Monday, December 01, 2003

{When are the tests due?}

Oh, next week. You’ve got 3 classroom days after this; and I need it before the last classroom day, so….

{_____________________}

Make sure that when you turn those in that you have the appropriate test number on there. Make sure it says, intro to business and your name, so I can record your score properly. But, otherwise, if I don’t know which is test 4 and which is test five, I won’t know how to run it through the scantron, so that is critical.

{On our last day we meet is on the 10^th…}

During finals week…there’s a two hour time block assigned to this class, and it’s in your class schedule. And on the last day, or the second to last day, I’ll bring that, and we’ll talk about that. But you need to learn how to find it in the schedule. Because every class has to look at that…ever student in every class has to look at that. So it’s in the fall schedule, and if it says that your class starts on Monday at eleven, here’s when you’re two hour time block is. And there’s 3 or 4 days of finals, so we have a two hour time block. During that two hour time block, you don’t do anything. You just show up, and we’re going to record your extra credit. So if you’re not there that day, do you get any extra credit?

{No…}

No, you don’t. You would have had to talk to me a day in advance and have a really good excuse as to why you’re not there. But, under contract, I’m obligated to be there during finals week, and so are you. So how I use that is I add up your points, we’ll hand back the projects, so you’ll find out your grade, and we’ll add up your points to make sure that you get everything you’ve got coming, and you’ll walk out of here knowing your final grade.

{So we won’t know what our paper is until then?}

You won’t know what your paper is until then.

{Our final is on Friday, December 19^th from 8 to 10.}

There we go…from 8 to 10. And it’s a different time than we normally meet for most of the classes. So, it’s Friday from 8 to 10 on December 19^th.

{It is here, right?}

Yes, and it will be in the same classroom.

No, it takes me a fair amount of time to get through these. Alright, if you did not turn your paper in, you have until about three o’clock this afternoon. I will leave campus today about 3 o’clock this afternoon.

If it’s in now, no late points, right? If it’s in on Wednesday, then you get late points. So, typically, a class like this which meets Monday Wednesday and Friday, so how I assign the late points is based on that Monday Wednesday Friday. Now, we meet two days a week, so it’s ten points if you turn it in one day late, which means that if you turn it in on Wednesday instead of today it’s another ten points. Then it’s another ten points for Friday, and then another ten points for the following Monday, and then another ten for Wednesday…so you want to make sure you get your paper ready. But I always have to make that clear, so the students can understand.

We were supposed to have a guest speaker today…and I don’t have my watch on. I’m in trouble when I don’t have my watch on. I was skiing this weekend, and my wristband broke on me, and I haven’t had the time to get it replaced yet. We’re at ten after?

[Just set it on the table.]

Ok… So I think we’ll move right in to talking about financing, and then if they show up, which has been the case, we can yield the floor.

Before I get into that, however; we’ll take a moment to talk about a job opportunity. And this is one of my former students, Judy Anderson, who does want to be involved in our Networking Club. And this is an example of how the Networking Club can help not only existing students, but former students as well. So I had run into her husband at the community center, over there, where I swim three days a week. And I had said, “Well, have Judy call me…” Well, sure enough, a week ago I got a call, and hopefully she’ll come to that meeting next year with someone from Super America as well as…her brother owns a trucking company. It’s just down by Cannon Falls, or someplace. But, hopefully, we’ll get her involved.

But she’s doing very well, now. And she’s managing the Super America store. And I said to her to husband, “Oh, she’s into the big bucks now…” And he goes, “Yeah, right, she’s into the long hours, now.” But store managers can make pretty good money, because they make a percentage of their store, so they get like a salary and they also get bonuses. And if your store is well managed and you keep your costs down, they can do pretty well. One of these days I’ll find out more about how Super America works. I have some friends who are in the grocery business, but I would imagine that they are all somewhat similar. But she asked me to tell them that the dollar amount, here, is not what is exciting. You can work part-time, and she’ll be flexible with your schedule. But the opportunity for training and the opportunity to get on a corporate training program and to be sponsored and mentored. And that’s one of the things that alumni do for each other right? They help each other along. So you come to her, or one of your friends come to her and says, “I go to Inver Hills, and I’m looking for a job…” And they’ve learned some things at Inver Hills and they do well on the job…. She’s more than willing, and understands, because she’s been in one of my classes where she learned how this sponsor and mentor thing works.

They also have tuition assistance. So you start at $7.50, and you go up from there, but, even better, they’re willing to help out with tuition. If you know anyone that you think might like a job at this facility, you can pass on the number. I told her I would have you guys do that. She’s in immediate need for somebody right now.

Now, turn the table and pretend that you are in her shoes; you’ve had an employee quit and you need somebody right away. What does that feel like? That’s trouble, isn’t it. And she can’t…normally, the supervisor is the backup, if somebody doesn’t come in for a day. But if you have people who have quit and they’re not coming in on a regular basis, that’s a problem. If the reason she has people quitting, and it’s because she’s not a good manager…well, I don’t know that. Although, I’d be surprised if that’s the case, from what I know about her personality. But I’d promised her that I’d put that information out there and pass that on. So, if you know someone, even if you’re not interested and you have a job, let some folks know. Hopefully somebody from the Networking club will be calling her. Tom Andrews will also be posting this job; I hope that she followed through and sent the information to him…but it takes a while to get the information through our system.

