1. China recently experienced its first corporate bond default, which some see as the beginning of a potential credit crunch, but the Investment Committee views it positively.
2. They believe defaults are necessary to reduce moral hazard, incentivize reform, and introduce the concept of risk, whereas bailouts discourage financial discipline.
3. The default was small and expected, China has the power and resources to contain any crisis, and they can learn from mistakes made in other countries.
A great primer on Financial Restructurings prepared by Valerio Ranciaro, General Director from SACE, covering everything you need to know from analyzing the capital structure of a company, to the procedures in financial restructure, to a case study of the restructuring of Telecom Argentina.
A great primer on Financial Restructurings prepared by Valerio Ranciaro, General Director from SACE, covering everything you need to know from analyzing the capital structure of a company, to the procedures in financial restructure, to a case study of the restructuring of Telecom Argentina.
This study presentation looks at the causes and consequences of different types of financial crisis. It also focuses on the Hyman Minsky theory of financial instability in a capitalist economic system.
Buy-sell agreements are usually part of a succession plan put in place to protect the financial interests of the owners of closely held companies and their heirs and to protect the company’s stability in case of a major event. Funding buy – sell agreements is frequently accomplished using insurance policies under (1) a cross purchase agreement, or (2) a stock redemption agreement.
Cross purchase agreement. Each owner of the company takes out, and is beneficiary of, an insurance policy on each of the other owners. In the event of an owner’s death, the other owners use the insurance proceeds to buy out the decedent’s ownership share in the company from the decedent’s beneficiaries.
This is a free e-book from the London School of Economics. It includes several stand alone chapters. Each one of them is written by a different expert or professor. The main underlying topics include how to manage and prevent future financial crisis. And, what would be the best financial regulatory framework to do just that.
The system of organized lending can never run out of risks. Be market, liquidity, credit, interest or operational, risk is inevitable for banks and other financial firms.
Hence, a primary importance is given to risk profiling in all financial institutions.
One of the omnipresent risks that have taken a toll on banks regularly is credit risk. In simplest terms, this risk can be defined as non repayment of a loan as per agreed conditions, to the lender, thus ruining the lender’s investment.
The non repayment can be intentional (willful default), due to failure of an industry (systemic risk), failure of cross currency settlement (settlement risk) etc.
In this article, we are going to explore credit risk. We will discuss its basic meaning, types, causes, effects and how banks all over the world have made attempts to monitor, mitigate, transfer and at times, accept the risk.
This study presentation looks at the causes and consequences of different types of financial crisis. It also focuses on the Hyman Minsky theory of financial instability in a capitalist economic system.
Buy-sell agreements are usually part of a succession plan put in place to protect the financial interests of the owners of closely held companies and their heirs and to protect the company’s stability in case of a major event. Funding buy – sell agreements is frequently accomplished using insurance policies under (1) a cross purchase agreement, or (2) a stock redemption agreement.
Cross purchase agreement. Each owner of the company takes out, and is beneficiary of, an insurance policy on each of the other owners. In the event of an owner’s death, the other owners use the insurance proceeds to buy out the decedent’s ownership share in the company from the decedent’s beneficiaries.
This is a free e-book from the London School of Economics. It includes several stand alone chapters. Each one of them is written by a different expert or professor. The main underlying topics include how to manage and prevent future financial crisis. And, what would be the best financial regulatory framework to do just that.
The system of organized lending can never run out of risks. Be market, liquidity, credit, interest or operational, risk is inevitable for banks and other financial firms.
Hence, a primary importance is given to risk profiling in all financial institutions.
One of the omnipresent risks that have taken a toll on banks regularly is credit risk. In simplest terms, this risk can be defined as non repayment of a loan as per agreed conditions, to the lender, thus ruining the lender’s investment.
The non repayment can be intentional (willful default), due to failure of an industry (systemic risk), failure of cross currency settlement (settlement risk) etc.
In this article, we are going to explore credit risk. We will discuss its basic meaning, types, causes, effects and how banks all over the world have made attempts to monitor, mitigate, transfer and at times, accept the risk.
