Warren Buffett - An Ideal Billionaire

Today's blog entry is about a man from the finance industry, well known by the world and whom I truly admire - Warren Buffett, the chairman and CEO of Berkshire Hathaway. He is an investor, a business magnate and a philanthropist. 'Several billionaires are philanthropists, what's the big deal?', you may ask. He could the only billionaire in this world who has pledged 99% of his 50 billion dollars wealth for philanthropic causes. His benevolence is not only extended to those in need of basic necessities but he also strives for equality for the general populace.


Buffett has pointed out to the congress to raise the taxes for the rich Americans. Some years back, he noticed that he was paying only 19% of his income for taxes while his employees were paying 33% of theirs' despite earning much less money. He then proposed a 'Buffett Tax' to 'ensure that no millionaire would pay less in taxes than a middle-class family'. Hearing this, Obama has gotten down to work out a deficit reduction plan, which includes a measure to increase the minimum tax rate for taxpayers in the highest income group. We only have Mr Buffett to thank for taking this initiative to raise awareness to the public of what the federal government has known for years: America's tax system is not progressive (higher tax rates for those with higher income) as thought.


In August 2011, when Bank of America was struggling with a budget deficit, Buffett contributed $5 billion to help. In 2008 when Goldman Sachs and General Electric were in a similar situation, he made huge investments in them which helped to firms get back up on their feet. While it is true that Buffett made these deals at a return which paid him back well (naturally, being a businessman), Buffett has to be thanked for immediate relief from imminent bankruptcy of Goldman Sachs and General Electric and for a boost to the overall market.


Despite his immense wealth and power (3rd richest man in the world as of 2011), Buffett till today is living in a 5-bedroom house which he purchased for $31,500 in 1957. What I truly admire about Buffett is that money has not corrupted him. He seeks to earn money, being a businessman and investor, but not to squander it wastefully as many rich do.We have seen so often in the news about corruption of the common people by the rich and powerful, but seeing people like Buffett who divert their wealth towards those in need gain my admiration and respect. Buffett-"The way I see it is that my money represents an enormous number of claim checks on society. It's like I have these little pieces of paper that I can turn into consumption. If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the GDP would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don't do that though. I don't use very many of those claim checks. There's nothing material I want very much. And I'm going to give virtually all of those claim checks to charity when my wife and I die."

Money Laundering - How? Why? Oh my!

Recently, I did a short online tutorial on money laundering and found it really interesting, so I decided this topic has to go down in my blog. What is money laundering? It is a way by which illegal sources of money are disguised to make them look like they are from legal sources.

Illegal sources of money could refer to funds from drug trafficking and smuggling, fraud, extortion, corruption or prostitution rings. Significant profits are made through such criminal activities and fraudsters have to find a way to enjoy this money without attracting any attention to the activity or people involved. Money laundering happens in almost every country in the world but it is difficult  to give an exact figure of how much money is being laundered every year. In 1996 though, IMF estimated that 2-5% of the world's GDP, which ranges between USD 590 billion and USD 1.5 trillion is being laundered every year.

So the next question will be, 'How is money laundered'? Money laundering occurs in 3 steps, which by order are, 'Placement', 'Layering' and 'Integration'. In the placement stage, the launderer introduces the illegal money into the financial system by probably breaking up a huge sum of money into smaller amounts and depositing them into bank accounts.

Next is the layering stage in which the money is converted into financial instruments or wired through various accounts from banks all over the world. In this phase, complex financial transactions are made to disguise the illegal source of the money.

Once these two stages are successfully completed, the money launderer then proceeds to the integration stage where money re-enters the legitimate economy. This is where the launderer uses the money for actual intentions such as investing in luxury assets or business ventures.

Banking and financial services industry take money laundering very seriously and are taking several concrete steps to uncover and eradicate money laundering as it is a matter of integrity, which is the most important value for a financial institution. If a financial institution is found to have links or complicity with criminals and their activites, the impacts are disastrous such as loss of reputation, faith of other financial intermeidiaries, regulatory authorities and customers, and huge fines. For example, Wachovia was found to have been involved in the handling of illicit funds of $378.4 billion dollars between 2004-2007 for Mexican-currency exchange houses.

There are several organizations such as the United Nations, the World Bank and International Monetary Fund or divisions in organizations trying to get an edge over the problem of money laundering. However, given the scale on which it happens and the multi layers of complex activites that take place in the process, several criminals get away with successful money. An international organization, The Financial Action Task Force(FATF) has been set up to combat money laundering and terrorist financing. As of 2011, FATF has 34 member states and 2 regional organizations who are encouraged not to deal with 'uncooperative countries' on financial matters. FATF's uncooperative list has gone from 15 countries in 2000 to none in 2009. This is significant progress in the attempt to control money laundering. Only global awareness and cooperation will contribute to the abolition of money laundering.

