Where Did All The Money Go?

by Manshu on March 9, 2009

in Opinion

I was recently at UPS to pick up a package and got talking to one of the guys there, the hot – topic of that particular day was AIG’s 60 billion dollar quarterly loss, and how AIG’s ex CEO had sued the company for his personal losses.

In a CNBC interview that morning – Mr. Hank Greenberg – the Ex – CEO of AIG said that he lost over 2 billion dollars in personal stock of AIG, and had sued AIG for those losses.

The question that was bothering the guy at UPS was this – “Where did all the money go?”

The short answer to that question is – it just vanished.

Here is the long answer to it.

How did the Money Vanish?

The current melt-down has meant that the price of stocks and real-estate has fallen dramatically, which means – home owners who were invested in stock are much poorer now, than they were a few months ago.

So, in the case of Hank Greenberg, he may have had 50 million shares of AIG that were worth 40 bucks each, and the total value of his AIG stock would have been 2 billion dollars about six months ago.

When the same shares came crashing down to 40 cents — he lost those two billion dollars from his net worth (almost). And the wealth simply vanished.

How Do You Measure Your Net – Worth?

I am sure all of us have felt what Mr. Greenberg felt when he lost his two billion, but at a much scaled down level. We saw our net worth decline substantially because we measured it in terms of the value of assets we hold.

However, I am not so sure why the standard way of calculating a person’s net worth is to sum up his assets. In the case of companies the – Discounted Cash Flow – model is very popular, which is the sum of all future earnings that a company will make, adjusted for inflation.

So far, I haven’t seen a calculator that allows for this type of net worth calculation for regular people. If we were to go by this, we would calculate the net worth of a person based on:

  1. his annual earnings,
  2. number of years he has left to earn,
  3. a growth rate and
  4. a discount rate.

I think this would give a very good idea of how much a person is really worth. This model will be much easier on the nerves of most people, as the volatility in stock markets is much higher than the volatility in most people’s pay checks. It will also protect people from going on a shopping binge when the market is at all time highs.

On the flip side this model will not be good for people who have run up high levels of debt, as it doesn’t account for expenses and debt repayments.

So, what do you think, does the idea have any merit? If so, would you be interested in seeing a Net Worth calculator of this kind like the CAGR calculator?

{ 3 comments… read them below or add one }

Dana March 9, 2009 at 11:12 am

Umm, interesting.

I think the challenge is in valuing someone based on their potential versus what they have managed to accumulate thus far. It’s one of these instances where more emphasis is placed on past activities versus future plans to act.

It’s also difficult to predict when unemployment or disability/accidents may hit, or how inheritance or unexpected wealth may affect one’s “net worth”.

But our obsession with constant evaluation of one’s net work at any given point in time might be the problem. Good point raised here.

Thoughts?

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vilkri March 9, 2009 at 3:23 pm

I don’t really agree that Ace Greenberg and I feel the same way about our vanishing net worth. Top reason: I did not directly cause the decline of my net worth while Greenberg was instrumental in building AIG into the kind of company that ended up bankrupt and that made his stock holdings practically worthless.

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manshuv March 9, 2009 at 4:16 pm

@Dana – When I wrote about this I thought about the exact same points as you raise.

It is true that taking all amounts that someone is going to make and discounting them do not take into account unemployment and calamities. But I do think that this method is still “less worse” than what everyone is used to.

You could make it more complicated by using a smaller number as a rate of growth or assign or marking the net worth 10 or 20% down for safety — and that may do some good. I am not sure, just throwing out some ideas.

About inheritance and positive cash flows like lotteries — I think those are the kind of things that should be kept out of any calculation.

@Vilkri – I agree with you and here is what Bloomberg has to say about Greenberg’s lawsuit:

“What Greenberg rarely mentions is that it was on his say-so that AIG created its Financial Products unit, which is where these fancy new derivatives were created, vetted (or not) and marketed.

Greenberg himself ran off the unit’s creator who had insisted on constant critical analysis and re-vetting to minimize risk. The guy, Howard Sosin, just wouldn’t put himself under Greenberg’s thumb, so off he went, according to a recent three- part series in the Washington Post.

Credit Default Swaps

Nor is Greenberg fond of pointing out that it was under his watch that AIG began marketing credit default swaps linked to subprime mortgages, or that it didn’t actually take into account the risk involved in resting so much investment, so many bets, on so little substance.

And it is rarely convenient for him to mention his status as an unindicted co-conspirator in a $500 million deal involving General Reinsurance Corp. that got the indicted co-conspirators convicted and imprisoned.”

http://www.bloomberg.com/apps/news?pid=20601039&sid=apkB8U14Dado&refer=home

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