hedge_(finance)
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