Publication: Space Debris: Applied Technologies and Policy Prescriptions
BIZ Archives
1. BIZ Archives
About Money and Finance
Siddhant Infocom
1st Edition Collected and compiled by: Prashant Khopkar
2. Introduction 6.........................................................
Getting Started 6..................................................................................................................
Financial Events 7..................................................
In no particular chronology 7.................................................
AOL - Time Warner Merger 7.............................................................................................
Baring Bank 7.......................................................................................................................
Silver Thursday 8.................................................................................................................
The California Gold Rush 8.................................................................................................
The Mississippi Bubble 8....................................................................................................
South Sea Company 9..........................................................................................................
WorldCom 9.........................................................................................................................
Arthur Andersen 9...............................................................................................................
2003 MF Scam 10................................................................................................................
Black Tuesday 10.................................................................................................................
European Union 10..............................................................................................................
Enron 10...............................................................................................................................
Interesting Facts and Facets 11...........................................................................................
Trending in March 2016 11..................................................................................................
Glossary of Banking Terms 12................................
A Collection 12..........................................................................
Annual Percentage Rate 12..................................................................................................
Asset 12................................................................................................................................
Bill of Exchange 12...............................................................................................................
Bank Bill 12..........................................................................................................................
Bank Draft 12.......................................................................................................................
Bond 12................................................................................................................................
Book Value 12......................................................................................................................
Bridging Loan 12..................................................................................................................
Buy-back 12..........................................................................................................................
Capital 13.............................................................................................................................
Capital market 13.................................................................................................................
Certificate of Deposit 13......................................................................................................
Cheque 13.............................................................................................................................
5. Term Deposit 19...................................................................................................................
Term Loan 19.......................................................................................................................
Traveller’s Cheque 19...........................................................................................................
Unit Trust 19........................................................................................................................
Underwrite 19......................................................................................................................
Value Dating 20...................................................................................................................
Variable Rate 20..................................................................................................................
Waiver 20.............................................................................................................................
Working Capital 20..............................................................................................................
Write-off 20.........................................................................................................................
Yield 20................................................................................................................................
6. Introduction
This is just a small experiment about the business world has taken its course. The topics
discussed will reflect my rudimentary, incomplete and inaccurate knowledge of economy
and finance. I have gained this so far, so little insight by observing closely the BFSI
industry verticals during my 25+ years career in Software industry. My reflections are my
personal views and hence if they are not appealing or defamatory in nature, kindly ignore
my unintelligent endeavour. Well, in case you think that this content is useful or
debatable, I shall be happy to help by making myself available for discussion. I firmly
believe that the world is a very dynamic and we may have different views on these matters.
There can be a healthy difference in opinion and chances are that all of them being correct
in their own way.
Getting Started
There have been lots of ups and downs in our known universe. Man has been evolved
pretty recently in comparison to the age of the universe and his science, commerce,
industry and economic activity is yet further towards his late history. So, our
understanding of the universe is so though good, may not be good enough.
Going by the above, the information that I present here as an individual is both
inadequate and non-resilient.
7. Chapter One
Financial Events
In no particular chronology
This specific chapter depicts Global Financial events that mark significant milestones for
development of economical model that we experience today in the world around us. The
information has been compiled from different sources such as magazines, printed diary of
stock broking house, etc. Hope it serves the purpose of quenching your curiosity and add
to your already rich reservoir of knowledge.