How many of you know about Tom Andrews who is upstairs in the college placement department in our College Center building? Only 4 of you…so there’s a few of you. Well, as you go into the College Center and as you go out the main doors, there’s a little window, and there’s a guy in there named Tom Andrews. And if you’re looking for an internship site, he can help you look that up. If you are looking for a job, he has people who contact him who are looking for Inver Hills students. And that’s a nice resource. So, we’re very pleased to be able to offer that. And, hopefully, she’ll get on file with him and stay on file with him, and pass on information to students about those kinds of opportunities.

Financing

Alright, we want to move on to finance…financing a business and we’ve got a couple of overheads that we can look at. Initially, I think we’ll talk about the major question, do we do debt or do we do equity financing? Anybody know what the difference is between them?

[Either borrowing or issuing shares…]

Ok, borrowing or issuing of shares. Essentially, debt financing means that we’re taking out a loan. And we’re going to have to pay back this loan, plus, interest. And that will probably be scheduled payments. What kind of an interest rate are we likely to get on that? Let’s say that we’re a small business just starting out, and there’s some risk involved.

{That depends…}

It varies…but it’s probably going to be high, isn’t it. It’s probably going to be prime rate, which is the best rate that any business customer can borrow for, plus a certain percentage. So, prime rate, plus. It could be 12, it could be 18, it could be 21 percent; it could be 30 percent.

{Are you serious?}

Yeah…. Now, students say, well, Mitchell, that can’t be. There’s laws that put a cap on finance and interest charges. But those are meant for consumers; those are meant for individuals, those are for personal loans, aren’t they. Business loans, however, there are no caps. And, obviously, with a business loan, there is a certain amount of risk. So what will happen, more than likely, they will give you a loan, but they’re going to have you pledge some equity.

So, often times, the bank is looking for a combination of debt and equity. But a pure equity loan is selling stock. It’s not really a loan; we raise money…and, really, financing is all about getting money into, and out of a firm. So if we look at cash flow coming in and cash flow going out, what are our financial needs, essentially? How much are we going to need? And we project that out into the future. So, equity financing, when we think about that, is typically by selling stocks. So, we issue shares of ownership, right?

Now, there’s a way around that, in terms of the debt financing in that I can attach rights to the ownership. So if you own trucks or equipment, or facilities, I can have you pledge those assets. So, if you go bankrupt, in a bankruptcy court, I’m going to get a percentage of that, or I’ll get something. There’s two kinds of bankruptcy that we go through. One is voluntary and the other is involuntary. And you don’t want to get into an involuntary bankruptcy, you want to do the voluntary. What happens with the involuntary, is your creditors have gotten together and said, “This person owes us money, but he’s not paying us…” And then they make the complaint, and the bankruptcy court comes in and they determine how your assets, or what’s left of them, are divided up. So, all of a sudden, you’re out of control.

If you do the voluntary, and head it off, so you declare bankruptcy before any of your creditors go through that process, now, you can have some control. So you see that a lot, when businesses declare bankruptcy. Does that mean they’re going out of business? No. What did Wall Mart declare just a while back? It was a Chapter 11 voluntary bankruptcy, where they said, we’re going to reorganize, we’re going to restructure…. All of our creditors will be paid something. So if you had an unsecured loan, you probably didn’t get paid. If you had a secured loan, you probably got paid something. Employees get paid first, unsecured loans get…. So if I’m selling you ball-point pens, and you owe me money, but all I have is a bill of sale, am I going to get paid? Probably not. Employees will get paid, and then loan holder who signed special agreements will get paid, and then the stockholders. And there’s a division between common stockholders and preferred stock holders. Preferred stock holders will get paid first then the common stockholders will get paid after that.

So you have to understand how that works; you have to understand that if you are a corporation…it’s pretty easy; you’ve formed a corporation to protect your personal assets, right? So often times, then, businesses want you to sign, personally, on the line if they give you a loan. So, oftentimes, there’s a personal guarantee. So the bank might say, “Well, that’s fine. If you don’t pay back this loan, this agreement states that we get the equipment. And, if you don’t pay back the loan, this agreement also says that you’re going to give us the equity in your house.” So a lot of entrepreneurs are very surprised, when they go in to finance a business, that a bank is asking for all of this other stuff. And, basically, it’s that, “Hey, we’re loaning you the money, we’re taking the risk, and we need to have a way of getting paid back.”

So the more solid you are, and the more financially you are, the better off you are. Well, my dad got to the point in his business that he could borrow money at any time. And it’s kind of one of those things…when you don’t need the money is when more people are willing to give it to you, right? He actually borrowed money at less than prime. How can you do that? You might say, he can’t do that. It says in the book, the prime rate is the best rate that a client can get. Well, he had a trade-off agreement with his bank. And, now, it would actually be illegal. But before bank deregulation, and before rules and credit got tightened up, they were able to do this.

So, we would sell them advertising and ad specialties, we would do the paper-work on their ads on TV and in the newspaper, and then they would get our ad specialty discount, our immediate discount. And we would put that into a fund; and they would use that fund to buy more ad specialties. So they got a lot more pens to give away, given their year’s ad budget. Otherwise, if they had gone through the newspapers by themselves, they wouldn’t have gotten the full 15% deal, they would have paid the full, standard price.

