The rise and fall and rise of oil prices

The oil prices have been very volatile lately. According to the data published by Energy Information Administration, U.S., the Europe Brent spot price has touched a daily average high of $143.95 per barrel on July 3, 2007 during the bull phase and then fallen to a low of $33.73 per barrel on Dec 26, 2008. The fall from the peak has been quite steep and was triggered with the slowdown in the demand of oil owing to the economic recession and credit crunch.

The chart below summarizes the journey of the oil prices.




























Source of Data: EIA

Bear Stearns CEO steps down

James E. Cayne stepped down as chief executive officer of Bear Stearns. Though retiring from the firm he will remain on the the board of directors as chairman. Alan D. Schwartz, president of Bear Stearns, will be taking over the responsibility of the chief executive officer of the fifth largest investment bank in US.

Alan D. Schwartz joined Bear Stearns in 1976. He became executive vice president and head of the Investment Banking Division in 1985, president and co-chief operating officer in June 2001 and sole president in August of 2007.

This step is looked as an aftermath of the sub-prime crisis of which Bear Stearns was also lost over billion dollars in bad debts. Since the announcement of write-offs there has been reshuffling of major positions at the affected investments banks including Citigroup, Merrill Lynch, Morgan Stanley etc.

"Founded in 1923, The Bear Stearns Companies Inc. is a leading financial services firm serving governments, corporations, institutions and individuals worldwide. The Company's core business lines include institutional equities, fixed income, investment banking, global clearing services, asset management, and private client services. Headquartered in New York City, the Company has approximately 14,000 employees worldwide."

For additional information about Bear Stearns, please visit the firm's website at www.bearstearns.com.

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."

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.

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

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.

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."

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.