PAGE 280APPLYING THE CONCEPTTRUTH OR CONSEQUENCES PONZI SCHEM.docxsmile790243
PAGE 280
APPLYING THE CONCEPT
TRUTH OR CONSEQUENCES: PONZI SCHEMES AND OTHER FRAUDS
In the financial world, you always have to be on the lookout for crooks. Fraud is the most extreme version of moral hazard, and it is remarkably common.
The term Ponzi scheme has its origins in a 1920 scam run by serial con artist Charles Ponzi. Promising a 50 percent profit within 45 days, he swindled unsuspecting investors out of something like $250 million in 2014 dollars. Ponzi never invested their money. Instead, he paid off early investors handsomely with the money he obtained from subsequent investors.
Financial laws are now far more elaborate than in Ponzi’s day, and governments spend much more to enforce them, but frauds persist.
Bernie Madoff is the leading recent example. For decades, Madoff was a respected member of the investment community and able to escape detection. In the same manner as Ponzi, Madoff was redeeming requests for funds with the money he collected from more recent investors. Madoff’s con, which may have begun as early as the 1970s, failed only when the financial crisis of 2007–2009 depleted his funds, making it impossible for him to pay off the final cohort of wealthy, sophisticated—yet apparently quite gullible—investors and financial firms. The Madoff scandal dwarfed Ponzi’s racket: at the time the scheme blew up, the losses were estimated at $17.5 billion, and extensive efforts at recovery have put final losses in the neighborhood of $7 billion.
Unfortunately, in a complex financial system, the possibilities for fraud are widespread. Most cases are smaller and more mundane than those of Madoff or Ponzi, but their cumulative size is significant. One source devoted to tracking just Ponzi-type frauds in the United States listed 70 schemes worth an estimated $2.2 billion in 2014 alone.*
We aren’t going to get rid of Ponzi schemes and other frauds (see In the Blog: Conflicts of Interest in Finance). But the mission of ferreting them out and prosecuting those responsible is essential. A well-functioning financial system is based on trust. That is, when we make a bank deposit or purchase a share of stock or a bond, we need to believe that the terms of the agreement are being accurately represented and will be carried out. Economies where property rights are weak and enforcement is unreliable also usually supply less credit to worthy endeavors. That means lower production, lower income, and lower welfare.
imagesIN THE BLOG
Conflicts of Interest in Finance
Financial corruption exposed in the years since the financial crisis is breathtaking in its scale, scope, and resistance to remedy. Traders colluded to rig the foreign exchange (FX) market, where daily transactions exceed $5 trillion, and to manipulate LIBOR, the world’s leading interest rate benchmark (see Chapter 13, Applying the Concept: Reforming LIBOR). Firms have facilitated tax evasion and money laundering. And Bernie Madoff engineered what was arguably the largest Ponzi.
Week-1 Into to Money and Bankingand Basic Overview of U.S. Fin.docxalanfhall8953
Week-1 Into to Money and Banking
and Basic Overview of U.S. Financial System
Money and Banking Econ 311
Instructor: Thomas L. Thomas
Financial markets transfer funds from people who have excess available funds to people who have a shortage.
They promote grater economic efficiency by channeling funds from people who do not have a productive use for them to those who do.
Well functioning financial markets are a key factor in producing economic growth, where as, poor functioning financial markets are a major reason many countries in the world remain poor.
Financial Markets
A security or financial instrument is a claim on the issuer’s future income or assets.
A bond is a debt security (IOU) that promises to make payments periodically for a specified period of time.
The bond market is especially important economic activity because it enables businesses and the government to borrow and finance their activities and because it is where interest rates are determined.
An interest rate is the cost of borrowing money or the price to rent (use someone else’s) funds.
Because different interest rates tend to move in unison, economist frequently lump interest rates together and refer to the “interest rate”.
Interest rates are important on a number of levels:
High interest rates retard borrowing
High interest rates induce saving.