As long as we were willing to offer that service to them, they would loan us to us at five percent below prime rate. Most of our competitors were borrowing at above five percent prime rate. Who has the competitive advantage when a big order comes up, and we need to borrow $100,000 to finance this order until the company pays us? …we’re going to borrow money for 90 days. We do, if we’re going to be borrowing for less than prime rate. So if you get yourself into a good financial position, and you have a good relationship with a good financial institution…. The two banks that we worked with were Community State Bank and Richfield Bank; we didn’t go with big banks, we went with small banks. And, because of that, we were able to have that competitive advantage.

At one point, my dad had, what was called, a signature loan account. So he could go into the bank and, at any time and without any paperwork, he could sign on the dotted line and get money, he could get cash. Usually, they would just transfer money into your checking account, right? Today, it would all be done via computer, wouldn’t it. But, back then, he actually had to go in and he would sign his name, and then they would put the money into his account. If he had a good opportunity to buy product from a supplier, he could buy lots of product, then turn around and sell that, and, hopefully, make money on the transaction. And that’s what business people do; they buy low and sell high. So your ability to finance your business is truly critical.

Now, his business was a simple business. When he started out, he really didn’t that much money. He kept his expenses low, and he was able to operate. Over the years, he got more and more saved up, and he had more and more equity built up. The more money he had built up in the bank, the more they were able to loan him.

He actually had a $500,000 line of credit. When my brother-in-law started his business in building, his goal was to get to where my dad was, and to have a signature loan, and the ability to borrow up to a million dollars. He never got to that point, he got to about 500,000 or 600,000. Unfortunately for him, at the time when he really needed the money, the bank tightened up its lending rules, and took away his ability to do that. And they said, “Oh, no, Gary, the only way we’re going to loan, now, is if you build a house…let’s say you build a spec house, we’ll have to hold the mortgage on that spec house. And once you’ve paid us, then we’ll release the mortgage to you. That actually put an end to his business. So sometimes you can have a good business going and if the rules of the game, as to how you’re financing this business, changes, then you can find yourself in trouble pretty quickly.

Ok, we’ve talked about the prime rate; we’ve talked about equity; we talked about debt. Let’s talk briefly about the 3 Cs of credit. Does anyone know what that is? Some books say the 4 Cs, some books say 3…. We’re not going to cover it today, but on another day, I’m going to tell you a story about a particular business and how they got their money and the decisions that they made. And it’s a rather interesting success story. It’s about some relatives of mine, out in Spokane who started a lighting studio. I wish they had invited me in as a partner.

[A lighting studio?]

A lighting studio, like Southern Lights or Thompson Lights, or… Yeah, there are huge margins. But they needed a lot of money. They needed like $250,000 just for the lot, and $250,000 for the building, and another $250,000 for the inventory. Well, that’s a lot of money. How are you going to get that kind of money; where’s that going to come from?

So what are the 3 Cs to credit. This applies to personal borrowing as well as business borrowing.

[How about cash flow?]

Well, that makes sense, but it’s not one of the right Cs that I’m looking for. If I’m a banker, and I’m going to loan you money, what am I concerned with?

{Your credit?}

Yeah, I’m concerned with your credit, and your credit rating, and that’s what we’re talking about.

[Competency?]

Ok, competency…that sounds pretty good. And in the model of 4 or 5 Cs, could be one of them, but…. If I’m going to give you some money, what do I expect to come back in?

{Cash flow?}

Payments…cash flow. But what do we call that?

{Capital?}

Well, we’re going to look at capital, and that’s one of them…what’s your equity, what do you own, what can I attach to….

{Collateral}

[Your turn-around cycle?]

Well, kind of… It’s really called capacity…

[…I said capacity.]

Did you? I just didn’t hear you. Yeah, capacity. So when we talk about the 3 Cs of credit, we talk about capacity; we talk about capital, or collateral, and we talk about character.

Now, why character? What’s that all about? Yeah, what’s your financial position… Are you likely to declare bankruptcy, and go, “Hey, that’s no big deal…I don’t care…” Well, wait a minute, we might get hurt, here. Well, too bad for you, I followed the law… Actually, character seems to be more and more of an issue every day. And we have seen with NRON, that was a problem, wasn’t it. So if I’m going to be loaning you money, or if you are going to buy stock in a company, you want to buy stock in a company that those executives have…. Well, that’s hard to judge and know, but if you are a bank, you have the ability to require the proof of their character to a certain extent, right? So what they want to know is are you a good person or not.

Well, how do you establish your character? Well, part of it is through your credit rating, isn’t it…where you show an ability to pay it back. And earlier, we talked a little about accessing people’s credit ratings, and stuff, in qualifying accounts. But there are companies that sell the service to banks and other businesses in providing your credit history, right. And, so you want that to look pretty good. So if you want to start a business, and you and your partner don’t pay your bills, and you bounce checks, and your credit is not clean…are you likely to get a business loan? No. Now, you might be able to get a credit card company to loan you money. And we can talk about creative ways to finance a business. You don’t have to have a bank loan do you? There are lots of ways to finance something. But if you’re going to go through the procedure of borrowing the funds, you’re going to have to have good character. It means that people in the community are willing to sponsor you; you go to church and what have you.

So, is being a good citizen come into play here? Does going to college and having a good school record and all of that stuff have any thing to do with it? Yeah. And, normally, what they will ask for is some references.

