#235 hedgefunds & derivatives

I read about hedgefunds and derivatives needing more regulations on US news.

However I do recall in February of 1995, the Barings Bank founded in 1762 in Britain was bankrupted by a rogue trader who was then posted to Singapore to manage its securities arm of the bank. He speculated on some derivatives contracts that left a $1.4 billion hole in Barings balance sheet that brought its demise — the merchant bank that once financed the Napoleonic Wars, Louisiana and Erie Canal and was Queen Elizabeth’s personal bank.

Why were these instruments still in the market since?

Why did those American financial institutions rationalise in support for such instruments that had brought the demise of a 233-year-old merchant bank in 1995?

Is this one reason that created the financial blackhole which cause this global economic meltdown?

#234 thot-provoking

I read this piece on blog ‘a baseline scenario’ written by Sanjiv Gupta for Huffington Post (?) dated on 10 March 2009 under the title — The Change We Need I: A Bank for America — :

 …Rather, I want to use the crisis in our financial system to pose a fundamental question about our political system.

Consider: What is democracy?

We normally think of democracy in terms of some essential, precious rights not available in any other political system, not the least of which are the right to vote that made Obama President, and the right to express ourselves freely on websites like this one.

But now we’re compelled to ask: What does democracy mean when our lives can be so drastically affected by the Market, in which the most powerful players are people we haven’t elected, and institutions in which most of us have little say?

When the Market, an entirely human creation, can ruin us as effectively as a hurricane, sweeping hundreds of thousands of us from our homes, destroying the livelihoods of millions more, and washing away the retirement security of an entire generation?

When the actions of organizations wholly unaccountable to us can imperil our public libraries, parks, fire departments, and schools? When many of our elected representatives have facilitated these actions instead of protecting our interests?

If there is a positive side to the financial crisis, it is this: We can no longer avoid confronting the limits of our democracy when our lives and communities are thrown into such violent disarray by individuals and organizations so completely outside our reckoning. (3)

It is this same crisis, moreover, that points the way toward a more complete democracy, one in which we will have greater control over the financial system. That is because the core of any government strategy to rescue this system will be — and already has been — a massive injection of our money into it.

If we’re going to pay to save the financial system, we have the right to shape its future.

Banking and credit are the economy’s air and water. They’re too important to be left entirely to private operators whose only concern is maximizing short term profits. Yet even the most ardent mainstream proponents of nationalization assume that once this crisis passes, the government should, and will, re-privatize any financial institutions it takes over.

What then? What is to prevent these organizations from continuing to invent ever more destructive “financial weapons of mass destruction?” (4) Will they be any more accountable to us after the next cycle of boom, bubble and bust?

It is time we considered the possibility of permanent public ownership and control of a large part of the nation’s system of savings and lending.

How might this work? One way is the creation of a national public bank along the lines of a credit union. Credit unions are owned not by shareholders but by their depositors, or members. We would own a national credit union in which all of us could be members.

A national credit union would combine our deposits into a huge pool of capital to lend, invest, and do all the other things banks do. Crucially, we would exercise far greater control over such a bank than we ever could over institutions like Bank of America. Credit union members vote for their board of directors. Unlike private banks, in which the greatest influence is exercised by those with the largest number of shares, every member enjoys the same voice in a credit union — one depositor, one vote.

Would a national credit union be competitive with large private banks? Like existing credit unions, it would return profits directly to us in the form of favorable interest rates for loans and deposits. For example the typical yield on certificates of deposit at the largest credit union in my area is about one percent higher than Bank of America’s, and the yield on its best checking account is over 4%, compared to less than 1% for BoA. (5)

A national bank structured along these lines may also be safer than large private banks. Credit union managers are salaried employees who earn wage increases rather than exorbitant bonuses for good performance, which reduces their incentive to take wild risks with members’ money. This would not by itself guarantee the stability of a national credit union, but its managers and directors would at least be accountable to us if things went wrong.

This is just one way the government could use our money to create a national public bank; there are other possibilities. (6) Whatever its specific form, a permanent national bank could compete with private banks and demonstrate the benefits of a financial institution owned by, and accountable to, the people.

At stake here is not solely or even most importantly the stability of our banks; rather, it is the very character of our democracy. A large, public financial sector could be a critical piece of a new democracy in which we cannot be held hostage by organizations over which we have no control. In this new democracy, the heresy would be not the notion of public ownership of financial institutions, but rather the idea that these institutions should exert so much power over our lives without being accountable to us.

Let us use this crisis to move ourselves in the direction of such a democracy. Let us demand that the government use our money not merely to bail out Bank of America but to create a new Bank for America.
NOTES

…3. Simon Johnson, ex-chief economist at the IMF and currently at the MIT Sloan School of Management, has been one of the few mainstream commentators to correctly identify the financial meltdown as not just an economic crisis but a deeply political one. “This is, after all, a critical fight to save American democracy, and it’s good to know what we are up against.”

4. This is the now famous formulation of Warren Buffett in his 2002 letter to investors in his mutual fund (p. 15).

5. One reason this credit union may be able to offer better rates is that membership in it is open only to employees of the local educational institutions. This may be a more stable base of depositors than most private banks like BoA, and translate into better rates. This could be a problem for a large national bank open to all.

