OK – Let’s give the Recession a break this time around and talk about something else for a bit. The Holy Grail of Life – the Secret to being successful.

It must be more than a coincidence – I looked closely at some immigrant families that  have migrated to the US,  and I saw that almost all of them have characteristics that fall into several of the following : Successful, Highly Educated, Thrifty, Rich, Happy…you get the drift. So I thought to myself, what are these folks doing that makes them so successful? They must have some magic mantra chant. My research led me to the following facts which seem to have a major influence upon their success:

1. Relationships are for keeps - If you want your partner to be perfect, then you’d better be perfect too. Since being perfect is impossible, it follows that neither you nor your partner is ever going to be perfect. So, once you enter a relationship, don’t take the easy exit. No relationship is going to be perfect, so learn to live with imperfections.

Financial Impact – No messy divorces, no alimony, peace of mind.

2. Stretch your legs only as far as the edge of the blanket you own - in other words, learn to live within your means. Of course, use credit if you must, but use it wisely. A friend of mine confessed that he was able to save about 45% of his monthly take home salary (ok, no mortgage), but isn’t that great? This rule would also mean – no maxed out credit cards, no new flashy car till the old one breaks down, no Bahamas cruises….and so on.

Financial implications – More money in the bank, more savings, emergency fund, secure future.

3. If you want something, be ready to give something up too - In other words, Sacrifice is the name of the game. You want an emergency fund in the bank? Then cut the cable TV out and watch TV online instead.  You want to visit your family back home abroad each year? Then skip that expensive 1080p Plasma TV. You want that nice family home in 10 years? Then replace the BMW buying plan with the Camry buying plan instead.

Financial Impact – Excellent long term returns.

4. Make your kids successful, sacrifice for them - We all want our kids to be successful. To ensure this, make sure you sacrifice your personal time. Are the kids exams nearing? Then, cut down on the outings to the mall and the TV times. Kids grades slipping? Punish the entire household by cutting TV time, Gifts, Movies and Outings. Ensure that the kids get the message that studies are critical – to everyone in the family. Who are the kids hanging out with after school? Make it your business to know.

Financial Impact – Comfortable old age. Rich kids pick out fancy nursing home for you in your old age.

5. Learn the value of money and teach it to the family as well, be frugal, not a Scrooge - Practice thrift and teach it to your kids too, but don’t go overboard. Buy the right stuff in the right place. Use coupons but avoid a coupon obsession. Cut the Plasma TV, but buy a good TV for the family room.  Buy that purse you liked, but stay within budget but buying it on sale instead. Get the kids the Wii, but only as a Birthday gift. Switch off the lights when you leave the room, but even more critical, ensure that the kids do it too. Give the nephew that birthday money, but as a Savings Bond, not cash to spend.

Financial Impact – More money in the bank, financially educated family, Excellent long term returns.

Welcome to Part 4 of the Recession Series. While not exactly essential, I strongly suggest that you peruse Part 1, Part 2 and Part 3 before you read any further into this article.

I wanted to title this post “How the hell can a bank go Bust – when it was  worth billions such a short time ago?“, but that title sounded far too long, so I shortened it a bit. As you’ve guessed, in this post, we are going to try and understand how a large bank (such as WaMu, Bank of America or Lehman) can go bankrupt. We will start by understanding how a Bank works in it’s simplest form and then move into the complex scenarios, again in simplified form.

The business of Banking, in essence, is straightforward. Let’s assume for the sake of example that you are the CEO of GU Bank (which proudly stands for Growing Up Bank). GU Bank takes money from people as Deposits, on which it pays them a low interest rate, say 3%. Then, GU Bank finds someone who needs money and lends the depositors’ money to them at a sufficiently higher interest rate, say 7%. The Bank earns for itself the 4% difference generated between these two transaction percentages as profit. Once this is complete, the Bank repeat this process over and over – that’s it. Simple, isn’t it?

