Globalization

To Whom Does American Owe Money?

2012-01-12T04:24:00.000-08:00

The American National Debt is growing faster than the debt of any other world nation, it currently owes in excess of $2.7 trillion to foreign governments and other private investors. The debt equates to around 20% of the countries total GDP. This quick hub will give you the low down on who America owes and how much money they owe them, you should perhaps bear in mind that interest payments will make the true figure much higher - so who is profiting from America's overspending? Lets take a look.

1. Japan - $585.9bn

You think that your mortgage is big? Try telling that to the Japanese government, who are owed an astonishing $585.9bn by the American government- a sum which is difficult for any of us to even comprehend. Based on a rough American population estimate of 313 million people, this equates to $1,871 per American citizen. I find it quite frankly astonishing that America's biggest creditor is a country with whom it was at war just half way through the 21st Century

2. China - $541.0bn

Close behind Japan in the list of creditors is China who are owed some $541bn by America. That is another $1,728 that each American citizen owes to Asia. To think that America owes so much money to a country that it imports so much from is quite frankly economic suicide; Americans are purchasing many of their consumer goods from China, only for China to lend their money back to America and charge them interest on it. That's like buying a new sofa for $1000, then having the shop lend you back your $1000 but charge you.... say 10% APR on your own cash. Debt is power, and China certainly has a lot of power over America, it is believed that Chinese funding was used to meet the significant costs of the Iraq war. Taking over a country to topple one man that posed no direct threat to world safety was certainly an expensive exercise.

3. United Kingdom - $307.4bn

To be honest, this one surprised me greatly; particularly as the British have racked up significant national debts themselves. I wouldn't be surprised to see the UK calling in this debt in order to pay its own creditors, but this is still a sour debt for American people. America flourished after the first World War because of the huge UK debts that itself owned. It appears that the tables have turned however, and each American citizen now owes the UK $982. Since the population of the UK is about one-fifth of the size of the USA's, I will take a total of $4,910 from five of you please (paypal or cheques accepted)

4. OPEC Nations - $179.8bn

The OPEC Nations, this stands for the Organization of the Petroleum Exporting countries are basically Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, U.A.E. and Venezuela. I don't really understand this one, but I do find it rather amusing that the Americans owe Iraq money - having pretty much chosen to blow the place to bits, I suppose it is only fair that they pay the costs of damages. If your kid smashes your neighbours window whilst playing baseball, then you have to pay for the window, same rule applies to global politics it seems. To owe money to Angola, one of the developed world's poorest countries, seems ludicrous. I doubt that America could sink too much further.

5. Caribbean Banking - $147.7bn.

America also owes $147.7bn to the Caribbean Banking centres. This debt is basically owed to Bahamas, Bermuda, Cayman Islands, Netherlands Antilles, Panama, and British Virgin Islands. To think that the USA owes so much cash to places with.... well, hardly any money themselves, is perhaps testimony to how low the country has sunk. The good news is that Obama intends to reduce America's debt, so hopefully Americans will no longer face the embarrassment of owing money to a bunch of tiny islands.@

Financing source

2011-12-31T07:49:00.000-08:00

Where and how you finance an operation can be the difference between dominance and failure. All money may sound like good money in this environment. It isn't.

Often it makes the most sense to tap a few different sources of capital. One deal I arranged involved seven funding sources. That sounds like a hassle, but it ended up greatly reducing the company's cost of capital and saving it from bankruptcy.

There are myriad financing sources available for American entrepreneurs . Here are the 12 best, from least attractive to most. Two glaring omissions: venture capital--VCs fund just 3,500 of the 22 million small outfits in the U.S., and they only tend to hunt for companies with the potential for torrential growth--and a founder's own savings. If you don't know by now that financiers want to see some of your own skin in the game, you may already be in over your head.

12. Angelequity. If you must sell an ownership stake to get your company off the ground, start by finding a respected industry executive who is willing to invest a reasonable amount and give your venture credibility with other investors. The advice and networking--without all the heavy-handed demands of a VC--come in handy, too.

11. Smart leases. Leasing fixed assets conserves cash for working capital (to cover inventory), which is generally tougher to finance, especially for an unproven business. Warning: Don't put so much money down that you end up spending the same amount of cash as you would have had you bought the asset with a down payment. The cost of a lease may be slightly higher than bank financing (see source No. 10), but the cost of the down payment you did not have to make is likely to be less painful than the dilution you suffer from giving away equity.

10. Bank loans. Banks are like the supermarket of debt financing. They provide short-, mid- or long-term financing, and they finance all asset needs, including working capital, equipment and real estate. This assumes, of course, that you can generate enough cash flow to cover the interest payments (which are tax deductible) and return the principal.Banks want assurance of repayment by requiring personal guarantees and even a secured interest (such as a mortgage) on personal assets. Unlike other financing relationships, banks offer some flexibility: You can pay off your loan early and terminate the agreement. VCs and other institutional investors may not be so amenable.

9. SBA 7(a) loans. Of all the federally sponsored debt-financing programs, this is the most popular, and perhaps the best. It loosens the flow of credit by guaranteeing the lender against a portion of any loss incurred on the loan. Not to say that banks aren't careful when making 7(a) loans: They are required to keep the non-guaranteed portion on their books.

The interest rate can vary based on the size of the loan, with smaller amounts costing a little more. Shop around. Some banks reap servicing fees and nice profits by selling the guaranteed portion of the loan to insurance companies and pension funds; in those cases, a lender may be willing to offer you a better rate.

8. Local and state economic development organizations.Economic-development organizations can charge tantalizingly low interest rates when lending alongside a bank. Say you need to raise $200,000 for a building. A bank may offer $150,000 on a first mortgage at a variable interest rate of prime, now 3.25%, plus 200 basis points, for a total of 5.25%. The local development entity might lend you another $30,000 on a second mortgage at a fixed-interest rate of 4%, without seeking equity shares or warrants. (Without the development corporation's contributions, you would have to scare up $50,000 in equity--expensive.) If you don't have the cash flow to cover the interest, the development organization may offer extended terms. Some loans are interest-only for the first year or two, and even the interest payments can be accrued for a certain time period.

Development groups may not agree to finance an entire operation, but they make snagging the remainder from other private sources a lot easier. Talk to your local chamber of commerce to find these programs.).

7. Customers. Advance payments from customers--assuming the terms aren't too onerous--can give you the cash you need, at a relatively low cost, to keep your business growing. Advances also demonstrate a level of commitment by that customer to your operation. This strategy allowed them to grow faster and with limited resources, and to operate with relative impunity with respect to their investors.

6. Vendors: with financing from large consumer electronics firms--in other words, his suppliers. This way, your financiers do not control your growth; you do. Just be sure not to enslave yourself to a handful of powerful suppliers in the process.

5. Friends and family members. If you're lucky, friends and family members might be the most lenient investors of the bunch. They don't tend to make you pledge your house, and they might even agree to sell their interest in your company back to you for a nominal return.

4. Small Business Innovation Research (SBIR) grants. Getting past the paper-intensive application process and SBIR grants can be a great way to turn your intellectual property into mailbox money. For more on these grants, check out How To Get Uncle Sam To Fund Your Start-Up 3. Tax Increment Financing. TIF subsidies are geared toward real estate development in targeted areas. Depending on the state, the subsidies can be as large as 20% to 30% of the cost of the project. Better yet, you may even be able to borrow against this subsidized value. If your own community does not offer a TIF program, look at communities that do. You may end up a little farther from your home or office, but it could be worth your while.

2. Internal Revenue Service. No, the IRS does not lend money. But it does allow you to deduct expenses. If you are paying a heap in taxes, evaluate whether you can use your profits to expand your business--and reduce your tax bill.

1. Bootstrapping: Many billion-dollar entrepreneurs find a way to grow without external financing so that financiers don't control their destinies or grab a disproportionate slice of the wealth pie. For more on the sound strategic thinking you'll need in order to live on your own cash flow.

Structure ?

2011-12-31T07:37:00.000-08:00

Capital structure is the proportion of all types of capital viz. equity, debt, preference etc. It is synonymously used as financial leverage or financing mix. Capital structure is also referred as the degree of debts in the financing or capital of a business firm. It is believed that with the change in capital structure, the value of a firm can be influenced. There are four approaches to this, viz. net income, net operating income, traditional and M&M approach. Financial leverage is the extent to which a business firm employs borrowed money or debts. In financial management, it is a significant term and an important decision in a business. In the capital structure of a company, broadly, there are mainly two types of capital i.e. Equity and Debt. Out of the two, debt is considered a cheaper source of finance because the interest payments are a tax deductible expense.

Capital structure or financial leverage deals with a very important financial management question. The question is - ‘what should be the ratio of debt and equity?’ Before scratching our minds to find the answer to this question, we should know the objective of doing all this. In the financial management context, the objective of any financial decision is to maximize the shareholder’s wealth or increase the value of the firm. The other question which hits the mind at the first place is whether change in the financing mix would have any impact on the value of the firm or not. The question is a valid question as there are some theories which believe that financial mix has an impact on the value and others believe it to be not connected.

How can financial leverage affect the value?

One thing is sure that wherever and whatever way one sources the finance from, it cannot change the operating income levels. Financial leverage can, at the max, have impact on the net income or the EPS (Earning per Share). The reason is explained further. Changing the financing mix means changing the level of debts and change in levels of debt can impact the interest payable by that firm. Decrease in interest would increase the net income and thereby the EPS and it is a general belief that the increase in EPS leads to increase in value of the firm.

Apparently, under this view, financial leverage is a useful tool to increase value but, at the same time, nothing comes without a cost. Financial leverage increases the risk of bankruptcy. It is because higher the level of debt, higher would be the fixed obligation to honour the interest payments to the debts providers. Discussion of financial leverage has an obvious objective of finding an optimum capital structure leading to maximization of value of firm. If cost of capital is high

Important theories or approaches to financial leverage or capital structure or financing mix are as follows: Net Income Approach: This approach was suggested by Durand and he was in the favour of financial leverage decision. According to him, change in financial leverage would lead to change in cost of capital. In short, if the ratio of debt in the capital structure increases, the weighted average cost of capital decreases and hence the value of the firm.

Net Operating Income Approach: This approach is also provided by Durand but it is totally opposite to the Net Income Approach. It says that the weighted average cost of capital remains constant. It believes in the fact that the market analyses firm as a whole which discounts at a particular rate which is not related to debt-equity ratio.

Traditional Approach: This approach is not defined hard and fast facts but it says that cost of capital is a function of the capital structure. The special thing about this approach is that it believes an optimal capital structure. Optimal capital structure implies that at a particular ratio of debt and equity, the cost of capital is minimum and value of firm is maximum.

Modigliani and Miller Approach (MM Approach): It is a capital structure theory named after Franco Modigliani and Merton Miller. MM theory proposed two propositions.

Proposition I: It says that the capital structure is irrelevant to the value of a firm. Value of two identical firms would be same and it would not be affected by the mode of finance adopted to finance the assets. Value of a firm is dependent on the expected future earnings.

Proposition II: It says that the financial leverage boosts the expected earnings but it does not increase the value of the firm because the increase in earnings is compensated by the change in the required rate of return.

To summarize, it is very essential for finance professionals to know about the nitty-gritty of capital structure they have suggested to the management. Accurate analysis of capital structure can help a company save on the part of their cost of capital and hence improve profitability for the shareholders.

Private placement : solution

2011-11-29T06:17:00.000-08:00

The one constant in the life of your small business will be the need for a cash infusion to jump start sales, expand into new markets, or continue to sustain growth. While there are a multitude of financing sources of funding available to small business owners, each source has its limitations and requirements. For instance, commercial bank loans are often intended for businesses that have been around and have shown a steady stream of profitability. Private placements are an attractive alternative for growing companies.

What is Private Placement? Private placement or private investment capital, is money invested in your company usually from private investors in the form of stocks and sometimes bonds. In the United States, private placement often does not need to be registered with the Securities Exchange Commission. Regulation D is the most popular form of non-public private placement.

According to Thompson Financial, over 416 billion was issued in the private placement market for 2002. As good as it sounds, the majority of those dollars came from pension funds, investment pools, banks and insurance companies amounting to just over 2,000 deals. However, private placement does exist for the small business owner and is often less expensive and easier than taking your company public.

Benefits of Private Placement: High degree of flexibility in amount of financing ranging from 100 thousand to 10-20 million with combinations of debt, equity, or debt and equity capital.

Investors are more patient than venture capitalists, often seeking 10 to 20% return on investments over a longer term of 5 to 10 years.

Much lower costs than approaching venture capitalists or selling the stock to the public as an IPO (Initial Public Offering).

Quicker form of raising money than usual venture capital markets.

Who is a Candidate for Private Stock Offerings? The ideal small business candidate is a company in the third stage of finance and is looking for growth or expansion funding. Small business owners might think private placement applies to start-ups when your company has completed product development, conducted a market-feasibility study and business planning but start-up funding often comes from angel investors.

Where to Find Private Placements? The money from private placements will come from accredited investors defined by the SEC Rule 501 under Regulation D as:

an individual earning 200k per year.

a household with income of $300K per year or having a net worth over $1M.

or venture funds, some banks and other institutions.

Connect with bankers, attorneys, and accountants who can network your small business with a private investor.

What is Required for Private Placements?

A. sound business plan

B. private placement memorandum (PPM) disclosing the full facts of the investment and business

C. law firm or lawyer experienced in private placements.

With the limited infusion of capital into the stock market, the private investor market is an attractive alternative for investors and small businesses. Private placement offers a viable form of business financing without the constraints of taking a company public and conceding control.

Risky Money Market..

2011-11-29T06:07:00.000-08:00

Is your money market mutual fund safe? Historically these “cash” funds have done fine even in turbulent markets, but some experts nowworry that investors could suffer losse due to the European debt crisis. If you’re concerned, it might be a good time to consider a switch, perhaps to a money market account at your bank or credit union.

Throughout the years, money market funds have produced a good record of maintaining the $1-per-share value promised to investors. The sole exception in recent years was when the Reserve Primary Fund “broke the buck” in the heat of the financial crisis in 2008. After that the Securities and Exchange Commission took steps to reduce risk in money funds’ holdings, such as commercial paper issued by big corporations. However, those moves may not be enough if troubles in Europe continue to deepen.

The good news is that money fund yields are so low (averaging around 0.05% according to Crane Data) that inconvenience rather than lost earnings is the main issue when considering a switch out of one of these funds, which are provided by a brokerage or mutual fund company. In fact, the average money market account held at a bank yields more, about 0.175%, according to the BankingMyWay.com survey.

Money market accounts, like certificates of deposit and savings accounts, have federal FDIC insurance, making them as safe as can be. Money market funds do not.

Despite the funds’ slightly higher risks, many small investors use them as a convenient way to hold cash reserves or money that will later flow into other investments. If your money market and other investments are managed by the same institution, cash can be moved in and out of the money fund with a few clicks of a mouse or a phone call.

If the news out of Europe makes you nervous, the first step is to ask your broker or fund company what the money fund’s managers are doing to minimize their exposure to European securities. It may be that you have nothing to worry about.

If you still want to play it safe, though, move some or all of your cash to an FDIC-insured money market account, a CD, a savings account or a checking account, all available at any bank. These days most brokerages, fund companies and banks allow customers to set up electronic links to accounts at other firms to make it easy to transfer cash from one institution to another.

Keep in mind, though, that it can take several days for a transfer between institutions to be complete, probably longer than it takes for money to move between accounts within a single institution. If you need to have cash available for investing on short notice, you can keep the bare minimum in the money fund at the brokerage or fund company.

Generally, savers and investors are told to shop around for the best yields. While that’s sound advice, yields are currently so low it’s probably not worth opening an account at an unfamiliar institution just to earn a few more basis points. In fact, if you move thousands of dollars to your bank from your brokerage or fund company, you may get a better deal on your banking services, so be sure to ask.

Finally, study your bank’s terms. To get the highest yield in a money market account, for example, you’ll probably need a minimum deposit of $10,000 or more, and there might be restrictions on the number of withdrawals you can make over a given period.

Money Market Fund Reforms

2011-10-31T00:56:00.000-07:00

The Securities and Exchange Commission adopted new rules designed to significantly strengthen the regulatory requirements governing money market funds and better protect investors.

The financial crisis and the weaknesses revealed by the Reserve Primary Fund's "breaking the buck" in September 2008 precipitated a full-scale review of the money market fund regulatory regime by the SEC. A money market fund "breaks the buck" when its net asset value (NAV) falls below $1.00 per share, meaning investors in that fund will lose money. The SEC's new rules are intended to increase the resilience of money market funds to economic stresses and reduce the risks of runs on the funds by tightening the maturity and credit quality standards and imposing new liquidity requirements.

"These new rules will have substantial benefits for investors and are an important first step in our efforts to strengthen the money market regime," said SEC Chairman Mary L. Schapiro. "These rules will help reduce risks associated with money market funds, so that investor assets are better protected and money market funds can better withstand market crises. The rules also will create a substantial new disclosure regime so that everyone from investors to the SEC itself can better monitor a money market fund's investments and risk characteristics."

Further Restricting Risks by Money Market Funds

Improved Liquidity: The new rules require money market funds to have a minimum percentage of their assets in highly liquid securities so that those assets can be readily converted to cash to pay redeeming shareholders. Currently, there are no minimum liquidity mandates.

Daily Requirement: For all taxable money market funds, at least 10 percent of assets must be in cash, U.S. Treasury securities, or securities that convert into cash (e.g., mature) within one day.
Weekly Requirement: For all money market funds, at least 30 percent of assets must be in cash, U.S. Treasury securities, certain other government securities with remaining maturities of 60 days or less, or securities that convert into cash within one week.

The rules would further restrict the ability of money market funds to purchase illiquid securities by:

Restricting money market funds from purchasing illiquid securities if, after the purchase, more than 5 percent of the fund's portfolio will be illiquid securities (rather than the current limit of 10 percent).
Redefining as "illiquid" any security that cannot be sold or disposed of within seven days at carrying value.

Higher Credit Quality: The new rules place new limits on a money market fund's ability to acquire lower quality (Second Tier) securities. They do this by:

Restricting a fund from investing more than 3 percent of its assets in Second Tier securities (rather than the current limit of 5 percent).
Restricting a fund from investing more than ½ of 1 percent of its assets in Second Tier securities issued by any single issuer (rather than the current limit of the greater of 1 percent or $1 million).
Restricting a fund from buying Second Tier securities that mature in more than 45 days (rather than the current limit of 397 days).

Shorter Maturity Limits: The new rules shorten the average maturity limits for money market funds, which helps to limit the exposure of funds to certain risks such as sudden interest rate movements. They do this by:

Restricting the maximum "weighted average life" maturity of a fund's portfolio to 120 days. Currently, there is no such limit. The effect of the restriction is to limit the ability of the fund to invest in long-term floating rate securities.
Restricting the maximum weighted average maturity of a fund's portfolio to 60 days. The current limit is 90 days.

"Know Your Investor" Procedures: The new rules require funds to hold sufficiently liquid securities to meet foreseeable redemptions. Currently, there are no such requirements. In order to meet this new requirement, funds would need to develop procedures to identify investors whose redemption requests may pose risks for funds. As part of these procedures, funds would need to anticipate the likelihood of large redemptions.

Periodic Stress Tests: The new rules require fund managers to examine the fund's ability to maintain a stable net asset value per share in the event of shocks - such as interest rate changes, higher redemptions, and changes in credit quality of the portfolio. Previously, there were no stress test requirements.

Nationally Recognized Statistical Rating Organizations (NRSROs): The new rules continue to limit a money market fund's investment in rated securities to those securities rated in the top two rating categories (or unrated securities of comparable quality). At the same time, the new rules also continue to require money market funds to perform an independent credit analysis of every security purchased. As such, the credit rating serves as a screen on credit quality, but can never be the sole factor in determining whether a security is appropriate for a money market fund.

In addition, the new rules improve the way that funds evaluate securities ratings provided by NRSROs:

Require funds to designate each year at least four NRSROs whose ratings the fund's board considers to be reliable. This permits a fund to disregard ratings by NRSROs that the fund has not designated, for purposes of satisfying the minimum rating requirements, while promoting competition among NRSROs.
Eliminate the current requirement that funds invest only in those asset backed securities that have been rated by an NRSRO.

Repurchase Agreements: The new rules strengthen the requirements for allowing a money market fund to "look through" the repurchase issuer to the underlying collateral securities for diversification purposes:

Collateral must be cash items or government securities (as opposed to the current requirement of highly rated securities).
The fund must evaluate the creditworthiness of the repurchase counterparty.

Enhancing Disclosure of Portfolio Securities

Monthly Web Site Posting: The new rules require money market funds each month to post on their Web sites their portfolio holdings. Currently, there is no Web site posting requirement. Portfolio information must be maintained on the fund's Web site for no less than six months after posting.

Monthly Reporting: The new rules also require money market funds each month to report to the Commission detailed portfolio schedules in a format that can be used to create an interactive database through which the Commission can better oversee the activities of money market funds. The information reported to the Commission would be available to the public 60 days later. This information would include a money market fund's "shadow" NAV, or the mark-to-market value of the fund's net assets, rather than the stable $1.00 NAV at which shareholder transactions occur. Currently a money market fund's "shadow" NAV is reported twice a year with a 60-day lag.

Improving Money Market Fund Operations

Processing of Transactions: The new rules require money market funds and their administrators to be able to process purchases and redemptions electronically at a price other than $1.00 per share. This requirement facilitates share redemptions if a fund were to break the buck.

Suspension of Redemptions: The new rules permit a money market fund's board of directors to suspend redemptions if the fund is about to break the buck and decides to liquidate the fund (currently the board must request an order from the SEC to suspend redemptions). In the event of a threatened run on the fund, this allows for an orderly liquidation of the portfolio. The fund is now required to notify the Commission prior to relying on this rule.

Purchases by Affiliates: The new rules expand the ability of affiliates of money market funds to purchase distressed assets from funds in order to protect a fund from losses. Currently, an affiliate cannot purchase securities from the fund before a ratings downgrade or a default of the securities - unless it receives individual approval. The rule change permits such purchases without the need for approval under conditions that protect the fund from transactions that disadvantage the fund. The fund must notify the Commission when it relies on this rule..@

China ?

2011-10-26T09:45:00.000-07:00

China's nominal per-capita GDP stands close to $4500. This is about a third of the way towards a developmental milestone INSEAD economists Antonio Fatas and Ilian Mihov have dubbed "The Great Wall." Fatas and Mihov have given this name to attaining over $15,000 in per-capita GDP because over the past thirty years middle income countries have consistently failed at climbing over it into the ranks of advanced nations.

In a recent Wall Street Journal article, entitled, "Is Mexico China's Future," Bob Davis also talks of the difficulty emerging countries have in reaching developed status and notes that "Singapore and South Korea are nearly alone in having made the transition." Nearly everyone else gets stuck in a sort of Mexican purgatory where continued growth is dependent on continued reform of governmental and financial institutions: Most every other poor nation — whether one calls them “third world,” “developing” or “emerging” — gets stuck in second-tier, Mexican-style status. “Absent continuing reforms,” the economists argue, “Chinese growth is likely to slow down sharply, perhaps leaving China at a level less than Mexico’s” — an outcome that would be a hard slap to the China-as-future crowd.

While Mexico and China seem very different, the economists point out a number of similarities. On the positive side, the two nations focused on foreign trade as a growth engine and they eased central government control of the economy. On the negative side, their financial systems are inefficient, their non-tradable industries (communications, transportation and the like) lack competition; and their rigid labor rules discourage employers from adding full-time workers. The thinking on this is that it is relatively easy for developing nations to make big yearly moves in their per-capita, but only up to a certain, Mexico-like point. After that, top tier governing and financial reform becomes necessary to become Denmark-like:

Once that catch-up period is over, however, the countries need to continue to reform institutions and policies to produce a well-functioning government an efficient financial system and a steady increase in knowledge so it can continue to grow smartly. Few countries manage that transition, which leaves them well behind the U.S. and Europe. In its post, "China’s $10,000-12,000 Question, the China Bystander blog (a superb blog, by the way) posits that China will not reach developed status without some serious changes:

“There is not a single country that has good quality institutions and is poor,” Mihov said in Singapore. “The gap between rich and poor is driven by poor productivity that is linked to poor quality institutions and poor business environment.” As evidence he offers the contrasting experiences of Singapore and Venezuela. Even more dramatically, consider the economies of the old Soviet bloc, which collapsed as per capita incomes hit and then got stuck at the $12,000 a year level (adjusted for current prices).