Now, fortunately, for me I guess I grew up in a nice neighborhood, and I had a neighbor who had known me ever since I was a little kid. It turns out that he had worked his way up through Deluxe… And by the way, he took a lot of stock options in the company couldn’t pay their employees. He said, “That’s ok, I know you’re hurting, you don’t have to pay me in cash, you can pay me in stock.” So they issued him more stock. By the time I was in high school, he was a multimillionaire. The stock had gone up and split, gone up and split, again. Now, Deluxe is a great story about how one company can do incredibly well.

Fortunately for me, his position, when I was looking for employment, was director of personnel. Is that a good person to have as a reference? It helped me get this job at Inver Hills, because he called and told me, “Yeah, somebody from the State of Minnesota called and wanted to know some information about you.” And I said, “Oh, really…I hope you said some good things.” And he said, “Well, of course….” And, so, did they check? Yeah. I could list him as a personal reference, because he has known me for…. Because that’s one of the first things they ask is how long have you known this guy? And in what way have you known this person? “Well, he was a neighbor of mine, and I’ve known his parents for quite some time; I know a lot about this person.”

Sometimes they’ll ask for a financial reference. Maybe someone you’ve worked with financially. So that’s a big part of having the ability to borrow funds. And, so, you have to think in terms of how you look on paper, and you have to think about how you’re going to put this together, and starting off early. This means you should have a budget; you should borrow money and then pay it back, because if you borrow money and pay it back, that establishes a what?

{A credit record.}

A credit history…yeah, good credit. So, my bother-in-law taught me this years ago. He said, “Rusty, go out and borrow some money when you don’t need to borrow money.” So I bought a Ford Maverick; my Mustang was dying and I knew I had to replace it. My wife had a really good job, so she had capacity. She worked for the school system, so we looked good on paper. But he said, “Go out and borrow more money than you need for that car; buy that car, and then pay the loan back early.” Was that smart? Oh yeah. Not only did he make his first nine payments, but then he started doubling his payments, then he tripled his payments and paid it off early. Now, actually, in the real world, the bank doesn’t want you to do that, because they want your interest, don’t they. But it establishes good credit for your record.

I had no idea, at the time, how that would really affect my lifelong credit. The fact that, later on, I owned a building, and that I had some equity in that, really helped out as well. Because the building was appreciating, I was able to legally depreciate it, and I got to keep what the difference was, right. So every year, on paper, I looked better and better and better. So pretty soon, people are pushing money at me. Now, fortunately, I didn’t need it and I didn’t want it. But I was able to get a gold American Express Card and a Visa Card. Later on, when I wanted to build a house in Inver Grove Heights, I was able to borrow the money and buy the land… And, buy the way, do you get a discount if you pay cash for stuff? Oftentimes yeah. So I found a builder who really needed to make a payment that day, because he had spent a lot of money developing his property. He had paid graders and people to put in utilities, and he had to pay taxes to the city. He needed a payment that day. And fortunately for me, Roy Good now, who I taught with, knew that he had to make a payment that day. And he said he was probably willing to negotiate.

So on that given day, I said, “Look Mike, here’s the deal, I’ve got cash and I’ll write you out a check for the balance of it if you want, but here’s the amount that I’ve got, and let’s negotiate. We actually sat down and talk about terms; if you give me this amount of cash, right now and today, here’s you final price. So I paid him cash, and then ten days later he got a check and the deal was closed.

The ability for me to do that, by having a good credit rating, was essential. And, indeed, he wouldn’t have offered me a deal if he knew that I didn’t have good credit. He wouldn’t have made that offer for me.

The capacity is about seeing money coming in down the road. So if you’re going to start a business, is it good to have a working spouse that has a steady check, a steady income? Yeah. So when I was in the add specialty business, and I was doing things like financing a house, the fact that I had a wife who worked for St. Paul School System that had the paid benefits looked good. My income, by the way, if you looked at it, went up and down, didn’t it. And people look at that and go, “Well, ok, you’re making good money now, but that’s sales income, and that could go away tomorrow.” And the only thing I could respond with was, “Yeah, but the add business is pretty steady, it’s pretty stable.” So, in terms of capacity, it was more about her income.

Right now, my wife has a very steady job at Gillette Children’s Hospital, I work for the State of Minnesota, you can’t get any more secure than that, right? I mean, our credit looks really good. By the way, I don’t ever access my credit report; I don’t need to.

{I got a question on credit. If someone writes you a check, and it bounces, whether it’s big or not, does that affect your credit. Like someone just wrote me a check and it bounced, do I have to pay…does that look bad….}

If your account goes into default or if you go below your minimum, then it does, yeah.

{I had enough money to cover it.}

If there’s enough money to cover it then it doesn’t.

{Ok. }

No one even knows about it. But you’re pissed about it, aren’t you?

{Yeah, I’m taking him to court.}

Yeah, yeah. And, in reality, at some point, if someone is going to check, they will not only look at your credit stuff, but they’ll look at your court records. We had a friend who built a house, and they never checked this guy out. They should have…we checked when we built. He was checking me out; I was checking him out. It turns out that this guy had all kinds of problems. He wasn’t in good standing with the Builders’ Association—he bounced his dues to the Builders’ Association! He had a criminal charge against him; he had other court charges against him, and his credit rating was crappy. But, unfortunately, they didn’t check him out.