Lower interest rates induce borrowing
Lower Interest rates retard saving
Information Asymmetry and Information costs
Why Financial Intermediaries
In the neo-classical world economists have argued financial intermediaries are not necessary. Savers (investors) could manage their risks through diversification.
The logic rests on the perfect market assumption – that is investors can always through their own borrowing and lending compose their portfolios as they see fit, without costs. In such a world there are no bankruptcy costs.
In such a world if taken to the extreme, perfect and complete markets imply that there is no need for financial institutions to intermediate in the financial (capital markets) as every investor (saver) has complete information and can contract with the market at the same terms as banks. E.g. Information Asymmetry
Why Financial Intermediaries Bonds
A common stock (usually called stock) represents a share of ownership in a corporation.
It is usually a security that is a claim on the earnings and assets of the corporation.
Issuing stock and selling it to the public (called a public offering) is a way for corporations to raise the funds to finance their activities.
The stock market is the most widely followed financial market in almost every country that has one – that is why it is generally called the market – here “Wall Street.”
The stock market is also an important factor in business investment decisions, because the price of shares affects the amount of funds that can be raised by selling newly issued stock to finance investment spending. (Note impact examples..
Participation Expectations.In order to be eligible for the m.docxdanhaley45372
Participation Expectations.
In order to be eligible for the maximum score on this graded activity, the initial response to the discussion questions must be at least 200 words and be suitably supported (citations) with material from our our assigned textbook readings. Subsequent comments to other students must "add value" to the discussion and should be approximately 100 words each in order to be considered "substantive" and therefore eligible for the maximum score
APA FORMATTING NOT NEEDED
: Please keep the two post separate
Discussion Post #:1
From 2007-2010, the Federal Reserve Bank (the Fed) used many practices that had never before been seen from the central bank of the United States.
Discuss the some of the actions that the Fed took during this period. Such as:
· How the Federal Reserve’s lending practices changed during this period.
· What did the Federal Reserve do to support firms deemed “too big to fail.”
Do you believe these actions were necessary to avoid a collapse in the financial system? Support your opinion with information from the textbook or external source(s).
Reference: Chapter 12, section 12.4: Bank Failures During the Great Recession, Chapter 14, section 14.4: Monetary Policy in the 2000s, and Conclusions section at the end of the Chapter 14
Guided Response: Review the posts of your classmates and respond to at least two of your classmates by agreeing or disagreeing with their opinions on whether the Federal Reserve actions were necessary to avoid the collapse of the financial system.
Peer Response #1: AM
At the height of the Great Recession, the Fed made changes to the FDIC to prevent the same kind of loss from happening again. “First, all accounts that do not earn interest are insured infull, regardless of the balance” (Amacher & Pate, 2012). Followed by the increase in the SMDIA to the amount of $250,000. This law (Dodd–Frank Wall Street Reform and ConsumerProtection Act ) was enacted by President Obama as a permanent fixture to the banking system.
The Fed took actions the were considered unconventional for the large financial institutions that were considered nonbanks. “Too Big To Fail” means these companies are too important the economy to let fail or go bankrupt. In an effort to keep these institutions from closing, the Fed offered bailout programs.
The actions taken by the Fed were thought necessary to keep from further hindering the U.S. economy. President of Federal Reserve Bank of Minneapolis, Neel KashKari, said, “We had a choice in 2008: Spend taxpayer money to stabilize large banks, or don’t, and potentially trigger many trillions of additional costs to society” (Kashkari, 2016). The failure of these companies could have harmed homeowners, businesses, and families across the U.S. much more than the bailouts that were given. Many believe that these banks should be broken up because they are too big and taxpayer bailouts should not be required to keep them afloat. “[…] there is no question that the.
Systemic Risk in Banking : Systemic risk is the possibility that an event at the company level could trigger severe instability or collapse an entire industry or economy.
