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Nov 30, 2007

Banks may freeze ARMs as sub-prime aid measure

Treasury Secretary, Fed and leading banks and lenders of sub-prime loans are reportedly working on some plan to extend the teaser rates on mortgages which were scheduled to be reset at higher levels in the coming months. Till now no formal agreement has been reported but things are expected to be made public by next week.

Treasury Department spokeswoman Jennifer Zuccarelli said; “We’ve all agreed that there should be some sort of standardized approach to reaching more homeowners faster,...”


Earlier Federal Reserve Chairman Ben Bernanke has hinted of another cut in interest rate to prevent economy from recession.


Recently a magazine reported Treasury Secretary Henry Paulson’s remark "We'll have broad agreement on criteria that will make it easier to modify mortgages in the volumes we need,...".


This comes at a stage when the foreclosures in this year have already reached about double of last year. A increase in the period with teaser interest rates will provide relief to the home loan takers who may find difficult to pay the increased installment.

Probably in the meeting the concerned authorities may be figuring out a mechanism to selectively give the interest rate rebate to those with good repayment history.


The parties attending the meeting were Treasury Secretary, Fed regulators, officials from OTS (Office of Thrift Supervision), bank executives from Citigroup, JPMorgan Chase & Co., Wells Fargo & Co.’s amongst others.


According to an estimate, about 2 million house owners whose rates are going to be reset and may face foreclosures in 2008 if defaulted.

World's most costly / expensive cities in 2007

According to a survey done by Mercer, the leading HR consulting firm, across 143 countries of the world comparing the cost of over 200 items including basic items like housing, food, clothing etc. the top 10 most expensive cities of the world are:

March, 07 March, 06 City Country March, 07 March, 06
1 1 MOSCOW Russia 134.4 123.9
2 5 LONDON United Kingdom 126.3 110.6
3 2 SEOUL South Korea 122.4 121.7
4 3 TOKYO Japan 122.1 119.1
5 4 HONG KONG Hong Kong 119.4 116.3
6 8 COPENHAGEN Denmark 110.2 101.1
7 7 GENEVA Switzerland 109.8 103
8 6 OSAKA Japan 108.4 108.3
9 9 ZURICH Switzerland 107.6 100.8
10 10 OSLO Norway 105.8 100

The rightmost columns list the cost of living index relative to New York, US as base with 100 points. Mercer has ranked 50 cities and the complete list can be accessed at their website(link given below in source).

Source: Mercer

Nov 29, 2007

Top 10 financial cities of the world

The top 10 financial hubs of the world according to a survey by Mastercard in June 2007. The ranking was based on six parameters: Financial flows, ease of doing business, economic stability, legal and political framework, volumes of business, and knowledge creation and dissemination. The ranking was given to 50 cities, the top 10 list goes like this...


Rank

City

1

London

2

New York

3

Tokyo

4

Chicago

5

Hong Kong

6

Singapore

7

Frankfurt

8

Paris

9

Seoul

10

Los Angeles


Source: City Mayors Economics

Nov 28, 2007

FINRA imposes fine of $300k on Wachovia Capital Markets

The Financial Industry Regulatory Authority (FINRA) has censured and fined Wachovia Capital Markets LLC, a division of Charlotte-based Wachovia Corporation, with $300,000 for violation of FINRA's research analyst conflict of interest disclosure.

"This case strikes at the heart of FINRA's research-disclosure program, which was put into place in 2002 in part to combat incentives that could lead to biased research," says Susan Merrill, FINRA executive vice president and chief of enforcement."These critical reforms require firms to provide investors with information about actual and potential conflicts of interest that could influence analysts' conclusions about investing in publicly traded companies. Wachovia failed to ensure that certain of its research reports contained this vital information."

Source: The press release can be accessed at :2007NewsReleases/P037532

For more information, please visit www.finra.org.

About FINRA:

The Financial Industry Regulatory Authority (FINRA) is the largest non-governmental regulator for all securities firms doing business in the US. FINRA watches over about 5,100 brokerage firms, 174,000 branch offices and more than 675,000 registered securities representatives.

It was created in July 2007 through the consolidation of NASD and the member regulation, enforcement and arbitration functions of the NYSE. It has approximately 3,000 employees and operates from Washington, DC, and New York, NY, with 15 District Offices around the country.

"The creation of FINRA is the most significant modernization of the self-regulatory regime in decades," said Mary L. Schapiro, Chief Executive Officer of FINRA. "With investor protection and market integrity as our overarching objectives, FINRA is an investor-focused and more streamlined regulator that is better suited to the complexity and competitiveness of today's global capital markets."