{I did that to both people that I borrowed money to. I borrowed money to him, and he’s been avoiding me for the last two months since I borrowed it to him. He won’t pay it back. It’s his brother, so I’m taking him to small claims, and they both have been avoiding me. And I should have thought about the whole character issue, right away, because neither of them are good for it. I should have known that, but I was just helping them out.}

You know, a lot of businesses get into trouble, because they are anxious for a sale, and they say, “Well, I can finance this…” where they take it on themselves…you’re better off to say, “Hey, I only deal with cash or Visa.” Buy the way, Visa makes money, because every merchant pays them 3, 4, 5, and 6 percent. Inver Hills hates it that every month you guys charge stuff. But it’s a nice convenience for them. It’s kind of like a financing plan for you, right. But we have to pay now. But because we have a big account, we’re paying them the lowest rate. So Visa makes money on both ends, don’t they. They make money from every business, and then if you don’t pay at the end of the month, they charge you on that unpaid balance.

We use our credit card, but we always pay the total every month. We never have an outstanding balance. Oh, I shouldn’t say that. Now and then, cash flow is such that we might pay three quarters of it, and we have a little bit outstanding, but…. By the way, am I using their money free, every month, by doing that?

[If you’re not paying an annual.]

Yeah, if you’re not paying an annual. Now, on my Northwest Frequent Flyer perk, I do pay an annual, but for $25, I’m earning frequent flyer miles. So I’ll pay that. It’s only $25. We charge everything. We hardly ever have cash. By the way, Northwest and Cub Foods didn’t really anticipate that this was how it was going to work, that for every time I buy groceries I use that card. But Cub is getting their best deal, and it’s good money for them. So it’s reflected in the cost of doing business. When they sell product, they assume that a certain amount of people are going to do the charge thing.

I got into trouble with our business manager—big trouble—many years back, because I convinced him that we should take Visa and Discover cards from students. And, mainly, it was because I was running a small business program, and business people wanted to pay the cost of a workshop with their business credit card, right? And they were like, “Well, Rusty, I’m not going to write you out a check for that. And I’m certainly not going to pay the day of the workshop. I want to know that I’m in. I’ll just give you my Visa number, and you record me. Then I’ll know that I’m in.” So I really worked hard to sell him on the idea that if we were going to have business people coming on the campus, we needed to take the credit card. So they finally made the decision. But if they were going to do it for business folks and workshops, they have to do it for everyone, right? Well, they had no idea how many students were going to use this thing. And as it happened, a lot of students ended up using their credit cards. And, so, he had an expense that he didn’t count on. It turned out to be a lot more than he had planed on. Well, a little after that, we kind of worked it into the budget, where it worked itself out overtime. But for that initial period…oh, there were times like when your friends were avoiding you… Well, I’d see Larry, and I’d go running into the gym, you know? It’s like, “Oh, Larry’s coming!” He wasn’t real happy about that. But did it increase our sales? Yeah. And we saw repeat business and we saw more students coming to campus. And if you make it easy for people…it’s like the electronic registration process. I mean, you’re just going to do more business. So after a while, it just becomes the standard cost of doing your business, and you figure it in, and away you go. But for that first quarter, that was a problem.

Fortunately, back then, we had better funding. If that were to happen now, it would really be disastrous.

Alright, as long as we’re not going to have a guest speaker, let’s take a look at a couple of overheads. I can be flexible, here, for the next few days in case someone should come in for a talk.

{____________________________}

Ok, on Wednesday. That’s what I was planning on.

Financial Institutions

So what we’re going to look at next is where do you get money from? Where can money come from into a business? And these are the types of financial institutions and their basic functions. Now, this is an old overhead—I mean, it’s really old—I’m dating myself, here. I don’t think that it’s actually physically dated, but…

If you look on here, it says savings and loan associations and savings banks…well, we don’t have savings banks. We used to have F&M, Farmers and Mechanics Savings Bank. Now it’s gone. When the banking business deregulated, and they changed the rules, they got rid of much of these constraints.

In the old days, only commercial banks could offer checking accounts. Now, you can get a checking account from any bank, credit union, any financial institution. You can have a mutual fund account and have a credit, ok? You can have a loan account with them and a checking account with them. So, in a way, what that did, when they talk about deregulation, is that it made the business more competitive, right? In the old days, each of these banks were protected for a certain area of business that they engaged in. And it worked for quite some time, but then they decided that it would be better for consumers to have more competition. And in a way, it put the banking industry at a little more risk. Under this plan, there was less risk, but it brought rates down and made it more competitive. It’s worked out, actually, fairly well.

But I like this, because it kind of gives you an idea of the basis for that. By the way, you all know who owns the Minnesota Twins, the guy’s wife just died the other day, Carl Polad. The Polad family were very wealthy. How did they get their money? Well, when the Polad’s saw that these financial institutions were going to change… and business people are always looking ahead, right? They realized that some of these banks would be available. So he had, then, what was called Marquette State Bank, or Marquette Bank, and there are either state or federal charters for banks. My dad’s dad, there were three brothers who owned state banks in Minnesota and in the Dakotas. And they were all state chartered. Your bigger banks are federally chartered, and they belong to the Federal Reserve group, etc. The state banks have a corresponding federally chartered bank that they do their exchange process with.

But, anyway, Mr. Polad realized that this was going to change, and so he bought up a bunch of smaller banks, Farmers and Mechanics, etc., folded them into his commercial bank, and virtually over night, there was a new major competitor for, back then, it was Norwest, or North West, and the First Bank. And now there’s Norwest, Wells Fargo, and the First Bank is now US Bank, because there have been a lot of mergers and acquisitions along the way. But his understanding of how the industry worked, and that this was going to change, gave him an opportunity. By the way, he was the one who loaned Erwin Jacobs money on some very risky deals, and Erwin Jacobs made a bunch of money, and of course the banker made a bunch of money, and the two of them have been like this for quite some time.