China Bystander himself adds that poor quality in China is linked to set of very specific problems and that China's ability to get past The Great Wall will depend on its ability not only to reform, but to reform quickly enough: China’s annual per capital income is $4,000. At current growth rates that gives it less than a decade before it starts bearing down in earnest on that tipping point or The Great Wall as Mihov inevitably dubs it. China By stander sees SOEs as another potential impediment: The growing economic and political clout of state-owned enterprises is another possible impediment to progress. Like Japan before it, China has grown fast by replicating and improving on what advanced economies have already done and producing and selling the results much more cheaply. Yet, as Japan found out, there comes a point where innovation has to replace imitation if growth is to be sustained.

China’s state-owned national champions and aspiring multinationals are ambitious, adaptive and fast learners (as were Japan’s). They are developing R&D and product development capabilities but they remain reliant on access to low-cost capital from the state, have rudimentary organizational and financial management skills by the standards of multinationals and have yet to acquire two of the most essential traits of a globalized multinational, managing diversity and allowing the intrapreneurship in which innovation can flourish (traits that few Japanese multinationals were able to acquire). Beijing is throwing a wall of money and of engineers and scientists at making its national champions more innovative (dealing with diversity isn’t even on the radar). Yet in the process of building up the SOEs it is distorting markets and entrenching vested interests that increase the resistance to reform. It also crowds out small and medium sized companies where growth-generating innovation truly flourishes.

China Bystander also thinks China's demographics bode ill for it climbing over the Wall:China has already reaped the benefits of a demographic dividend, which is believed to have played a role in the country's economic breakthrough, having enjoyed the advantage of abundant cheap labor for decades. "Wage increases are the most direct response to labor shortages. That will definitely squeeze the profit margin for some low value-added manufacturers," Zhang said.

What will China do and what will China's economic future be? I have heard many say they think the Chinese government will be fine with the $12,000-$15,000 wall, preferring to stop there than to reform "too much." i personally think it is too early to judge. I mean, who knew Korea and Singapore would keep growing while Malaysia, Indonesia, and Thailand would fail to keep pace? What is the difference between Korea and Singapore and Chile (whose economy has done amazingly well over the last ten years) on the one hand, and Malaysia, Indonesia, Mexico and Thailand on the other? And if you answer better governance, then you have to explain why Singapore and Korea got it and the other three did not? Same if your answer focuses on corruption. So really, which way will China go? Korea/Singapore or Malaysia/Thailand/Mexico? . What do you think will happen? Will China climb over the wall, merely bang against it or never get close? Why?

Global Financial Crisis

2011-09-26T18:39:00.000-07:00

9 August 2007. 15 September 2008. 2 April 2009. 9 May 2010. 5 August 2011. From sub-prime to downgrade, the five stages of the most serious crisis to hit the global economy since the Great Depression can be found in those dates.

Phase one on 9 August 2007 began with the seizure in the banking system precipitated by BNP Paribas announcing that it was ceasing activity in three hedge funds that specialised in US mortgage debt. This was the moment it became clear that there were tens of trillions of dollars worth of dodgy derivatives swilling round which were worth a lot less than the bankers had previously imagined.

Nobody knew how big the losses were or how great the exposure of individual banks actually was, so trust evaporated overnight and banks stopped doing business with each other.

It took a year for the financial crisis to come to a head but it did so on 15 September 2008 when the US government allowed the investment bank Lehman Brothers to go bankrupt. Up to that point, it had been assumed that governments would always step in to bail out any bank that got into serious trouble: the US had done so by finding a buyer for Bear Stearns while the UK had nationalised Northern Rock.

When Lehman Brothers went down, the notion that all banks were "too big to fail" no longer held true, with the result that every bank was deemed to be risky. Within a month, the threat of a domino effect through the global financial system forced western governments to inject vast sums of capital into their banks to prevent them collapsing. The banks were rescued in the nick of time, but it was too late to prevent the global economy from going into freefall. Credit flows to the private sector were choked off at the same time as consumer and business confidence collapsed. All this came after a period when high oil prices had persuaded central banks that the priority was to keep interest rates high as a bulwark against inflation rather than to cut them in anticipation of the financial crisis spreading to the real economy.

The winter of 2008-09 saw co-ordinated action by the newly formed G20 group of developed and developing nations in an attempt to prevent recession turning into a slump. Interest rates were cut to the bone, fiscal stimulus packages of varying sizes announced, and electronic money created through quantitative easing. At the London G20 summit on 2 April 2009, world leaders committed themselves to a $5tn (£3tn) fiscal expansion, an extra $1.1tn of resources to help the International Monetary Fund and other global institutions boost jobs and growth, and to reform of the banks. From this point, when the global economy was on the turn, international co-operation started to disintegrate as individual countries pursued their own agendas.

9 May 2010 marked the point at which the focus of concern switched from the private sector to the public sector. By the time the IMF and the European Union announced they would provide financial help to Greece, the issue was no longer the solvency of banks but the solvency of governments. Budget deficits had ballooned during the recession, mainly as a result of lower tax receipts and higher non-discretionary welfare spending, but also because of the fiscal packages announced in the winter of 2008-09. Greece had unique problems as it covered up the dire state of its public finances and had difficulties in collecting taxes, but other countries started to become nervous about the size of their budget deficits. Austerity became the new watchword, affecting policy decisions in the UK, the eurozone and, most recently in the US, the country that stuck with expansionary fiscal policy the longest.

Last Friday, the morphing of a private debt crisis into a sovereign debt crisis was complete when the rating agency, S&P, waited for Wall Street to shut up shop for the weekend before announcing that America's debt would no longer be classed as top-notch triple A. This could hardly have come at a worse time, and not just because last week saw the biggest sell-off in stock markets since late 2008. Policymakers are confronted with a slowing global economy and a systemic crisis in one of its component parts, Europe. To the extent that they are united, they are united in stupidity, wedded to blanket austerity that will make matters worse not better. And they have yet to tackle the issue that lay behind the 2007 crisis in the first place, the imbalances between the big creditor nations such as China and Germany, and big debtors like the US.

In the circumstances, it is hard to be wildly optimistic about how events will play out. Markets are bound to remain highly jittery, although it seems unlikely that American bond yields will rocket as a result of the S&P downgrade. Japan lost its triple A rating long ago and has national debt well in excess of 200% of GDP but its bond yields remain extremely low. The reason for that is simple: Japan's growth prospects are poor.

So are America's, which is why bond yields will remain low in what is still, for the time being, the world's biggest economy. The dressing down given to Washington by Beijing following the S&P announcement was, however, telling. Growth rates of close to 10% mean that the moment China overtakes the US is getting closer all the time, and the communists in the east now feel bold enough to tell the capitalists in the west how to run their economies. Whatever it means for financial markets this week, 5 August 2011 will be remembered as the day when US hegemony was lost.

All this is terrible news for Barack Obama. He has not delivered economic recovery. The US is drowning in negative equity and foreclosed homes. No president since Roosevelt has won an election with unemployment as high as it is today. Fiscal policy will be tightened over the coming months as tax breaks expire and public spending is cut. The Federal Reserve only has the blunt instrument of QE with which to stimulate the economy, and will only be able to deploy it after a softening up process for the markets that will take several months. On top of that, Obama will now be branded as the president who presided over the national humiliation of a debt downgrade. He looks more like Jimmy Carter than FDR.

Not that the Europeans should get too smug about this, because what we are witnessing is not just the decline of the US but the decline of the west. One response to last week's meltdown was the announcement of talks between the G7 – the US, the UK, Germany, Italy, France, Canada and Japan – but while this would have been appropriate 20 years ago it is not going to calm markets today. Holding a G7 meeting without China today is like expecting the League of Nations without the US to tackle totalitarianism in the 1930s.

There is no happy ending to this story. At best there will be a long period of weak growth and high unemployment as individuals and banks pay down the excessive levels of debt accumulated in the bubble years. At worst, the global economy will be plunged back into recession next year as the US goes backwards and the euro comes apart at the seams. The second, gloomier scenario, looks a lot more likely now than it did a week ago.

Why? Because there is no international co-operation. There are plans for austerity but no plans for growth. Even countries that could borrow money for fiscal stimulus packages reluctant to do so. Europe lacks the political will to force the pace of integration necessary to avoid disintegration of the single currency.

Commodity prices are coming down, but that is the only good news. We are less than halfway through the crisis that began on 9 August 2007. That crisis has just entered a dangerous new phase.@

What They Really Are

2011-09-02T21:33:00.000-07:00

Trading Platforms are pools of capital that invest in a wide variety of financial instruments including stocks, bonds, commodities, ETF’s and foreign exchange. These pools of capital may be a number of legal entities; however, the most common is known as a PPP, an acronym for Private Placement Programs. Private Placement Trading Programs are not offered to the general public. They are exactly what their name implies, offerings of membership interest to a select group of chosen investors who meet certain financial requirements.

The minimum investment in these Private Placement Programs can often be quite high and require a lockup period, where the capital is committed to the Trade Program for a certain amount of time. The minimum investment levels and principal commitment periods vary depending on the type of investments and the objective of the investment. One year lock ups are not uncommon and in some investments the lock up period may be even longer. Lock ups serve a very important function. They provide the Trade Platform Managers and Platform Traders with time in which to obtain results for the investors. Platform Traders want to know that the capital allocations they have been given to trade are for a long enough period of time to allow a particular trading strategy time to mature.

If you were to look at the returns of outstanding Platform Traders you would see profitable results over time; however, in the short term they may have a period of negative returns. If your interest is in traders with no down periods, please read no further, as they do not exist, contrary to popular belief. There is no such thing as free money. Trading involves risk. Every investor dreams of opening the door today and finding tomorrows Wall Street Journal, but this only exists in fantasy. Platform Trading requires hard work, tremendous discipline, patience and superb talent. The fact is very few people have the gifts to be a successful trader. The Platform Traders at the very top of their peers are rewarded with staggering wealth. Platform Traders utilize many strategies to help determine profitable trades, such as macro analysis, price theory, fundamental analysis, value analysis and many more investment strategies. What superior and outstanding Platform Traders can do is make enough winning trades over time, irrespective of what strategy they may use to accumulate trading profits. However, a number of their trades will not be winners. A large part of successful Private Placement Program trading is risk management; controlling losses and preserving investment capital.

One of the very basic risk management techniques utilized by Private Placement Program Traders is only risking a very small percentage of the investment capital on every trade. It is usually between one half and two percent on a particular trade. If a trade loss hits a defined percentage allocation, the trade is closed out. The average investor has an extremely difficult time taking a loss. In fact, it is a human tendency to hold on to losing trades and cut winning trades short, which is the very opposite of what great Platform Traders do. Risk management systems can get very complex and Platform Traders often write complex algorithms to manage risk when there are many positions and trade strategies running all at once.

The advent of the computer has radically revolutionized trading, just as it has every facet of our lives. Modern Trading Platforms are heavily dependent on mathematics and the hard sciences. Most Platform Traders today have advances formal education and training in mathematics, probabilities, physics, computer science, economics and engineering. Trade rooms are more similar to busy computer driven laboratories than the old image of guys in a boiler-room shouting into two telephones at one time. Almost all orders are input electronically and trades are matched up by sophisticated software. Private Placement Programmers and software engineers are indispensable to successful Private Placement Programs and Trade Platforms.

As mentioned earlier, Platform Traders have many products to trade and a huge number of global exchanges to execute the trades. The most well-known exchange in the world is the New York Stock Exchange (NYSE). When Platform Traders make a trade, that trade is executed on an exchange. The NYSE, CME, NYMEX, ICE, CBOE and NASDAQ are the largest U.S. exchanges. In Europe the LSE, Euronext and Frankfort Exchange are largest. In commodities much of the execution is done on the Globex, an electronic exchange. Platform Traders use the exchanges to buy and sell trillions of dollars of stocks, bonds, currencies, gold, oil, euro-dollars, collateralized mortgage obligations (CMO’s), Exchange Traded Funds (ETF’s) and hundreds of other securities, currencies and derivatives in efforts to make profits for themselves and investors.

Private Placement Program Traders can make profits by buying a particular instrument or by shorting, (selling it) betting the price will go down. Some Platform Traders buy and sell similar instruments simultaneous, betting on the change in price between the two instruments; this is called arbitrage and spread trading. Other Platform Traders employ option strategies, such as writing options, writing straddles, strangles, butterflies and condors. Option strategies can quickly become extremely complex and are a highly specialized area of trading which requires extraordinary expertise.

Private Placement Trading Platforms utilize margin to buy and sell all of the various instruments they trade. Margin is simply a partial payment for the instrument. Most people are familiar with margin on stocks. Margins are met with cash, period. Contrary to what some people may believe, the only instrument that is good for backing a trade position is cash. When a profit is made, it is credited to the Trade Platforms books that day; when a loss is taken it is debited from the Trade Platforms books that day. Private Placement Platform Trading is a cash business; gains and losses are marked to market each day. Trade Platform Managers should know by between midnight and two a.m. each trading day where they stand. The Private Placement Trade Platforms maintain what is called a customer segregated account with an Futures Commission Merchant, more commonly known as a FCM. This account is where the Trade Platform Investors’ funds are held. An independent capital account is established for each Trade Platform Investor in order to provide accurate accounting on a monthly or quarterly basis. The Private Placement Platforms’ funds are deposited into a master segregated funds account to be used for margin in trading.

Goldman Sachs, Merrill Lynch, ABN AMRO, MF Global, JP Morgan Chase, Credit Suisse, Deutsche Bank and Bank of America are all FCMs. These companies, as well as handling trades for independent Trade Platforms for many years, have had their own internal proprietary trading desk or Trade Platforms. Some of these trade desks are famous such as Goldman’s Alpha Fund, Morgan Stanley’s PDT (Process Driven Trading) Platform and Deutsche Bank’s legendary SABA Trading Program, led by Boaz Weinstein. The new regulatory environment is forcing many of the banks to divest themselves of proprietary Trading Platforms. This is making for a large talent pool comprising the best and brightest traders available for Private Placement Programs, Private Hedge Funds and Trading Platforms.

Private Placement Programs and Trading Platforms often use what is known as notionalization or notional funding to increase the leverage that the Trade Platform may use. The Trading Platforms may leverage its trading capital as much as ten times, meaning that One Hundred Million Dollars ($100,000,000) may be traded as it was a Billion Dollars ($1,000,000,000). Leverage, while giving the ability to greatly increase the returns on cash can also lead to significant loss. The old adage that “leverage is a double-edge sword” is very true. Notionalization absolutely must be constantly monitored and adjusted, depending on margin requirements and market conditions. The Private Placement Platform Managers have investment committees that are responsible for determining notional trading levels. Notionalization is a very powerful tool for the Private Placement Trading Platforms.

In conclusion, when it comes to Private Placement Programs, the minimum investment can be high and the risk can be high as well. However, the reward can be great, great enough to easily justify the investment and risk for one who has the means with which to get involved in such an investment.

Payment system

2011-08-18T07:49:00.000-07:00

When you make a SWIFT payment, you are using a highly-specialized and secure messaging service to an institution, either in the US or overseas. It is an acronym for Society for Worldwide Interbank Financial Telecommunications. The processors of the information sent are located in Belgium where they store the messages, generate reports and bill the members for the service.

Before SWIFT was created, banks around the globe used Telex to communicate. It was deemed both too slow and insecure, and there was no standardization in the format the banks used. In many ways, SWIFT revolutionized the international banking community. This led to improvements in commerce between countries.

In 1974, seven international banks met to find a way to replace Telex as the prime communications vehicle among them. They formed a society called SWIFT three years later after recruiting over 200 banks in five countries. They went live with the SWIFT system. SWIFT is now a consortium of most major institutions located in over 200 countries. Its headquarters in Belgium has 19 offices worldwide.

SWIFT has adapted to the changes that have taken place in banks throughout the world which has resulted in significant growth in both the number and type of transactions made by its members. SWIFT now handles about 3.5 billion messages each day. SWIFT is a highly secure system that can be accessed by its members either through a leased line, a dial-up connection or through public data transmission. Each member has its own terminal by which it can access the system and enter its encrypted message. The SWIFT system uses the smart card technology, and it requires its users to enter a user name and a password each time the system is accessed.

Because of the elaborate nature of SWIFT's programming stemming from concerns about security, only trained specialists are capable of sending messages to member organizations. For example, a member bank's customer cannot use SWIFT; however by relaying instructions to the bank, the SWIFT message will be developed and sent by the bank's trained employees.

SWIFT began as the means by which organizations with banking licenses throughout the world communicated. Today SWIFT not only does business with banks. It also embraces security firms and international corporations that have accounted for the rapid growth of the system. For example, SWIFT experienced--in 2007 alone--a growth of 22 percent in the messages sent by and to its membership

Lack Financial Resource

2011-08-18T07:37:00.000-07:00

The global financial crisis has prompted a wholesale re-evaluation of risk management. But while companies admit that major change is needed, a significant proportion is unwilling, or unable, to make the necessary enhancements. A report published by Beyond Box-ticking: A new era for risk governance, written by the Economist Intelligence Unit and sponsored by ACE and KPMG, finds that a lack of financial resources will be the biggest barrier to effective risk management in the year ahead. Companies everywhere are conserving cash, cutting headcount and reining in expenditure. The report finds that risk functions are no exception, with the result that important improvements to risk management are pushed to the sideline.

Asked about the biggest barriers to effective risk management in their organisation, the 364 risk professionals questioned for this study point to poor data quality, inadequate technology and a lack of expertise. But rather than tackling these issues, risk professionals say they are more likely to concentrate on process improvements and training. This suggests that, rather than addressing the key risk management issues—which also carry the biggest price tag—companies are instead opting for some quick wins, and trying to do more with less. While this will have some limited impact the underlying problems with risk management are likely to remain.

“Companies are facing a difficult dilemma in the current environment,” says Rob Mitchell, editor of the report. “On the one hand, they recognise the need to allocate greater time and resources to risk management so that serious shortcomings with their current approach can be addressed. But, on the other hand, they are facing huge pressures to keep costs under control. Satisfying these competing objectives poses something of a conundrum, and this could prevent necessary fixes to risk management from being made.”

Oliver Engels, head of enterprise risk management Europe for KPMG, said that linking risk management to decision-making in the boardroom will be vital for future success. “This will require more knowledge of the risk appetite, the risk profile and the control environment compared with the past,” he says.

Andrew Kendrick, chairman and CEO of ACE European Group, adds that the survey reveals the potential disconnect between business strategy and risk management.

“Senior management from board level down must place a greater emphasis on establishing a pervasive and robust risk culture or face the impact and consequences at every level of the organisation,” he says.

Other key findings from the research include the following: A lack of risk expertise at the top of companies is making it difficult to build a strong risk culture. More than half of respondents say they have no plans to recruit a chief risk officer, and slightly fewer than half say they do not intend to recruit a board-level executive with overall responsibility for risk management. With a high proportion of respondents saying that a “risk culture” depends on strong direction from the top of the organisation, an absence of expertise at board level suggests that many companies will find it difficult to embed a greater awareness and understanding of risk in their business.

Compliance, controls and monitoring are consuming a disproportionate amount of time and resources. Respondents point to the identification of new risks as the most important role and responsibility of risk management. But, asked how they allocate their time, it is compliance, controls and monitoring that consume the lion’s share of their resources. With a disproportionate amount of time being spent on the more mechanical aspects of the role, risk managers may be neglecting the responsibilities they have identified as being most important.

More needs to be done to ensure that risk information is finding its audience. Only around one-third of respondents think their organisation is effective at ensuring information about risk is reaching the right people. There is also limited confidence in the quality of risk reporting: only 30% think it provides information that is tailored to its audience. Better risk reporting will depend on improved communication and understanding between risk functions and their intended audience. Only then can information be provided that is relevant, timely and pitched at an appropriate technical level.

There is a window of opportunity for chief risk officers to take on a more strategic role. In the majority of companies questioned for the research, chief risk officers play no role in major strategic initiatives: just 44% are actively involved in M&A activity, for example, and just 36% in product development. Yet, at a time when risk is dominating boardroom agendas, there is a rare and valuable opportunity for senior risk professionals to take a seat at the top table, and to make themselves an indispensable part of any discussion about the future of the business.@

...Why Are They Loading Up On Gold?

2011-07-24T22:18:00.000-07:00

I’ve been warning for years that an inflationary storm was coming. I’ve recently tailored my forecast to allow for a resurgence in deflation based on QE 2 ending and the economy diving, but my long-term forecast remains the same: inflation WILL be exploding in the years to come. Indeed, even the biggest proponents of paper money (central banks) have begun to realize that their grand experiment is coming to an end. Central banks officially became net buyers of Gold last year. And we now find that they have acquired the most Gold in over a decade.

The Financial Times reports: Central banks have pulled 635 tonnes of gold from the Bank for International Settlements in the past year, the largest withdrawal in more than a decade. The move, disclosed in the BIS’s annual report, marks a sharp reversal from the previous year, when central banks added to deposits of gold at the so-called “bank for central banks” rather than lending it directly to the private sector amid growing concerns over counterparty risk.

Let’s consider this. If you’re a central bank and youactually believe in the value of paper money and your ability to create wealth by printing it…why would you be loading up on Gold? The answer is simple: you see the writing on the wall.

The central banks of the world are in a competition to devalue their respective currencies against each other. They will work together to suppress a particular currency if a carry-trade gets too out of control (see Japan earlier this year), but in general the ECB wants a cheap Euro, the Fed wants a cheap Dollar and so on and so forth. These guys know that the financial system is broken. They’ve known it for over a decade (Greenspan even admitted that derivatives could “implode” the market in 1999). But they’re going to kick the paper money can down the road as long as they can… primarily because the entire financial system is banking on their ability to “fix” things.

The 2008 Crisis was the first taste of systemic risk. The central banks threw everything including the kitchen sink at the problem in an attempt to hold things up. And it’s worked temporarily in the sense that the financial world still believes central banks can handle the situation. However, the fact remains that the central banks actually didn’t fix anything. After all, you can only fix a debt problem by paying the debt off or defaulting. Moving it around and issuing more debt to meet current payments does nothing.

In this sense, the world’s central banks literally “bet the farm” on themselves and the view that sovereign balance sheets can stomach this toxic waste. As we’re now discovering in Europe, the laws of the markets (oversaturation of debt, default and the like) apply to countries as well as private banks. The central banks know this and are now acting accordingly. It is not coincidence that they became net buyers of Gold within two years of the 2008 Crisis. Nor is it coincidence that they are now loading up on Gold at the fastest pace in over a decade. They KNOW (not think) that systemic risk is still on the table in a big way and that they will be POWERLESS to address the next Crisis when it explodes. You can already see this in their public statements. Bernanke himself even admitted the Fed has no idea why the economy isn’t recovering. If you extend the implications of this statement it becomes clear Bernanke and pals are realizing that printing money is not going to patch up the financial system.

Hence the Gold purchases.

In plain terms, the REAL Crisis, the Crisis that was put off temporarily during the last two years, is coming. It will not be a Crisis of stocks or bonds. It will be a Crisis of the financial system itself. A Crisis in which entire countries default. And it will make 2008 look like a picnic. Remember, every asset class is defined relative to sovereign bonds. So if sovereign bonds begin defaulting… KA-BOOM. Round One (2008) of the Financial Crisis wiped out over $11 trillion in household wealth. Round Two will wipe out…?

Insider...