Nov 27, 2007

US subprime crisis: Can 2 million homeowners be rescued?

About seven hundred thousand houses in US had to undergo foreclosure in 2005 and this year the figure is likely to double. Even more the size of the ARM which is expected to get reset in next eight months is about 600 billion and includes some 2 million houseowners.

The foreclosures and home-mortgage defaults are likely to cause more pain in US because a lot of mortgages will be having the expiry of the freedom period (interest only), and teaser rates (initial low rates). The payment on these mortagages may rise considerably and lead to higher defaults. According to Bank of America $362 billion ARM is up for reset its interest rates. But this is not the only reason. According to a report by Wall Street Journal many subprime loans went bad during their initial periods.

“…While many accounts portray resetting rates as the big factor behind the surge in home-loan defaults and foreclosures this year, that isn't quite the case. Many of the subprime mortgages that have driven up the default rate went bad in their first year or so, well before their interest rate had a chance to go higher...”

{Teaser rate is a reasonably low interest rate in the starting, which is increased after a set period, generally 2 years. An example of a teaser rate is a rate of 6.5% which rises to 9.5% after two years.}

Adding to the pain is the crash of housing market due to which the value of property has reduced drastically leaving many borrowers and house owners with a loan amount more than the value of their property.

How can the situation be controlled?

The situation is getting out-of-control by the time. Though Fed has reduced the interest rates, its effect is not significant. The country’s money supply is squeezing and dollar is degrading. Injecting more money supply into the system, lowering interest rates further may help solve the situation, but in the long run better regulatory measures are required to prevent or identify any kind of uncontrolled activities in the economy early to limit the damage. Big banks can recover from billions of write-offs in their balance sheet but what about a normal person who has lost all his/her life’s earnings including his house. It’s a very urgent matter and needs to be dealt with immediately to control the extent of damage.

Nov 26, 2007

Banks in Japan, Japanese Mega Financial Groups

There are 12 major banks in Japan (not in any order) are:
  • Mizuho Bank,
  • The Bank of Tokyo-Mitsubishi UFJ,
  • Sumitomo Mitsui Banking Corporation,
  • Resona Bank,
  • Mizuho Corporate Bank,
  • Saitama Resona Bank,
  • Mitsubishi UFJ Trust and Banking Corporation,
  • Mizuho Trust and Banking Company,
  • The Chuo Mitsui Trust and Banking Company,
  • The Sumitomo Trust and Banking Company,
  • Shinsei Bank,
  • Aozora Bank

Besides these, there are about 110 regional banks and many shinkin banks(cooperative banks).

The 'Bank of Japan' is the central bank of Japan. It is also a juridical body and is not a government agency or a private corporation.

Japanese banking sector is under consolidation since 1990s. The number of regional banks and shinkin banks has declined gradually while the size of banks has increased. There are three financial groups which are very large and are often known as Mega groups.

Three Japanese Mega Financial Groups (Big Three Megabanks)
  1. Mizuho Financial Group
  2. Mitsubishi UFJ Financial Group
  3. Sumitomo Mitsui Financial Group.

Top 10 banks in India by market capitalization

The top 10 banks in India by market capitalization (on Nov 26, 2007) are:

Rank Company Name Type Market Cap. billion INR Market Cap. billion USD
1 ICICI Bank Private 1287 32.4
2 SBI Public 1180 29.7
3 HDFC Bank Private 581 14.6
4 Kotak Mahindra Private 393 9.9
5 Axis Bank Private 335 8.4
6 PNB Public 189 4.8
7 Bank of India Public 165 4.2
8 Bank of Baroda Public 132 3.3
9 IDBI Public 118 3.0
10 Canara Bank Public 110 2.8


Source: http://www.moneycontrol.com Public Sector Banks and Private Sector Banks


INR-Indian National Rupee; USD-United States Dollar

The ‘type’ column shows that the bank is in public sector or private sector.


The logos of the above mentioned banks are:

IIMK goes live via "iimklive.com"

[Off-track News]
The student community at Indian Institute of Management Kozhikode, India recently launced a portal to share their experience and opinions with the entire student community and prospective MBAs. According to iimklive.com

The students of IIMK have long felt the need of a dynamic website which is maintained by the student community - a site which can help students network with each other, showcase the vibrant student life on campus and the portray the commitment of the Institute to academic excellence.