AOL - Time Warner Merger
• This merger in January 2000 was the largest merger in corporate history
• Resulted in the world’s largest media and entertainment conglomerate
• The merger structure led to each original company merging into newly created entity
• The smaller AOL bought out the larger Time Warner for US$164bn
• After the merger, the profitability of the ISP division (America Online) decreased
• The following year it suffered a loss of US$99 billion - largest loss ever reported by a
company
• In response to the huge loss in 2002, the company dropped the “AOL” from its name
• Steve Case was removed as the Executive Chairman in favour of Richard Parsons
Baring Bank
• It was founded in 1762 and was the oldest Merchant Banking company in London
• Nick Leeson - a derivatives trader falsified trading records in bank’s computer systems
• Using the hidden “five-eights account,” he began to aggressively trade derivatives on
SIMEX
• He used money entrusted to bank by subsidiaries for use in their own accounts
• Leeson’s activities generated losses totalling GBP827 million (US$1.4 billion)
• The Bank of England attempted a weekend bailout but it was unsuccessful
• The Bank was declared insolvent in February 1995 and got purchased by ING for a
mere GBP 1
• The collapse was dramatic and employees around the world did not receive their
bonuses
8. Silver Thursday
• Occurred in March 27, 1980 when Hunt Brothers attempted to corner the Silver Markets
• Hunt Brothers believed that only ‘hard’ assets provided protection against government
induced inflation
• They started accumulating Silver and 1980 held one-third of the world’s supply of Silver
• When Silver prices slid, they failed to meet huge margin calls on their futures contracts
• Culminated in a 50% one-day decline on exchanges, leading to huge losses for
speculators
• The price on the day plummeted from $21.62 to $10.80
• The Hunt Brothers lost hundreds of millions of dollars through their speculation in silver
• In 1988 they declared bankruptcy, as the family’s fortune declined following the debacle
The California Gold Rush
• In 1848, a foreman found pieces of shiny metal along the American River
• New spread and some 300,000 people from around the world rushed to California
• These early seekers called “forty-niners,” travelled by sailing ships and in covered
wagons
• Forty-niners faced hardship and often death on the way to the gold fields
• By April 1850, most of the easily accessible gold had been collected and rush ended
• Attention turned to the task of extracting the gold from more difficult locations
• The rush resulted in the admission of California as a state in 1850
• San Francisco grew from a tiny hamlet of tents to a boomtown
The Mississippi Bubble
• Around 1715, France was bankruptcy by wars & approached Scottish businessman Law
for help
• In 1716, Law established the Banquet Generale, modelled after a successful bank of
Amsterdam
• In 1717, acquired control of the Mississippi Company of France
• It was granted monopoly by French government on trade with West Indies and North
America
• Law launched as a scheme which led to wild speculation on the shares of the company
in 1719
• Share prices rose from 500 to 15,000 livres, and the ailing French economy saw
financial stability
• In May 1720, the stock price fell to 500 livres and ended in a financial collapse
• By the end of 1720, the Regent Phillippe II of Orleans dismissed Law, who then fled
from France
9. South Sea Company
• Dubbed the "Enron of England”, its collapse was one of history’s worst financial crisis
• It was created to convert GBP 10 million of Britain Government’s was debt into its own
shares
• In return it got 6% in interest and exclusive trading rights in the South Seas
• It issued shares to finance operations and gain investors and the shares quickly got
consumed
• Investors had no quibble, despite it having a highly inexperienced management team
• The management started hyping the stock and the share price kept skyrocketing
• Price peaked at GBP1050 in June 1720, before crashing due to panic selling of the
shares
• It continued its management as a part of the National Debt until it was abolished in the
1850s
WorldCom
• Its growth was fueled primarily through acquisition during the 1990s
• Announced its US $ 37 billion merger with MCI in 1997 - the largest merger in US
History
• For a time, it was the United States’ second largest long distance phone company
• Overstated cashflow by booking $3.8 billion in operating expenses as capital expenses
• Under-reported ‘line-costs’ by capitalising these costs rather than properly expensing
them
• Gave founder Bernard Ebbers $400 million in off-the-books loans
