Posts Tagged ‘Financials’
Macro Level Resolution Strategies per the Ongoing Financial Systems Crisis of 2008
Just a few thoughts and possible resolution strategies (in outline format) to consider per the current financial system crisis from a concerned long-term investor, citizen, and voter. And from an Independent’s perspective, the political players from both parties don’t seem to be focusing on real solutions, just the problems and the resulting finger-pointing (or “blame game”) that occurs. Note: In terms of presenting a macro causal analysis for this financial crises, private sector lenders issued risky home loans to buyers who could not afford them, which they then sold to Wall Street financial institutions as bundled, mortgage-backed securities that eventually became worthless with the downturn in the housing market. As a result, the heavily leveraged financial institutions became overly susceptible to the collapsing asset class, leading to a liquidity crisis, a disturbance of bank lending, and an overall global contagion.
I. Short-Term Macro Level Strategies to Mitigate Current Crisis (note that some of these strategies are now being implemented in some fashion) –
1). Continued Implementation of timely “lender-of-last-resort” measures by central banks are needed in order to mitigate the current credit crisis before it spirals completely out of control.
1a). Immediate, large-scale damage-control measures are needed in order to restore the public’s confidence in financial markets and institutions.
1b). Organized bailout programs by central banks across the globe are needed in order to reduce the overall amount of help and costs involved (i.e., the quicker the better in terms of lowering costs).
2). Aggressive actions required on the part of central banks and governmental agencies in order to mitigate the seizing global credit crisis include the following:
2a). Continued cutting of short-term interest rates and increasing the amounts of loans made available to banks via auctions in order to maintain fluid liquidity levels.
2b). Force remaining lenders to extend low “teaser” rates on ARM based loans that have been given to sub-prime borrowers.
2c). Force remaining lenders to restore partial homeowner equity to sub-prime mortgage holders having negative equity in order to forestall the foreclosure rates.
2d). Continued swapping of Fed funds (e.g., Treasure bills, etc.) for “Level 3” securities from struggling financial institutions in order to provide them with necessary liquidity.
2e). Permanent providing of emergency loans to the remaining investment banks, with the resulting increase in regulation that should go with it (i.e., like that required for commercial banks).
2f). The establishment (ASAP) of an organization similar to the former Resolution Trust Corporation of the S&L days to use taxpayer funds to buy out the worst sub-prime loans. Note: When the current credit crisis finally does ease up, central banks will then need to expedite reverse monetary actions designed to prevent the reintroduction of market speculation using “cheap” money.
II. Long-Term Macro Level Strategies & Proactive Regulatory Measures –
1). Implementation of stricter governmental regulations for securitized mortgage loans.
1a). SEC directed revamping of underwriting standards to reduce the chances that credit risks will be underestimated, which in turn will reduce the overvaluing of securitized sub-prime loans.
1b). SEC led mitigation of regulatory capital arbitrage attempts in the securitization process by enforcing the maintenance of minimum capital requirements by financial entities.
1c). SEC led mitigation of “safety net” and risk transfer abuses in the securitization process.
2). Require that mortgage loan originators hold bigger equity positions in the securitized packages and that banks issue “covered” bonds backed by securitized mortgage loans in order to keep the risks on their balance sheets.
2a). Increase involvement of criminal investigation agencies in the securities arena to mitigate the misrepresentation of the quality of mortgage loans in securities filings by financial entities.
2b). Implementation of more stringent licensing requirements for mortgage brokers and tougher mortgage lending standards, including enhanced risk management practices by lenders.
2c). Implementation of more stringent disclosure and write-down requirements for financial institutions, as well as an increase in the monitoring of their “capital adequacy”.
2d). Consolidation of the different governmental finance agencies into a financial oversight “super” agency designed to rate sub-prime mortgages and financial securities per their safety levels.
2e). Establishment of well defined roles for the International Monetary Fund (IMF) in terms of its serving as a bailout agent for emerging market countries experiencing financial difficulties.
2f). Need to mitigate any moral hazard issues that could arise due to IMF intervention (e.g., an increase in risk-taking activities by the governments of the countries being assisted, etc).
2g). Complete banning of Alternative-A type mortgage loans, which require little or no documentation on a borrower’s wealth or income, resulting in abuses on the part of mortgage brokers.
3). Establishment of new generally accepted auditing standards (new FAS rulings) designed to force financial entities to start valuating their investment instruments (e.g., CDOs) using market based measures rather than their own pricing models, along with the reform of the credit rating agencies.
3a). Mortgage based securities should be strictly booked as “marked to market” from an accounting standpoint instead of “book” value in order to help mitigate the blatant overvaluation of the underlying collateral assets.