The portal has various communication facilities like blog, forum, gallery and was launched keeping in mind the knowledge sharing culture at IIMK.
Source: http://iimklive.com

Nov 25, 2007

Biggest Treasury Scam and Salomon Brothers

About Salomon Brothers: Salomon Brothers & Co. was formed in January, 1910 as a partnership of three brothers – Arthur, Herbert, and Percy; and a clerk, Benjamin Levy. They continued their father’s business of money brokerage with great ambition. But, the firm faced capital crunch and in the same year, April month it merged with Martin Hutzler & Co. It was later acquired by the commodity trading firm Phibro Corporation. The joint company was named at Phibro-Salomon and then Salomon Inc. and the commodity operation were sold. Its greatest dominance came in 1980s when it became known for many innovations in Bond market and created the first “mortgage-backed security”. With time, it became the largest issuer and trader of bonds in the United States. Its dominance can be judged by the fact that in those days a bond was called liquid if it was traded by Salomon brothers.

But, the turning point for which company got so much of media attention came in 1991, when the treasure scam done by company got exposed. By this year, Salomon Brothers had taken control of the U.S. Treasury Bond market. Firm became one of the selected groups of buyers allowed to bid on government securities in the primary market. The securities purchased in the primary market were then sold to general public in secondary market. In order to ensure competition and fairness in primary market, federal regulations prohibited individuals or firms from purchasing more than 35 percent of any bond issue. On three separate occasions, however, Salomon traders exceeded the limit by unethically using the names of its clients for submitting fraudulent bids. Client’s name was used for the bidding without their authorization, cornered the Treasury bond market and firm illegally made millions of dollars of profit.

The scandal involved billions of dollars of illegal bids in the multi trillion-dollar Treasury market. By making such bids, Salomon was able to exert unusual control over the marketplace. But, soon the head of bond-trading desk at Salomon Brothers, Paul W. Mozer, was accused of manipulating the bidding at government auction of Treasury securities. The civil suit, brought by the Securities and Exchange Commission, accused two former managing directors, Paul W. Mozer and Thomas F. Murphy, of falsifying the details and improper bidding for Treasury securities. The then CEO, Mr. John H. Gutfreund and the firm’s president, Mr. Thomas W. Strauss, announced their resignation on account of not taking prompt action even after getting to know in April about the one of the unauthorized bid at a February Treasury auction.

The encouragement of reckless trading culture at the investment firm led to commitment of fraud and constituted a breach of public trust of the most serious kind. It cost Gutfreund his job and Salomon Brothers its independence, almost putting the firm out of business. The scandal is covered extensively in the book Nightmare on WallStreet.

Nov 24, 2007

US Top 10 Commercial Banks and Savings Institutions

The top 10 US banking institutions based on the total deposit amount as on June 30, 2007 are:

Rank Name Deposits
1 Bank of America, NA 596
2 JPMorgan Chase Bank, NA 440
3 Wachovia Bank, NA 315
4 Wells Fargo Bank, NA 264
5 Citibank, NA 210
6 Washington Mutual 203
7 SunTrust Banks 114
8 U.S. Bank, NA 113
9 Regions Bank 88
10 Branch Banking and Trust Company 84



The amount of total deposits is in billion US Dollars.

Source: FDIC (Federal Deposit Insurance Corporation)

Official Logos of top banks:


Bank of America




JPMorgan Chase Bank




Wachovia Bank



Wells Fargo Bank




Citibank




Washington Mutual



SunTrust Banks





U.S. Bank





Regions Bank




Branch Banking and Trust Company

How deep is Japan in subprime mess?

According to an estimate by Japan’s Financial Services Agency (FSA) Japanese financial institutions have lost over 230 billion ¥ (Yen) or about 2 billion dollars this fiscal half year because of degradation of the US sub-prime investments. This is about 17% of its total exposure of 1.3 trillion ¥ ($12 billion) in the securitized instruments as of September 2007.

Official estimate by the Japanese financial supervisors on the impact of US sub-prime crisis and came after the Japanese largest financial lender Mitsubishi UFJ Financial Group reported its half yearly results. FSA had surveyed 575 financial institutions in Japan primarily to gauge the extent of sub-prime related exposure and its impact of their performance. These included 10 major banking groups, 110 regional banks and a total of 455 cooperative financial institutions.

Out of the 1.3 trillion Yen exposure 1.2 trillion is to the top 10 banking groups. According to Nikkei, Japan's leading six banking groups are likely suffer a total loss in excess of 300 billion yen ($2.75 billion) due to bad debts originating from the slump in the U.S. housing market. Regional banks were less affected. They were hit by about 15 billion yen loss.