There are some limitations to the above Banking methodology. We’ll talk a bit about them below:

1. You cannot lend what you don’t have – In other words, if the total deposits in your vaults is 1 million – that the maximum amount that you can lend out (minus government restrictions, CRR etc etc).
2. Your Bank and you are competing against the other Banks out there - some of who have more deposits than you and can outpace you easily. In other words, you need much more than what you have, if you want to grow against the tough competition.

So, from the 70’s, Banks that wanted to grow came up with two innovative ideas to generate money: Dipping into their own money chests and, Getting investor money – both of which we discuss below.

1. Over time, Banks had saved off a part of their profits for rainy days. With the competition in the market becoming more and more intense, Banks began to dip into this rainy-day fund to start getting money to increase their lending power.
2. Banks moved into Wall Street as institutions and started selling pieces of themselves as shares. Based on their reputation and marked standing, they were able to garner investor money by selling part of their ownership through Stocks. This provided even more money for lending.

Soon, things at GU Bank reached a point where the deposits in your vaults totaled 2 million. However, by dipping into your emergency funds and selling pieces of yourself in the Stock Market, you are able to raise capital that equals another 40 million. Hence, GU Bank now has 42 million available to lend. Compare this to your competitors who are still lending only what they have in Deposits – you soon realize that GU Bank is now firmly in the Big League.

The only thing that stops you is this (silly) Government law which stipulates that that maximum amount you can lend is 15 times the cash you have. Since you have 2 million in the vault, you can lend up to 30 million only. And you wonder – How old-fashioned – whoever heard of  loans being backed by deposits in this age?

However, what you have NOT realized (or blinded yourself to – same thing) is that a lot of the money you are lending out as Loans is now YOUR OWN and if the Lender fails to pay back the loan – YOU will be directly hit. Compare this with the traditional Banking business where you are lending out Depositor’s money, not your own.

But hold on a second – while you’ve grown your Lending Funds out of nowhere, your competitors have realized your trick and they’ve done it too. In other words, the entire Banking industry out there has now realized how to blur the line of distinction between a Bank and an Investment House,  everyone is dipping into their savings and selling pieces of themselves in the Stock Market and pretty much everyone out there has tons of moolah to lend and is looking for Borrowers. There’s a craze in the market to lend and every Bank out there is trying to get you to borrow more and more money from them.

Here are some samples of what Banks did with all this crazy money in the 00’s:

1. Industry leading salaries and record benefits to employees
2. Multi-million dollar bonuses to executives
3. Stock Buybacks – Buying back company stock from the open market
4. Sports Sponsorships
5. Private Jets for company executives

The list is long and crazy…

But even this was not enough, In 2007, Henry Paulson, the US Treasury Secretary and former CEO of Goldman Sachs pushed the US Lawmakers to lift the 1 deposit = 15X loans restriction as well. In other words, you were now free to lend everything you had.

Based on our example, Growing Up Bank has deposits of only 2 Million. It raised another 40 million but was able to lend out only 30 Million. Thanks to this new amendment, the Bank is now able to lend out the entire 42 Million.

Wow – you and Growing Up Bank are now at the top of the Big League. You’re having parties on your private yatch for your private guests, your wife is busy with buying those crocodile-skin designer bags, your Kids go to a private top-of-the-line school with their Nanny – in other words, you’ve got it all.

So what’s next? Next comes the Big Downturn, which we will talk about in the next post.

Welcome to Part 3 of my series of posts on the current Recession. While not strictly essential, you may want to look at Part 1 and Part 2 before you read any further.

In all the major newspapers in the country, one important item in the news is the big hoopla about Senators Grassley and Sanders who introduced an amendment in the US Stimulus bill that – simply put – seeks to ban all stimulus payment recipients from employing any workers with H1B visas. Why all the ire against the H1B visa in particular? Why the singling out of Indian companies especially? Before we pass judgment on the Senators decisions,  let’s consider the reality – as they see it.