2011-07-24T22:05:00.000-07:00

In an effort to plug leaks at the Federal Reserve, the U.S.’s central bank issued a statement yesterday that members of the Federal Open Market Committee “will refrain” from sharing insider information“with any individual, firm, or organization who could profit financially from…that information.”Since the establishment of the Federal Reserve in 1913, its operations and decision-making processes have been deliberately opaque. In the 1990s the minutes of its policy meetings weren’t made public for five years. And with then-Chairman Alan Greenspan’s deliberate obfuscation of Fed policy — called “FedSpeak” — an entire cottage industry sprang up trying to interpret the Fed’s machinations and likely next moves on monetary policy.

But facing increasing pressure from Congress and the public to become more “transparent” and “legitimate”, the Fed began implementing policies designed to discourage the selling of insider information by members of the staff. According to its Policy on External Communications, the Fed now says that: Members of the official staff should refrain from publicly expressing their own personal views regarding prospective monetary policy decisions and should never speculate about future monetary policy decisions…Whenever staff makes public comments on monetary policy, they should clearly indicate that those comments are solely their own responsibility and should not be interpreted as representing the views of the FOMC, its principals, or any other person associated with the Federal Reserve System.

In other words, if you are on the staff at the Federal Reserve, you are to “refrain from” expressing your opinion publicly about the future of monetary policy based on your insider information, BUT IF YOU DO, you should make clear that your comments “are solely [your] own.” Obviously, staff members have been doing precisely that for years: basing their comments on what inside information they have and then declaring it to be their own opinion!

The new rules further state that:

To ensure that no member of the public is able to profit financially from acquiring nonpublic information about economic and financial conditions…staff will not provide such information to any individual, firm, or organization… Staff will strive to ensure that their contacts with members of the public do not provide any profit-seeking person or organization with a prestige advantage over its competitors. So, to review: if you are a staff person at the Fed and have inside information that might be valuable to an outsider who might be able to use that information to gain an economic advantage, you are to “refrain” from sharing that information. But IF YOU DO, you must make clear that these are just your own opinions. And you certainly don’t want to share this information FOR MONEY! It doesn’t take a high-priced lawyer to determine that these rules are so poorly written and enforced that they simply invite insiders with inside information to do precisely that, and many have.

Take Larry Meyer, for instance. He founded an investment consulting business, Laurence H. Meyer and Associates, Ltd., prior to joining the Fed as a governor in 1996. When he left the Fed in 2002, he returned to his firm, now called Macroeconomics Advisers, which “issues regular reports on the economic outlook and monetary policy prospects, sponsors quarterly outlook meetings, prepares periodic policy analyses, and offers other ancillary services…” One of those services to his high-end clients who pay him upwards of $75,000 for it is an email on breaking events inside the Fed. Despite having retired from the Fed, he (and others who have left the Fed) still have access, not only to the Federal Reserve building, but to meetings, group discussions and policy analyses taking place inside. One of those emails was definitely worth the price to his clients. On August 10, 2010, the FOMC announced the start of QEII (additional monetary stimulus to help the limping economy). Just nine days later, Meyer sent a note to his clients about the discussion during that meeting indicating that there was significant disagreement about the policy, with “deep divisions” among the members.

This was valuable information to have, and it was received well before the Fed published its own minutes from that meeting after the usual three-week delay. Meyer noted that a number of the committee members were miffed at not knowing about the pace of mortgage prepayments which indicated that the Fed’s support for the economy was weakening until just before the meeting. He wrote: For a few members, it was too late to affect their decisions; for others it was a very important factor, even the most influential factor.

Five days after Meyer’s clients received the inside information about the divisions and disagreements, the Wall Street Journal published a more detailed account of that meeting, and the yield on the 10-year treasury note jumped 20 basis points — a huge rise — that cost investors on the wrong side of the trade millions of dollars. As Reuters pointed out, “Small wonder that large funds are willing to shell out tens of thousands of dollars a year to receive ‘color’ — as investors refer to the useful tidbits [like Meyer’s] that … such consultants supply.” Haag Sherman, chief investment officer of Salient Partners which manages $8 billion in assets, says that “even the slightest hint of the possible direction of policy can give investors a huge leg up.” He added: The fact that government today is driving the markets more than any time in recent history and having insight into near-term … plans provides a money manager with a significant competitive advantage.

Meyer isn’t the only one milking the advantage of having inside information. One of the most obvious is former Fed chairman Alan Greenspan’s offering of similar consulting services to PIMCO, the largest bond fund in the world. Susan Bies retired from the Fed’s board in 2007 and took a position with Bank of America. Alice Rivlin served as a Fed governor and is now a fellow at the Brookings Institute. She likes to think she followed the rules by not trading on her insider connections at the Fed: “It’s certainly not what Fed officials should be doing. The rules when I was there were you don’t talk to anybody about anything that could be used for commercial purposes.” And Ernest Patrikis, a former number two official at the Federal Reserve Bank of New York, became a partner at the White and Case law firm. He was emphatic: If Bernanke can’t stop the leaks he ought to have a full press conference after [each] meeting. It’s inappropriate for certain people to gain an advantage on information from the Fed.@

It’s ironic (but satisfying) to see that the harder the Fed tries to present an image of honesty, integrity, and transparency, the more citizens discover that for years the Fed and its committee members have been operating behind closed doors, allowing special privileges for its special customers, all the while claiming to be pure as the driven snow.@

Gold ?

2011-07-24T20:01:00.000-07:00

On July 18, gold prices reached record highs in 1.602 U.S. dollars per troy ounce. The increase means the already 10-fold in the past 10 years compared with the total yield on the Standard & Poor's is only 32 percent, it is easy to imagine that the rise in gold prices seem to already be over.

However, market watchers said it was likely the price of gold will continue to increase. If you invest in cash, investors will not get anything. U.S., Europe, and China keep their interest rates remain low. Price of paper currency is likely to slump continues with the possibility of default will be experienced by U.S. and European governments. "These issues can be a supporter of rising gold prices. There is no issue that will be completed," said David Wislon, commodities analyst at Sociate Generale.

If back in the 1980s when gold prices peaked, the inflation rate rose 1 percent per month and interest rates skyrocketed to 14 percent. The price of gold was to be doubled in just two months. International gold distributor in North Africa Krugrrands to run out of gold coin production. In the U.S., central bankers busy dismissed rumors that they would re-use the gold standard. Although arising enthusiasm that gold prices can be seen from the television ads about gold coins, most analysts agree that the euphoria will not happen as bad in the 1980s.

Another sign of a sign of excitement in the gold market is the increase in "real interest rate" or interest rate adjusted for inflation. When real interest rates negative, the cash will lose its value. Investors also will divert their money into riskier assets and add another asset such as gold. That is the situation during the last rise in gold prices when the interest rate on a 10-year bond fell from 1.94 percent in January 1977 to minus 4.65 percent in June 1980. However, real interest rates rose again in 1980 to stop the gold price. So, as long as real interest rates on U.S. Treasury three-month tenure that is currently at position minus 3 percent remained negative, the price of gold will continue to progress.

In the past, the rise in gold prices was also suspended when speculators or buyers who are betting that gold prices will go up to reduce purchases and buyers is fundamental gold artisans, and the mining company became the dominant buyer in the gold market. In January 1980, for example, Krugerrands sales fell 42 percent despite rising gold prices. Investors should also pay attention to developments in Asia. China and India is the consumer 58 percent of global gold during the first half of 2011, according to data from the World Gold Council. The figure rose from 34 percent last year. It occurs because the problem of inflation in Asia. In India, inflation jumped to 8.7 percent in May, while in China of 6.4 percent. "If the buyers from Asia have declined, investors should be cautious," said Saeed Amen, a gold analyst at Nomura International Holdings.

"Meanwhile, that must be considered also shares in gold mining companies," says John LaForge, commodities analyst at Ned Davis Research. Typically, gold is trading at 1.05 times the ratio of stock prices of gold mining companies. Currently, the ratio becomes 1.48. That is, the gold mining company is still below market value (undervalued). Shares of gold mining companies fell 3.2 percent this year compared with an increase of 11.7 percent on the price of gold. Partly because of rising oil prices.

Rebecca Patterson, global chief strategist at JP Morgan Asset Management, recommends investors hold only slightly golden, about 1 to 2 percent of their assets are secure, including cash and U.S. government to bond. "At least there are still concerns about Europe and the U.S.. Gold is expensive, but expensive for good reason," he said.

US default

2011-07-21T15:30:00.000-07:00

US government now borrows about 42 cents of every dollar it spends. Imagine that one day soon, the borrowing slams up against the current debt limit ceiling of $14.3 trillion and Congress fails to raise it. The damage would ripple across the entire economy, eventually affecting nearly every American, and rocking global markets in the process. A default would come if the government actually failed to fulfill a financial obligation, including repaying a loan or interest on that loan. The government borrows mostly by selling bonds to individuals and governments, with a promise to pay back the amount of the bond in a certain time period and agreeing to pay regular interest on that bond in the meantime.Among the first directly affected would likely be money-market funds holding government securities, banks that buy bonds directly from the Federal Reserve and resell them to consumers, including pension and mutual funds; and the foreign investor community, which holds nearly half of all Treasury securities.

If the U.S. starts missing interest or principal payments, borrowers would demand higher and higher rates on new bonds, as they did with Greece, Portugal and other heavily indebted nations. Who wants to keep loaning money to a deadbeat nation that can’t pay its bills? At some point, the government would have to slash spending in other areas to make room for any further sales of Treasury bills and bonds. That could squeeze payments to federal contractors, and eventually even affect Social Security and other government benefit payments, as well as federal workers’ paychecks.

A default would likely trigger another financial panic like the one in 2008 and plunge an economy still reeling from high joblessness and a battered housing market back into recession. Federal Reserve Chairman Ben Bernanke calls failure to raise the debt limit “a recovery-ending event.” U.S. stock markets would likely tank — devastating roughly half of U.S. households that own stocks, either individually or through 401(k) type retirement programs. Eventually, the cost of most credit would rise — from business and consumer loans to home mortgages, auto financing and credit cards. Continued stalemate could also further depress the value of the dollar and challenge the greenback’s status as the world’s prime “reserve currency.”

China and other countries that now hold about 50 percent of all U.S. Treasury securities could start dumping them, further pushing up interest rates and swelling the national debt. It would be a vicious cycle of higher and higher interest rates and more and more debt. The U.S. has long been the global standard for financial stability and creditworthiness, with Treasury securities seen as a fail-safe investment. But after the near-shutdown of the U.S. government and a new credit-rating report this week questioning the country’s fiscal health, Treasury bills and bonds are losing luster.

If there is a debt limit deadlock, the government by this summer could find itself legally unable to borrow more money to pay its bills, beginning with interest on its debt and gradually extending to day-to-day federal operations. At some point, the government would have to decide which bills to pay and which to put aside. The debt ceiling will be hit on, the Treasury Department says. Unlike the threatened government shutdown, the impact would start slowly, but then build mightily until the damage would be so dire that few political leaders or economists even want to contemplate it. The day of reckoning could likely be delayed at least until early July with creative bookkeeping.

When the House first rejected the Bush administration’s $600-billion bank bailout in September 2008, the Dow Jones industrials went into a dizzying 778-point tailspin. A whiff of a possible similar stock market collapse came on Monday with a sharp selloff on Wall Street when the Standard & Poors lowered its outlook on U.S. debt to “negative” from “stable,” possibly a first step toward a possible downgrade of America’s coveted AAA credit rating.

Investment bank J.P. Morgan Chase recently concluded that any delay in making an interest or principal payments by the Treasury “even for a very short period of time” would have large “long-term adverse consequences for Treasury finances and the U.S. economy.” The analysis is being circulated on Capitol Hill by supporters of raising the debt limit. House Speaker John Boehner and most other GOP leaders agree on the need to raise the debt limit — and don’t want to be held responsible for a new financial meltdown. Still, they want Obama to make more concessions on spending cuts than he has done thus far. That isn’t sitting well with liberal Democrats, who think Obama has already given too much ground.

One reason the two parties can’t find common ground: they can’t even agree on what’s causing high deficits. Democrats mostly blame it on policies of George W. Bush: two wars, tax cuts that continue to benefit the wealthy and an expensive prescription drug program. Republicans see government spending as the culprit, particularly on Obama’s watch. In fact, the main reason is the deep recession, which slashed tax revenues and led to hundreds of billions of dollars in recession-fighting spending by both Bush and Obama. The debt was $9 trillion in late 2007 before the start of the Great Recession, and it’s just a sliver under the $14.3 trillion limit today.

Even though GOP leaders say they want to avoid more economic chaos, there is a large crop of tea-party aligned Republicans threatening to refuse to raise the cap under almost any circumstance. Polls suggest a large percentage of Americans oppose raising the debt limit. The debt limit has been raised ten times over the past decade. Obama voted against Bush’s debt-limit increase in 2006 as a senator, accusing Bush of “a leadership failure.” Obama recently apologized for “making what is a political vote as opposed to doing what was important for the country.”

Islamic Finance

2011-06-28T08:01:00.000-07:00

The notion of ethical investing goes back at least to 1758, when the Quakers banned profiting from the slave trade. But the market for ethical investments has always remained a niche. The goals of maximizing profit and fulfilling a moral agenda conflict more often than they complement one another, and investors who want to put ethics first have turned out to be relatively few. "Socially responsible investing," or SRI, as it is called these days, has never captured the heart of Wall Street.

That could be changing. Finance that complies with Sharia, or Islamic law, is still a niche within the ethical investing niche. In all, there are at least $500 billion worth of Islamic finance assets worldwide. That's not much in terms of global banking--U.S. banks alone hold about $12.7 trillion in assets, according to the American Bankers Association.

But the industry's growth is eye-catching: Islamic banking has expanded by more 10% annually over the past decade, according to Standard & Poor's. It's grabbing the attention of some of the biggest banks in the world, and changing how they do business.

In the 1990s, HSBC (nyse: HBC - news - people ) and Citigroup (nyse: C - news - people ) established global Islamic finance divisions. Far beyond just offering a few mutual funds to suit religious investors, they and stand-alone Muslim banks are creating instruments that parallel many of the Western world's financial products, from consumer loans to insurance to bonds.

Central banks and corporations in other industries are likewise feeling the demand. The governments of Japan and Great Britain--whether in an attempt to lure Muslim investors or impress Muslim voters--have announced plans to issue sukuk, which behave like bonds but conform to Islamic law.

Ford Motor's (nyse: F - news - people ) $848 million sale of Aston Martin to Investment Dar, a Kuwait-based Islamic bank, required Sharia-compliant financing, and Caribou Coffee (nasdaq: CBOU - news - people ), America's second-largest specialty coffee chain, after Starbucks (nasdaq: SBUX - news - people ), is owned by a Sharia-compliant private equity firm based in Bahrain.

So just what does Sharia-compliant banking entail? Some of it is simply prohibiting things seen as immoral. Investing in casinos, pornography and weapons of mass destruction is out.

The animating religious goal behind other restrictions is to achieve greater social justice by sharing risk and reward. Islamic finance bans people from selling what they don't own, which rules out short selling, and from engaging in contracts deemed to have excessive uncertainty on either side. That rules out traditional insurance, so Islamic banks have instead developed takaful, in which a group of people pool risk.

The Sharia stipulation banning interest, though, is the one that poses the most problems for modern finance. To be sure, from the Bible to Buddhism, most of the world's faiths have issued warnings against usury, and theologians through the ages have debated the line between permissible and excessive interest rates. But ultimately, in the West, governments and religious authorities deemed some amount of interest permissible.

Not so in Islam, in which most scholars (Islam has no central authority) deem fixed-interest payments forbidden. So, for example, a sukuk issuer does not sell a debt, as a traditional bond issuer would, but rather sells a portion of an asset, on which the buyer is then entitled to receive rent. Likewise, rather than take out an interest-bearing loan, a business in need of financing might enter a musharaka, a partnership with profit-and-loss sharing.

Why the growth in Islamic finance now? After all, Islam's rules have been around since the seventh century, and some Muslim countries have been rich since the discovery of oil.

One important factor has been the recent rise in religiosity in Muslim countries, says Ibrahim Warde, author of Islamic Finance in the Global Economy and an adjunct professor of international business at Tufts University. He dates the rise to shortly after the terrorist attacks of Sept. 11, 2001. With the U.S.-led invasions of Afghanistan and Iraq, "there was a feeling in many countries that Islam was a religion under siege," he says.

Some observers date the rise in religious observance back even further, to the 1980s, when guest workers in Saudi Arabia from across the Muslim world began returning to their own countries, re-importing with them the strict Wahhabi subsect of Islam for which the desert kingdom is known.

Whenever this burgeoning religious observance began, it's now visible across the Muslim world in the increasing number of women in the street wearing head scarves, the number of Islamist parties that have made electoral gains in recent years (in Morocco and Egypt for instance), and now, in an increasing appetite for Sharia finance. In some cases, Warde says, Middle Eastern governments have embraced Islamic banking to advertise their religious chops.

There are, of course, glaring exceptions to this growing demand. Saudi billionaire (and member of the ruling sect) Alwaleed Bin Talal owns big stakes in Citigroup (nyse: C - news - people ), The Walt Disney Co. (nyse: DIS - news - people ), and Planet Hollywood. But Saudi Arabia, where the ruling family is trapped delicately between reform and radical extremism, may prove Warde's point.

"The government did not encourage Islamic finance there at all. It was a grassroots movement," says Warde. Now, many banks and financial products there are Sharia-compliant. "Once there was nothing they could do about it, they accepted it," he says.

Some of the growth in Islamic finance has also been due to clever marketing by Malaysia. After Sept. 11, U.S. authorities froze the bank accounts of several prominent Saudis, which triggered other wealthy Arabs to withdraw their funds from the United States. Ultimately, some $200 billion left the U.S. Many of the investors were from tiny Gulf states whose economies were too small to absorb their funds, and so they looked to Malaysia, a Muslim country with a relatively sophisticated financial system.

Malaysia issued the first sovereign sukuk in 2002, and made a point of appointing Sharia scholars from the Gulf to monitor compliance. "They marketed it all over the world, and especially in the Arab world," Warde says. Today, Kuala Lumpur rivals traditional hubs like Dubai and Bahrain as a global center of Islamic finance.

In the end, the math behind the growth of Islamic banking may be pretty simple: There are 1.3 billion Muslims in the world--roughly a fifth of the world's population. Some live in quickly developing economies like India and Indonesia, some sit on vast oil wealth and some are newly middle-class Americans and Europeans.

No one can say for sure how many will seek out banking that complies with Islamic law, or even pay a premium for it. But even a small fraction of 1.3 billion is a market no one wants to ignore.@

WHY ?

2011-06-28T06:01:00.001-07:00

Public service announcement : Anything that may seem remotely like trading or investment advice in this post is of course not advice in any way or matter at all. Anyone stupid enough to invest money without knowing anything about the investment have themselves, and not me, to blame when they go bust.

I have long thought that the US was in a bigger hole than Europe. And while long-term, I think total collapse is more a threat on the US side, the prospect of a deflationary collapse still looms very probable in Europe. Within a few months, I suspect that the ECB will have to decide if they are going to monetize to the grave, or let the house of cards fall. Here’s what sort of convinced me :

LGD 100 (Loss Given Default) by Reggie Middleton

Reading between the lines, you soon find the conclusion that the shareholder capital of all the major banks in Europe is likely to be wiped out if Greeces starts the dominoes. This means that the majority of the European banking sector has to be liquidated (a situation in which it will be hard to find buyers for assets …. ) and that we are now in a situation where there is exactly 0 margin for error. No wonder they are feeling desperate in Brussels. Basically, they cannot let Greece fail. And they will continue to hand out money to Greece and others until finally something cracks. It may be the Greek banks. It may be a Greek revolution. It may be a German court decision. It may be the market figuring out that Spain and/or Italy is toast.

When this all happens, it is without a doubt 2008 all over again, with the exception that there is no margin for any country to save any bank. On top of this, entire retirement funds and money-management centers will collapse. IF this starts a run on short-term european debt papers (which may very well happen, even for short-term papers), then US money market funds are going down as well. If you do not realize what I’m trying to say here, I’ll put it simply : In 2008, a lot of financial institutions were about to go broke because the pyramiding paper ponzi failed. Had they been allowed to do so, and orderly liquidations hade taken place, we would be seeing the light right about now. There would also still be solvent governments in Europe. Since everyone played pretend for three more years, we are now more or less guaranteed a critical system failure, meaning more or less EVERYONE goes broke simultaneously. The crisis will rage on for at least a few years, a period during which the political systems will be damn close to the breaking point.

Thank you, eurocrat elite, for doing your darndest to try and utterly destroy society.

A few people are guaranteed to know this right now. This is the reason for the neverending bailouts. They cannot and will not allow this to happen. The financial class, as well as politicians all across Europe to one extent or other know that they are staring down the barrel of complete system collapse. So, it is my belief (and the recent ousting of Bini Smaghi from the ECB board could theoretically be a sign of this) that once Trichet has managed to escape with his “honour” intact (*snarl*), the next ECB chairman will create an emergency mechanism at least the size of the Federal Reserves. In short, “print print print print print print print print oooops!” is the order of the day. And just like the US Federal Reserve, larger and larger amounts of money will give less and less of an impact.

Germany may put a stop to this, and will then be called nazis. As always. Finland may opt out and re-introduce the Finnish Mark. Greece may dump the euro volountarily, in the end. Any number of events could trigger system failure despite an endless printing of money. Because if the “transmission mechanisms” of the banking system, meaning the ability to get bank A to lend to bank B who lends to bank C etc. fails despite guarantees by insolvent governments and an insane ECB, its game over.

I think you get my point by now.

What this means is that we may in fact (and I really, really, really hate saying this) be seeing significant strengthening by the USD against the EUR. I’m not saying the USD is suddenly a good currency, rather I’m saying that the USD and EUR are like two first world war fighter planes that have collided in mid-air, and are now doing a downward spiral of death. In the end, it will end with a big bang and lots of fire. But currently, it looks like the EUR-plane is tilting further down than the USD-plane.

But currency speculation is madness at this point. A better way to hedge against the collapse is to short european banks. I’m sure they will make it illegal soon enough, at which point the value of almost all European banks will reach zero in no-time, effectively preventing any way of saving them by emitting new shares to increase capital. Good move, regulators! But until then, the EuroStoxx50 index contains quite a few banks (~30%), so if you cannot short those stocks outright, this would be a good proxy. There are also a few ETF’s out there I think you can short, and in Sweden there are a few financial creations that are reverse banks. As I said – don’t take my advice on anything, but the one thing that is looking almost as clear as gold in the end going up, is European banks as a group going down. Way down. Way, way, way, way down.

On that cheery note, I will leave you for now. I will soon be on vacation, and then it will mostly be pics of stuff I’m growing, some trees, and possibly the ocean. Stay vigilant!@

Alternative source

2011-05-07T19:03:00.000-07:00

Infrastructure (e.g., transportation, power, telecommunications and environmental) requirements are growing rapidly, both domestically and internationally, and in both developed and developing countries, far outpacing the public and other traditional sources of financing available for these requirements. A considerable "funding gap" has either already arisen or is widely predicted. This has led to the exploration and development of private sector alternatives to traditional public financing sources and has created a new lexicon of "public-private partnerships" and "infrastructure privatization" for these activities.

At the risk of oversimplification, the current universe of debt instruments issued to finance infrastructure comprises or is provided by the following:

Commercial Banks

Private Placements

Rule 144A/Public Offerings

ECA/RDB/IBRD Financing

Municipal Finance

Commercial Banks. Commercial banks have always had an active role in project finance transactions. .Commercial banks have successfully provided project financing because of their demonstrated ability to evaluate complex project financing transactions and to assess and assume the construction and performance risks usually involved in such financings. However, principally due to the short-term nature of a commercial bank's liabilities (i.e., its deposits), commercial banks usually limit in amount and otherwise closely monitor and control their project finance exposure.

The project's sponsor will normally request commitments from its commercial banks for both construction financing and, following completion, the permanent, long-term financing of its project. Typically, the commitment for construction financing will be for 2 to 3 years and, following completion and demonstration of operational performance, for permanent financing will be from 10 to 15 years, although in rare cases commercial banks have provided permanent financing commitments of 20 years or more. Most permanent financing commitments by commercial banks will include specified increases in the applicable interest rate ("step-ups" in the applicable margin or spread over the commercial bank's cost of funds) in an effort to create escalating incentives for the commercial bank financing to be refinanced before its scheduled maturity.