The six leading lending institutions of Japan are:
  1. Mitsubishi UFJ Financial Group
  2. Sumitomo Mitsui Financial Group
  3. Mizuho Financial Group
  4. Sumitomo Trust & Banking
  5. Resona Holdings
  6. Mitsui Trust Holdings

The above six banks have written-down 115 billion yen ($1.1 billion) as bad debt. All of these, including, the top three banks, which are also known as megabanks, have shown a decline in profit so far this year.

Mitsubishi UFJ Financial Group Inc., Japan's largest bank, has reported a loss of 260 billion yen in subprime mortgage related investments. The exposure of Mizuho, Japan's second-largest bank, is about 800 billion yen in the US mortgage-linked securities as of the end of September. 575 Japanese banks and credit unions held subprime-related products worth $1.2 billion in book value and recognized $985 million in unrealized valuation losses.

Yoshimi Watanabe, Minister of State for Financial Services and Administrative Reform, said at a briefing in Tokyo:
"In response to this market turbulence, we will pay due attention to the status of risk management by financial institutions and the conditions of financial markets from a wide range of standpoints, while cooperating with other authorities in Japan and abroad."

According to Seiji Nakamura, a policy board member of the Bank of Japan, :
"We need to watch closely if the subprime problem will affect the global economy and if there will be a spillover effect on the Japanese economy,"

Nov 23, 2007

Warren Buffett : greatest investor

Warren Edward Buffett is unarguably one of the most successful investors of all time. He is a firm believer of the value investing.

Buffett is the third richest person in the world as per the Forbes magazine ranking of September, 2007. His wealth is estimated to be more than $52 billion. Some people call him "Sage of Omaha" or "Oracle of Omaha".

During his Masters degree in economics at Columbia University he studied under Benjamin Graham, the value investor guru. Two other famous value investors - Walter Schloss and Irving Kahn also studied during the same time under Graham.

He is perhaps the biggest financial donator and has committed more than $25 billion. Much of it will be going to the Bill and Melinda Gates Foundation. The foundation is formed by his friend and the world’s richest person Bill Gates.

Recently people started losing faith in Buffett & value investing because of the dot-com bubble and Buffett’s decision to be away from the information technology stocks. His conservative investing style made him miss a big opportunity. But the dot-com crash once again proved that Buffett's strategies are best in long term.

Some of the famous quotes from Mr. Buffett are presented below.

His views on investing:

If you have a harem of 40 women, you never get to know any of them very well.

You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.

Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.

The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price.

Risk can be greatly reduced by concentrating on only a few holdings.

Be fearful when others are greedy and greedy only when others are fearful.

It is optimism that is the enemy of the rational buyer.

An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business.

His views on people:
In evaluating people, you look for three qualities: integrity, intelligence, and energy. If you don't have the first, the other two will kill you.

Alan Greenspan: ex-chairman US Federal Reserve

This is first article of the series of some of the famous people in the financial world. Below is a brief introduction of Alan Greenspan.


Alan Greenspan is the former Chairman of the US Federal Reserve Board of Governors.

His tenure at Fed lasted 18 years from 1987 until early 2006. He was appointed five times during this period. He was successively appointed by four US presidents: Ronald Reagan, George H.W. Bush, Bill Clinton and George W. Bush

During his tenure as Fed’s chairman, he was regarded as one of the most powerful financial men in US. Even today he is thought by many as having considerable influence over economic affairs.

He is known for his policies on keeping inflation in US at historically low levels. But, he is disapproved by many people for focusing too much prices and neglecting its impact on employment. He is also criticized for the high volatility in US economy more so in the 1990s period when dot-com bubble was taking place.

He was succeeded by former Princeton economics department chair Ben Bernanke.

Nov 22, 2007

200 billion dollar firms of India

According to an article in Economic Times, the number of firms having market capitalization of more than 1 billion dollar have crossed the two hundred mark in November 2007. Last year in April 2006 India had 100 firms with billion dollar plus market capitalization. The significant increase in the number of billion dollar firms is due to the bull run in the Indian stock market. The Sensex, 30 stock index, of Bombay Stock Exchange(BSE) of India has grown by more than 50% in a period of last one year. FII's contribution in this bull run is dominant like any other emerging markets. With a high growth rate of 9% the India Inc. is attracting lot of investment esp. in the stock markets.

Reliance Industries Ltd., India's largest listed company, has market capitalization of 3804 billion INR ($96.3 billion) as of 22 Nov, 2007. There is still a long way to go to catchup with the global giants.