I had a chance to see, a while back, how Erwin Jacobs started his whole business venture. There’s a piece of property adjacent to Camp Ripley….

….virtually nothing. Because Erwin, basically, didn’t care…. ….He was a scraper, he knew about the value of the copper, and he knew that that copper was worth more than all of the shares of stock. And so he bought the brewery. He sold the rights to Hilaman in La Cross and shut everything down. Well, anyway, this property, up there, looks good on paper, doesn’t it. So people would loan him money, Carl Polad was one of the people who loaned him millions of dollars based on that property. And then he went out and leveraged that to make other deals. Right now, he owns JenMar, which is one of the biggest boat producers in the world. And that company, actually, does produce a pretty good cash flow.

By the way, Irwin wanted to buy Disney…would that have been a sad thing if he had done that? He would have broken it all up. And it would have been really sad. Right now, though, Roy Disney is protesting; he wants off the board, and he’s going to be retired manually anyway. You have to retire by the age of 72 or something. But he wants Isner out of there. And imagine how nasty it gets in a big board like that. I mean, that’s a huge pile of money and that will get interesting… But, fortunately, he wasn’t able to do that, and Disney still stands as a corporation.

Well, commercial banks receive checking and banking deposits; they loan funds; they provide basic financial services to customer and businesses. And the key is, here, that they create money. So via a demand checking account, I can loan more money out than I have in reserves. I don’t have all of the money, but I don’t have to. There is what’s called a reserve requirement. And the Federal Reserve sets that. And so that money gets turned around, and turned around, and turned around. And that’s how the money supply works. A lot of people, when they think about the money supply, they think about cash and currency. There’s the M1, the M2, the M3… It’s a lot more than just cash, currency, and gold, isn’t it. And where there is a lot more is in the checking accounts.

Actually, today, most of the wealth of the world is transferred electronically. And because we’re off the gold standard, we’re not shoving gold bars around under the streets of New York anymore. I mean, there’s still international accounts, and we still have some gold hanging around, but it’s all based on faith. As the economy does well, we create more money. And if we create more money, we have inflation. And so the Federal Reserve has to control that. And they do that by lowering or raising your reserve requirements; they do that by lowering or raising the discount rate, which is the rate that banks borrow money for. So the prime rate is affected by the discount rate, ok.

But commercial banks are key in that role.

Investment banks market stocks and bonds. So give me an example of an investment banking firm.

[Commercial banks can do that now…]

Well, they can since deregulation, but give me an example of a classic investment bank.

{Merrill Lynch}

Yeah, Merrill Lynch, Saks and Goldman…you know, the big New York Stock Exchange members. So if you look at who is a member of the New York Stock Exchange, those are the big investment bankers. So if I’m…what’s the local one that’s downtown, here… Piper Jaffrey, the gale, Piper, who was kidnapped….

Initial Public Offering (IPO)

If I’m Piper Jaffrey, and if you come to me with a business idea, and you look like you got a good business idea, and I think my stock brokers can sell the stock, they will do what is called an IPO, an initial public offering. And we’ll float a certain number of shares. Well, that investment banking firm…their sales reps are out there pushing those stocks. So if they know you like to buy stocks, you’ll be getting a call saying, “Hey, this is a good deal, man, you can’t pass this up! You can buy this stock for ten cents, and, eventually, we expect it to go up to 3, 4, or 5 dollars, based on what they’re doing.” So that’s what those companies do, and then they buy and sell market shares that are already on the existing market. It’s called the secondary market. So the company gets the money initially, but, then, once that happens, then that stock trades freely. And if people think it’s a good stock, they bid the price up, right? And that’s what you want to do is you want to ride that price up. Don’t be like me, with my Continental Steel stock and ignore it, and then get a letter in the mail stating that we’re going to offer you three cents a share. I said, no, that’s a rip-off. Well, I didn’t realize…I was so stupid, I didn’t realize that you only got one chance. If you didn’t take the three cents a share, there was a time deadline, and if you went over that you get nothing, you get zero. Even though it wasn’t a good deal, that’s the only offer I was given by the bankruptcy court.

The only thing I can do now, and I still have the stock shares, by the way, is cross my fingers and hope and pray that the company eventually starts doing well, and then call them up and say, “I teach, and I think that Wall Street would be interested in knowing that you’ve cheated me all those years ago, and it would be good to just pay me off to shut me up.” Would they give me some money? They wouldn’t have to, but they might, just because no one wants bad press. Was it the current executives fault that there was some crooks back then? No.

[Was this Continental Steel or Continental Can?]

No, it was Continental Steel and it got bought out by a company called Pen Dixie. And Continental Steel made all the re bar for the highway projects, and Pen Dixie made the cement. Well, it made sense to merge those two companies together, right? So while we were laying all of the Eisenhower freeway system, this company made a fortune. By the way, at the same time, my sister bought stock in Malt O Meal. Her stock is still valid, isn’t it? That company has been very stable. My stock is gone. It spit, it went up again; it split again… I started with two shares when I was ten years old. And all through college, I cashed my dividend checks to pay for beer and books and commuting back and fourth for school. But I didn’t sell any of the shares. And they kept doubling, and sometimes it split 4 for 1. It split 4 for 1 a couple of times, 3 for 1, and a bunch of 2 for 1 splits. Last I looked, I think I had 800 shares. I started out with two. I didn’t put one more penny into this company; I only bought two shares of stock. Unfortunately, I didn’t pay attention to it, and so what are my shares worth now? Zero. But I’m hoping that at some point I can send them a letter and say, “I understand, now, that you are finally out of bankruptcy court, and you are finally making a profit again.”