The successful commercial bank syndicate for a project financing will usually seek to "sell down" its underwritten commitments in a further coordinated syndication to a larger bank group. This subsequent syndication may occur before financial closing (i.e., the execution and delivery of definitive financing documents) or afterwards, depending upon the confidence of the original underwriting banks in the "marketability" of their transaction in the bank project finance markets (and their willingness to assume the risk of adverse change in such markets), the timing constraints of the project, the project sponsor's preferences in this regard or the original underwriting banks' desire to reduce their level of commitments or all or any combination thereof.

The project's construction financing, which will normally bear interest at a floating rate, will usually require interest rate risk to be hedged through an interest rate swap, cap or collar (although, if such hedging is under swaps and collars, because payments there under may be due from the project and thus the swap or collar providers may become creditors of the project, project collateral will have to be shared with such providers). Even though the commercial banks provide a permanent, long-term financing commitment, upon completion of construction and demonstration of the project's acceptable performance, most sponsors will seek to refinance the project with permanent, long-term and fixed rate financing. This refinancing will usually be on terms that allow the project more operational flexibility because construction risk has been eliminated from the project and because obtaining waivers from institutional holders is more difficult.

This traditional model has proven very successful over a considerable period of time and in a wide variety of industries and specific applications. It has provided and will continue to provide substantial capital to qualifying projects throughout the world.

Private Placements. Private placements have also played a prominent role in infrastructure finance. This market has demonstrated strong tolerance of "story credit" and transaction complexity, lacks registration requirements and offers less maturity sensitivity than commercial bank financing (because of the longer-term nature of an insurance company's assets and the reduced asset/liability mismatch). Project finance is a key element of recent and dramatic growth in the private placement market. However, insurance companies (the private placement market's most active buyers) face recently imposed risk-based capital requirements and there is a demonstrable "flight to quality" in this market which has made it much more difficult to obtain financing (or at least more expensive to obtain financing) for a marginal project. While an explanation of the National Association of Insurance Commissioners' ("NAIC") rating system is beyond the scope of this paper, the market "break" seems to be at NAIC 2 (the equivalent of S&P's "BBB" rating), below which there are significantly fewer available investors.

Notably, both Standard & Poor's Rating Agency Group ("S&P") and Duff & Phelps Credit Rating Co. ("D&P") have announced private placement rating systems which are more lenient than their respective public ratings (insofar as the private placement ratings express views about ultimate payment and unlike public ratings do not place the same stress on timeliness of payment).

Rule 144A/Public Offerings. Approximately $4 trillion of the U.S. capital markets is comprised of public and corporate pension assets, which usually seek high-quality, long-term investments. The U.S. capital markets are therefore naturally attractive to infrastructure projects which seek long-term financing.

The attraction of the U.S. capital markets for infrastructure financing has been enhanced considerably by the adoption, in 1990, by the Securities and Exchange Commission (the "SEC") of Rule 144A ("Rule 144A") under the Securities Act of 1933, as amended (the "Securities Act"). As discussed below, Rule 144A established a non-exclusive exemption from the registration requirements of the Securities Act for resales by investors to eligible institutions of privately placed securities, subject to certain limitations. By facilitating resales of securities issued in private placements, Rule 144A has created liquidity in the secondary market for privately placed securities, causing the U.S. private placement market to become more attractive to foreign issuers, including those offering debt securities to finance infrastructure projects.

With the adoption of Rule 144A, a broader market for private financing in the U.S. capital markets has become available, especially for foreign issuers, characterized by greater liquidity than existed prior to adoption of the Rule and ease-of-entry. Prior to the adoption of Rule 144A, privately placed securities were subject to significant restrictions upon resale under applicable U.S. securities rules, rendering such securities more illiquid.

Rule 144A provides a non-exclusive safe harbor from the registration requirements of the Securities Act for resales of certain se4curities to "qualified institutional buyers" ("QIBs").The expressed intention of the SEC in adopting Rule 144A was to increase the liquidity of privately placed securities by allowing unrestricted resales of such securities among QIBs, and to increase access to the U.S. capital markets by foreign issuers.

In a Rule 144A placement, an issuer will sell, in a traditional private placement (in reliance upon an exemption from the registration requirements ), its securities to one or more investment banking firms which will then resell, in reliance upon Rule 144A, the securities to a larger number of QIBs. From an issuer's standpoint, the way in which Rule 144A placements are conducted is very similar to traditional underwritten public offerings, especially in that securities are offered by the investment banking firm to potential investors on a "take it or leave it" basis. Instead of direct negotiation with investors, issuers rely upon the bank's perception of the marketability of the issuer's securities.

A sale in compliance with Rule 144A must meet four basic criteria not discussed in detail in this paper: (1) the securities must be offered and sold only to QIBs; (2) the securities must not, when issued, be of the same class as securities listed on a U.S. securities exchange or quoted in a U.S. automated interdealer quotation system (such as the NASDAQ System); (3) the seller and the prospective purchaser must have the right to obtain certain information about the issuer if such information is not publicly available ; and (4) the seller must ensure that the prospective purchaser knows that the seller may rely on Rule 144A.

Since 1990, in response to the adoption of Rule 144A, a large number of foreign and domestic companies have issued securities in the U.S. private placement market in reliance upon the resale exemption afforded by Rule 144A and, as expected, there has developed a liquid secondary market for these securities among QIBs. The creation of this market and the growing appetite among U.S. institutional investors for high-yield securities (which, by definition, includes those issued by private or public sector issuers in the emerging markets) have made it possible to structure a capital markets financing for infrastructure projects targeted to the U.S. private placement market .

Infrastructure financing using Rule 144A or public offerings seemed to offer the best of both worlds -- access to the deepest segment of the U.S. capital markets (because of its liquidity and required minimum credit quality) and availability of long-term, fixed rate debt capital. The latter is especially important to infrastructure projects because shortening the maturity of financing can dramatically increase debt service requirements which will drive infrastructure tariffs to higher levels. For this reason, the long-lived assets which characterize infrastructure investments ideally should be financed with comparable debt maturities. But, this market generally requires an investment grade rating. The use of a U.S. capital market financing for an infrastructure project is a "major development of the 1990s." 18 While S&P believes that some European and Asian issuers will obtain an investment grade rating, this will depend significantly on the transaction's structure and, in particular, on how currency and political risks are handled.

ECA/RDB/IBRD Financing. One of the most interesting recent developments in infrastructure finance is the growth in export credit agency ("ECA") and regional development bank ("RDB") activity, as well as significant growth in infrastructure finance activity at the World Bank and International Finance Corporation ("IFC"). This growth is evident in the "reengineered" Export-Import Bank of the United States ("US ExIm"), which has formed a Project Finance unit and has been very proactive in educating potential users about its services and in streamlining its application requirements and approval procedures. A similar proactivity has been exhibited by the Overseas Private Investment Corporation ("OPIC"), which has likewise established a special Project Finance unit, increased its maximum project loan amounts and has both sponsored and made significant investments in several country-specific funds.

IFC has created and expanded its infrastructure department, sponsored and invested in several infrastructure funds and increased its cofinancing (the so-called "B loan") program. In a laudable transaction this year, the IFC Latin America and Asia Loan Trust 1995-A (some 2 years in gestation) sold interests in a pool of LIBOR-indexed, dollar-denominated loans to non-governmental borrowers in Argentina, Brazil, Colombia, Chile, Mexico, Venezuela, China, India, the Philippines and Thailand. This transaction introduces the potential benefits of secondary liquidity and diversification to investors. One can only hope that this transaction will provide the same stimulus to the capital markets and create the same secondary liquidity for similar instruments as did the groundbreaking RTC transactions for mortgage-backed securities.

More controversially, the IFC has sought and obtained several significant financial advisory engagements and syndicated many of its B loans.

The World Bank has attracted a lot of recent criticism and calls for reform. Most of this criticism concerns the delay in obtaining World Bank financing, conceded by the World Bank to be over 2 years (although, in the case of the Hub River project in Pakistan, it was 6 years), and inflexible rules that limit its guarantees to less than 5% of its lending volume and prevent guarantees from being extended to low-income countries that qualify for its concessioned loans.

Similar criticism has been made about the ECAs and RDBs, although several ECAs have implemented reforms aimed at expediting approvals increasing the use of guarantees and other credit enhancements to increase the total value of supported projects. US ExIm has admitted that it subsidizes its insurance premiums (although it claims to do so only to the same extent as other ECAs). The OECD arrangement or consensus, to which US ExIm and most other ECAs subscribe, provides only general rules and guidelines which result in substantial differences between ECAs.

While the participation of multi- and bi-lateral institutions in infrastructure finance is necessary at least in the near term, it inherently distorts free competition to provide capital to infrastructure projects and may significantly influence whether and, if so, which projects will be financed.

Municipal Finance. Municipal bonds are debt securities issued by states, cities, counties and other governmental entities to finance capital projects, such as building schools, highways or sewer systems, and to fund day-to-day obligations. Investors who buy municipal bonds are in effect lending money to the bond issuer in exchange for a promise of regular interest payments, usually semi-annually, and the return of the original investment, or “principal.” The date when the issuer repays the principal, the bond’s maturity date, may be years in the future. Short-term bonds mature in one to three years, while long-term bonds generally will not mature for more than a decade.

Individual investors hold about two-thirds of the roughly $2.8 trillion of U.S. municipal bonds outstanding, either directly or indirectly through mutual funds and other investments. Bond investors typically are seeking a steady stream of income payments, and compared to stock investors, they may be more risk-averse and more focused on preserving rather than accumulating wealth.

Benefits to investors in municipal bonds include the fact that interest on such bonds generally is exempt from federal income tax and may also be exempt from state and local taxes for residents in the state where the bond is issued. Given the tax benefits, the interest on municipal bonds is usually lower than on taxable fixed-income securities such as corporate bonds.

The two most common types of municipal bonds are general obligation bonds (bonds backed by the “full faith and credit” of the issuer) and revenue bonds (bonds backed by the revenues from a specific project or source). In addition, municipal borrowers sometimes issue bonds on behalf of private entities such as non-profit colleges or hospitals. These “conduit” borrowers typically agree to repay the issuer, who pays the interest and principal on the bonds.

Investors who buy municipal bonds face a number of risks, including: call risk, credit risk, inflation risk, interest rate risk, and liquidity risk

ideal solution.

2011-05-06T18:08:00.000-07:00

In a mezzanine financing arrangement, the borrower negotiates an arrangement with a lender wherein the necessary capital is secured by combining a loan with a stock purchase to the lender. "As a rule, you pay only interest on the money you borrow (at prime plus two to four points) for five years or so. At that point, you [the business owner] cash out your investors by going public or by recapitalizing your business in a new round of financing. Your investors, meanwhile, have earned interest on their loans, and if the value of your business has increased, they realize capital gains by selling their stock in your company."

Lenders that review mezzanine financing requests closely examine several facets of the prospective borrower's business when weighing the deal. The most important consideration examined by a mezzanine lender is the company's capacity to generate cash flow. Because the primary concern of a subordinated lender is a company's ability to generate cash, if it is anticipated that the business' cash flow is sufficient to repay the loan, it is quite likely subordinated debt can be used.

" In addition to cash flow, lenders also examine ownership flexibility, company history, growth strategy, and acquisition targets (when applicable). Business owners in need of capital, meanwhile, should do some comparison shopping of their own. "In selecting a source for mezzanine financing, companies should pay attention to personnel turnover, commitment to the business, track record, and flexibility in structuring," . "Low turnover and commitment to the business are key because businesses rarely perform exactly according to plan. Therefore, you need an investor who understands the business and will respond consistently and appropriately."

***

Financing offers a way for publicly and privately held companies to attain financing without going public and potentially ceding ownership of their company. It is a blend of traditional debt financing and equity financing, reaping some benefits of both. Like equity financing, mezzanine financing is an unsecured debt, requiring no collateral to be put up unlike traditional bank loans. Like debt financing, mezzanine financing is very fluid and does not necessarily involve giving up an interest in the company.

Mezzanine financing relies on very high interest rates in the 20-30% range to make it profitable. Unlike a bank loan, mezzanine financing does not hold real assets of a company as collateral; instead, lenders offering mezzanine financing have the right to convert their stake to an equity or ownership in the event of a default on the loan.

Mezzanine financing is a particularly appealing form of liquidity for owners of privately held companies. It is traditionally understood that a privately held company simply cannot achieve the same sort of fluid capital flow as a publicly held company, but mezzanine financing offers a way to balance that situation without going public. In addition to the fact that mezzanine financers do not retain an interest in the company except in the event of a default, there is also the important consideration that they actively do not want an interest in the company. While traditional equity investors are often striving towards some level of control, a displeasing thought to many private owners, with mezzanine financing one can rest assured that the financers will do what they can to ensure you pay off your debt without resorting to default.

Because of the lack of real collateral, as well as the high speed of lending, mezzanine financing is typically more difficult to receive than a traditional bank loan or equity financing. A company must demonstrate an established track record in its industry, show a profit or at the very least post no loss, and have a strong business plan for future expansion. Because of these limitations, mezzanine financing is not for every business. For businesses looking for a quick injection of capital to grow their already successful business, without giving up an interest, mezzanine financing can be an ideal solution.

Mezzanine financing involves the use of financial instruments that fall between the risk-return parameters of equity (high risk, high return) and senior debt (low risk low return. ) Mezzanine financing includes subordinated debt, convertible subordinated debt, equity warrants, and preferred equity, described below:

Convertible debt. Convertible debt gives its owner the right to exchange debt by a certain time for a predetermined amount of equity at a fixed price. Until conversion, convertible debt carries the right to stipulated interest payments, repayment of principal on maturity, and a claim on cash flow and assets ahead of equity. Before conversion, the convertible debt holder receives interest payments that are almost always higher than dividends. If the project is successful and the actual worth of the equity is greater than the conversion price, the holder benefits from upside appreciation in the price of equity.

Equity warrants. Equity warrants are long-term options that give the holder the right to purchase common equity at an established price within a specified period of time. This enables the holder to benefit from the upside potential of a successful project. They are often given to subordinated debt holders to lower the interest rate paid.

Preferred equity. Preferred equity is a special class of equity with priority over common equity in receiving dividends. Mezzanine financing, local and foreign, can be a useful tool for attracting financing for projects.

Derivatives

2011-04-08T00:24:00.000-07:00

Financial derivatives (aka derivative assets, contingent claims) are securities whose value depends on another security or some benchmark, such as a particular interest rate or the value of a financial index at a specified time. Primitive securities are based directly on real assets or on payments from the issuer. For instance, stocks represent an ownership interest in a corporation, and bonds are valued mainly on what the issuer promises to pay. The value of a derivative security depends on the value of its underlying financial asset or the current value of a benchmark, such as an index or current interest rates.

The value of derivatives is sometimes called the notional value, because derivatives are generally illiquid investments and are difficult to value. Oftentimes, their value is derived from pricing models for accounting purposes. Derivatives can be listed on an exchange, but most are traded either privately or in the over-the-counter market.

There are more than 1,000 different derivatives on the market, with more to come. Derivatives are based on stocks, commodities, debt, currencies, and almost anything else that 2 parties can agree on, or for which an investment bank considers marketable.

Derivatives are created by investment banks or other dealers by entering into a contract with a business, dealer, or investor to provide payment depending on the future price of some asset or the future value of some benchmark. For instance, a business may have to pay floating rate on issued securities, but doesn’t want to take the interest-rate risk, so it does an interest-rate swap with a bank to pay the floating rate interest on the securities in exchange for a fixed rate of interest paid by the business to the bank.

Derivatives are created by financial engineering, which is the design and creation of securities with particular characteristics that the issuer thinks can be marketed for a profit. Financial engineering frequently involves the securitization of debt, or the bundling of other securities into a hybrid security, or the unbundling of a security into different risk classes., or even different tax classes, such as separating interest or dividend income from capital gains income, which is usually taxed at a lower rate.

A good example of a derivative is the mortgaged-backed security (MBS), first issued in 1970 by the Government National Mortgage Association (GNMA, or Ginnie Mae, as it is usually called), which is created by the securitization of a pool of mortgages. Mortgage payments are collected by the bank servicing the mortgage, and both interest and principal payments are passed-through to the buyers of the MBSs—thus, they are called pass-through securities. Other debt, such as auto loans, credit card debt, and student loans, is similarly packaged as asset-backed securities.

There are 2 types of derivatives: option-type and forward-type. The option-type derivative is based on the price of the underlying asset, and it gives the holder the right, but not the obligation, to buy or sell a specific asset for a specific price for a specific time period. The most common example is stock options, which are based on the price of a stock. A call is a stock option giving the holder the right to buy a specific stock for a specific price—the strike price—and a put gives the holder the right to sell the stock for the strike price within a specific time. Option-type derivatives always sell for much less than the underlying asset—otherwise, what value would the option have?

The forward-type derivative is based on the value of some benchmark, such as interest rates or a financial index or the price of a commodity. A common example is the FX forward contract, which is a contract to buy or sell currency at a specified exchange rate at some time in the future. Another example is futures, which are contracts to buy or sell specific commodities or other assets at a specific price on the settlement date. Forward-type derivatives are based on an agreement about a future transaction for a specified price. No cash or asset changes hands until the contract is settled. Sometimes, however, a performance bond—sometimes referred to as margin—will be required to ensure the performance of the contract by the parties, such as is commonly required for futures.

Settlement is the performance of the contract and terminates the existence of the derivative. Settlement can be satisfied by physical delivery or by cash settlement. Physical delivery is the actual delivery and possession of the underlying commodity or other asset. A future contract to sell and buy corn, for instance, involves the actual delivery of the corn by the seller of the future, and the actual possession of the corn by the buyer of the contract. Most derivatives are cash-settled, which only involves exchanging cash, depending on the underlying value on the settlement date.

Derivatives are used for hedging, speculation, and to remove assets from balance sheets. Hedging is using a derivative to protect a position. For instance, a business manufactures a widget to sell in a foreign country, but will not receive payment until some time in the future. To be able to price its widgets so that it can make a profit, it must know in advance what it will receive in its own currency when the widgets are sold. Before the delivery of the widgets to the foreign country, the business can enter into a forward contract with a bank or a speculator to exchange currency at a guaranteed rate, thus, hedging any risk that the currency exchange rate will lessen the amount of money received for its widgets.

Speculation is the buying and selling of derivatives for a profit. Many future contracts call for physical delivery of a commodity; however, most speculators buy future contracts without having any intention of delivering or taking delivery of the commodity. They close out their position before the settlement date, taking a profit or loss by offsetting the contract by reversing their previous transaction. Thus, if a speculator buys a contract to buy butter, she will close out her position by selling the contract.

Derivatives can also be used to remove assets from the balance sheets of companies, which provides liquidity for the companies and reduces risk by transferring it to the holders of the derivatives. The reason why mortgaged-backed securities were created was so that banks could remove mortgages from their balance sheets, giving them more cash to issue more mortgages, and reduce their own risk by transferring it to the holders of the MBSs.

The SPE

2011-04-08T00:22:00.000-07:00

The special purpose entity (aka SPE, special investment vehicle, SIV, special purpose vehicle, SPV, special purpose corporation, SPC) is a limited-purpose legal vehicle, organized as a corporation, limited liability company, or business trust, that is formed to securitize assets, such as loans and receivables, and sell them as asset-backed securities (ABS). Since most ABSs are sold to institutional investors that require an investment grade credit rating, the SPE provides bankruptcy remoteness from the seller of the assets, which includes banks and finance companies, and allows the credit rating of the SPE to be higher than that of the seller or sponsor of the ABS.

Bankruptcy remoteness is accomplished by legally segregating the collateral from the originator or seller for the benefit of ABS holders. For bankruptcy remoteness to be legally effective, there must be a true sale of the assets at arm's length. The Uniform Commercial Code (UCC) of most states stipulates that this transfer can be accomplished either by transferring the loan documents from the seller to the SPE, or by filing a UCC finance statement. Filing UCC statements is usually done because it is cheaper and faster.

Legal counsel for the seller will render a legal opinion concerning the effectiveness of the transfer, including a true sale opinion and a nonconsolidation opinion, stating that if the sponsor enters bankruptcy, the assets of SPE would not be consolidated with the assets of the sponsor.

After the special purpose entity is formed, the securitization of assets and their sale to investors involves the following steps:

The assets, usually loans or receivables, are transferred from the seller to the SPE.

The SPE securitizes the assets, then sells the resulting securities, mostly as notes, to investors.

The proceeds of the security sale are then paid to the seller of the assets.

Credit rating agencies review all documents of the SPE before assigning a rating. While the credit rating agency is not a legal party to any of the agreements for setting up the special purpose entity, it is listed in the documents as the credit rating agency, and the documents also require that specified information be provided to the credit rating agency continually, to ensure that the proper procedures are being followed to maintain credit quality, and that the credit quality is actually being maintained.

Some of the legal documents used to form the SPE and issue securities include:

SPE organizational documents

investment/portfolio management agreements

trust agreements

custodial agreements

collateral, pooling, and servicing agreements

loan and sale agreements

mortgages or deeds of trust

liquidity and credit support agreements

swap agreements for converting floating and fixed rates

legal opinions required by the credit rating agencies

trust indenture and offering circular or prospectus for the securities

Bonds ?

2011-04-08T00:15:00.001-07:00

When a bond is first issued, it is generally sold at par, which is the face value of the bond. For instance, the par value of a bond with a face value of $1,000 is $1,000. The par value is the principal, which is received at the end of the bond’s term. Sometimes when the demand is higher or lower than an issuer expected, the bonds might sell higher or lower than par. In the secondary market, bonds almost always trade for either more or less than par, because interest rates change continuously. When a bond trades for more than par, then it is selling at a premium, and when it is selling for less, it is selling at a discount. The main determinant of most bond prices in the secondary market is the prevailing interest rates. When interest rates rise, bond prices decline, and vice versa.

When bond prices are listed, the convention is to list them as a percentage of par value, regardless of what the face value of the bond is, with 100 being equal to par value. Thus, a bond with a face value of $1,000 which is selling for par, sells for $1,000, and a bond with a face value of $5,000 that is also selling for par will both have their price listed as 100, which means their prices are equal to 100% of par value, or $100 for each $100 of face value.

This pricing convention allows different bonds with different face values to be compared directly. For instance, if a $1,000 corporate bond was listed as 90 and a $5,000 municipal bond was listed as 95, then it can be easily seen that the $1,000 bond is selling at a bigger discount, and, therefore, has a higher yield. To find what the bond’s price actually is, the listed price must be multiplied as a percentage by the face value of the bond, so the price for the $1,000 bond is 90% x $1,000 = 0.9 x $1,000 = $900, and the price for the $5,000 bond is 95% x $5,000 = .95 x $5,000 = $4,750.

A point is equal to 1% of the bond’s face value. Thus, a point's actual value depends on the face value of the bond. Thus, 1 point = $10 for a $1,000 bond, but $50 for a $5,000 bond. So a $1,000 bond that is selling for 97 is selling at a 3 point discount, or $30 below par value, which equals $970.

No commission is charged when buying or selling bonds. A bond dealer makes money through the spread—the difference between the bid price, which is what the dealer is willing to pay for a bond, and the ask price, which is what the dealer is selling the bond for. To keep the spread further apart, bond prices are generally listed in 1/32 increments of a point, or a higher multiple, although some Treasuries have price differentials as low a3E

Price of Security that pays interest only at maturity = PRICEMAT (settlement, maturity, issue, rate, yield,basis)

Settlement = Date in quotes of settlement.

Maturity = Date in quotes when bond matures.

Rate = Nominal annual coupon interest rate in decimal form.

Yield = Annual yield to maturity in decimal form.

Issue = Issue date of the security.

Price = Price of security as a percent of par value.

Redemption = Value of security at redemption per $100 of face value. Most often, redemption will equal 100.