Read more on this at Economic Times.

Oil price struggles to touch $100

Oil prices are closing in towards the triple digit figure of $100 per barrel. The $100 is a very strong psychological barrier and the prices may move swiftly in either direction once this level is crossed.

The US light crude hit an all time high of $99.29 per barrel on Tuesday. This was in anticipation of the reduction in inventory level in Wednesday’s announcement. Also, there was fire at two US refineries.

The oil prices have risen by more than 40% this year from $61/barrel. Much of this increase can be attributed to the weakening dollar and concerns for supply of oil. Markets are adjusting for the future risks of US attacking Iran.

High oil prices are having an adverse impact on Asian economies importing oil.

King Abdullah of Saudi Arabia said "Oil is energy for building and prosperity, it shouldn't become a means of conflict". Saudi Arabia is the biggest oil producer in the Organisation of the Petroleum Exporting Countries (OPEC). OPEC has a share of more than 40% in oil exports.

Nov 21, 2007

What are hedge funds?

Hedging means reducing risk of adverse price movements in a security generally by taking an offsetting position in a related security. So, essentially hedging leads to lower risks.

The term "hedge" was coined by the agriculture industry and farmers were the first "hedgers". They hedged the risk of losing their agricultural produce. Insurance is also a type of hedging method.

A Hedge Fund is fund which can take advantages of any of the hedging strategies, trade in any financial instrument, but produce above average gains at reduced risks. A hedge fund is genrally expected to have positive returns under all market conditions.

Timeline of Hedge Funds
In 1949: Alfred Jones started first hedge fund in the US
In 2005: USD 1 trillion industry with 9,000 Hedge Funds
Oct 2007: Hedge Funds: 2.5 trillion USD

By some estimates the size of Hedge Funds industry has crossed 3 trillion dollars. This is huge when we consider the fact that the total domestic market capitalization of all the stock markets of the world is less than 60 trillion dollars and that of NASDAQ is 4 trillion dollars.

Nov 20, 2007

World's top paid executives

The top 10 CEOs in the world ranked on the basis of the compensation package are:

Rank CEO's Name Company $ m Age
1 Steven P Jobs Apple 647 52
2 Ray R Irani Occidental Petroleum 322 72
3 Barry Diller IAC/InterActiveCorp 295 65
4 William P Foley II Fidelity National Finl 180 62
5 Terry S Semel Yahoo 174 64
6 Michael S Dell Dell 153 42
7 Angelo R Mozilo Countrywide Financial 142 68
8 Michael S Jeffries Abercrombie & Fitch 115 62
9 Kenneth D Lewis Bank of America 100 60
10 Henry C Duques First Data 98 63

Source: Forbes Magazine

World's richest people

The top 10 richest people of the world according to Forbes magazine as on Mar 2007 were:
Rank Name Citizenship Age Net Worth ($bil)
1 William Gates III United States 51 56
2 Warren Buffett United States 76 52
3 Carlos Slim Helu Mexico 67 49
4 Ingvar Kamprad & family Sweden 80 33
5 Lakshmi Mittal India 56 32
6 Sheldon Adelson United States 73 26.5
7 Bernard Arnault France 58 26
8 Amancio Ortega Spain 71 24
9 Li Ka-shing Hong Kong 78 23
10 David Thomson & family Canada 49 22

Source: Forbes

Nov 19, 2007

Top 10 stock markets by capitalization

The top 10 biggest stock markets in the world when ranked on the basis of the market capitalization of all the shares of the domestic companies is:

Market Capitalization in trillion US Dollars:

Rank Stock Exchange Oct-07 End 2006 End 2005
1 NYSE Group 16.3 15.4 13.6
2 Tokyo SE 4.6 4.6 4.6
3 Nasdaq 4.4 3.9 3.6
4 London SE 4.2 3.8 3.1
5 Hong Kong Exchanges 3.0 1.7 1.1
6 Deutsche Börse 2.1 1.6 1.2
7 BME Spanish Exchanges 1.8 1.3 1.0
8 Australian SE 1.5 1.1 0.8
9 Swiss Exchange 1.3 1.2 0.9
10 Borsa Italiana 1.1 1.0 0.8

Source of Data : World Federation of Exchanges

What are bonds?

Bonds are debt instruments that are used by government and corporate to raise money on contractual basis. Generally bonds issuer promises a regular payment of interest which is known as bond’s coupon in finance parlance. In US the period for payment of coupon is every six months. Besides coupon, generally the bond issuer also promises to payback principal at the end of a particular time known as maturity of bond. The payment at maturity is equal to face value/par value of bond.