Are Collateralized Loan Obligations the ticking time bomb that could trigger ...Kaan Sapanatan, CFA, CAIA
After my recent trip to New York, where I met with investment advisors from various Investment Banks and Large Alternative Investment Shops, 3 letters really resonated in my ears on my flight back home.
And those 3 letters were C… L… O…
As I got back home I started digging more into it.
One thing that really stood out for me was that; the Investment Banks never mentioned a word on Collateralized Loan Obligations, whereas without an exception every Alternative Investment shop talked about CLOs with great passion, and would elaborate “How much value they see in them and how great the returns are”
Coincidently recently there have been some concerns raised on “Leverage Loans and CLOs” by some powerful voices such as; former Federal Reserve Chair Janet Yellen, IMF, Moody’s and so on.
In fact, I had read some of the comments as part of my daily news screening, but at the time it didn’t catch my attention enough to further look into it.
The more research I did, the more clear it became that “Ten years after the global financial crisis, investors are once again showing increasingly risky behavior as they search for sources of high yield in response to a decade of low-interest rates”.
Please find my research in the presentation. I would be very happy to discuss and share some thought regarding the topic.
Kaan Sapanatan
Discussion 1The Federal Reserves were using practices that t.docxduketjoy27252
Discussion 1
The Federal Reserves were using practices that they haven't used since the Great Depression. “First, the Fed extended credit to nonbank financial firms, which was the first time since the Great Depression that entities outside of the Federal Reserve System could borrow directly from the Fed”(Amacher Pate 2012). They did this so that all the small firms didn't fall because of the economy. “The Fed also purchased assets and loans from firms deemed "too big to fail." The purchases of mortgage-backed securities, loans ranging from millions to billions to financial firms like American International Group, and guarantees of the assets of Citigroup and Bank of America were all seen as unconventional practices of the Fed”(Amacher Pate 2012). That way they would have the money to used to help stabilize their financial state.
To support the firms that the Federal Reserve thought was to big to fail, they passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. “On July 21, 2010, President Barack Obama signed the Dodd–Frank Wall Street Reform and Consumer Protection Act into law, which permanently raises the current standard maximum deposit insurance amount (SMDIA) to $250,000”(Amacher Pate 2012). This way when there will be less likely for the banks to be in a crisis because they would have more money to work with.
I think they did what they thought they had to do to keep the economy from collapsing. If everything started falling apart and they couldn't come up with a solution, they would have bigger problems to deal with than unconventional practices.
Amacher, R., Pate, J. 2012. Principles of Macroeconomics. San Diego, CA. Bridgepoint Education Inc.
The Federal Reserve was established to provide bank safety. Subsequently, the Federal Deposit Insurance Corporation (FDIC) was created to provide protection to bank depositors from bank failures. According to text, “it is important to allow unsuccessful firms to fail and leave the industry if the market system is to function effectively” (Amacher, 2012, p. 343). In response to the numerous bank failures, the FDIC implemented several changes. First, it mandated that all accounts that are not interest bearing to be insured in full. Banks were using these funds to issue high interest loans, while paying minimal interest to funds that were deposited. Next, the Federal Reserve System was divided into 12 districts. This method ensured that control of the banks was not consolidated at a national level. At this point, the Federal Reserve can also adjust the interest rates to encourage or discourage banks from lending money. Also, Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act. This was the response for organizations who were deemed “too big to fail.” This law required banks to have a high ratios of capital reserves, as well as reduce their penchant for risk tasking.
Travis
References
Amacher, R., Pate, J., (2012).Principles of Macroeconomics. San Diego.
Snam 2023-27 Industrial Plan - Financial Presentation
(292) failure can be good
1. This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion of our investment managers
at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no
indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private
Capital is an SEC Registered Investment Adviser.
Thought for the Week (292):
Failure Can Be Good
Synopsis
Late last week, China experienced its first corporate bond default as the solar panel maker, Chaori Solar, failed to make an interest payment.
Although the payment was relatively small at 89.9 million yuan ($14.7 million), several market pundits in the media are calling for a domino effect, which could lead to a credit crunch.