Smartphones: Apple & Google Vs Blackberry

This seems to be going a bit off track from finance to technology sector but I guess its alright since they do overlap several times:). I am planning to talk about Apple's and Research in Motion's shares and earnings as well so there you go! Yesterday, I was reading a finance news page and saw an interesting article on the comparison between Apple and Blackberry smartphones. Research in Motion, which I'm sure many of you know, is the maker of Blackberry smartphones. The third quarter results for RIM is out and utterly disappointing with a whooping 71% fall in earnings to $265 million which is way, way lower than last year's $911 million. However, much of that drop was due to a $485 million pretax charge on the large number of unsold Playbook tablets. This has forced RIM to offer huge discounts on the tablets, which are not as loved as Apple's ipad.

The severity of RIM's situation is reflected in its share price which was a low of $13.12 on Friday(12.17.2011) after trading as high as $144 in 2008 and $70 as recently as Feb this year. At peak, the company that was worth $80 billion is now valued at just $7 billion. Just a few years ago, Blackberry was considered a status symbol and owned by 'very important and busy' people such as Wall Streeters, corporate lawyers and Capitol Hill staffers. Once a premier smartphone, it is now greatly overshadowed by Apple's iphone and Google's Android devices. The reason for this: RIM had unidimensional focus on user experience and the mobile market whereas Apple and Google focused on the consumer market. They went ahead to create dynamic, as well as consumer-friendly devices to send emails and browse the web. Another key point for their dramatic success: creating a platform on top of which developers could create applications. There are thousands of applications available for iPhone and Android devices.

Let's now look at the statistics of Apple's and Google's market share and share price. Today, Apple and Google jointly account for 71% of the U.S. Smartphone market and 83% among users who have downloaded 'apps' over the last 30 days. The average share price range for Apple in 2011 is $310.50-$426.7 and Google's is $473.02-$642.96. Given the tragic, sudden fall of RIM, there is a call for a new 'transformational leader' to replace CEOs Mike Lazaridis and Jim Balsillie. If there is a change in management, hopefully, the new leader uses strategic focus to help steer RIM in the right direction.

Unemployment in the US

US has been undergoing a dire economic depression for the past 2 1/2 years with unemployment rates ranging between 8.6% and a whooping 10.1%. Housing market is a mess with property prices falling by about a third from the peak time in 2006. Poverty is on the rise. About 25 million Americans are either unemployed or underemployed today. Since the Great Depression, this can be considered America's worst economic catastrophe, given the number of unemployed and the duration of unemployment.

The latest unmployment statistics for November 2011 has been positive, giving some reason to cheer as it has fallen by 0.4% to 8.6%, the lowest since March 2009. There are two reasons for this drop, first is that more Americans got jobs and second, more people have given up on their job searches. Interestingly, there is a sexual divide in these two factors. Americans who got jobs were mostly men and those who left the workforce were mostly women. Employment does not necessarily mean all's well. Many Americans with jobs are making do with less. During the official recession, incomes fell by about 3.2% and since July 2009, incomes have fallen by another 6.7%. In June 2011, the official median income of an American household was $49.909, which is $5,500 less than at the end of 2007.

The job crisis does not just revolve around financial situation of the individual or family but has dramatic effects on the family structure and relationships. Marriage rates have dropped 10% since the recession began. Birth rates have dropped significantly from 69.6 births per thousand women of child bearing age to 64.7 last year. Children from families with unemployed parents dont excel at school and men who are unemployed for long periods are generally abusive to their spouses. Unemployment has adverse effects on people's mental health, such as anxiety and depression. Even if someone gets re-employed after a long bout of unemployment, their mental health will not return to the level it was before.

It is expected that the crisis will continue to impact American families in the coming months and years even if unemployment falls as the damages are already done. Savings gone, home value decimated and job`opportunities obscured. Depressed and bleak.

Causes of Eurozone Debt Problems

Eurozone debt crisis is and has been the major headlines on all financial news websites and news channels for at least a year now. It's impact is felt in economies world over and the threat is still looming over, with no resolution yet in sight. So, what is happening there? Big debts, growing deficits and stalling economies across Europe, with Greece being the most affected.

Let's analyse why this all began. Initially, during the 2002-2008 period, high budget deficits and debt levels rose due to high risk lending and borrowing practices, international trade imbalances, real estate bubbles that had burst, slow economic growth and approaches used by nations to bailout troubled banks and private bondholders. However, the main culprit is in the form of economic worries that have spooked the markets. Investors were hit with fear that Greece and other Europe nations would not be able to repay their debts. If a nation defaults on government bonds, the investors, such as banks across Europe would face severe losses. This led to potential buyers from declining these nations' bonds which pushed the prices down. When prices of bonds go down, the yield goes up which means the goverments have to pay higher interest for investors to buy their bonds.

This has impacted Greece in 2 major ways. First is that Greece is struggling to afford the huge interest rate on its debts and second, since there is no demand for Greece's bonds, it is not able to borrow new debts to pay off existing debts. Without bailout, the result is default. The impact on Greece has spread to other European nations as a domino effect. Other Euro nations in trouble are Portugal, Ireland, Spain and Italy.