Coupon rate is the annual coupon payment divided by the face value of the bond. Coupon yield is coupon payment divided by the market price of the coupon.


Those bonds which do not offer any coupon are called zero-coupon or discount bonds.


Bond yield is similar to interest rate which the investor wants on the money he/she is lending to the bond issuer. It is dependent on the coupon rate, maturity, and risk associated with that particular bond.

Bonds issued by government are regarded as risk-free bonds, while those issued by corporate carry some risk of default depending on the company. This risk is reflected in the bond yield requirement. The bond yield of corporate is higher than of government bond. This gets adjusted through the price of the bond. Generally, if the coupon rate is higher than the yield then the bond’s price will be higher than its face value (premium), otherwise it will set at less than face value (discount). The risk associated with the corporate bonds is classified by rating agencies which classify the bonds based on their quality.

Nov 18, 2007

UCO bank signs MOU with ICRA for credit rating

[India]

The bank loans and other exposure of UCO bank will be rated by rating agency ICRA. The grading of these exposures will help the bank to move to Reserve bank of India’s new capital ratio adequacy framework for Basel-II norms. ICRA says – “The MOU seeks to deliver benefits to the bank as well its clients. For the bank, ICRA’ credit rating would assist in implementing RBI’s new framework under Basel-II, whereas for the entity in a superior position in terms of faster loan processing and to obtain competitive credit terms from the bank.”

Nov 17, 2007

World's top 10 IPO markets 2007

The top ten stock exchanges on the basis of amount of funds raised through IPO this year till Oct 07 are:

RankExchangeCountry2006
Rank
1NYSE GroupUS3
2Shanghai SECHINA9
3London SEUK1
4Colombia SECOL

5Sao Paulo SEBRA
6Hong Kong Exchanges HK2
7NasdaqUS5
8BME Spanish Exchanges SPA6
9Australian SEAUS8
10Bombay SE INDIA

Those Stock exchanges which were not in top 10 in 2006 ranking are left empty in the 2006 Rank column.

The amount of IPO activities(million US Dollars) in these exchanges in past three year were:

ExchangeJan - Oct 0720062005
NYSE Group530613713044116
Shanghai SE3959711818349
London SE384045580731169
Colombia SE38034195598
Sao Paulo SE2855260412029
Hong Kong Exchanges 261294297221291
Nasdaq136221737512193
BME Spanish Exchanges 13075146637771
Australian SE126021287718050
Bombay SE 871356011319

Source : World Federation of Exchanges (WFE)

Nov 16, 2007

Financial institutions sub-prime writedowns

Update(2) November 16, 2007

Announced Write-downs


Bank Billion USD
CITIGROUP 13.5
MERRILL LYNCH 8.4
MORGAN STANLEY 4.6
BANK OF AMERICA 3.8
U BS 3.7
HSBC 3.4
DEUTSCHE BANK 3.2
WACHOVIA 2.3
CREDIT SUISSE 1.9
BEAR STEARNS 1.9
JP MORGAN CHASE 1.6
GOLDMAN SACHS 1.5
LEHMAN BROTHERS 0.7
COUNTRYWIDE 0.7

Goldman Sach indicates US's lending to go down by $2t, Bank's credit loss could cross $400b

Goldman Sachs chief US economist Jan Hatzius said that "back-of-the-envelope" calculations indicate the loss for US banks to be more than $400 billion. Earlier this week Germany's biggest bank, Deutsche Bank, had also estimated the losses in the range of $300b - $400b. Jan also predicted decrease in the lending by $2 trillion because of the sub-prime crisis. In his report 'Leveraged Losses: Why Mortgage Defaults Matter' said the macroeconomic implications of these losses 'could be quite dramatic' and still have a heavy impact on lending and overall economy.

``The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognized,''

``A $1 mortgage credit loss could result in a reduction in lending by significantly more than $10.''

Sarbanes-Oxley Act, SOX, Sarbox 2002

Passed in July 2002, the Sarbanes-Oxley Act has reformed the world of accounting by introducing means of ensuring transparency and full disclosure. It is officially known as Public Company Accounting Reform and Investor Protection Act of 2002. The law was enforced after a series of corporate scandals related to accounting practices came to light and shook the world. The accounting loopholes and insufficient law structure that existed before could not prevent some corporate from indulging in unethical activities. Some of the companies which were regarded as one of the world's biggest and most trusted companies like Enron, WorldCom and Tyco were found guilty of hiding or producing false information in accounts. Investors lost millions of dollars and their assurance was taken aback. To bring faith in the system Congress passed this act to improve the accuracy and reliability of corporate disclosures.