Frequency = Number of coupon payments per year.

1 = Annual

2 = Semiannual

4 = Quarterly

Basis = Day count basis.

0 = 30/360 (U.S. NASD basis). This is the default if the basis is omitted.

1 = actual/actual (actual number of days in month/year).

2 = actual/360

3 = actual/365

4 = European 30/360

Examples—Using Microsoft Office Excel For Calculating Bond Prices And Discounts

The following basic facts—where they apply—will be used for each of the example calculations for a 10-year bond originally issued in 1/1/2008 with a par value of $1,000:

Settlement date = 3/31/2008

Maturity date = 12/31/2017

Issue date = 1/1/2008

Coupon rate = 6%

Yield to maturity = 8%

Price (per $100 of face value) = 21.99

Redemption = 100

Frequency = 2 for most coupon bonds.

Basis = 1 (actual/actual)

What is the price of a bond selling for a yield to maturity of 8%?

Bond Price =PRICE("3/31/2008","12/31/2017",0.06,0.08,100,2,1) = 86.62092 = $866.21

What is the discount price of a zero coupon bond with a par value of $1,000 yielding 8%?

Price Discount = PRICEDISC ("3/31/2008","12/31/2017",0.06,0.08,100,1) = 21.99288 = $219.93

What is the interest rate of a discounted zero coupon bond selling for $219.90 that pays $1,000 at maturity?

Interest Rate of Bond Discount = DISC("3/31/2008","12/31/2017",21.99,100,1) = 0.080003 = 8%

Note that the price found with the PRICEDISC function has been rounded and plugged into the DISC function as a way to verify values. (21.99 = $219.90 for a bond with a $1,000 par value).

The last function, PRICEMAT, calculates the price of a security that pays all of its interest at maturity, which includes negotiable money market certificates of deposit (CD).

What is the price of a negotiable, 90-day CD originally issued for $100,000 on 3/1/2008 paying a rate of 8% with a current yield of 6% and a settlement date of 4/1/2008? Here we use the Microsoft Excel Date function, which takes the format DATE(year,month,day) to do some calendar arithmetic. We also use the banker's year of 360 days, so we choose a basis of 0, which we could have omitted, since it is the default.

Market Price of CD = PRICEMAT (DATE (2008,4,1), DATE (2008,3,1) +90, DATE (2008,3,1),0.08,0.06,0) = 100.3181 per $100 of face value = $100,318.10

BIS ?

2011-03-18T20:14:00.000-07:00

The BIS has been called “the most exclusive, secretive, and powerful supranational club in the world.” Founded in Basel, Switzerland, in 1930, it has been scandal-ridden from its beginnings. According to Charles Higham in his book Trading with the Enemy, by the late 1930s the BIS had assumed an openly pro-Nazi bias. This was corroborated years later in a BBC Timewatch film titled “Banking with Hitler,” broadcast in 1998. In 1944, the American government backed a resolution at the Bretton-Woods Conference calling for the liquidation of the BIS, following Czech accusations that it was laundering gold stolen by the Nazis from occupied Europe; but the central bankers succeeded in quietly snuffing out the American resolution.

In Tragedy and Hope: A History of the World in Our Time (1966), Dr. Carroll Quigley revealed the key role played in global finance by the BIS behind the scenes. Dr. Quigley was Professor of History at Georgetown University, where he was President Bill Clinton’s mentor. He was also an insider, groomed by the powerful clique he called “the international bankers.” His credibility is heightened by the fact that he actually espoused their goals. He wrote:

“I know of the operations of this network because I have studied it for twenty years and was permitted for two years, in the early 1960's, to examine its papers and secret records. I have no aversion to it or to most of its aims and have, for much of my life, been close to it and to many of its instruments. ... n general my chief difference of opinion is that it wishes to remain unknown, and I believe its role in history is significant enough to be known.”

Quigley wrote of this international banking network: “The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations.”

The key to their success, said Quigley, was that the international bankers would control and manipulate the money system of a nation while letting it appear to be controlled by the government. The statement echoed an often-quoted one made by the German patriarch of what would become the most powerful banking dynasty in the world. Mayer Amschel Bauer Rothschild famously said in 1791: “Allow me to issue and control a nation’s currency, and I care not who makes its laws.”

Mayer’s five sons were sent to the major capitals of Europe – London, Paris, Vienna, Berlin and Naples – with the mission of establishing a banking system that would be outside government control. The economic and political systems of nations would be controlled not by citizens but by bankers, for the benefit of bankers. Eventually, a privately-owned “central bank” was established in nearly every country; and this central banking system has now gained control over the economies of the world. Central banks have the authority to print money in their respective countries, and it is from these banks that governments must borrow money to pay their debts and fund their operations. The result is a global economy in which not only industry but government itself runs on “credit” (or debt) created by a banking monopoly headed by a network of private central banks; and at the top of this network is the BIS, the “central bank of central banks” in Basel.

Behind the Curtain : For many years the BIS kept a very low profile, operating behind the scenes in an abandoned hotel. It was here that decisions were reached to devalue or defend currencies, fix the price of gold, regulate offshore banking, and raise or lower short-term interest rates. In 1977, however, the BIS gave up its anonymity in exchange for more efficient headquarters. The new building has been described as “an eighteen story-high circular skyscraper that rises above the medieval city like some misplaced nuclear reactor.” It quickly became known as the “Tower of Basel.” Today the BIS has governmental immunity, pays no taxes, and has its own private police force. It is, as Mayer Rothschild envisioned, above the law.

The BIS is now composed of 55 member nations, but the club that meets regularly in Basel is a much smaller group; and even within it, there is a hierarchy. In a 1983 article in Harper’s Magazine called “Ruling the World of Money,” Edward Jay Epstein wrote that where the real business gets done is in “a sort of inner club made up of the half dozen or so powerful central bankers who find themselves more or less in the same monetary boat” – those from Germany, the United States, Switzerland, Italy, Japan and England. Epstein said: “The prime value, which also seems to demarcate the inner club from the rest of the BIS members, is the firm belief that central banks should act independently of their home governments. . . . A second and closely related belief of the inner club is that politicians should not be trusted to decide the fate of the international monetary system.”

In 1974, the Basel Committee on Banking Supervision was created by the central bank Governors of the Group of Ten nations (now expanded to twenty). The BIS provides the twelve-member Secretariat for the Committee. The Committee, in turn, sets the rules for banking globally, including capital requirements and reserve controls. In a 2003 article titled “The Bank for International Settlements Calls for Global Currency,” Joan Veon wrote: “The BIS is where all of the world’s central banks meet to analyze the global economy and determine what course of action they will take next to put more money in their pockets, since they control the amount of money in circulation and how much interest they are going to charge governments and banks for borrowing from them. . .

“When you understand that the BIS pulls the strings of the world’s monetary system, you then understand that they have the ability to create a financial boom or bust in a country. If that country is not doing what the money lenders want, then all they have to do is sell its currency.”

The Controversial Basel Accords : The power of the BIS to make or break economies was demonstrated in 1988, when it issued a Basel Accord raising bank capital requirements from 6% to 8%. By then, Japan had emerged as the world’s largest creditor; but Japan’s banks were less well capitalized than other major international banks. Raising the capital requirement forced them to cut back on lending, creating a recession in Japan like that suffered in the U.S. today. Property prices fell and loans went into default as the security for them shriveled up. A downward spiral followed, ending with the total bankruptcy of the banks, which had to be nationalized – although that word was not used, in order to avoid criticism.

Among other collateral damage produced by the Basel Accords was a spate of suicides among Indian farmers unable to get loans. The BIS capital adequacy standards required loans to private borrowers to be “risk-weighted,” with the degree of risk determined by private rating agencies; and farmers and small business owners could not afford the agencies’ fees. Banks therefore assigned 100 percent risk to the loans, and then resisted extending credit to these “high-risk” borrowers because more capital was required to cover the loans. When the conscience of the nation was aroused by the Indian suicides, the government, lamenting the neglect of farmers by commercial banks, established a policy of ending the “financial exclusion” of the weak; but this step had little real effect on lending practices, due largely to the strictures imposed by the BIS from abroad.

Similar complaints have come from Korea. An article in the December 12, 2008 Korea Times titled “BIS Calls Trigger Vicious Cycle” described how Korean entrepreneurs with good collateral cannot get operational loans from Korean banks, at a time when the economic downturn requires increased investment and easier credit: “‘The Bank of Korea has provided more than 35 trillion won to banks since September when the global financial crisis went full throttle,’ said a Seoul analyst, who declined to be named. ‘But the effect is not seen at all with the banks keeping the liquidity in their safes. They simply don’t lend and one of the biggest reasons is to keep the BIS ratio high enough to survive,’ he said. “Chang Ha-joon, an economics professor at Cambridge University, concurs with the analyst. ‘What banks do for their own interests, or to improve the BIS ratio, is against the interests of the whole society. This is a bad idea,’ Chang said in a recent telephone interview with Korea Times.”

In a May 2002 article in The Asia Times titled “Global Economy: The BIS vs. National Banks,” economist Henry C K Liu observed that the Basel Accords have forced national banking systems “to march to the same tune, designed to serve the needs of highly sophisticated global financial markets, regardless of the developmental needs of their national economies.” He wrote: “National banking systems are suddenly thrown into the rigid arms of the Basel Capital Accord sponsored by the Bank of International Settlement (BIS), or to face the penalty of usurious risk premium in securing international interbank loans. . . . National policies suddenly are subjected to profit incentives of private financial institutions, all members of a hierarchical system controlled and directed from the money center banks in New York. The result is to force national banking systems to privatize . . . .

“BIS regulations serve only the single purpose of strengthening the international private banking system, even at the peril of national economies. . . . The IMF and the international banks regulated by the BIS are a team: the international banks lend recklessly to borrowers in emerging economies to create a foreign currency debt crisis, the IMF arrives as a carrier of monetary virus in the name of sound monetary policy, then the international banks come as vulture investors in the name of financial rescue to acquire national banks deemed capital inadequate and insolvent by the BIS.” Ironically, noted Liu, developing countries with their own natural resources did not actually need the foreign investment that had trapped them in debt to outsiders:

“Applying the State Theory of Money [which assumes that a sovereign nation has the power to issue its own money], any government can fund with its own currency all its domestic developmental needs to maintain full employment without inflation.” When governments fell into the trap of accepting loans in foreign currencies, however, they became “debtor nations” subject to IMF and BIS regulation. They were forced to divert their production to exports, just to earn the foreign currency necessary to pay the interest on their loans. National banks deemed “capital inadequate” had to deal with strictures comparable to the “conditionalities” imposed by the IMF on debtor nations: “escalating capital requirement, loan writeoffs and liquidation, and restructuring through selloffs, layoffs, downsizing, cost-cutting and freeze on capital spending.” Liu wrote: “Reversing the logic that a sound banking system should lead to full employment and developmental growth, BIS regulations demand high unemployment and developmental degradation in national economies as the fair price for a sound global private banking system.”

The Last Domino to Fall : While banks in developing nations were being penalized for falling short of the BIS capital requirements, large international banks managed to escape the rules, although they actually carried enormous risk because of their derivative exposure. The mega-banks succeeded in avoiding the Basel rules by separating the “risk” of default out from the loans and selling it off to investors, using a form of derivative known as “credit default swaps.”

However, it was not in the game plan that U.S. banks should escape the BIS net. When they managed to sidestep the first Basel Accord, a second set of rules was imposed known as Basel II. The new rules were established in 2004, but they were not levied on U.S. banks until November 2007, the month after the Dow passed 14,000 to reach its all-time high. The economy was all downhill from there. Basel II had the same effect on U.S. banks that Basel I had on Japanese banks: they have been struggling ever since to survive.

Basel II requires banks to adjust the value of their marketable securities to the “market price” of the security, a rule called “mark to market.” The rule has theoretical merit, but the problem is timing: it was imposed ex post facto, after the banks already had the hard-to-market assets on their books. Lenders that had been considered sufficiently well capitalized to make new loans suddenly found they were insolvent. At least, they would have been insolvent if they had tried to sell their assets, an assumption required by the new rule. Financial analyst John Berlau complained: “The crisis is often called a ‘market failure,’ and the term ‘mark-to-market’ seems to reinforce that. But the mark-to-market rules are profoundly anti-market and hinder the free-market function of price discovery. . . . In this case, the accounting rules fail to allow the market players to hold on to an asset if they don’t like what the market is currently fetching, an important market action that affects price discovery in areas from agriculture to antiques.”

Imposing the mark-to-market rule on U.S. banks caused an instant credit freeze, which proceeded to take down the economies not only of the U.S. but of countries worldwide. In early April 2009, the mark-to-market rule was finally softened by the U.S. Financial Accounting Standards Board (FASB); but critics said the modification did not go far enough, and it was done in response to pressure from politicians and bankers, not out of any fundamental change of heart or policies by the BIS.

And that is where the conspiracy theorists come in. Why did the BIS not retract or at least modify Basel II after seeing the devastation it had caused? Why did it sit idly by as the global economy came crashing down? Was the goal to create so much economic havoc that the world would rush with relief into the waiting arms of the BIS with its privately-created global currency? The plot thickens . . .@

Gold standard ?

2011-03-18T19:53:00.001-07:00

During any period of monetary disorder — the 1970s, for example, or today — a host of people calls for a return to the gold standard. This is not the only free-market response to the current system of fiat (or government-made) money. Other proposals are for privatising the creation of money altogether. (See, on this, Leland Yeager, professor emeritus at the University of Virginia and Auburn University, in the latest issue of the Cato Journal.) But the gold standard is the classic alternative to fiat money. It is not hard to understand the attractions of a gold standard. Money is a social convention. The advantage of a link to gold (or some other commodity) is that the value of money would apparently be free from manipulation by the government. The aim, then, would be to “de-politicise” money.

The argument in favour of doing so is that in the long-run governments will always abuse the right to create money at will. Historical experience suggests that this is indeed the case. So why choose gold? It is, after all, an impossibly inconvenient means of exchange. But gold has a lengthy history as a widely-accepted store of value. If one is looking to reinstate a pre-modern monetary, gold is the obvious place to start.

After the experience of the last three decades the monetarism of Milton Friedman is no longer a credible alternative. It was abandoned for two simple reasons: first, it proved impossible for monetarists to agree on what money is; and, second, the relation between any given monetary aggregate and nominal income proved unstable.

Again, recent experience suggests that we can no longer be so confident that delegation to independent central banks protects against severe monetary instability. That system permitted a gigantic increase in credit, relative to gross domestic product. It is equally clear that governments do not wish to see this edifice collapse, for understandable reasons. This being so, the ultimate solution may be to increase nominal incomes, via inflation. Indeed, several economists recommend this. If that did happen, it would support those who argue for abandonment of the modern experiment with fiat money.

So would the gold standard be the answer? We would need to start by asking what a return to the “gold standard” might mean. The most limited reform would be for the central bank to adjust interest rates in light of the gold price. But that would just be a form of price-level targeting. I can see no reason why one would want to target the gold price, rather than the price of goods and services, in aggregate. The opposite extreme would be a move back into a world of metallic currency. But money in circulation will continue to be predominantly electronic, with a small quantity of paper, as today. That is the only convenient way to run a modern economy. Finally, a return to the Bretton Woods system, in which the US promised to convert dollars into gold, at a fixed price, but only for other governments, would lack any credibility, since there would then be no direct link between gold stocks and the domestic money supply.

With these possibilities eliminated, the obvious form of a contemporary gold standard would be a direct link between base money and gold. Base money — the note issue, plus reserves of commercial banks at the central bank (if any such institution survives) — would be 100 per cent gold-backed. The central bank would then become a currency board in gold, with the unit of account (the dollar, say) defined in terms of a given weight of gold. In a less rigid version of such a system, the central bank might keep an excess gold reserve, which would allow it to act as lender of last resort to the financial system in times of crisis. That is how the Bank of England behaved during the 19th century, as explained by Walter Bagehot in his classic book, Lombard Street.

So what would be the objections to such a system? There are three: difficulties with the transition; instability; and lack of credibility.

The biggest transition problem is the mismatch between the value of official gold holdings and the size of the monetary system. The value of gold held by central banks is apparently about $1,300bn, while global deposits of the banking system were about $61,000bn in 2008, according to the McKinsey Global Institute. To survive the slightest financial panic, the ratio of gold to bank money would need to be perhaps an order of magnitude higher.One obvious objection is that this would generate huge windfall gains to holders of gold. More important, if policymakers set this initial price wrong, as they certainly would, they could unleash either deflation or inflation: the latter is far more likely, in fact, because private holders would start selling their gold to the central banks at such a high price. Apparently, about 90 per cent of gold is now privately held. So the expansion in the monetary base could be enormous.

Moreover, gold reserves are distributed quite erratically around the world. So some currencies would have to experience inflation and others severe deflation. A similar problem explains why it was impossible to recreate the gold standard after the First World War: too much of the world’s gold reserves were then held by the US. What, then, about the problems of the steady state? One obvious point is that we would be back to the world in which the balance of payments would be settled by physical shipment of gold or, as it was later, by movements within central bank vaults. That would, at the least, be absurd.

A far more important problem is that of financial stability. Economists of the Austrian school wish to abolish fractional reserve banking. But we know that this is a natural consequence of market forces. It is wasteful to hold a 100 per cent reserve in a bank, if depositors do not need their money almost all of the time. Banks have a strong incentive to lend some of the money deposited with them, so expanding the aggregate supply of money and credit. The government might seek to impose narrow banking: banks would have to back any deposits with notes or reserves at the central bank. But entrepreneurs could then create quasi-banks (let us call them “shadow banks”). These would hold deposits in the safe narrow banks and offer higher returns to customers, because they lend out surplus reserves for profit.

Such a system is unstable. In good times, credit, deposit money and the ratio of deposit money to the monetary base expands. In bad times, this pyramid collapses. The result is financial crises, as happened repeatedly in the 19th century. To prevent this one would have to move into the world of limited purpose banking recommended by Larry Kotlikoff, in which no financial institution would be allowed to promise redemption at par unless it held matching assets.* If so, the pure gold standard would require abandonment of the current banking system altogether. A further danger is that the response to all shocks would have to come via nominal wage and price flexibility. A less obvious point is that the gold standard does not guarantee price stability. Depending on the supply conditions for gold, the price level might move up or down. In the long-run, however, the price level would probably tend to fall (because the supply of gold fails to keep pace with global activity). Such a world of trend deflation is liable to depressions if or when the equilibrium real rate of interest is less than the rate of deflation.

Another and, in my view, even more serious, threat to the stability of any gold standard regime is international. A peg to gold may prove radically destabilising for any currency if other significant countries failed to sustain domestic monetary and financial stability. There could then be floods of gold into or out of a currency that is well managed. The monetary and financial consequences could be dramatic, with severe deflation one obvious threat. This is precisely what happened in the interwar years, with the chaos emanating mainly from the US.

Finally, there is the fundamental problem of credibility – or rather lack of it. AsBennett McCallum of Carnegie Mellon University also notes in the Cato Journal, the forces that now demand inflation from time-to-time would demand a change in the gold weight of the currency as happened in the 1930s. “Historically”, he notes, “the gold standard provided a reasonable degree of price level stability over long spans of time because the population at large had at that time a semi-religious belief that the price of gold should not be varied but should be maintained ‘forever’.” That faith has perished. Moreover, everybody knows it has perished. So whenever the economy was in difficulty, the only question would be how soon the gold price would be changed or the link abandoned.

In short, we cannot and will not go back to the gold standard. As L.P. Hartley wrote, “The past is a foreign country: they do things differently there.” We cannot live in the 19th century. It is foolish to pretend that we can.@

Leverage

2011-02-22T16:56:00.000-08:00

Leverage the control of a position larger than your own funds would directly allow. It’s available in one form or another in basically every market and is accomplished either through borrowing and/or the use of derivatives.

You will see things like 50:1 leverage or 100:1 leverage. A 100:1 leverage ratio means that for every $100 in position value you would be required to put up $1 in deposited funds.

Now margin is closely tied to leverage. Margin is the deposit money used to secure a leveraged position. It is normally expressed in percentages. For example the margin on a position when employing 100:1 leverage would be 1%. At 50:1 leverage it would be 2%. An so on.

There is the additional topic of gearing or effective leverage or real leverage. Those are just different ways of talking about the actual leverage one employs when holding a position. For example, you may be able to trade at 100:1 leverage but if you have a $10,000 account and are trading a $100,000 position you are actually only using 10:1 leverage – meaning your are only controlling a trade 10 times the size of your account.

I think most people get that part of it all.

Here’s where the confusion comes in. I have seen a number of traders say that leverage equals risk. This simply isn’t true. What is boils down to is this. Allowable leverage tells you one thing – how big you can trade, either in terms of position size or number of positions. That’s it. No more. No less.

Risk comes down to one thing, and one thing only – the size of your position. The larger the position, the greater the risk. It’s that simple, really. High degrees of available leverage certainly allow for larger positions, but they do no require them.

The thing that I think causes the most confusion is thinking in terms of margin and not account size. If you trade at 100:1 leverage you would have to put up 1% margin. That means a 1% move in the market against you would wipe out your margin deposit. If you were trading on 50:1 leverage the same 1% move against your trade would only take out half your margin. That seems like less risk.

Here’s why it isn’t.

Assume a $10,000 account and a $100,000 trade size. For a 100:1 leverage account the margin requirement would be $1000, while at 50:1 it would be $2000. If the market moves against the position by 1%, that would mean a $1000 loss to the account, or a 10% decline in account value. It doesn’t matter whethere the trade was done in a 100:1 or 50:1 leverage account. A 1% move on a $100,000 position will always represent a 10% change in account value for a $10,000 account.

The only time differences in leverage mean differences in risk is when you are talking about different position sizes, basically meaning using all available funds for margin. The 100:1 leverage $10,000 account could trake $1 million, while the 50:1 could only go as high as $500,000. Clearly, when the accounts are maxed out like that a 1% move in position value is different. The 100:1 account would be wiped out, while the 50:1 account would only lose have its value.@

Food and global Crisis...

2011-02-16T03:09:00.000-08:00

Food inflation is here and it's here to stay. We can see it getting worse every time we buy groceries. Basic food commodities like wheat, corn, soybeans, and rice have been skyrocketing since July, 2010 to record highs. These sustained price increases are only expected to continue as food production shortfalls really begin to take their toll this year and beyond.

This summer Russia banned exports of wheat to ensure their nation's supply, which sparked complaints of protectionism. The U.S. agriculture community is already talking about rationing corn over ethanol mandates versus supply concerns. We've seen nothing yet in terms of food protectionism.

Global food shortages have forced emergency meetings at the U.N. Food and Agriculture Organization where they claim "urgent action" is needed. They point to extreme weather as the main contributing factor to the growing food shortages. However, commodity speculation has also been targeted as one of the culprits.

It seems that the crisis would also present the perfect opportunity and the justification for the large GMO food companies to force their products into skeptical markets like in Europe and Japan, as recently leaked cables suggest. One thing is for sure; food shortages will likely continue to get worse and eventually become a full-scale global food crisis.

Here are seven reasons why food shortages are here to stay on a worldwide scale:

1. Extreme Weather: Extreme weather has been a major problem for global food; from summer droughts and heat waves that devastated Russia’s wheat crop to the ongoing catastrophes from 'biblical flooding' in Australia and Pakistan. And it doesn’t end there. An extreme winter cold snap and snow has struck the whole of Europe and the United States. Staple crops are failing in all of these regions making an already fragile harvest in 2010 even more critical into 2011. Based on the recent past, extreme weather conditions are only likely to continue and perhaps worsen in the coming years.

2. Bee Colony Collapse: The Guardian reported this week on the USDA's study on bee colony decline in the United States: "The abundance of four common species of bumblebee in the US has dropped by 96% in just the past few decades." It is generally understood that bees pollinate around 90% of the world's commercial crops. Obviously, if these numbers are remotely close to accurate, then our natural food supply is in serious trouble. Luckily for us, the GMO giants have seeds that don't require open pollination to bear fruit.