• Was the biggest bankruptcy in US & filed for Chapter 11 bankruptcy protection in July
2002
• Got purchased by Verizon Communications with the deal closing in 2006
Arthur Andersen
• Once one of the “Big Five” accounting firms
• The consulting wing of the firm became increasingly important during the 1970s and
1980s
• Was alleged of fraudulent accounting and auditing of many firms including Enron
• Its indictment put a spotlight on its faulty audits of other companies, most notably
WorldCom
• Its reputation was so badly tarnished that no company wanted Andersen’s name on an
audit
• From 85,000 employees worldwide, it got down to around 200 based primarily in
Chicago
• Was renamed to Accenture on January 01, 2001
• Surrendered its licenses to practice as Certified Public Accountant in August 2002
10. 2003 MF Scam
• Began with complaint against Canary Capital Partners LLC in September 2003
• It was charged with engaging “late trading” in collusion with a major bank in America
• The bank allowed Canary to purchase fund shares after 4:00 p.m. at that day’s closing
price
• Some companies were charged with market timing trading for favoured clients
• Canary settled the complaint for US $40 million, while neither admitting nor denying
guilt
• SEC’s investigation of the matter revealed the practice of front-running
• On April 28, 2003, every major US investment bank was found to have aided fraud
• The firms were fined a total of $1.4 billion by the SEC
Black Tuesday
• October 19th, 1929 - notorious for being the worst day in US stock market
• It marked one of the most devastating stock market crashes in American History
• It is considered by many to be the beginning of the Great Depression
• The market lost $14 billion, 10 times the annual budget of the federal government
• The impact was such that the market did not return to pre-1929 levels until late 1954
• The loss was far more than the U.S. had spent in all of World War I
• It led to the Institution of landmark financial reforms and new trading regulations
European Union
• It owes its base to Maastricht Treaty, entered into force on November 1, 1993
• Created a single market to enable free movement of people, goods, services & capital
• It let to the union of twenty-seven member states over time
• To join it, a country must meet the criteria defined at the Copenhagen European
Council
• In 1993 a single currency - Euro - was introduced and was adopted by thirteen (13)
members
• It represents its members in the WTO and observes at G8 summits and at the UN
• It has also developed a role in foreign policy, and in justice and home affairs
• With almost 500 million citizens it generates nearly 31% share of the world’s GDP
Enron
• Founded in 1985 through merger of two natural gas pipeline companies
• Fortune name it “America’s Most Innovative Company” for six consecutive years
• Was one of the world’s leading companies, employing around 22,000 people
• Took advantage of accounting limitations to portray a rosy picture of its performance
• Many of its recorded assets and profits were inflated, or wholly fraudulent and non-
existent
• Its management made a series of self-interested off-the-books deals to raise capital
• Moved from being valued at $80 billion to being a penny stock
• Filed a bankruptcy in December 2001
11. Interesting Facts and Facets
In older days, the massive projects that used to be of epic proportions often ran from one
generation to another before completing; in the modern world today, their scale have
grown and completion periods have shrunk considerably shorter due to an advent in
technology, engineering and innovations that serve us.
The Conclusion
Many of the world events happen simultaneously seldom giving us the chance to adjust or
to predict their combined or composite outcomes. There are many a possibilities in view of
World Wars I & II, subsequent change in trades and technologies implied sift in priorities
and so on.
There isn't anything such as final outcome in the Financial Jungle. The events presented here
serve as an outline. These events have shaped the modern markets & evolved our economy.
Trending in March 2016
There are present scams and scandals occurring in India such as…
• Business tycoon Vijay Mallya fleeing abroad with his 9000 Crore of debt with various
banks in India at the beginning of March, 2016.
• Indian financial system put under stress as scrutiny reveals that there is another scam of
INR 2200 Lakh Crores lurking as about 100 people including some parliament
ministers have evaded taxes by falsely showing their income is from agricultural
produce.
12. Chapter Two
Glossary of Banking Terms
A Collection
Annual Percentage Rate
• The total cost of credit expressed as an annual percentage amount of the Credit
extended.