The act was named after its sponsors Senator Paul Sarbanes and Michael G. Oxley. This act empowered Securities and Exchange Commission(SEC) to be able to act in the interest of the investors, protect whistleblowers and severely punish the law breakers. SOX made it mandatory for the public companies to make their financial statements more transparent, authentic, and certified by an officer.

Some of the features of SOX are:
  • All business records must be retained for at least 5 years.
  • CEOs and CFOs should sign on their companies’ financial reports (legally responsible)
  • CEO’s and CFO’s compensation and profits must be disclosed.
  • More stringent punishment for intentionally misstating financial statements .
  • Internal audits and its certification by outside auditors made necessary.
  • Audit firms should not have any other engagement with company like consulting.
  • SOX 404 compliance: For publicly traded companies- establish internal financial controls and get them audited annually. Costs for this is in millions of dollars for big companies.



Excerpts from SOX:

Sec. 802(a)
"Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both."

Sec. 802(a)(1)
"Any accountant who conducts an audit of an issuer of securities to which section 10A(a) of the Securities Exchange Act of 1934 applies, shall maintain all audit or review workpapers for a period of 5 years from the end of the fiscal period in which the audit or review was concluded."

Sec. 802(a)(2)
"The Securities and Exchange Commission shall promulgate, within 180 days, such rules and regulations, as are reasonably necessary, relating to the retention of relevant records such as workpapers, documents that form the basis of an audit or review, memoranda, correspondence, communications, other documents, and records (including electronic records) which are created, sent, or received in connection with an audit or review and contain conclusions, opinions, analyses, or financial data relating to such an audit or review."

Nov 12, 2007

Nick Leeson and late Barings bank :)


The Britain’s oldest merchant bank, Barings bank, had financed the Napoleonic wars, the Louisiana purchase, and the Eire Canal and Queen Elizabeth’s personal bank. Once one of the biggest banks, it grabbed attention of the world in 1995 for the action of a single trader from the small office in Singapore.

Nick Leeson joined Barings bank after working with Morgan Stanley for short period. His work on clearing the mess in Jakarta was highly appreciated and he was made General Manager with authority to hire traders and back office staff in Barings Securities (Singapore) Limited (BSS). After joining BSS in 1992, Leeson soon took necessary exam to trade in SIMEX (Present Singapore Exchange) along with his team of traders. Leeson and his traders got authority for two types of trading


1. Transacting futures and options orders for clients or for other firms within the Barings organization, and
2. Arbitraging price differences between Nikkei futures traded on the SIMEX and Japan’s Osaka exchange.


As a trader, Leeson had extremely hard luck. He started losing money since very beginning and increasing his bets made his position worse. By the end of 1992, he was losing GBP 2MM which increased to GBP 23MM in a year. By 1994 he had lost total of GBP 208MM and surprisingly Barings management was till unaware of this. For all such furtive trading Leeson used account number 88888. Generally neither trader, nor employer prefers to publicize the loss. But by the time the unauthorized speculative trading of Leeson was discovered, Barings bank was bankrupted after such a huge loss.


Such a staggering loss caused by Leeson speculation went unnoticed in the Barings management because of ongoing merger of two parts of Barings organisation. Barings had started forming risk management function, but Singapore went without having any risk controller. There was no single person within Baring responsible for supervision of Leeson’s activity. Baring had adopted Matrix structure in 1993 and lines of reporting were not clear most of the time.


Leeson tried every possible act to keep the management unaware of such mismanagement of funds. He falsified records, fabricated letters and concocted stories to deflect management attention, auditors and even SIMEX. A few concerns from other employee couldn’t attract attention of management and Leeson remained celebrity within Barings. He secretly kept making loss in 88888 account, but publicly recorded profit in three arbitrage accounts.


By February 1995, when the management discovered the fraud, the total loss of Barings had reached $1.4 billion. Barings was unable to meet SIMEX’s margin call and was declared bankrupt. On 3’rd March 1995, the Dutch bank, ING, purchased it for £1 and assumed all its liabilities.