[But they reissue new and different shares after bankruptcy…]

That’s probably what they are going to say to me, “Well, we feel bad that you had a bad experience, and here’s what we’re going to do…we don’t have to do this, but out of the goodness of our heart, we’ll issue you this many of the new shares….” I’ll fiddle with that in my retirement when I’ve got nothing better to do.

But, anyway, I bought that through an investment banker. Well, actually, my dad bought it. And you pay a commission, right. That’s how that works. So those sales reps make… Is that a good business to be in? Yeah, if you know a lot of people who have money, and if you don’t mind talking on the phone or making email solicitations.

Savings banks provide savings accounts and loan funds to consumers and businesses. Primarily, a savings bank was designed for the common man, for the average person. So it was Farmers and Mechanics Savings Bank. And it was for guys who worked and farmers. And, basically, who they loaned money to was guys who worked and farmers. So they did a lot of small business loans and private loans, or a loan for my lake place. Well, a commercial bank probably wouldn’t have handled that in the old days, but the savings bank did.

Now, of course, those banks’ lines have blurred dramatically, but….

My first savings account was at F&M, and they had school account. And so you’d bring money to school, and you’d put it in an envelope, and the teacher would turn it in, and then you would get a thing back saying how much you had earned. And then at the end of each quarter, you’d get a statement back; and the teacher would do a math exercise, and we would talk about the compounding of interest. It was really cool. That’s how I started. By the way, my first thing that I bought, I bought a snow blower and I did snow blowing work for all my neighbors, who had a private ally. And I paid for that snow blower the first season. I owned that snow blower and claimed that as property that I owned for many years. It was an asset, right. Even though it was old and it might not have worked that well, ultimately, my father-in-law gave me one that he bought for $20 from the city. It was a huge monster, the ones they used to do the bridge things with… It was old and crappy, but it worked. I had two of them sitting outside, because I had no room for them when I lived in Inver Grove Heights. I didn’t have them chained up, and they got stolen. Which surprised me, because my bedroom was right above there; you think I would have heard something. But somebody saw those two snow blowers, there, and stole them.

Because I had replacement insurance on my home, I got the replacement value of those two beasts. I bought me a brand-new John Deer snow blower. And it didn’t cost me a penny. I still have that John Deer snow blower. But thanks to a savings bank… Are you going to loan to a ten-year-old kid? No. But I had saved the money, and I had the account there, and it worked out well.

Ok, savings and loan associations…who’s the big savings and loan in town? A big name, every body sees their ads every day…

{TCF}

You bank, there, at Cub Foods…TCF. Twin City Federal Savings and Loan Association. Now, today, they operate with the same ability as every other bank. But, originally, they were a classic savings and loan association. They received savings deposits, regular, and/or periodic. And, primarily, they made home loans and commercial building loans. So the idea of the savings and loan association was so that people could build a house. And once you had a house, that helps the economy, doesn’t it. And once you have a house, you are more likely to be stable and so that was created to do that. A lot of commercial banks, in the old days, wouldn’t loan money for 30 years. They wanted quick loans and quick turn around. So these were long-term loans, 20, 25, and 30 year loans. Now, we have Fanny May that’s kind of the backbone of that whole industry. And there’s all kinds of players that do home and building kinds of loans.

{How do you get a huge loan if you don’t have credit or like….}

You have to find a wealthy partner that will cosign. Yeah. If you want a huge loan, like you’re talking about, for your snow boarding park, you’ve got to have a partner, who is a builder, who can actually build it. Or, you’ve got to have a partner who’s daddy started General Mills, you know… I mean, anyone who has a certain amount of dollars. Or, you sell stock in it. My dad was on the board of directors of a company that had electronics in its name, and they ultimately installed the microwave tower back here. But because they had electronics in their name, back in the mid to late sixties, everyone wanted in on that craze. “….oh, there’s going to be a lot of money made. Oh, what do these guys do? Oh, they do cable TV.” He had all of those people’s money for free for all of those years. By the way, he never paid a dividend. I don’t know that that is morally right, but he didn’t have to pay a dividend. And, ultimately, he bought back their stock, and went private. So he had free money. So that’s one strategy you could follow. Or, you could say, “Hey, snow board users, if you want to see a park, here’s a chance to take…” I bet collectively 100,000 snow boarders would be a part of it. Then the question is, is it a for profit or a nonprofit, or do you set it up as a coop, where it’s member owned. There’s a number of ways to finance a business. Not just given these institutions.

Insurance companies provide insurance against some types of risk. And they take your monthly payments and….they are a future business, right. So what do they do with that? Do they just go to a bank and put it into a savings account? No, they loan it out again. Well, what do they loan it towards? Well, special projects like buildings. So many of the real estate deals that you see are financed by insurance companies. Mall of America was originally financed by a mutual fund, the Teachers Savings Group. But South dale, was originally financed by the Catholic Church; and when they sold, they took their appreciation and depreciation and they sold it to Equitable, my insurance company, that has my life insurance. So as long as South Dale is profitable and making money, and by the way, that is still a very profitable property, Equitable is going to make bucks.