Includes: Documentation Fee / Arrangement Fee / Acceptance Fee
Asset
• The thing of value owned by a company or an individual.
Bill of Exchange
• A written from one person (the Drawer) to another (the Drawee) requiring the Drawee to
pay a specified sum, on demand or on a specified date, to the Drawer.
Bank Bill
• A Bill of Exchange issued by a Bank on behalf of a Company, as a promise to pay
specific amounts by a due date, usually 30, 60, or 90 days ahead. The recipient pays
less than the face value of the Bill (discounted value) and may hold it on collection on
maturity, or sell it at a discount to another party.
Bank Draft
• An order from a buyer from his/her Bank to make a payment to the Bank of the seller
from whom goods are ordered.
Bond
• An interest bearing certificate issued by a Corporation or Government.
Book Value
• The original cost of an item less the cost of Depreciation to date.
Bridging Loan
• A short-term, temporary loan to tide a borrower over until money promised from
elsewhere is forthcoming.
Buy-back
• An agreement, between a seller and a buyer, that the seller will repurchase a security
within a specified time at a pre-determined price.
13. Capital
• The value of a Company, measured as the excess of Total assets over total liabilities;
the value of an investment.
Capital market
• A financial market where business obtain funds for long-term investment, and where
shares and bonds are traded.
Certificate of Deposit
• A promise by Bank to pay a specific amount by a specific date; a negotiable instrument
which can be bought and sold.
Cheque
• A written, unconditional order from one person (the Drawer) to another (the Drawee -
usually a Bank) to pay a sum of money to the bearer or named recipient.
Collateral
• Assets submitted by a borrower as additional security for a loan.
Commercial Deposits ( CD’s )
• Securities issued by banks to raise funds on the wholesale money market, and which
can be traded by investors.
Correspondent Banking
• An arrangement whereby a resident bank will act as agent or ‘Correspondent’ for
another, which is not resident in that country, in the provision of payment and other
services.
Credit
• The use of someone else’s funds in exchange for a promise to repay, usually with
interest, at a later date.
Credit Grading
• The process of evaluating a loan application.
Credit rating
• A measurement of the creditworthiness of an individual or business. Based significantly
on the applicant’s loan repayment history as recorded by financial institutions
individually, or centrally by a credit reference agency.
Credit Transfer
• Instruction by an individual or business to a Bank to credit a specified third-party
account with a specified amount.
14. Creditor
• A person or business to whom a debtor owes money.
Currency
• Coins, Notes and Cheques accepted within a country as its medium of exchange.
Debenture
• A fixed interest bond issued by borrowing companies to medium / long term investors.
Debtor
• A person or business from whom a creditor is owed money.
Default
• Failure to repay a loan on schedule.
Depreciation
• A decrease in the value of a fixed asset, i.e., plant, machinery and buildings as
expressed in a company’s accounts; or in the value of a country’s currency relative to
others.
Devaluation
• A downward movement in the exchange rate or international value of a currency;
reverse of revaluation.
DIBOR
• The Dublin Inter-Bank Offer Rate is one of the wholesale rates quoted on the interbank
market where banks with surplus funds lend to banks with funds deficit.
Direct Credit
• An arrangement allowing a regular, direct lodgement to a person’s bank account by way
of payment, e.g., Salary, from another person or company.
Direct Debit
• An instruction to a Bank from a customer to debit his/her account with the amount (fixed
or variable) demanded by a named creditor; e.g., payment of telephone bills, monthly
rental.
Dividend
• The part of company’s profit paid out to its shareholders or owners.
Documentary Credits
• Provision of credit to buyer on the strength of documentation providing that he has title
to the goods; a method by which banks finance trade.
15. Electronic Funds Transfer (E.F.T.)
• The transfer of funds by means of electronic messages instead of by traditional means,
such as cash or cheques.
E.F.T.P.O.S.