6. Gerald Epstein, an economist at the University of Massachusetts-Amherst, advocates a reversal of the proposal that the government should detoxify bank balance sheets by buying their bad assets. “A much better approach is to turn the formula on its head. Let the taxpayers keep the good banks and leave the bad ones for the bankers…And the bankers will have to deal with their own mess, rather than foisting it off on the rest of us.” With the new good banks, the government could create “a completely different banking environment, one with a completely different mandate and incentives” and considerably greater public accountability.

#228 transparency

There was so much talk about transparency in corporate managment and in politics…today, news revealed there was NO transparency at all. If there were, it was selective transparency. As a matter of fact, there were lots of cover-up!

The latest: bonuses given to top executives at Merrill Lynch on the quiet! The bargain to pay out bonuses were kept for these top earners yet staff were axed and investors lost their hard-earned money!  Where is integrity? Where is honesty? Are the consciences of these top executives seared?!?

This recession is a revelation of sheer lack of transparency in every aspect of life! It is not just greed but lacking in integrity and honesty!

How could banks and corporations chalked up so much deficit that cause a downward spiral on the world economy? These were kept out of the public in annual reports.

Were there concerted efforts among the professionals involved — accountants, lawyers and others — to deceive the public, without mentioning those in governance! All those mutual back-scratching and deception…haha…the truth is out there!

#207 who do you trust?

Having money is a problem these days. Putting money in the bank is no consolation either.

You lose your hard earned cash when a financial institution collapsed. I was told you could file for misrepresentation — that the profile of products bought did not suit the personality of one. How does this work?

The high turnover of officers serving you in the banks leaves one insecure and lacking continuity especially for the smaller or new savers. 

Why the high turnover of bank officers? The officer has to perform, otherwise the manager will be breathing down his neck daily. Should he not perform according to portfolio, the officer is shown the exit. If he did well, he was rewarded handsomely.

The latest news: Iceland is a country that is going bankrupt! What does that mean? Will those who had savings in the banks see these evaporate?

#205 economic crunch

This is an average Singaporean trying to understand that said by our leaders.

Any average young in the workforce can tell there will be job losses without the finance minister making that pedantic remark on economic crunch.

What concerted effort and plan to lift us out of the economic crunch or job creation?

Commercial property rentals will continue to increase after each of 2-year contract regardless of the crunch. Can one continue with retail business?

Though salaries increase annually but the increases suck out that earned!

The recent increase of fares on public transport…though legitimate as oil price had gone up but the increase made earlier in the year was not considered and users of public transport were made to bear the hike?!

Mr Tharman said: “I can assure you that our Singapore banks are well regulated and there is no risk and no reason whatsoever to have a run on our banks. More importantly, the banks themselves have good risk management.

“So frankly, you need not worry about how solid our banks are, your money is safe. We are not in the same situation as the US, we need not panic.

“Our regulations are stricter compared to Ireland, the United States, in fact compared to many developed countries. We have always been old-fashioned in our regulatory approach.”

The minister added that Singaporeans can have the same confidence in insurance companies, which also have to abide by strict regulations.

What about those who lost their investments on mini-bond products sold by Lehman Brothers? Do these financial institutions not abide by the strict regulations of Singapore?

As a regulator of these financial institutions there is no guarantee to losses of funds invested in times of liquidation — only prosecution of those scoundrel bankers! In this case, scapegoats will be prosecuted!

#200 spend first pay later

‘Spend first, pay later’ — was the slogan to attract the use of credit cards.

Living on borrowed money was the vogue for the past 40 years conservatively. Instead of regarding this as debt, it was sugared as ‘credit’.

There was a time when it was regarded smart to travel first — to enjoy life first — then pay back later! Many were caught in this and eventually led some to loansharks which spiral into deeper debts and sufferings.

However in the West, this personal credit debt is now beyond control!

While it seems expedient to solve a person’s dilemma on short term but for long term, this means accumulated debts, eventually calling for personal bankruptcy when a person cannot pay up!

Does this mean the banks write-off these debts?

What does it mean for the person going on bankruptcy for short period? What does bankruptcy do to one’s reputation?

Is this one cause that has led the banks to the point of no return today?

Apparently in the US, foreclosures of small banks were common phenomenon. Many on the international scene were not aware that happened on the domestic front.

Is this financial crisis in the US the result where bigger banks are unable to resolve their crunch? Am I too simplistic? Or is there something more sinister?

#198 bail-out plan?

What if there were no bail-out for those scoundrel and irresponsible investment banks? How will this financial quake affect the US and the world economy?

Why such jittery around the world?

According to some pundits, if there were no bail-out, this will filter every aspect of life and economy in the US! 

Was there no regulatory controls for these financial institutions?

It appears those investment banks that offer security bonds are really not secured bonds. If one were to play in stocks and shares market, at least there was some way of retrieving part of the money.

However with Lehman Bros declared bankruptcy, all those who invested with them their hard-earned cash in the name of security bonds have just disappeared into thin air?! This IS not fair!

Is there a way of bringing those managing the financial institutions to court and hold them  answerable for decisions made? Surely they must be fully aware of that happening within the bank for some time now! Why was there no curb? Where is the creditability of the American investment banks? Can we trust these so-called security bonds products in the financial market?

Can one not smell this happening from the annual reports? Or this was so well-covered up by the auditors that even the staff do not know that happening within the institution? If so, dare we trust any of those reports that we receive!

Who should we trust our hard-earned money to in future (i.e. if there was a future…)? Will it not be better if we kept these under our pillow?!