Posts Tagged ‘derivatives’
Tuesday, August 31st, 2010
The nation’s financial system needs significantly more regulation than exists now. The lack of tough regulatory powers strongly impacted the recent financial crash and the Great Recession that ensued. The good news is that the Obama administration is moving firmly in this direction with financial reform legislation a critical item on its agenda. This is the opinion of Anthony Downs, a senior fellow with the Brookings Institution and former President of the Real Estate Research Corporation. In a recent interview for the Alter NOW Podcasts, Downs said that between 1980 and 2007, the value of international capital markets - including bank deposits, assets, equities, public and private debt - quadrupled relative to the world’s GDP, lifting millions of people out of poverty. Although unprecedented, this growth relied heavily on borrowed money to finance higher living standards and highly leveraged loans with limited reserves backing them. In the end, the growth was unable to be sustained.
The financial reform legislation currently undergoing reconciliation by a Senate-House conference committee is not a reinstatement of the 1933 Glass-Steagall Act - which separated investment and commercial banking — because banks will still be allowed to deal with securities. Under the new law, banks will have to register derivatives with some type of formal exchange and maintain records on who is borrowing money and under what terms. This marks a significant change from before the Great Recession, when derivatives were traded with virtually no oversight.
Downs believes that former Federal Reserve Chairman Alan Greenspan contributed to the financial crisis in two ways. In 2001, when Greenspan was informed that there was fraud in the subprime housing market and that he should do something about it, he refused to take action because he didn’t believe in regulation. According to Downs, “that was a terrible mistake and meant that all the horrible loans made in the subprime market could continue unchecked.” Greenspan’s second error was to maintain low interest rates for as long as he did at a time when an enormous amount of capital was coming into the United States economy from overseas. Because investors were avoiding the stock market, they put their money into real estate. That drove the price of properties sky high and destroyed the concept of intelligent underwriting and evaluating the risk before approving the loan.
Anthony Downs On Financial Reform:
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Tags: Alan Greenspan, Anthony Downs, Ben Bernanke, Brookings Institution, derivatives, Federal Reserve, financial crash, financial reform, financial regulation, GDP, Glass-Steagall Act, Great Recession, Obama administration, reconciliation, securities, subprime
Posted in Development, Economics, Financing, Industrial, Office | 1 Comment »
Wednesday, August 25th, 2010
Curiosity is growing about which Wall Street banks will be the first to get out of proprietary trading or the private equity business as they restructure to come into compliance with new financial regulatory reform legislation. The Volcker Rule - named for former Federal Reserve chairman Paul Volcker - limits banks from these practices and sets new levels on the size of private equity or hedge fund investments. In other words, the banks are not allowed to hold more than three percent of their Tier 1 capital - a measure of their financial strength — in private equity or hedge fund investments.
Bank of America is almost in compliance, though Goldman Sachs must act more aggressively and is reported to be weighing several options to comply with the increased regulation. The good news for the Wall Street banks is that they have several years in which they can reduce their holdings. “They have time to adjust,” said Mark Nuccio, partner at Boston-based Ropes & Gray. “I don’t think there’s any intention on behalf of the regulators to create economic dislocation at financial institutions.”
The new rules are driving certain banks to rethink their business, while others see the new law as a welcome excuse to distance themselves from unwanted hedge or private-equity funds. “If you were leaning toward a strategic change anyway then now is a good time to re-evaluate the business because you have a regulator saying you shouldn’t be in this business anyway,” said Thomas Whelan, chief executive of Greenwich Alternative Investments. This is particularly true for banks that quickly acquired hedge fund operations during the boom years. At that time, having a hedge fund was essential to the strategic mix. Since 2008, however, when hedge funds posted their worst-ever returns and clients tried to cash in assets, the math changed for many banks.
Tags: Bank of America, banking, derivatives, Federal Reserve, Goldman Sachs, hedge funds, Morgan Stanley, Paul Volcker, President Barack Obama, private-equity firms, Volcker Rule, Wall Street
Posted in Economics, Financing | No Comments »
Monday, June 7th, 2010
Senator Christopher Dodd (D-CT) is enjoying a big victory in his last days in the Senate following passage of broad financial reform legislation designed to rein in the excesses that caused the financial meltdown. First, the Senate and House versions of the bill must undergo reconciliation. Under the new law, for example, homebuyers will have to provide proof of income when applying for a mortgage. Additionally, a new consumer protection apparatus will monitor lenders who offer subprime loans and then raise interest rates to sky-high levels.
The legislation - which will bring openness to complex financial instruments such as derivatives - passed 59 - 31 and provides a way to liquidate financial institutions once viewed as too big to fail. It also establishes a council of regulators who will monitor threats to the economy and specific restraints on the derivatives trading, which set off the toxic debts that froze the credit markets and prompted the Federal Reserve to make trillions of dollars of loans to banks on the brink of collapse.
The vote hands President Obama his second landmark legislative victory this year, following the March passage of his historic health-care bill. “Our goal is not to punish the banks,” he said hours before the final vote, “but to protect the larger economy and the American people from the kind of upheavals that we’ve seen in the past few years.”
Senate Majority Leader Harry Reid (D-NV) summed up the legislation: “When this bill becomes law, the joyride on Wall Street will come to a screeching halt.” The reconciled bill is expected to hit President Obama’s desk for his promised signature this summer.
Tags: Barney Frank, Christopher Dodd, Consumer Financial Protection Agency, derivatives, Federal Deposit Insurance Company, Federal Reserve, financial meltdown, financial reform legislation, Harry Reid, House Financial Service Committee, house of representatives, President Barack Obama, reconciliation, subprime mortgages
Posted in Economics, Financing | No Comments »
Wednesday, June 3rd, 2009
It’s no surprise that investors are still wary of investing in derivatives, given the financial devastation that these vehicles’ collapse caused last year. Proof of the fact is that the IPO of a financial instrument designed to be on American home prices failed because its auction did not generate adequate investor interest.
According to its Securities and Exchange Commission filing, MacroMarkets turned down all auction bids because there was an “insufficient demand for an equal number of Down and Up shares”. In other words, MacroMarkets was forced to abandon the auction process because the offering would work only if there was an equal number of shares in both the “up” and the “down” trusts - and if each pair of shares totaled $50. The firm had initially set a minimum closing investment pool of $125 million, though CEO Sam Masucci did not disclose the value of the bids received before pulling the plug.
MacroMarkets sought out investment from homebuilders and banks who want to hedge their housing exposure, as well as foreign investors seeking a stake in U.S. real estate. The problem is that investors had difficulty valuing the shares because it meant predicting the movement of the 10-city index on which the offering was based. That’s not easy in a housing market where prices may not have bottomed out yet.
When housing trusts eventually restart, their shares will trade under the symbols UMM for “up” and DMM for “down” on the NYSE Arca, the New York Stock Exchange’s all-electronic U.S. trading platform.
Tags: auction, auction bids, banks, derivatives, DMM, Down and Up shares, financial devastation, financial instrument, foreign investors, home, home prices, homebuilders, housing exposure, housing market, housing trusts, interest, investing, investment, investment pool, investor, investors, IPO, MacroMarkets, New York Stock Exchange, NYSE Arca, Sam Masucci, Securities and Exchange Commission, UMM, US real estate, US trading platform, value
Posted in Economics, Financing | No Comments »