• Electronic Funds Transfer at Point of Sale is carried out by means of a Debit Card which
has the effect of automatically debiting a payment from the customer’s bank account
and crediting a retailer’s bank account.
Endorsement
• A signature at the back of a cheque which transfers ownership of the cheque from the
signatory to the bearer.
Equity
• Funds supplied by the owners of a business.
Eurocheque
• A guaranteed multi-currency cheque which can be written out in 40 different currencies ,
allowing direct payment and withdrawal of cash.
Exchange Rate
• The price of one country’s currency in terms of another.
Export Credit
• A loan to an exporter to tide the business over the time between sending goods abroad
and receiving payment for the goods.
Factoring
• The practice whereby a business sells the debt owing to it to a factor (e.g., Bank) and
raises finance in the process. The factor’s profit comes from collecting more than the
discounted price paid for the debts.
Floatation
• The process of company’s “going public” whereby its shares are listed on Stock
Exchange and available for investment by institutions and members of the public.
Forward Market
• A market where traders can contract to purchase or sell financial product or foreign
currencies for a pre-determined price at a future date.
Forward Rate Agreement
• An agreement between two parties, where each agrees to indemnify the other for an
adverse rise or fall in interest rates, based on a pre-defined settlement amount for a pre-
defined period in the future. FRA’s enable risk managers to efficiently lock into the future
interest rates for periods of upto twelve months.
16. Garnishee Order
• A court order forbidding a Bank to release money that it holds in the account of a
customer for as long as that customer owes another person.
GIRO
• A payment system organised by a group of banks, or a postal authority, which allows
customers of one bank to make payments to customers of another bank without the use
of cash or cheques.
Guarantee
• An understanding by a third party to be responsible for a loan should the borrower fail to
repay. To be legally binding a guarantee must be made in writing.
Hedging
• Behaviour in the money and/or in the foreign markets designed to reduce the risk of
loss from future price movements; e.g., company due a payment in one currency in a
month’s time might “hedge” against a devaluation in that currency by selling it now for a
known quantity of another currency.
Hire Purchase
• The combination of hiring and purchasing which sees the purchaser hiring a product in
return for a series of regular payments; when these are finished, the product
automatically becomes the property of the purchaser.
Instalment Credit
• Credit which is repaid over a period in regular, equal instalments.
Interbank Market
• Means by which banks with surplus funds can lend to banks with a funds deficit.
Interest Rate
• The cost/price of borrowing money, expressed as a percentage per year of the amount
borrowed (principal).
Interest Rate Future
• An arrangement by which parties enter into a contract to protect themselves against
interest rate fluctuations for specific amounts and contract periods.
Interest Rate Option
• An Agreement giving the buyer the option to purchase government bonds at a pre-
determined price and stage of maturity; provides the buyer with the opportunity to
benefit from rising interest rates and to avoid the risk of lower rates.
Leasing
• The hiring of capital goods or equipment to avoid the cost of buying them all at once.
17. Legal Tender
• Money which must, by law, be accepted in payment of debts.
Letter of Credit
• An undertaking by a bank to third party to pay a customer’s debts as they become due
and are presented; frequently used in international trade as a means of payment for
imports and exports.
Liabilities
• Debts owed by, an individual or company, to others.
Liquidity
• Relates to the ability of a financial institution to repay depositors on demand or short
notice. Banks are required to maintain a stock of liquid assets , i.e., assets that can be
readily turned into the most liquid asset of all i.e., cash.
Maturity
• The life expectancy of a loan.Original maturity is the length of time from the beginning of
a loan to the date of the last repayment. Residual maturity is from the present to the
final payment.
Money Market
• The market on which money is traded.
Wholesale: Banks and other big corporate dealers borrow and lend large amounts.
Retail: Financial institutions lend in smaller amounts with their retail customers.
Money Order
• Financial instrument used to remit money to persons who do not hold a bank account or
whose account number is unknown; the order can be cashed or lodged to an account.