3. Collapsing Dollar: Commodity speculation has resulted in massive food inflation that is already creating crisis levels in poor regions in the world. Food commodity prices have soared to record highs mainly because they trade in the ever-weakening dollar. Traders will point to the circumstances described in this article to justify their gambles, but also that food represents a tangible investment in an era of worthless paper. Because the debt problems in the United States are only getting worse, and nations such as China and Russia are dropping the dollar as their trade vehicle, the dollar will continue to weaken, further driving all commodity prices higher.

4. Regulatory Crackdown: Even before the FDA was given broad new powers to regulate food in the recent Food Safety Modernization Act, small farms were being raided and regulated out of business. Now, the new food bill essentially puts food safety under the direction of the Department of Homeland Security where the food cartel uses the government to further consolidate their control over the industry. Militant police action is taken against farmers suspected of falling short on quality regulations. It is the power to intimidate innocent small farmers out of the business.

5. Rising oil prices: In 2008, record oil prices that topped $147 per barrel drove food prices to new highs. Rice tripled in 6 months during the surge of oil prices, along with other food commodities. The price of oil affects food on multiple levels; from plowing fields, fertilizers and pesticides, to harvesting and hauling. Flash forward to 2011: many experts are predicting that oil may reach upwards of $150-$200 per barrel in the months ahead. As oil closed out 2010 at its 2-year highs of $95/bbl, it is likely on pace to continue climbing. Again, a weakening dollar will also play its part in driving oil prices, and consequently, food prices to crisis levels.

6. Increased Soil Pollution: Geo-engineering has been taking place on a grand scale in the United States for decades now. Previously known in conspiracy circles as 'chemtrailing,' the government has now admitted to these experiments claiming they are plan "B" to combat global warming. The patents involved in this spraying are heavy in aluminum. This mass aluminum contamination is killing plants and trees and making the soil sterile to most crops. In an astonishing coincidence, GMO companies have patented aluminum-resistant seeds to save the day

7. GMO Giants: Because of growing awareness of the health affects of GM foods, several countries have rejected planting them. Therefore, they would seem to need a food crisis to be seen as the savior in countries currently opposed to their products. A leaked WikiLeaks cable confirms that this is indeed the strategy for GMO giants, where trade secretaries reportedly “noted that commodity price hikes might spur greater liberalization on biotech imports.” Since GMO giants already control much of the food supply, it seems they can also easily manipulate prices to achieve complete global control of food.

The equation is actually quite simple: food is a relatively inelastic commodity in terms of demand. In other words, people need to eat no matter how bad the economy gets. Thus, demand can be basically measured by the size of the population. Therefore, as demand remains steady while the 7 supply pressures outlined above continue to worsen, food prices will have only one place to go -- up, up, and up.

As international agencies scramble to find "solutions," their energy may be just as well spent on questioning if this famine scenario is being purposely manipulated for profits. Regardless, the average person would be very wise to stock up on food staples as an investment, and frankly to survive the worsening food crisis.

Notes

2011-01-20T04:50:00.000-08:00

Although the term notes generally designates debt securities with an issued maturity of 1 year or less, medium-term notes (MTNs) are debt securities with maturities that range from 9 months to 30 years or longer. The Walt Disney Company issued a note with a term of 100 years! So notes is a misnomer, but it did describe them more accurately when General Motors Acceptance Corporation (GMAC) first issued them in the 1970's as notes with terms greater than commercial paper, but less than most bonds, so that GMAC could match the terms of the notes with its auto loans.

However, MTNs really didn't take off until SEC Rule 415 was enacted in March, 1982, that allowed a shelf-registration for securities. Under a shelf registration, new securities could be sold for up to 2 years without requiring a new SEC registration for each issue. This greatly reduced the cost of issuing MTNs, since many of these issues were small offerings that were made intermittently over time to match the needs of the issuer. Today, they have evolved into highly customizable debt securities that serve the special needs of both issuer and investor, and serves as a major source of funding for corporations, government agencies, institutions, and countries. Most MTNs are noncallable, unsecured, senior debt with fixed rates and investment grade ratings.

The main benefit of MTNs over bonds to both issuers and investors is the flexibility of its structure and documentation. MTNs can match MTN terms with liabilities of the issuer. MTNs can have floating or fixed rates; formulas that tie return to equity, commodity, or currency prices. They can even have calls, puts, other options built into them. They can be issued as zero coupons, or have step-up or step-down coupons, or inverse floating rates; or be denominated in a foreign currency, or pay interest based on an index. Interest payments can be monthly, quarterly, or semiannually.

Asset-backed MTNs could be collateralized by mortgages, equipment trust certificates, amortizing notes issued by leasing companies, or subordinated notes issued by bank holding companies. However, most MTNs are issued based on the creditworthiness of the issuer.

MTNs Compared To Bonds. The advantage of medium-term notes is simple: if an issuer can issue a bond that has the specific characteristics that an investor would want, then the issuer can pay a lower yield by providing those exact characteristics. However, this customization also fragments the market, where each part of the market is smaller than the whole. It is also more difficult to forecast demand for these specialized products, which is why MTNs are issued as a best-efforts underwriting, since most MTNs are sold in small amounts, either continuously or intermittently. The flexibility of MTNs also allows the issuer to take advantage of temporary market opportunities, since a new MTN with specific characteristics can be issued quickly.

MTNs also make reverse inquiries feasible. A reverse inquiry is a request by an investor for a security with specific characteristics that is not currently on the market. For instance, an investor could ask for a specific note that matures just when the investor has to pay a large expense or have a floating rate interest that is paid quarterly.

MTNs also allow discreet funding, since only the issuer, agent, and investor need to know about a transaction. Thus, the issuer can avoid a large public offering that may indicate that the company is financially distressed. Although medium-term notes have many advantages, the traditional method of bond underwriting still has its advantages. It is more cost effective to underwrite a large single offering, and the investment bank can make a firm commitment by buying the entire issue from the issuer and then sell it to the public. In this case, the risk of selling the entire issue is transferred from the issuer to the investment bank. Also, bonds from a large offering have greater liquidity in the secondary bond market.

The Medium Term Note Program. To create medium-term notes in the United States, a corporation, institution, or a government entity files a shelf registration with the SEC, typically for $100 million to $1 billion of securities. After the initial application is approved, the issuer files a general prospectus describing the MTN. The registration includes a list of investment banks—typically 2 to 4—to distribute the notes to investors.

The issuer's agents post offering rates with various maturities. Usually yields are expressed as a spread above another fundamental rate, such as the rate for Treasuries or the LIBOR. However, the issuer varies the spread according to its needs. For instance, if the issuer wants mostly 5 year notes, it will give those notes a higher spread, and less desirable notes, a lesser spread. As the need for a particular maturity lessens, the issuer will lower the spread of the notes for that maturity, thereby lessening the demand.

To issue medium term notes, most issuers use the services of investment banks, which charge an underwriting spread plus a fee for creating the structured products upon which many notes were based. Since about 2000, investment banks were also issuing their own notes based on their own credit.

Structured MTNs. The main advantage of medium-term notes is their flexibility for both issuer and investor. This flexibility can be extended by creatingstructured MTNs—combining MTNs with derivatives to satisfy the specific needs of the investor while reducing risk for the issuer.

For instance, through a reverse inquiry, an MTN issuer may want to borrow from an investor who will accept a lower yield in exchange for a floating interest rate, but the issuer doesn't want to assume interest rate risk, so the issuer may arrange a plain-vanilla interest rate swap with a counterparty, that allows the issuer to pay a fixed rate of interest to the counterparty in exchange for a floating rate payment, usually based on a spread above some key interest rate, such as the LIBOR. However, the issuer will not do this unless the investor accepts a yield low enough for the issuer to cover the costs of creating the structured notes, since these products have greater accounting and legal costs, as well as the costs to assess and monitor the credit of the swap counterparty.

Sometimes structured MTNs are created to take advantage of a temporary market condition. Investment bankers may know of clients with specific needs that can be met by a structured MTN. The bankers will contact their clients with their proposal. If the clients agree, the bankers can contact an issuer of an MTN who would accept the proposal.

Some of the unusual properties of structured MTNs include: floating rates based as a spread on some key interest rate, such as the prime rate or the LIBOR rate; an inverse-floating rate that moves inversely to a key interest rate; LIBOR differential notes that pays the spread above the LIBOR in 2 different currencies; dual-currency MTNs that pay interest in 1 currency and principal in another.

There are also structured MTNs that pay interest according to some index, such as an equity index or commodity index. Indeed, the newexchange traded notes being offered by some investment banks are structured MTNs that are traded on stock exchanges, just like stock. Currently, most of these notes pay an interest rate commensurate with an equity or commodity index minus fees that range from 0.4% to 1%.

Medium Term Notes Risk. About 1/3 of MTNs issued offer partial or complete principal protection. However, as with bonds, the principal protection is only as good as the creditworthiness of the issuer. If the issuer declares bankruptcy, then note holders will be unsecured creditors, and secondary market prices for the MTNs will decline substantially.

Hedge Funds

2011-01-07T13:45:00.000-08:00

The term hedge fund usually refers to private investment vehicles that seek above-average returns through active portfolio management. Hedge funds tend to be skill-based investment strategies that attempt to obtain returns based on the unique skill or strategy of the trader. These returns are considered "absolute," as they do not depend on the relative long-term return of underlying traditional stock and bond markets.

Investors are attracted to hedge funds for a variety of reasons. This includes their potential to deliver positive returns under all market conditions, low correlation to traditional asset classes, and access to highly specialized strategies not typically available through traditional money management.

Hedge funds are largely unregulated by U.S. security laws and are strictly prohibited from advertising. As a result, hedge funds today are offered as private investment partnerships, generally with fewer than 100 affluent investors or institutional clients. Not all hedge funds are appropriate for all prospective investors: most hedge funds are available only to persons who meet specific financial requirements. Prior to investment, the law requires that the hedge fund determine the investor's suitability (i.e. is the hedge fund appropriate to the investor's risk tolerance, investment goals, and investment experience).

A primary benefit of hedge funds is the low correlation many strategies have to traditional investments. While past performance is not indicative of future results, hedge fund strategies historically offer returns independent from the performance of stock and bond markets. In fact, they aim to diversify away from traditional "long-only" equity strategies and deliver positive returns under all market environments.

Alternative investment products, including hedge funds and managed futures, involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment.

Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop. There may be restrictions on transferring interests in any alternative investment. Alternative investment products often execute a substantial portion of their trades on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S. markets. Additionally, alternative investments often entail commodity trading, which involves substantial risk of loss.

With an estimated 6000 hedge funds managing in excess of $550 billion, most investors today are questioning where to begin. Many investors attempt to conduct their own due diligence and invest directly with specific managers, while others take advantage of professional hedge fund consultant firms to research, advise and monitor their investments.

Investing with a hedge fund manager involves a complex evaluation process. Identifying the best managers can be very difficult. Hedge fund managers are not required, and in many cases not allowed, to advertise or report performance data to any central authority. As a result, many of the top hedge fund managers are not listed in commercially available databases.

Hedge fund consultants can greatly assist in this process. Research specialists, with access to this data, screen the universe of hedge funds in search of high quality candidates for further analysis. They perform qualitative, on-site evaluations and review a manager's background, financial statements and corporate documentation in an attempt to identify a competitive advantage. This process often includes a quantitative review focused on the performance statistics related to volatility, consistency, and peer comparisons.

Consultants help investors define their investment profile and offer their clients a unique range of comprehensive hedge fund solutions. They then help clients monitor their investments to compare performance with their original investment parameters. They may advise a client to redirect their investment allocations as a result of changing market conditions, some asset classes outperforming others, or a change in the investor's objectives.

While there are risks involved, and hedge funds are not suitable for all investors, there is a compelling argument for the inclusion of hedge funds in a traditional investment portfolio. Many hedge funds can offer enhanced portfolio performance under various market conditions. It is hedge fund managers' flexibility and skill-based strategies that make this investment class inherently attractive. However, investors need to approach these investments with the necessary information to make an informed decision. Researching and evaluating hedge funds presents a host of challenges to even the most sophisticated investor. Through an appropriate allocation, hedge funds can be an attractive addition to a well-diversified portfolio designed to deliver positive returns while attempting to reduce volatility and risk.

Limited Access

2010-12-07T04:44:00.000-08:00

The hypothetical scenario described in this article is intended to illustrate some of the differences between the two regimes in the United States that regulate trading in foreign listed options. For reasons of space, the discussion only touches the high points of these differences.

Mary Jane is an investment adviser registered with the Securities and Exchange Commission and a commodity trading advisor registered with the Commodity Futures Trading Commission. She manages money for a large pension fund and for several very wealthy investors.

To diversify her clients’ investments she acquired a portfolio of European stocks and bonds. She now believes that European interest rates will rise over the short term, causing the value of the bond portfolio to fall. She decides to use options to hedge the interest rate risk in the bond portfolio. She also feels that since stocks in the portfolio generally are likely to trade in a narrow range, it would be a good time to sell out-of-the-money call options to enhance the income of the stock portfolio. She is also considering buying call options on certain of her foreign stocks that she believes will outperform the portfolio.

She sees that the Euronext.liffe exchange in London offers options on the Euribor futures contract and on the London-traded stocks in her clients’ portfolios. She also sees that the Eurex exchange in Frankfurt offers equity options. She calls Ted, a broker at the broker-dealer that helped her acquire her portfolio, to discuss her order. Ted tells her that, as a futures commission merchant, his firm would be happy to open futures accounts for her clients, and in these accounts she can trade Euribor options. But he will have to preclear with his legal or compliance departments whether his firm can execute the equity option trades for her clients on Euronext.liffe and Eurex.

The equity options, he informs her, will have to be booked in securities accounts. Any margin required for the derivatives will be computed and collected separately in each account, without any netting between the accounts.

She is not happy, and asks why it is so complicated to trade these options. Knowing he is out of his depth, Ted conferences in Bob, his in-house lawyer. Bob immediately thinks "Oh no, not again!" but agrees to try and answer Mary Jane’s questions.

"Mary Jane, the simple answer is that the Euribor options are products regulated by the Commodity Futures Trading Commission and equity options are securities regulated by the Securities and Exchange Commission," Bob explains. "The governing laws and regulatory schemes have taken very different approaches to these two types of options products and the foreign exchanges on which they trade. These differences affect whether and how U. S. investors and their brokers can access these foreign products.

"We can offer you direct trading in foreign listed options on interest rate futures because they are exclusively regulated under the Commodity Exchange Act and neither the CEA nor CFTC rules restrict a U.S. FCM from offering these products to U.S. clients. On the other hand, the CFTC has no jurisdiction over options on securities or equity indices. The SEC has jurisdiction over these products, so the federal and state securities laws apply."

Mary Jane is curious. "Bob, I just don’t understand why this is so. Options are exchange products. Aren’t all foreign exchanges treated the same?"

"Unfortunately no," Bob replies. "The CFTC has taken a number of steps that make it easier for U.S. investors to trade foreign futures and options, and has allowed a number of foreign exchanges to promote certain of their products to U.S. investors. The CFTC also has granted permission to several foreign exchanges to make their trading systems available in the U.S. Eurex, then known as DTB, was granted this right in 1996, and Euronext.liffe, then Liffe, in 1999. That makes it easy for our firm to execute your Euribor options order because we have Liffe’s trading terminals right here in Chicago and you can even place your orders electronically from your own office.

"It’s a very different situation for equity options. The federal securities laws regulate not only the exchanges that promote the trading of these products to U.S. investors but also the offer and sale in the U.S. of any product that is a security—and options on securities and equity index options are securities. So if foreign exchanges want to promote their equity options products to U.S. investors, they face having to register as exchanges with the SEC. No foreign exchange—as far as I know—has registered with the SEC. In addition, they have to either register the offer of options or find an exemption from that requirement."

"Wait a minute, Bob," says Mary Jane, "I’ve heard that some foreign exchanges have gotten permission from the SEC to sell equity options in the U.S."

"You’re right, Mary Jane," Bob replies. "The SEC’s Division of Market Regulation granted no-action letters to several foreign options exchanges relieving them from the exchange registration requirement. Euronext.liffe obtained a no-action letter but Eurex has not. These letters establish a number of conditions. For example, the division allowed the exchanges and their members to make available information about themselves, their clearinghouses and their products to eligible investors, which the SEC defines as QIBs, but only if they have prior experience in trading options. The exchanges also may allow their members to accept orders from QIBs, but they are required to send their own options disclosure statement to the QIBs before their members can take an order."

"What is a QIB?" asks Mary Jane.

"A QIB is a ‘qualified institutional buyer’ defined in SEC Rule 144A and includes a range of institutional investors, such as mutual funds, insurance companies, pension funds and trusts, that own and invest at least $100 million in securities. As a registered investment adviser you qualify if you manage at least $100 million in securities, but each account for which you trade options must also be a QIB. Unfortunately, individual investors don’t qualify as a QIB no matter how rich or experienced they are," Bob explains.

"Well, I guess I personally qualify, and the pension fund I manage has more than $100 million in securities, but the rest of my clients are wealthy individuals," replies Mary Jane. "Does that mean I can’t even use options for conservative strategies like writing covered calls or hedging with put options for my individual clients?"

"Unfortunately, you’re right, that won’t work under the no-action letters," Bob answers.

Mary Jane is stunned. "Let me get this straight. If I happened to be a professional options trader with a net worth of $10 million, I can’t trade the foreign equity options for my own account? Even Warren Buffet can’t trade foreign equity options? Not even as a hedge?"

"That’s right, at least not under the no-action letters," Bob replies. "But keep in mind that the SEC doesn’t actually forbid U.S. investors from trading. The SEC simply insists that the foreign exchanges must make sure that when their members take orders from U.S. investors, those orders are coming only from QIBs. But the result is the same if everyone is abiding by the terms of the letters. "You could consider trading options for your high net worth clients in the over-the-counter market as an alternative. Of course, OTC options raise a number of additional considerations. We would have to set up additional documentation and you would have to consider a number of issues such as credit and liquidity risk."

Mary Jane is exasperated. "Why has the SEC made it so difficult for me to trade foreign equity options for my high-net worth clients?"

"That’s a tough question," Bob responds. "I guess that one of the reasons the SEC used the institutional QIB approach was to avoid undercutting the policies underlying the federal securities laws. As I said before, unlike the CFTC, the SEC regulates the offer and sale of options and of the equity security underlying the option. Specifically, the offer and sale of any security to a U.S. person is regulated by the Securities Act of 1933, as amended. This law basically requires that the offer and sale to the public of any security must be done pursuant to a registration statement that the SEC declares effective, and a prospectus must be delivered to purchasers before the trade unless there is an exemption available.

"Yes, but you were able to execute my trades in foreign stocks and bonds. How is that different from foreign options?" Mary Jane asks.

"We were able to sell the foreign stocks and bonds in your portfolio because none of these were involved in a distribution at the time and exemptions from registration were available. But options are unusual animals. The SEC considers that options are ‘continuously offered.’ With respect to options traded on U.S. exchanges, the SEC dealt with that by adopting a rule under which the Options Clearing Corp is considered the issuer of every option and the OCC’s Options Disclosure Statement is considered to be in the nature of a prospectus. "Foreign exchanges have not sought to register their options. Thus, the risk disclosure statement that must be delivered to potential U.S. investors under the no-action letters does not have the same status as the OCC Risk Disclosure Statement. That means that for purposes of the Securities Act, anyone offering or selling these options to you must rely on an exemption from registration."

"So what you are saying is that you need an exemption in order to offer foreign equity options to me?" Mary Jane asks.

"That’s right. Rule 144A is a limited exemption from registration that allows securities to be offered to QIBs as long as the securities are not being offered in a public distribution. Our firm is prepared to rely on Rule 144A to trade foreign index options for the accounts that are QIBs.

"There is, however, an additional issue for single stock options. The SEC has said that options are deemed the equivalent of a purchase (long call, short put) or a sale (short call, long put) of the underlying security. That means that we need an exemption from the registration requirements for both the sale of the option and for the sale of the underlying security.

"Accordingly, there may be times when our firm must restrict your options trading because our firm is engaged in an investment banking transaction with the issuer of that stock. This is no different than when we restrict trading in a stock and its options in the U.S."

"If your firm restricts my trading in an option, I can just go to a broker in London to place my order, right?" asks Mary Jane.

Bob, grimacing, answers, "Mary Jane, I can’t tell you what a broker in London will or won’t do, but technically the foreign exchanges agreed in their representations to the SEC, and their no-action letters are based upon, undertakings that any actual options transactions will be done pursuant to SEC rule 15a-6 and in conformity with other applicable U.S. securities laws. That rule generally requires that these trades be effected through a U.S. broker acting as agent for the foreign broker. So unless the foreign broker considered your order to be completely unsolicited, the foreign broker would still need to go through a U.S. broker to accept your equity option orders.

"The CFTC’s rules here are quite different. Under Part 30, the CFTC has recognized ‘comparable’ regulatory regimes and doing so has allowed foreign FCMs to deal directly with futures customers in the U.S."

"So I pay two commissions for an equity option trade and just one for a Euribor trade?" asks Mary Jane.

"That’s correct," says Bob. "The SEC has specifically prohibited foreign exchanges from putting their trading screens in the U.S., so our firm has to send your order to our London affiliate for execution and that will add costs to the transaction. European regulators have asked the SEC to allow them to put their trading screens here but have not been successful. But, as I said before, the CFTC allows us to have direct access to Liffe’s futures and options on futures so you pay one commission."

Totally exasperated, Mary Jane says, "Well maybe I’ll just trade the single stock futures that Liffe offers."

"Ummm," says Bob, wishing this was over. "It’s true that the Commodity Futures Modernization Act removed the prohibition against trading single stock futures in the U.S., but foreign single stock futures, and narrow-based index futures for that matter, are still prohibited. Nobody is supposed to sell these to you."

"I still don’t understand. Why does the SEC make it so difficult for U.S. investors to manage the risks on their foreign equity portfolios and take advantage of listed products that have an active market?"

"There are a number of policy reasons that inform the SEC’s views," Bob explains. "These include accounting disclosure for foreign issuers, general disclosure and anti-fraud concerns and investor protection. While there may be alternatives to the current state of affairs, the SEC has a lot on its plate right now, and the fact is that because they aren’t under pressure from people like you to address these rules they have no incentive to move the bar."

"Thanks, Bob," Mary Jane replies. "Unfortunately, I also have more pressing issues than lobbying the SEC on foreign stock options. I’ll follow up with Ted, or maybe I’ll just move to London!"

The foreign exchanges listed below have received no-action letters from the Securities and Exchange Commission, under which they and their members may offer option products to "qualified institutional buyers" (a term defined in SEC Rule 144A) in the U.S.

EDX London and OM London Exchange, Tokyo Stock Exchange, Paris Bourse, Osaka Securities Exchange, Monep, Borsa Italiana, Société de Compensation des Marches Conditionnels, London Internat’l Financial Futures and Options Exchange, Hong Kong Futures Exchange, London International Financial Futures Exchange, London Traded Options Market. @

QE-Money Scam

2010-12-03T10:02:00.000-08:00

The Fed was announced on November that it will buy $500 billion to $1 trillion in government debt, and drive already low long-term interest rates even lower. Economists call it “quantitative easing.“ It gets the name ”QE2″ — like the ship — because this would be the second round. The Fed spent about $1.7 trillion from 2008 to earlier this year to take bonds off the hands of banks and stabilize them. The proper economic term for QE is "monetizing the debt" and the more colloquial phrase is "printing money".

There are a few reasons central banks don't use the term "printing money".1). The central bank does not actually have to print money, they just create digital credit in a computer and give it to banks. 2). All central bankers learned in banking class 101 that printing money is bad for the currency and the economy that uses that currency. There is one reason that central bankers don't use the proper economic term "monetizing the debt". All central bankers learned in banking class 101 that monetizing the debt is bad because it creates inflation which is bad for the economy and for the currency.