The Investment Committee disagrees and actually applauds these types of failures in markets as controlled as China, because “moral hazard” is reduced and risk is more accurately priced.
China Finally Allowed a Default
Late last week, China experienced its first corporate bond default as the solar panel maker, Chaori Solar, failed to make an interest payment. Although defaults are commonplace in the U.S., China’s local governments have historically bailed out companies that are close to missing payments on loans.
The reason for most bailouts is almost always politically motivated. Local officials in China often fear that a default would damage their career prospects, and the potential economic concerns surrounding unemployment from a failed enterprise in their region/district have encouraged bailouts in the past.
NOTE: China is still a communist society and one of the biggest fears (if not the biggest fear) is unemployment, because rising levels often lead to political unrest. Communist societies cannot allow civil unrest because their leaders view protest to be an indication that their way of government is flawed.
As a result, investors have often viewed bonds in China to have implicit government backing, which is something that has benefitted China greatly and fueled a rapid credit boom since 2009 to a total size of $1.4 trillion. Since many investors felt that corporate bonds were as safe as government bonds, they chased those bonds with the highest returns with no concern for default risk.
Failures Are Needed in Markets
Government bailouts are almost always a bad outcome for markets in the long run because they create a disincentive for companies to practice financial discipline and investors to pay attention to the risks associated with an investment opportunity.
Therefore, the Investment Committee actually views this default as a positive for the global economy for three reasons:
1. Reduces Moral Hazard: A “moral hazard’ is a situation where one party takes risks because any negative outcome due to their actions will not be felt by them. The radical change from China’s past behavior of bailing out troubled companies sends a message to other firms that there will be consequences for mismanagement.
2. Push Needed Reform: This minor default will likely incentivize investors and regulators to pursue reforms in investor protection via covenants and better disclosures and governance. The net result should attract additional investors into their debt markets as they evolve.
2. This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion of our investment managers
at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no
indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private
Capital is an SEC Registered Investment Adviser.
3. The Concept of Risk Has Now Been Introduced: Lenders and investors will become more disciplined because they can now lose money. Furthermore, we expect to see a more efficient allocation of capital among corporate borrowing. Meaning those firms with less risk will pay less to borrow, and those with more risk will pay more to borrow.
Think about a twenty-something who is not so great with money and spends wildly on a credit card for several years. If this individual’s parents kept paying off the debts, then one could argue that he/she will never learn financial discipline.
Well just as individuals must “learn the hard way” at times, companies must also endure failure in order to realize that there are consequences to financial mismanagement.
Implications for Investors
The Investment Committee sees little to no risk of a “domino effect”, or a chain reaction that occurs where a small change causes a similar change nearby which can accelerate over time, for three key reasons:
1. Default Was Small and Expected: The solar industry in China has too much competition and weak pricing, resulting in a very difficult environment to generate earnings. Chaori had a history of financial issues due to these factors, and the size of the default is miniscule when compared to what ignited the financial crisis here in 2008.
2. China Has Far More Power: China lacks the inefficiencies that exist in our government to act quickly (a.k.a. “Congress”) and can attack any systemic crisis if one were to ignite. Their government would likely intercede immediately, and they possess the financial resources to extinguish nearly any financial fire.
3. China Learned from Our Mistakes: The collapse of Bear Stearns, Lehman Brothers, and other notable financial institutions taught the rest of the world a harsh lesson. China not only has the firepower to quell a liquidity crisis but also the knowledge of forewarning, having watched the U.S. go through our own lessons
The bottom line is that failure is often good for economies because the lessons learned will likely make markets more reliable. Companies must be penalized for borrowing more money than they can handle, and those firms who are in worse financial shape should be required to pay a higher interest rate if they choose to pursue more debt.
Similarly, if an investor pays little to no attention to the inherent risks of an investment, then he/she should be subjected to a loss in the event of a company default. Just as a child will rarely touch a hot stove twice, the investor will likely be far more cautious the next time that they are presented with the opportunity for higher returns with no regard to the risk involved.