Nov 11, 2007

China's bank reserve ratio may increase

According to a report by ICBC (The Industrial and Commercial Bank of China) the reserve ratio required for commercial banks can reach 15% in 2008. Currently the ratio is 13.5%, which is a ten year high. More monetary tightening is expected to follow in order to curb the inflation and deal with rising Yuan. The ratio requirement has been increase nine time in this year and has crossed the previous highs of 13% observed during mid 1998. The reserve ratio hike will suck about $25 billion from the money market and reduce the surplus liquidity.

A good analysis on the tightening measures taken by Chinese central bank and its repercussions is done Lu Jianxin and is available with Reuters.

Nasdaq to acquire Philadelphia exchange for $652m

National Association of Securities Dealers Automated Quotations (NASDAQ), New York based stock market, is acquiring the Philadelphia stock exchange (PHLX) for $652 million cash to expand into the fast-growing options trading business.

Philadelphia exchange is third largest option exchange in the US. Its majority of shares are owned by the six Wall Street firms – Merrill Lynch, Citadel Derivatives, Morgan Stanley, Citigroup, Credit Suisse and UBS. These six firms together own 89.4% stake in PHLX.

The deal is expected to be completed in the first quarter of 2008 and this takeover will boost the Nasdaq earning starting 2009.

$1 bn spending by US banks on IT for Basel II

The movement to Basel II is expected to increase the spending on risk management IT by 30% over the next two years, to exceed $1 bn in 2009 for major US banks. According to Boston-based consultancy, Aite Group the spending on IT for Basel II initiatives will increase from around $805m in 2007 to over $1 bn in 2009.


The major budget of Basel II is expected to go in integration.


As of now only larger banks are moving towards Basel II and with implementation of this norm in developing countries like India is going to be effective from next year, Banks are getting ready in a big way to get into new emerging markets.

Wachovia, Bank of America, J P Morgan Chase affected by subprime wave

Bank of America, second-biggest bank of US, has accepted that its fourth-quarter results may get affected because of chaos in the credits market. BofA had $12.8 billion in liquidity support for CDO at the end of September. $9.8 billion of these are subprime related and $2.4 billion are in CDO trading.

JPMorgan Chase, third-biggest bank of US, is likely to write down more of its mortgage holdings in the fourth quarter depending on market conditions. JPMorgan had more than $40 billion in leveraged loans and unfinanced commitments on September 30. In the third quarter, JPMorgan wrote down $1.3 billion on leveraged loans and $339 million on C.D.O.’s.

Wachovia, fourth-biggest bank of US, had declared a loss of about $1.1 billion in October on assets backed mortgages. Earlier, Wachovia had reported $1.3 billion losses and write-downs in the third quarter of 2007. Its fourth-quarter result will be hurt by uncertainty in the credit markets to the extent of about $1.7 billion. Wachovia had high involvement in CDO transactions last year.

Barclays Plc, third-largest bank of UK, is yet to declare its involvement in the sub-prime mortgage securities. It had suffered a $4 billion hit due to trading, defaults and write-downs of CDOs in the third quarter. Speculations are high on its write-downs in fourth quarter.

Fourth quarter is going to be very tough for these banks as the liquidity crunch is worsening. Moreover their other sources of revenue like investment banking fees and trading gains are also getting marginalized.

Nov 10, 2007

Natural gas price may rise

Oil prices are trading at all time high but Natural gas is priced low with respect to its highest price. Oil has risen by more than 40% this year while Natural gas is at pretty much the same level as it was last year. This should attract some Americans to use Natural gas for heating instead of oil during this winter season. Natural gas is selling at about $8 per million BTU. Seeing the increase in demand in future the prices of Natural gas may increase by some amount.

FinManAc on top ;)

Nov 9, 2007

Top 10 American Bank Holding Company

Ranked by Asset size, the top 10 American Bank Holding Company (BHC) are:

Rank

Bank

Assets on 09/30/2007 (billion $)

Assets on 06/30/2007 (billion $)

1

CITIGROUP INC.

2,358

2,221

2

BANK OF AMERICA CORP

1579

1,536

3

JPMORGAN CHASE & CO.

1,480

1,458

4

WACHOVIA CORPORATION

754

719

6

WELLS FARGO & COMPANY

549

540

7

HSBC NORTH AMERICA

484

8

U.S. BANCORP

228

223

9

SUNTRUST BANKS, INC.

176

180

10

ABN AMRO NORTH AMERICA

160


Source: National Information Center (NIC), Google Finance, Wikipedia.

NIC has also used a qualifying criteria of submission of atleast five years of FR Y-9C data and engagement in significant banking activities. For further information please visit NIC.

The financial data for the latest quarter of two banks was not available with us.