So if printing and monetizing is bad, why is the central bank doing it? They are doing it for the same reason that all governments who had a currency not based on gold have printed money for centuries. They have run out of money and don't want to pay the price of default. It is much easier to steal from the productive people in society who trust the currency than to reform and restructure debt. "Central banks" were separated from the government for the sole reason to prevent this recurring tendency of governments to ruin its economy by printing money and giving that money to itself or struggling friends. Thus, central banks were given independence from government with a priority to keep the currency stable (ie. no printing allowed!).

The US central bank wants to print money but they can't say "I want to print money". Nor will intellectuals allow them to say "I plan to monetize the debt." Instead they created a new term which makes it seem like they are doing something new that has a chance of working. We are told that all of our bad debts can be washed away with this new inventive process called QE!.

We do not know the size of the Fed’s program, nor do we know how the markets will react in the short-term. However, one thing we know with near certainty – a large quantity of newly printed money is going to flow from the Fed to the eighteen primary dealers. We also know a significant amount of the electronic greenbacks will flow from the primary dealers into the accounts of their clients. Since the Fed encourages the primary dealers to offer client bonds in the QE competitive bidding process, it is helpful for investors to know more about the clients of the primary bond dealers. Sovereign wealth funds, who do business with numerous primary dealers, will be one of the most influential groups who may participate in QE2. A sovereign wealth fund is a state-owned investment fund, which holds a wide variety of financial assets, including stocks, bonds, commodities, currencies, precious metals, and real estate.

One of the largest sovereign wealth funds is the Norway Global Government Pension Fund, which holds somewhere in the neighborhood of $400 billion in assets. Others include the China Investment Corporation ($300 billion), Singapore Investment Corporation ($250 billion), Hong Kong Monetary Authority ($225 billion), the Russia National Welfare Fund ($140 billion), and the Australian Future Fund ($60 billion).

And now, in a desperate last attempt to keep the whole thing from imploding, enter the Ponzi schemers who have pulled out all the stops to keep the inevitable from happening..

SWIFT

2010-12-03T07:34:00.000-08:00

Many people talk about 'SWIFT MT 799 "platform”. That meant that they have a formula that uses SWIFT 799 to obtain credit facilities from Bank. From this facility they will enter the" PPP ". I will not discuss about PPP. I just want you know about SWIFT 799. Then I hope you can judge for yourself, whether SWIFT platform 799 is true or false.

SWIFT is an acronym which stands for ‘Society for Worldwide Interbank Financial Telecommunications’. Formed in 1973, SWIFT is a Belgian creation, and its main offices are still in Belgium to this day. SWIFT was formed in response to a growing need for an internationally sound communications network that could facilitate business transactions across borders effectively, quickly, and securely. When SWIFT was first formed it linked 239 banks in fifteen different countries. Now, SWIFT has grown to be a world wide organization which facilitates communications between banks, corporations, and securities institutions. SWIFT communications are now the global standard for international banking transactions, and as such are utilized millions of times daily. It is estimated that more than eight thousand banking institutions currently use the SWIFT messaging system for their transactions, and SWIFT systems are now in place in two hundred and eight countries.

SWIFT’s success has primarily been the result of understanding and responding to the unique demands of a global market. The SWIFT system utilizes standardized messages, which increase efficiency, and is fully automated, which means that the days of lost messages are all but over. International transactions depend on security, reliability, and accuracy. The SWIFT system provides all these elements. In addition to providing a safe and secure messaging system for the financial world, SWIFT also provides opportunities for companies to build revenue streams, and offers a wide range of services outside the messaging field. Some of these services include directories, market information, and market solutions.

SWIFT Codes are actually very easy to understand, in spite of their unfathomable appearance. The ‘MT’ at the beginning of the code stands for ‘Message Type’, and the number indicates one of the many standardized message formats which comprise the SWIFT messaging system.

The MT-799 is a free format SWIFT message type in which a banking institution confirms that funds are in place to cover a potential trade. This can, on occasion, be used as an irrevocable undertaking, depending on the language used in the MT-799, but is not a promise to pay or any form of bank guarantee in its standard format. The function of the MT-799 is simply to assure the seller that the buyer does have the necessary funds to complete the trade. The MT-799 is usually issued before letter of credit or bank guarantee is issued. An MT-799 is an automated message sent electronically from one bank to another, so you won’t really ‘see’ an MT-799 at all. The paperwork associated with an MT-799 will vary from bank to bank, though most banks follow a similar format.

In the U.S. and in some Asian nations, MT 760 are not allowed to be sent by any financial institution. So, the way around that is for the investor to obtain a cash back standby letter of credit and then, have the issuing bank send a SWIFT MT 720 under full banking responsibility. So, with that being said, whoever tells you that a "trader" can start trading as soon as the investor's bank send to the trader's bank a SWIFT MT 799, then that would be a sign that you are in contact with a broker that has no clue of it takes to get the trading transaction going. So what do you think ?

EC

2010-11-20T07:30:00.000-08:00

Call options give the buyer the right, but not the obligation, to purchase an underlying asset. They are available in various strike prices depending on the current market price of the underlying instrument. Expiration dates can vary from one month out to more than a year (LEAPS options). Depending on the mood of the market, you may choose to buy (go long) or sell (go short) a call option.

If you choose to buy or go long a call option, you are purchasing the right to buy the underlying instrument at whatever strike price you choose until the expiration date. The premium of a long call option shows up as a debit in your trading account. The premium amount represents the maximum risk a long call strategy can incur. Profit is made on a long call when the price of the underlying asset rises above the strike price of the call. You can then either exercise the call or offset it by selling a call with the same strike price and expiration date. By exercising a long call, you end up with 100 shares per option of the underlying stock at the call strike price. You can then turn around and sell the underlying asset at the current (higher) price to garner a profit on the difference between two (current price - strike price = profit). If you choose to offset the call option, the maximum profit is unlimited. The call's premium will increase in value depending on how high the underlying instrument rises in price beyond the strike price of the call. As the price of the underlying asset rises, the long call becomes more valuable because it gives you (or the person you sell it to) the right to buy the underlying stock at the lower strike price of the call. That's why you want to go long a call option in a rising or bull market.

If you choose to sell or go short a call option, you are selling the right to buy the underlying instrument at a particular strike price to an option holder. Selling a call option prompts the deposit of a credit in your trading account in the amount of the call's premium-a limited profit. You get to keep this credit if the option expires worthless. Thus, to make money on a short call, the price of the underlying asset must stay below the call's strike price. If the price of the underlying asset rises above the short call strike price, it will be assigned to an option holder who may choose to exercise it. This gives the option holder the right to buy 100 shares (per option) of the underlying stock from the assigned option buyer at the strike price of the short call. This means that the option seller must buy the underlying asset at the current price and sell it at the call's lower strike price to the assigned option holder, thereby incurring a loss on the trade (current price - strike price = loss). The maximum loss is therefore unlimited to the upside, which is why selling "naked" or unprotected call options comes with such a high risk. However, experienced traders who do choose to short call options would be wise to do so in a stable or bear market.

Call options give you the right to buy something at a specific price for a specific time period. However, if the current market price is more than the strike price, the call option is in-the-money (ITM). If the current market price is less than the strike price, the call option is out-of-the-money (OTM). If the current market price is the same as (or close to) the strike price, the call option is at-the-money (ATM).

Call Option Review

1. Call options give traders the right to buy the underlying stock at the strike price until market close on the 3rd Friday of the expiration month. A call option is in-the-money (ITM) if its strike price is below the current price of the underlying stock. A call option is out-of-the-money (OTM) if its strike price is above the current price of the underlying stock. A call option is at-the-money (ATM) if its strike price is the same as (or close to) the current price of the underlying stock.

2. Buying Calls - If bullish - believe the market will rise - buy (go long) calls. Buyers have rights. A call buyer has the right, but not the obligation, to buy the underlying stock at the strike price until the expiration date. If you buy a call option, your maximum risk is the money paid for the option, the debit. The maximum profit is unlimited depending on the rise in the price of the underlying asset. To offset a long call, you have to sell a call with the same strike price to close out the position. By exercising a long call, you are choosing to purchase 100 shares of the underlying stock at the strike price of the call option.

3. Selling Calls - If bearish - believe the market will fall - sell (go short) calls. Sellers have obligations. A call seller has the obligation to sell 100 shares of the underlying stock at the strike price to the person to whom the option was sold, if that person chooses to exercise the call option. Sellers have obligations. If you sell a call option, your risk is unlimited to the upside. The profit is limited to the credit received from the sale of the call. When selling calls, make sure to choose options with little time left until expiration. Call sellers want the call to expire worthless so that they can keep the whole premium. To offset a short call, you have to buy a call with the same strike price to close out the position.

PPN

2010-10-16T07:39:00.001-07:00

A principal-protected note (PPN) is a synthetic investment or structured product that creates a customized investment. PPNs have their own unique risk/return profile designed to appeal to specific groups of investors. They are created by financial engineers who combine derivatives with other derivatives (such as an index fund, mutual fund or commodity fund) or a traditional investment (such as a commodity, a stock or a bond).

What Are PPNs?. PPNs have become incredibly popular over the past few years. Their guarantee to return at least 100% of the original investment - provided the PPN is held to maturity - and a potential return exceeding that of a guaranteed investment contract (GIC) helps to explain their popularity. Demand for PPNs has also increased because unaccredited investors can access a hedge fund by purchasing a PPN. Hedge funds are a very popular investment these days, and they are not directly available to unaccredited investors due to security market regulations.

A principal-protected note is sold, or distributed, as a debt instrument with minimum return guaranteed to nominally equal the initial investment (the principal amount). Typically, a bank acts as the guarantor of the invested principal, which exposes the purchaser to a credit risk related to the guarantor. Therefore, it is extremely important to assess the guarantor's financial strength and creditworthiness. However, as most guarantors are financially sound banks, in most cases this risk is essentially nil. Although PPNs are sold as debt instrument a PPN contains an embedded option and is really a derivative that has several features in common with traditional fixed-income products.

Like a debt instrument, the PPN has a face value, a term to maturity and a return of principal at maturity. A PPN's term to maturity - which depends on the combined investment products it contains, its structure and market conditions - usually ranges from six to 10 years. Unlike a debt instrument, the return from a PPN depends on the terminal value of an embedded option; there is no guaranteed periodic coupon payment. Instead, a PPN usually makes one payoff, at maturity, consisting of the original principal and any increase in net asset value. The increase in the net asset value of a PPN is derived from the return of the underlying over the term of the PPN, as specified in the offering memorandum, taking various fees into account.

The Structure of PPN Returns. A direct correlation between the payoff and the actual return on the underlying may or may not exist depending on how the note was structured and existent market conditions during the investment term. In other words, the payoff from the PPN is very likely path-dependent. With this in mind, a PPN can be viewed as a bond with a variable coupon payment ranging from 0% to some maximum as determined by its structure and described in its offering memorandum.. In financial engineering terms, a PPN is a synthetic bond.

Although periodic payments are not the norm, financial engineers have created PPNs that do make periodic payments to appeal to investors who prefer to receive periodic returns. In most cases, the periodic payments are a return of principal and that each payment reduces the guaranteed principal by an equivalent amount. However, being creative, financial engineers have created PPNs that have periodic payments that may contain an earned return.

By purchasing a PPN, an investor acquires an embedded option linked to a risky underlying investment and its cash flows, forgoing a certain cash return. By investing in a PPN, an investor opts for an uncertain, but potentially larger, cash flow that may emanate from the option embedded in the PPN. However, a positive return is not guaranteed and should an investor only obtain back their original principal, they must realize that the foregone interest was the cost of insuring that their original principal would be returned.

The valuation methods used for standard asset classes are well defined because each member of a standard asset class has a set of common characteristics. It is these common characteristics that give them membership in the asset class. This is not the case for PPNs.

Each PPN constructed has a unique set of characteristics, which is partially determined by the underlying, how it is constructed and the market conditions that existed when it was issued (constructed) and during its lifetime (term), especially the interes rate environment. PPN disclosures are generally less transparent than those for investments sold by prospectus. This lack of transparency may be an issue when an investor attempts to determine the fees. Because risk is shifted when a PPN is constructed, a PPN and its underlying have different risk/return profiles. Because no two PPNs are alike, the valuation and comparison of two PPNs can be challenging.

Engineering a PPN, Ensuring the Guarantee. When a financial engineer wants to guarantee the nominal value of the original invested principal, a hedge will be involved. There are two common structures, which describe how the synthetic investment is created, and that are used to create a PPN. The main difference between the two is the hedging technique. In the zero-coupon bond structure, the simplest of which is a static hedge, the purchase of protection occurs when the PPN is created. The other structure, the constant proportion portfolio insurance (CPPI) structure, is more complex and uses a dynamic hedge to implement protection. With dynamic hedging, protection may be put in place and removed throughout the term of the PPN.

Zero-Coupon Structure. The zero-coupon structure, termed plain-vanilla by the financial engineering crowd, consists of a zero-coupon bond and a call option package on the underlying. When the PPN is issued, about 70% of the principal is used to purchase a zero-coupon bond with a maturity matching that of the PPN, which matures to the value of the original principal. It is this purchase of a zero-coupon bond that protects, or hedges, the principal and, because it remains in place throughout the term of the PPN, it is a static hedge. The remaining funds (minus fees) are then used to make a leveraged investment in the underlying that have a notional value equal to the invested principal.

Interest rates prevailing at the time the PPN is created determine the cost of protection and, therefore, the funds available to purchase the call option package. As interest rates fall, the cost of protection will increase and funds available to purchase the call option will decrease. The opposite is true also, as interest rates rise, the cost of protection will decrease and funds available to purchase the call option will increase.

The performance of the PPN, although directly determined by the payoff on the call option package, is ultimately determined by the underlying's performance. The theoretical maximum increase in the value of a zero-coupon bond PPN structure would be the increase in the value of the underlying over the term of the investment. However, the actual return will be less, and is often capped at some percentage of the underlying's return. This is due to limitations of the structure imposed by market conditions. Because of these limitations and a requirement for the existence of suitable call options, the zero coupon structure is not as widely used as the constant proportion portfolio insurance structure (CPPI).

Constant Proportion Portfolio Insurance Structure. The CPPI structure is more flexible and more widely used. When a PPN is created this way, the initial step is an investment in the underlying equal to the principal invested less fees. The need for principal protection is determined by the performance of the underlying and, if principal protection is needed, a zero-coupon bond is purchased. Protection will be subsequently sold if it is no longer needed. Hedging, in this case, is dynamic because it is based on market events; therefore, the performance of the underlying must be constantly monitored and with the use of a complex formula, financial engineers determine whether protection is required.

If, during the term of the investment, the net asset value of the PPN equals the cost of protection, full protection must be purchased. This is the "knock-out scenario". If this occurs, the return of the original investment is the only possible outcome. If the knock-out scenario occurs early in the term of the PPN, an investor is left holding the bag, so to speak, with his or her funds locked in and purchasing power declining at the rate of inflation.

A CPPI structure may also entail the use of leverage, permitting a larger initial investment in the underlying. Usually, leverage is limited to two or three times the invested principal. This use of leverage exposes an investor to all the advantages and disadvantages of leverage. However, when an investor is invested in a PPN, the downside is limited and the potential to benefit from the use of leverage exists.

Conclusion. A PPN is the purchase of risky investment combined with insurance, or downside protection. Relatively certain or less risky cash flows are exchanged for more uncertain, but potentially larger, cash flows. Realizing the return potential offered by a PPN requires favorable market conditions over its term. Unfavorable market conditions, which result in the return of the original principal, create, in real terms, a loss purchasing power due to inflation.

Off Balance sheet ?

2010-10-16T07:20:00.000-07:00

Is the company whose stock you own carrying more debt than the balance shee is showing? Most of the information about debt can be found on the balance sheet--but many debt obligations are not disclosed there. Here is a review of some off-balance-sheet transactions and what they mean for investors.

The term "off-balance-sheet" debt has recently come under the spotlight. The reason, of course, is Enron, which used underhanded techniques to shift debt off its balance sheet, making the company's fundamentals look far stronger than they were. That said, not all off–balance-sheet finance is shady. In fact, it can be a useful tool that all sorts of companies can use for a variety of legitimate purposes--such as tapping into extra sources of financing and reducing liability risk that could hurt earnings.

As an investor, it's your job to understand the differences between various off-balance-sheet transactions. Has the company really reduced its risk by shifting the burden of debt to another company, or has it simply come up with a devious way of eliminating a liability from its balance sheet?

Operating Leases. A lot of investors don't know that there are two kinds of leases: capital leases, which show up on the balance sheet, and operating leases, which do not. Under accounting rules, a capital lease is treated like a purchase. Let's say an airline company buying an airplane sets up a long-term payment lease plan and pays for the airplane over time. Since the airline will ultimately own the plane, it shows up on its books as an asset, and the lease obligations show up as liabilities.

If the airline sets up an operating lease, the leasing group retains ownership of the plane; therefore, the transaction does not appear on the airline's balance sheet. The lease payments appear as operating expenses instead. Operating leases, which are popular in industries that use expensive equipment, are disclosed in the footnotes of the company's published financial statements.

Consider Federal Express Corp. In its 2004 annual report, the balance sheet shows liabilities totaling $11.1 billion. But dig deeper, and you will notice in the footnotes that Federal Express discloses $XX worth of non-cancelable operating leases. So, the company's total debt is clearly much higher than what's listed on the balance sheet. Since operating leases keep substantial liabilities away from plain sight, they have the added benefit of boosting--artificially, critics say--key performance measures such as return-on-assets and debt-to-capital ratios.

The accounting differences between capital and operating leases impact the cash flow statement as well as the balance sheet. Payments for operating leases show up as cash outflows from operations. Capital lease payments, by contrast, are divided between operating activities and financing activities. Therefore, firms that use capital leases will typically report higher cash flows from operations than those that rely on operating leases.

Synthetic Leases. Building or buying an office building can load up a company's debt on the balance sheet. A lot of businesses therefore avoid the liability by using synthetic leases to finance their property: a bank or other third party purchases the property and rents it to the company. For accounting purposes, the company is treated like a tenant in a traditional operating lease. So, neither the building asset nor the lease liability appears on the firm's balance sheet. However, a synthetic lease, unlike a traditional lease, gives the company some benefits of ownership, including the right to deduct interest payments and the depreciation of the property from its tax bill.

Details about synthetic leases normally appear in the footnotes of financial statements, where investors can determine their impact on debt. Synthetic leases can become a big worry for investors when the footnotes reveal that the company is responsible for not only making lease payments but also guaranteeing property values. If property prices fall, those guarantees represent a big source of liability risk.

Securitizations. Banks and other financial organizations often hold assets--like credit card receivables--that third parties might be willing to buy. To distinguish the assets it sells from the ones it keeps, the company creates a special purpose entity (SPE). The SPE purchases the credit card receivables from the company with the proceeds from a bond offering backed by the receivables themselves. The SPE then uses the money received from cardholders to repay the bond investors. Since much of the credit risk gets offloaded along with the assets, these liabilities are taken off the company's balance sheet.

Capital One is just one of many credit card issuers that securitize loans. In its 2004 first quarter report, the bank highlights results of its credit card operations on a so-called managed basis, which includes $38.4 billion worth of off-balance-sheet securitized loans. The performance of Capital One's entire portfolio, including the securitized loans, is an important indicator of how well or poorly the overall business is being run.

Conclusion. Companies argue that off-balance-sheet techniques benefit investors because they allow management to tap extra sources of financing and reduce liability risk that could hurt earnings. That's true, but off-balance-sheet finance also has the power to make companies and their management teams look better than they are. Although most examples of off-balance sheet debt are far removed from the shadowy world of Enron's books, there are nonetheless billions of dollars worth of real financial liabilities that are not immediately apparent in companies' financial reports. It's important for investors to get the full story on company liabilities.

Bond ?

2010-10-14T19:28:00.000-07:00

Normally, a bond is a very simple investment instrument. It pays interest until expiration and has a single, fixed lifespan. It is simple, plain and safe. The callable bond, on the other hand, is the exciting, slightly dangerous cousin of the regular bond. Callable bonds have a "double-life", and as such they are more complex than a normal bond and require more attention from an investor. In this article we'll look at the differences between regular bonds and callable bonds, and then explore whether callable bonds are right for your investment portfolio. The Double Life Callable bonds have two potential life spans, one ending at the original maturity datem and the other at the "callable date."

At the callable date, the issuer may "recall" the bonds from its investors. This simply means the issuer retires (or pays off) the bond by returning the investors' money. Whether or not this occurs is a factor of the interest rate environment. Consider the example of a 30-year callable bond issued with a coupon of 7% that is callable after five years. Assume that five years later interest rates for new 30-year bonds are 5%. In this instance, the issuer would recall the bonds because the debt could be refinanced at a lower interest rate. Conversely, if rates moved to 10% the issuer would do nothing, as the bond is relatively cheap compared to market rates.

Essentially callable bonds represent a normal bond, but with an embedded "call option" This option is implicitly sold to the issuer by the investor, and entitles the issuer to retire the bonds after a certain point in time. Put simply, the issuer has the right to "call away" the bonds from the investor, hence the term callable bond. This option introduces uncertainty to the lifespan of the bond.

Callable Compensation. To compensate investors for this uncertainty, an issuer will pay a slightly higher interest rate than would be necessary for a similar, but non-callable bond. Additionally, issuers may offer bonds that are callable at a price in excess of the original par value. For example, the bond may be issued at a par value of $1,000, but be called away at a par value of $1,050. The issuer's cost takes the form of overall higher interest costs, and the investor's benefit is overall higher interest received.

Despite the higher cost to issuers and increased risk to investors, these bonds can be very attractive to either party. Investors like them because they give a higher-than-normal rate of return, at least until the bonds are called away. Conversely, callable bonds are attractive to issuers because they allow them to reduce interest costs at a future date should rates decrease. Moreover, they serve an important purpose to financial markets by creating opportunities for companies and individuals to act upon their interest-rate expectations.

Look Before You Leap. Before jumping into an investment in a callable bond, an investor must understand that these instruments introduce a new set of risk factors and considerations over and above those of normal bonds. Understanding the difference between yield to maturity(YTM) and yield to call (YTC) is the first step in this regard.

Normal bonds are quoted based on their YTM, which is the expected yield of the bond's interest payments and eventual return of capital. The YTC is similar, but only takes into account the expected rate of return should the bonds get called. The risk that a bond may be called away introduces another significant risk for investors - reinvestment risk.

Reinvestment risk, though simple to understand, is profound in its implications. Example - Reinvestment Risk : Consider two, 30-year bonds issued by equally credit-worthy firms. Assume Firm A issues a normal bond with a YTM of 7%, and Firm B issues a callable bond with a YTM of 7.5% and a YTC of 8%. On the surface, Firm B's callable bond seems most attractive due to the higher YTM and YTC.

Now, assume interest rates fall in five years so that Firm B could issue a normal 30-year bond at only 3%. What would the firm do? It would recall its bonds and issue new bonds at the lower interest rate. People that invested in Firm B's callable bonds would now be forced to reinvest their capital at much lower interest rates. In this example, they would likely have been better off buying Firm A's normal bond and holding it for 30 years. On the other hand, if rates stayed the same or increased, the investor would be better off with Firm B's callable bond.

In addition to reinvestment-rate risk, investors must also understand that market prices for callable bonds behave differently than normal bonds. Typically, as rates decrease bond prices increase, but this is not the case for callable bonds. This phenomenon is called "price compression" and is an integral aspect of how callable bonds behave. Since normal bonds have a fixed lifespan, investors can assume interest payments will continue until maturity and appropriately value those payments. Therefore, as rates fall, interest payments become more valuable over time and the price of the bond goes up.

However, since a callable bond can be called away, those future interest payments are uncertain. So, the more interest rates fall, the less likely those future interest payments become, as the likelihood the issuer will call the bond increases. Therefore, upside price appreciation is generally limited for callable bonds, which is another trade-off for receiving a higher-than-normal interest rate from the issuer.

Good Addition to the Portfolio? As is the case with any investment instrument, callable bonds have a place within adiversified portfolio. However, investors must keep in mind their unique qualities and form appropriate expectations. There is no free lunch, and the higher interest payments received for a callable bond come with the price of reinvestment-rate risk and diminished price-appreciation potential. However, these risks are related to decreases in interest rates and make callable bonds one of many tools for investors to express their tactical views on financial markets.).