Here are some details about the H1B visa that the common man does not know (important points highlighted). Firstly, the H1B visa is meant for American companies  to fill temporary shortages in their workforce. The workers hired, if found suitable and willing, would then embrace the American way of life and elect to settle down in the US for good. To facilitate this, the American employer would sponsor a Permanent Residency for the worker (aka the “Green Card“) and thus, the US would gain another skilled worker, thus enriching it’s brain power, the worker would gain citizenship of the United States and the employer would gain a happy employee – a win-win situation for all.

Now, let’s see how the H1B is practically used. A New York bank needs a technology expert to work on a new technology. The average American technologist is available, but his price is astronomical. He/she works by the hour, refuses to work on weekends and charges a hefty overtime fee as well. Meanwhile, there exists a company named Winfy Inc, which is actually the US arm of Winfy Ltd., an Indian company that offers the services of a technology person from among their employees who can fulfill this need, but is currently in India. The bank agrees, and Winfy Inc applies for an H1B visa for their technologist. Eventually, the visa is granted and the technologist travels to the US. The technologist is good at technology, but lacking in refinement and good communication skills. He, however, learns these as he goes along.

At this point, one of two things happen.

With time, the technologist nears the end of his project and decides to return to India. However, the bank is now convinced that the technologist is a good candidate and the bank hires him directly with an H1B visa. It is important to note that the salary paid to the technologist is reasonable and fair. However, it is lesser than what an American technologist (from the preceding paragraph) wanted. In time, the bank applies for the Green Card of the Indian technologist and he joins the American mainstream.

In the other scenario, as the technologist nears the end of his project, he and Winfy Inc make their move. They offer to the Bank a business case wherein they detail plans of setting up an ODC (an Offshore Development Center) in India to do the exact work that the technologist was doing. As part of this plan, the US division in the Bank would be transitioned offshore and all it’s US positions eliminated. The Bank accepts this offer and as a result, American jobs are lost and transitioned offshore.

I should admit that the above two scenarios are purely hypothetical and oversimplified. Sometimes, there are other alternative situations and different results may emerge, but in most cases, the outcome is one of the two stated above. What Senators Grassley and Sanders are trying to do is to ensure that the first scenario continues while the second is stopped. They are also trying to ensure that with all the funds being received by the US Banks, they do not replace American workers with foreign ones. As a precursor, they sent letters to the largest H1B recipient companies trying to gauge how these companies were using their visas.

Here are some more practical suggestions that could be considered:

1. H1B recipients need to detail the work done by their visa workers – This will make the US firms accountable to ensure that workers who get the visa are working on what they were supposed to.
2. The US company must decide to either provide a Green Card to the worker or cancel the H1B after three years – This period of time is sufficient for the employer to judge if the worker is really worth providing permanent residency, after all.
3. Conduct audits into the business of companies that hold a large number of H1B and L1 visas on their US payrolls – The purpose of the visa is to allow temporary positions to be filled. How can companies have more than 40% employees holding a visa justify their usage?
4. Pass laws to prevent visa sweatshops – Remember that when a worked works for Winfy Inc, that company absorbs a large percentage of the revenue generated – and this goes on infinitely. Once the technologist works for the Bank for more than say 6 months, make it mandatory for the Bank to put him on their rolls as an employee – and transfer his H1B visa to their firm. Rule #2 above, applies after 3 years.
5. Reform the L1 visa as well – The visa sweatshops also use the L1 visa when the H1B quota is full. The purpose of an L1 visa is intra-company transfer. Companies using large numbers of L1 visas need to provide justification.

The purpose of the above ideas is not to put a dent in the pockets of Winfy Inc., rather, the idea is to ensure that the H1 and L1 visa streams are not misused.

Do you have any positive suggestions? List them here.

EDIT:  If you read this far, I’m sure you will love the other parts of this Recession series.  Don’t miss Part 4 – How the hell can a Big Bank go Bust?

Note: IANAL (I am not a lawyer) and neither am I an authority on immigration or American law. The above post and suggestions are purely based on personal experience. Any similarity in names or situations are purely coincidental.