By the way, Equitable was a company that was owned by its members and stockholders who were members. And they almost went bankrupt. In the 70s, after deregulation, this whole thing got tested severely. And we almost lost our whole financial institution. Insurance companies were in trouble, Lloyd’s of London, the biggest insurer in the world, was in trouble. Well, what those companies did, and fortunately it worked, is they said that they were going to start selling shares in the open market. So that gave them a whole new influx of cash, and they were able to stay alive. But my ownership was, clearly, deluded. I, actually, would have preferred to see it stay the other way. But I had to vote, because I didn’t want it to go belly-up. They used the premium income to lend funds to consumers, businesses, and governments. And when they say governments, they are probably buying what?

[oh, treasuries…]

Treasuries, certificates or what ever.

Mutual funds and pension funds receive savings and they invest in stocks and bonds. And, they are in the news, right now, right, because of some questionable trading practices. And, hopefully, that will all get resolved. But I was real worried a few weeks ago, that most of my retirement was teetering on this very scary little peak. And, right now, they’re not paying me nothing. I mean, I’m not getting much. I have to hold it until the whole economy turns back around again. But this weekend, one of the guys that was a parent, writes reports on mutual funds, and advises retirement advisors what mutual funds to be in and which ones not to be in, and, fortunately, every one that I’m in is a good one. I’m in good shape. I don’t have any of those bad ones. I have T Row Price; I have Vanguard, and those are really good ones.

I subscribe to the thing called the Mutual Fund Forecaster, and that comes every month, and it says which funds to buy. When you’re buying mutual funds, you want to be where all the other people are. It’s like school of fish, there’s security in a big group. A few years back, when I first started teaching here, my colleges were asking me, “Well, gee, Rusty, in your retirement, did you choose the growth fund category or did you choose the equity fund category? And I said, “Well, it doesn’t take a lot to figure that out. Teachers are pretty conservative, I went with the equity fund.” Well, every year the equity fund was doing a pretty good return, while the growth fund was based on buying pretty risky stocks. It didn’t happen. So you want to look at where the base is and make that decision.

By the way, if you are going to have mutual funds, you’re goal should be a 20 percent return on that investment.

Factors purchase accounts receivables. So I can buy your business’s accounts that haven’t paid you yet. I’ll only give you 50 cents, but I collect a dollar. So that’s one way to get immediate cash in, right? The problem is that if the word gets out that you’re doing that, your creditors might file for bankruptcy. This is often a signal that you’re in trouble. So if you’re going to use a factor, it’s better that you use it when you’re in a good and strong cash position and when your credit rating is good, and then do it every month, as just a regular thing, which is always factor those accounts. The problem is that once you start factoring accounts, and somebody starts collecting, and they are nasty to them, are you going to get business from them again? “You owe me money, asshole! I bought this account and you have to pay me!” So, sometimes, once you factor an account, you might not ever see that customer again.

[Now, you can either buy or sell your receivables…]

Oh, yeah. There’s huge secondary markets. I mean, there’s so many ways you can play by buying options, and… it’s amazing as to what kind of opportunities are out there. It’s actually kind of scary.

[Do you become a debt collector, then?]

Well, that’s what factors are. They’re debt collectors. You can actually buy government currencies and buy whether you think that currency is going up or down in value and play the spread. I mean, there are a lot of different games. It’s kind of like Vegas where there are a lot of different machines to play.

{I don’t know if this is a stupid question or not, but how do you buy them…where can you get them?}

Well, you go through a stock broker, someone who has a seat on the exchange, or you can go on the Internet, now. I mean, I don’t do it on the Internet, but there’s a lot of stuff that you can do on the Internet that’s pretty easy to do.

[You can buy a contract for deed too…]

Finance companies make consumer loans, like Thorp would be an example of that. And these people do have a limit on what they can charge, but it’s the maximum legal, right, and it compounds the most frequently. And, so, you never want to get involved with one of those. And, more often than not, repackaging your debt is a problem. You’re better off doing it on your own. If you can’t do it on your own, though, it’s better than not doing it at all.

[Do you mean where somebody else services it, where they package it up and sell it to somebody else? ]

Yeah, and then you just make one payment to that company.

[Oh, one of those.]

The problem is that once you do that, you’re going to have trouble getting credit again. So it’s almost as bad as declaring bankruptcy. The best thing is for you to pay your stuff off right away and make regular payments.

{What’s so bad about declaring bankruptcy. It goes away after five years, right?}

Well, yes, on paper. But that mark is on your record forever in terms of you’ve done that and you’ve been there. My uncle declared bankruptcy, many many years ago, and he is still suffering because he did that. So when people tell you that you can do this, and that people don’t have access to it, that’s not necessarily true.

{________________________}

No, they’re going to look at your past. That’s what the character is really all about. It’s that past. So, can you show that you have redeemed yourself? Can you show that over the recent years that you have turned things around? Yeah. By the way, there are people who go out of their way to give people a break who have had problems previously. Brown and Bigalow, a company that was my dad’s competitors, it’s right off of 52 and Plato, that man went out of his way to hire prisoners as employees…sales reps and what not. Well, come to find out, he’d been in prison for some financial stuff early in his life, and he knew what that was like, and he…. So it’s possible to get things turned around.