Betting on Interest Rates. Effective tactical use of callable bonds depends on one's view of future interest rates. Keep in mind that a callable bond is composed of two primary components, a normal bond and an embedded call option on interest rates. As the purchaser of a bond, you are essentially betting that interest rates will remain the same or increase. If this happens, you would receive the benefit of a higher-than-normal interest rate throughout the life of the bond, as the issuer would never have an opportunity to recall the bonds and re-issue debt at a lower rate.

Conversely, if rates fall, your bond will appreciate less in value than a normal bond and might even be called away. Should this happen, you would have benefited in the short term from a higher interest rate, but would then be forced to reinvest your assets at the lower prevailing rates. As a general rule of thumb in investing it's best to diversify your assets as much as possible. Callable bonds offer one tool to marginally enhance the rate of return over your overall fixed-income portfolio, but they do so with additional risk and represent a bet against lower interest rates. Those appealing short-term yields, can end up costing you in the long run.

Global Rules

2010-09-28T07:57:00.000-07:00

Global regulators, aiming to prevent any repeat of the international credit crisis, agreed on Sunday to force banks to more than triple the amount of top-quality capital they must hold in reserve. The biggest change to global banking regulation in decades, known as "Basel III" will require banks to hold top-quality capital totaling 7 percent of their risk-bearing assets, up from just 2 percent under current rules.

The rules may oblige banks to raise hundreds of billions of dollars of fresh capital over the next decade. Germany's banking association, for example, has estimated its 10 biggest banks may need 105 billion euros ($141 billion) of additional capital. But to ease the burden on banks and financial markets, regulators gave the banks transition periods to comply with the rules. These periods, extending in some cases to January 2019 or later, are longer than many bankers originally expected.

Regulators hope the changes will push banks toward less risky business strategies and ensure they have enough reserves to withstand financial shocks without needing taxpayer bailouts. But banks say the new requirements could reduce the amount of money they have available to lend out to companies, slowing economic growth in Europe and the United States as those regions recover from the credit crisis.

CAPITAL STANDARDS

Under Basel III, banks will to hold top-quality capital -- known as "core Tier1" capital, and consisting of equity or retained earnings -- worth at least 4.5 percent of assets.They will also have to build a new, separate "capital conservation buffer" of common equity; this will be 2.5 percent of assets, bringing the total top-quality capital requirement to 7 percent. If they draw down the buffer, they will face curbs on the bonuses and dividends which they can pay out.

Another provision of Basel III, sharply criticized by some banks, will require them to build a separate "countercyclical buffer" of between zero and 2.5 percent when the credit markets are booming. National regulators will decide when economies have entered such periods of "excess aggregate credit growth." They hope the buffer will slow lending when credit markets threaten to overheat, preventing dangerous bubbles from forming. Although banks did not get their way on countercyclical buffers, they did appear to succeed in convincing regulators to provide generous transition periods.

The Tier 1 capital rule will take full effect from January 2015, with the capital conservation buffer phased in between January 2016 and January 2019. Some analysts said this showed regulators were caving in to the banks. "The phasing-in period for the new capital requirements is surprisingly long, which will add to the skepticism about the robustness of the bank capital enhancement efforts

G20 ENDORSEMENT

The Basel III agreement was reached in Switzerland by central bank governors and top supervisors from 27 countries, after a year of horse-trading and lobbying that involved banks and governments seeking to protect their national interests. Along with the capital standards, Basel III includes a range of reforms agreed earlier this year to reduce risk-taking by banks, including rules on how liquid banks' assets must be and how banks must treat tax assets on their books. Some changes were watered down in July after strenuous lobbying by banks.

After refusing in July to endorse draft Basel III rules, Germany won a key concession on Sunday, receiving a 10-year grace period from 2013 to phase out certain types of bank capital such as "silent participations," which are widely used by its state-backed banking sector but little used elsewhere. Leaders of the Group of 20 leading countries, blaming the global credit crisis partly on risky trading by banks, called on regulators in 2009 to work on tougher bank capital rules. The G20 leaders are set to endorse Sunday's deal when they meet in Seoul in November.

Most of the world's top banks have to a large degree repaired their balance sheets since the crisis, so they are not expected to need to rush to raise funds in response to Basel III.But Deutsche Bank, Germany's flagship lender, announced at the weekend that it planned to raise at least 9.8 billion euros to buy the rest of Deutsche Postbank. The fund-raising is seen partly as an effort to tap markets before any Basel-induced cash calls by other banks.

FUND ?

2010-09-14T16:06:00.000-07:00

Everyday, in the hustle and bustle of commerce and economic activity, a lot of cash gets transferred between banks. For example, your boss may pay your salary by transferring cash from his bank account to your bank account. Or a business may pay its supplier by doing an electronic funds transfer. As you may have been aware already, fund transfer from one bank account to another (especially if the accounts reside in different banks) take at least one business day to take effect. Why is this so? The Role of Exchange Settlement Accounts explained,

Historically, payments systems settled on a “deferred net” basis. Most low-value systems still do and will probably do so for the foreseeable future; the costs of settling a large number of low-value payments in real time cannot be justified by the reduction in risk.

With deferred net settlement, institutions offering payments services to their customers exchange instructions with other payment system participants throughout the day. After the close of the business day, they calculate their net obligations to each other. Most commonly, participants agree to calculate their multilateral net obligations “to the system”. In this case, the total payments made by and to each participant from all other participants are calculated and offset. The resulting multilateral net settlement obligations are “to the system”, not to an individual bank.

Let’s suppose we have 4 banks- A, B, C and D- in the financial system. At the end of each day, the net obligations to the ‘system’ will look like this:

		Receiving Bank				TotalPayments
		A	B	C	D
Paying	A	-	10	5	0	15
Bank	B	4	-	1	6	11
	C	3	7	-	2	12
	D	0	8	4	-	12
Total Receipts		7	25	10	8	50
Less Total Payments		15	11	12	12
Multilateral Net Position		-8	+14	-2	-4	0

So, the next question is, how does the bank settle their obligations with each other? Well, one way will be for each of the bankers (A, B, C and D) to sit in a round table and put/take physical cash on/from the table. For example, in this case, Banks A, C and D will put physical cash on the table while Bank B will collect them.

But surely, this is extremely inconvenient right? In economies where there are billions of dollars worth of transactions per day, moving physical cash around is extremely risky (e.g. robberies, hijacks), troublesome and impractical. A better system is required. That system is called the Exchange Settlement Accounts. How does it work?

You see, in addition to holding physical cash, banks (in addition to governments) have an account with the central bank where they ‘deposit’ their cash. It’s very similar to the way individuals hold their cash physically and in the form of bank deposits. For banks, this is called the exchange settlement funds (ESF). So, instead of settling their net obligations physically, they do so at the ESF level, which is nothing more than just flicking some book-keeping numbers on their account balances at the central bank’s books.

The next broader measure of money is the monetary base, which is (1) physical notes and coins held by the “private sector” (which is anything that is not of the government), (2) banks’ deposit at the CENTRAL BANK and (3) what the CENTRAL bank owes to the “private non-bank sector.” The central bank is the bank of the government and banks. Therefore, your bank will have an account at the central bank where it keeps its money, which is the previously mentioned (2).

Therefore, funds at the ESF are part of the monetary base.

Economic Terrorism

2010-08-15T23:06:00.000-07:00

“The American oligarchy spares no pains in promoting the belief that it does not exist, but the success of its disappearing act depends on equally strenuous efforts on the part of an American public anxious to believe in egalitarian fictions and unwilling to see what is hidden in plain sight.”— Michael Lind, To Have and to Have Not. Yes, of course, we all have very strong differences of opinion on many issues.

However, like our Founding Fathers before us, we must put aside our differences and unite to fight a common enemy. It has now become evident to a critical mass that the Republican and Democratic parties, along with all three branches of our government, have been bought off by a well-organized Economic Elite who are tactically destroying our way of life. The harsh truth is that 99% of the US population no longer has political representation. The US economy, government and tax system is now blatantly rigged against us.

Current statistical societal indicators clearly demonstrate that a strategic attack has been launched and an analysis of current governmental policies prove that conditions for a large majority of Americans will continue to deteriorate. The Economic Elite have engineered a financial coup and have brought war to our doorstep. . . and make no mistake, they have launched a war to eliminate the US middle class.Unless we all unite and organize on common ground, our very way of life and the ideals that our country was founded upon will continue to unravel.Before exposing exactly who the Economic Elite are, and discussing common sense ways in which we can defeat them, let’s take a look at how much damage they have already caused.

"Economic Terrorism": Surveying the Damage. America is the richest nation in history, yet we now have the highest poverty rate in the industrialized world with an unprecedented amount of Americans living in dire straights and over 50 million citizens already living in poverty.

The government has come up with clever ways to down play all of these numbers, but we have over 50 million people who need to use food stamps to eat, and a stunning 50% of US children will use a food stamp to eat at some point in their childhood. Approximately 20,000 people are added to this totalevery day. In 2009, one out of five US households didn’t have enough money to buy food. In households with children, this number rose to 24%, as the hunger rate among US citizens has now reached an all time high.

We also currently have over 50 million US citizens without healthcare. 1.4 million Americans filed for bankruptcy in 2009, a 32% increase from 2008. As bankruptcies continue to skyrocket, medical bankruptcies are responsible for over 60% of them, and over 75% of the medical bankruptcies filed are from people who have healthcare insurance. We have the most expensive healthcare system in the world, we are forced to pay twice as much as other countries and the overall care we get in return ranks 37th in the world.

In total, Americans have lost $5 trillion from their pensions and savings since the economic crisis began and $13 trillion in the value of their homes. During the first full year of the crisis, workers between the age of 55 - 60, who have worked for 20 - 29 years, have lost an average of 25% off their 401k. “Personal debt has risen from 65% of income in 1980 to 125% today.” Over five million US families have already lost their homes, in total 13 million US families are expected to lose their home by 2014, with 25% of current mortgages underwater. Deutsche Bank has an even grimmer prediction: “The percentage of ‘underwater’ loans may rise to 48 percent, or 25 million homes.” Every day 10,000 US homes enter foreclosure. Statistics show that an increasing number of these people are not finding shelter elsewhere, there are now over 3 million homeless Americans, the fastest growing segment of the homeless population is single parents with children.

One place more and more Americans are finding a home is in prison. With a prison population of 2.3 million people, we now have more people incarcerated than any other nation in the world - the per capita statistics are 700 per 100,000 citizens. In comparison, China has 110 per 100,000, France has 80 per 100,000, Saudi Arabia has 45 per 100,000. The prison industry is thriving and expecting major growth over the next few years. A recent report from the Hartford Advocate titled “Incarceration Nation” revealed that “a new prison opens every week somewhere in America.”

Mass Unemployment.The government unemployment rate is deceptive on several levels. It doesn’t count people who are “involuntary part-time workers,” meaning workers who are working part-time but want to find full-time work. It also doesn’t count “discouraged workers,” meaning long-term unemployed people who lost hope and don’t consistently look for work. As time goes by, more and more people stop consistently looking for work and are discounted from the unemployment figure. For instance, in January, 1.1 million workers were eliminated from the unemployment total because they were “officially” labeled “discouraged workers.” So instead of the number rising, we will hear deceptive reports about unemployment leveling off.

On top of this, the Bureau of Labor Statistics recently discovered that 824,000 job losses were never accounted for due to a “modeling error” in their data. Even in their initial January data there appears to be a huge understating, with the newest report saying the economy lost 20,000 jobs. TrimTabs employment analysis, which has consistently provided more accurate data, “estimated that the U.S. economy shed 104,000 jobs in January.”

When you factor in all these uncounted workers — “involuntary part-time” and “discouraged workers” — the unemployment rate rises from 9.7% to over 20%. In total, we now have over 30 million US citizens who are unemployed or underemployed. The rarely cited “employment-participation” rate, which reveals the percentage of the population that is currently in the workforce, has now fallen to 64%.

Even based on the “official” unemployment rate, just to get back to the unemployment level of 4.6% that we had in 2007, we need to create over 10 million new jobs, and most every serious economist will tell you that these jobs are not coming back. In fact, we are still consistently shedding jobs, on just one day, January 27th, several companies announced new cuts of more than 60,000 jobs.

Due to the length of this crisis already, millions of Americans are reaching a point where the unemployment benefits that they have been surviving off of are coming to an end. More workers have already been out of work longer than at any point since statistics have been recorded, with over six million now unemployed for over six months. A record 20 million Americans qualified for unemployment insurance benefits last year, causing 27 states to run out of funds, with seven more also expected to go into the red within the next few months. In total, 40 state programs are expected to go broke. Most economists believe that the unemployment rate will remain high for the foreseeable future. What will happen when we have millions of laid-off workers without any unemployment benefits to save them?

Working More for Less. The millions struggling to find work are just part of the story. Due to the fact that we now have a record high six people for every one job opening, companies have been able to further increase the workload on their remaining employees. They have been able to increase the amount of hours Americans are working, reduce wages and drastically cut back on benefits. Even though Americans were already themost productive workers in the world before the economic crisis, in the third quarter of 2009, average worker productivity increased by an annualized rate of 9.5%, at the same time unit labor cost decreased by 5.2%. This has led to record profits for many companies. Of the 220 companies in the S&P 500 who have reported fourth-quarter results thus far, 78% of them had “better-than-expected profits” with earnings 17% above expectations, “the highest for any quarter since Thomson Reuters began tracking data.”

According to the Bureau of Labor Statistics, the national median wage was only $32,390 per year in 2008, and median household income fell by 3.6% while the unemployment rate was 5.8%. With the unemployment rate now at 10%, median income has been falling at a 5% rate and is expected to continue its decline. Not surprisingly, Americans’ job satisfaction level is now at an all time low.

There are also a growing number of employed people who, despite having a job, are still living in poverty. There are at least 15 million workers who now fall into this rapidly growing category. $32,390 a year is not going to get you far in today’s economy, and half of the country is making less than that. This is why many Americans are now forced to work two jobs to provide for their family to hopefullymake ends meet.

A Crime Against Humanity. The mainstream news media will numb us to this horrifying reality by endlessly talking about the latest numbers, but they never piece them together to show you the whole devastating picture, and they rarely show you all the immense individual suffering behind them. This is how they “normalize the unthinkable” and make us become passive in the face of such a high causality count.

Behind each of these numbers, is a tremendous amount of misery, the physical toll is only outdone by the severe psychological toll. Anyone who has had to put off medical care, or who couldn’t get medical care for one of their family members due to financial circumstances, can tell you about the psychological toll that is on top of the physical suffering. Anyone who has felt the stress of wondering how they were going to get their child’s next meal or their own, or the stress of not knowing how you are going to pay the mortgage, rent, electricity or heat bill, let alone the car payment, gas, phone, cable or internet bill.

There are now well over 150 million Americans who feel stress over these things on a consistent basis. Over 60% of Americans now live paycheck to paycheck.These are all basic things that every person should be able to easily afford in a technologically advanced society such as ours. The reason why we struggle with these things is because the Economic Elite have robbed us all. This amount of suffering in the United States of America is literally a crime against humanity.

High Yield

2010-08-03T02:23:00.000-07:00

Once considered a risky proposition, the market for high yield bonds has grown to a large, yet stable market for availing capital to noninvestment-grade companies who do not meet the credit rating guidelines established by S&P, Moody's, and Fitch.

During the LBO explosion in the 1980's, many non-traditional financing vehicles were set in place to handle short-term borrowing needs; however, in recent years, the market has stabilized and gone back to the basic borrowing vehicles. These are plain vanilla cash-pay, fixed rate debt. There are still situations that require more non-traditional lending practices but these are not seen as readily as they were in the past. They are primarily used to finance high growth industries that have high funding needs and longer term revenue generating streams.

Let's cover some of the basic types of debt securities issued in the high yield bond market.

Plain Vanilla Fixed Rate, Cash Pay Securities. Out of all high yield bond securities, plain vanilla securities are the most widely used. They are exactly as they sound; they pay a cash interest payments at a fixed rate. These securities typically have aterm to maturity of 7 to 12 years and have a callable option built in within the first 3 to 5 years to allow for a company to pay off expensive debt as their revenues and credit ratings improve. The corporation can then issue more lower yield debt as a substitute due to their improved position.

Rule 144A Securities. Rule 144A securities has become a very desirable technique for companies to quickly access the credit markets. Rule 144A allows companies to bypass the typical four weeks review period required by the SEC before bringing the security to market. This bypass is done through the use of underwriters. Companies will sell the high yield bonds to an underwriter and the underwriters will, in turn, sell these securities in the secondary market under the safe harbor resale provisions provided by Rule 144A. The issuing company will be responsible for registering these securities within a maximum of 90 days.

Payment-in-Kind Securities. Payment-in-Kind securities is exactly as it sounds. Issuers will be allowed to pay the investor by issuing them more debt securities rather than actually paying the cash interest payment. PIK increases the corporations debt and future cash interest obligations. In comparison to other high yield bonds, PIK's trade without accrued interest

Split-Coupon Securities. Another popular form of high yield bonds is known as split-coupon securities. As with all the other types of high yield bonds we have discussed, split coupons are used by issuers who lack the funding to make large capital expenditures, in the form of interest. Split coupon securities being with the security being a zero coupon bond which does not make coupon payments. To compensate for this, the bonds are issued at a discount to par. This initial period in which no coupon payments are made usually last anywhere between three and seven years long. After that period, the security begins to pay coupon payments.

Some corporations will actually overfund the issuance in order to pay the coupon payments so that they can avoid issuing zeros, which some investors cannot buy into as they need to buy into cash paying securities.

Step-Ups. Very similar to split-coupon securities, step-ups are high yield bonds which pay low coupon payments in the first three to five years and then increase, or step up, the coupon payments in the remaining years until maturity

Bond/Stock Units. Another creative way of issuing high yield bonds involves packaging the bond securities with actual stock, or equity. Typically, between 10 and 15 percent equity ownership is issued to the bond holders in place of interest payments. The bond holder can either sell the stock immediately or hold it in the prospects of share price increases.

High Yield Bank Loans. The market for high yield banks loans has substantially grown in recent years. With the massive amount of liquidity in the credit markets, banks have been issuing high yield loans at an increasing rate. There is a downside of these bank loans; they carry floating interest rates which can be detrimental to a company. Additionally, they are callable at any time and usually require borrowers to pledge assets to secure the loan. Compared to the high yield bonds market, bank loans also have many other restrictions that make it more difficult for borrowers to abide by the bond covenants

Municipal Bond

2010-07-20T20:31:00.000-07:00

Creativity in exploiting the potential of local government are critical to the success of the region to find sources of funding. Munical Bond is one solution for Local Government to find sources of project financing funds. Local governments do not have to depend on the source of funds from central government to accelerate development of its territory. But however successful fundraising through the Municipal Bond depends on the reputation of local government and its ability to prepare appropriate projects funded through this scheme.

What is a municipal bond that?

Bond issued by a state, city, or local government. Municipalities issue bonds to raise capital for their day-to-day activities and for specific projects that they might be undertaking (usually pertaining to development of local infrastructure such as roads, sewerage, hospitals etc). interest on municipal bonds are generally exempt from federal tax. In the case that the bond is bought by a resident of the state that issued the bond, the interest payments are also exempt from state tax. Interest payments are further exempt from local tax if they are bought by residents of the locality that issued the bond.

Capital gains however are taxable. Given the tax-savings they offer, municipal bonds are often bought by people who have large tax burdens. Yields on municipal bonds are often lower than corporate or Treasury bonds with comparable maturities, because of the important advantage of not being taxed at the federal level. In general, municipal bonds are considered safer than corporate bonds, since a municipality is far less likely to go bankrupt than a company.

Some municipal bonds can also be insured by outside agencies. These companies will promise to pay the interest and principal if the issuer defaults. Both issuers and bondholders can carry this insurance, though a bondholder would need to have a large stake to get the coverage.

There are two common types of municipal bonds: general obligation and revenue. General Obligation (GO) bonds are unsecured municipal bonds that are simply backed by the full faith and credit of the municipality. Generally, these bonds have maturities of at least 10 years and are paid off with funds from taxes or other fees.

Revenue bonds are used to fund projects that will eventually create revenue directly, such as a toll road or lease payments for a new building. The revenues from the projects are used to pay off the bonds. In some cases the issuer is not obligated to pay interest unless a certain amount of revenue is generated. Municipal bonds usually come in $5,000 par values and usually require a minimum investment of $25,000 in order to get the best price. also called muni.

Municipal bonds (also known as “munis”) are attractive to many investors because the interest income is exempt from federal income tax, and in many cases, state and local taxes as well. In addition, munis often represent investments in state and local government projects that have an impact on our daily lives, including schools, highways, hospitals, housing, sewer systems and other important public projects. Some bonds, known as "zero coupon bonds", do not require the municipality to pay any interest fees, until the maturity date of the bond. The rate on the bond is determined by the municipality's credit rating and what are comparables for communities in any given state.

Financial resource

2010-07-11T06:28:00.000-07:00

Many people are interested in becoming entrepreneurs but not many are successful. Most failures were due to lack of funding. But the fact is the limited knowledge of the source of funds. Not understanding how to find sources of financing. Do not know how to open the doors financing sources. Financing sources were available ubiquitous. Because there is so much money saved and all need a channel to gain profit. At this point, the entrepreneur needs to have a good business plan needed to be a partner. One source of financing is through a channel "venture capital.

Early-Stage Companies. Companies are usually started by a single entrepreneur or a small group of entrepreneurs. These founders frequently work for no pay, a situation that is referred to as “sweat equity.”1 The initial cash needed is likely to be provided by the founders, but may be supplemented by money from friends and family members who have a variety of reasons to want to be a part of what the founders are doing. This type of funding is sometimes referred to as “seed capital.”2 The founders may also seek bank financing, but if the bank is willing to extend credit it will probably be based on their personal assets or borrowing capacity. Banks rarely lend to companies that do not have a track record of revenues and profits.

Venture capitalists generally expect to see that the founders have put in a combination of sweat equity and personal cash, and they prefer to see that they have raised some money from friends and family. After exhausting these sources, entrepreneurs may think it is time to approach VCs to raise the funds they need to grow their business. In fact, although VCs did invest smaller amounts in the 1970s and 1980s, they are now much larger funds and tend only to invest when companies need multiple millions. As this transition was taking place, angel investors began to fill the gap between friends and family and VCs.

Angel Investors. Typically, angel investors are thought of as wealthy financiers who want to fund startup companies that have a change-the-world idea or invention. They do usually have some wealth, but it is not necessarily the case that they are extremely rich. Successful business men and women may be sought out by entrepreneurs for their particular expertise. These individuals may not have previously thought of themselves as angels, but they may become interested in the business and impressed by the entrepreneurs and decide to invest. On the other hand there are those who regularly look for such opportunities. Angels generally invest in companies in their local area so they can keep an eye on their money.

Beginning in the mid-1990s, angel investors began to realize that there were some disadvantages to being a lone investor. For example, it is unlikely that one or even a couple of people possess all the knowledge necessary to make wise investments. They may have knowledge of many aspects of the business they are considering, but they are not likely to understand everything about the business and how to structure the investment. Additionally, a single investor would have to put a fairly large sum in a single company to have any real say in the business. A group of angels is more likely to have a breadth of knowledge and, by pooling their funds, an impact on the company.

Angel investment groups have been forming over the past 10 to 15 years, and there are now several hundred such groups in the United States and Canada. A 2008 study of US angel investing showed that in 2007 some $26 billion was invested in over 57,000 entrepreneurial ventures and that the number of active investors totaled almost 260,000. It can readily be seen that individual angel investors still make up the lion’s share of investors, which creates a challenge for those entrepreneurs trying to connect with them.

Finding angels requires networking. Ask attorneys and accountants, especially those who frequently work with and specialize in start-up companies. If your business is technical in nature, you might contact consultant, and you should certainly try to make contact with current and retired executives who come from industries related to yours.