Money Transmission
• The process of transferring money between accounts.
Mortgage
• Loan provided for house purchase; also a legal document by which borrowers pledge
their homes other property as security against which to borrow from financial
institutions.
Negotiable Instrument
• A financial instrument, the ownership of which can be passed from one owner to
another; bank note, cheque, certificate of deposit, etc.
Net Worth
• The value of a company calculated by subtracting its outstanding liabilities from the
current value to its total assets. If this figure is negative, the company is technically
insolvent.
18. Overdraft
• An arrangement authorising a bank customer to draw funds, up to a specified limit, in
excess of current account balances.
Principal
• The face value of a loan; to be distinguished from interest, which is the amount paid
each year for use of the principal sum.
Promissory Note
• A legally binding promise between two parties that one will pay the other a stated
amount at a future date.
Provisions
• Money that banks set aside, out of their earnings / profits, to meet likely costs such as
defaulting borrowers.
Rate
• Rate of charge or cost of money, either to borrow it (Interest rate) or to change it from
one form or currency to another (Exchange rate).
Reserves
• Bank / Company profits which are not distributed to shareholders as dividends can be
put into reserve and / or can be retained as bank / company capital (Retained earnings).
Revaluation
• An upward movement in the exchange rate or international value of a currency; reverse
of devaluation.
Rights Issue
• A new issue of company shares offered first to existing shareholders of the company at
a discount to their market price.
Roll-over
• Extension of a loan beyond the final payment date originally agreed.
Scrip Issue
• A gift of free shares to a company’s existing shareholders in proportion to their stake in
the company.
Security
• Assets such as house deeds, life policies and shares, pledged in support of a loan.
Securities
• Financial assets which pay income to investors in the form of interest or dividends; e.g.,
commercial deposits, government stock.
19. Securitisation
• Process whereby various types of loan including commercial and housing mortgages
are packaged, underwritten and sold to investors in the form of securities.
Spot Market
• That part of financial markets requiring immediate ( spot ) settlement.
Standing Order
• An instruction from a customer to his/her bank to make a regular payment of a fixed
amount from his/her account to another specified account.
SWAP
• A financial arrangement which enables a company to exchange the denomination of its
debt from one currency to another (currency swap), or between fixed or floating interest
rate (interest rate swap), or a combination of both.
S.W.I.F.T.
• The Society for Worldwide Inter-Bank Financial Telecommunications is a network of
thousands of banks worldwide which facilitates the telegraphic transmission of
instruction “messages” for the payment / transfer of funds on behalf of bank customers.
Syndicated Loans
• Large loans backed by a consortium of international banks to spread the risk.
Term Deposit
• A deposit lodged by a customer with a bank for a minimum, mutually agreed period of
time, and on which the bank pays a set rate of interest.
Term Loan
• A Loan granted for a specific purpose and repayable by negotiated amounts within a
fixed-period.
Traveller’s Cheque
• A cash substitute acceptable almost anywhere in the world.
Unit Trust
• A financial arrangement such as cash management, equity or property trust which
allows small investors to have their funds pooled and potentially earn a greater return
than they could separately.
Underwrite
• An agreement to buy, alone or as part of a syndicate, the whole of a bond or share
issue.
20. Value Dating
• The process which determines date on which value is actually given for funds moving
from one account to another.
Variable Rate
• An interest rate that varies over time in line with some benchmark (floating rate), as
against a fixed rate.
Waiver
• An agreement by a lender to overlook a borrower’s failure to meet certain conditions
attached to the granting of a loan; conditions which, without waiver, would give the
lender the right to declare the loan in default.
Working Capital
• The capital that a company uses to work with in running its day-to-day business.
Write-off
• A decision by a lender, in the event of an un-recoverable loan, to write the loan off its
balance sheet by reducing its assets by the value of the loan.
Yield
• The word used to refer to the annual return on an investment, expressed as a
percentage.