3b). Mortgage securities packages should be categorized and split into different “tranches” based on their differing levels of certified risk for both investing and auditing purposes.
3c). Tighter regulation of credit rating agencies (e.g., Moody’s, S&P, et al.) by the SEC and Congress.
3d). Credit rating agency reform acts are needed to mitigate the overrating of tenuous capital structures being passed as investment grade securities &d to enhance agency quality control measures.
3e). Recourse measures should include the suspending of credit rating agencies that continuously propagate inaccurate (“pumped up”) ratings due to the conflicts of interest involved with the issuers.
3f). The compensation method for credit rating agencies needs to be changed from that of being paid by the issuers of structured debt products to that of being paid by investors to eliminate conflicts of interest.
3g). Credit rating agencies should be required to decline credit rating services for exotic types of securities that have no performance records to track.
3h). Credit rating agencies should also be precluded from having exclusive access to non-public investment information.
Agency Note: SEC chief Mary Schapiro has now called for sweeping industry changes at a roundtable meeting as credit ratings agencies have been thoroughly blasted for not warning about the risks of subprime mortgage securities. Moody’s, Standard & Poor’s, and Fitch dominate the industry: one proposal calls for a governmental ratings agency that would compete with these three firms.
3i). Central banks should have quickly executable, pre-approved contingency plans “in place” for when unexpectedly large write-downs by financial institutions occur in the future. The immediate availability of liquidity measures and the continued identification of potential merger partners for failing financial institutions is key here.
3j). Tighter regulation of the corporate auditing function by the SEC & Congress. If necessary, the corporate auditing function may even need to be “nationalized” to become entirely a governmental function in order to eradicate the inherent conflicts of interest that currently exist between corporations & the private auditing/consulting firms that they employ on a high-fee basis (i.e., need to reduce the risk of over-inflated equity valuations based on creative accounting measures, etc).
Note: These macro strategies were initially conceived of as part of my section of responsibility for a group project/presentation in a graduate level finance course at the University of Houston (i.e., FINA 7340 – Financial Markets & Institutions).
Click on URL to link to a recently published NYU Stern working group paper that provides excellent insights on viable, real-time solutions for financial reform: http://govtpolicyrecs.stern.nyu.edu/docs/whitepapers_ebook_full.pdf
Will Apple’s ‘Disruptive Innovation’ Product Strategy Continue On?
The following is a very insightful ‘Disruptive Innovation’ genre quote per Apple Computers from the 24/7 Wall St. blog article ‘Apple Clobbers the Competition: The Carnage of Apple’s Spectacular Success’ (by Ashley Allen & Douglas McIntyre, 2010). http://www.marketwatch.com/story/apples-destructive-power-2010-09-24?pagenumber=2
“Apple is an anomaly. It has the disruptive force of a startup and the consistent message of a mature company. It is one of the largest tech companies, and yet it is a darling of Wall Street. It is a hardware company that is also software company, content company and now consumer-electronics company. It has manufactured not one but three revolutionary consumer products back-to-back, and all on a content distribution model that seems to evolve with the needs of the product. It’s a killer because it continues to be the first to market and often times the only game in town”.
Being a technology driven company, Apple is driven by the technological challenges presented by the computer and electronics industry sectors. But Apple is also driven by defining the new business models that need to be adopted in order to help propagate its disruptive-innovation based products. Apple’s iTune has basically turned the recording (or record) industry on its head in that consumers can now purchase and download individual songs at home instead of having to pay for entire albums of songs bundled onto CDs at record stores. As a result of this disruptive business model, record stores are now a thing of the past as iTunes has revolutionized the music industry at the retail level due to its lower costs, increased conveniences, and more desirable product selection changes. As a response to this, many retail record stores then moved over to the movie/DVD side of the industry, but this extended business model has now met its demise as well due to the arrival of even more disruptive innovations in the movie industry per new online delivery technologies (e.g., better internet streaming methods immediately come to mind).
I’d now like to expound on the premise that Apple has been a real master at disrupting the environmental scanning attempts of its competitors via a “sleight of hand” (or misdirection) strategy favored by the late Steve Jobs. This strategy has always caused much consternation with Apple’s competitors and industry analysts alike in their attempts to interpret and follow the product-line direction that Apple (as industry leader) is heading. Apple is also willing to canibalize its own existing product lines as part of this misdirection strategy, which is disruptive from the standpoint that most competitors find themselves unable to continue following Apple’s lead due to the fact that they cannot cost-effectively canabalize their own product line while following and competing with the industry leader. In effect, this “follow-the-leader” strategy becomes cost-prohibitive for Apple’s more cash-strapped competitors, who then either phase down or abandon entirely the particular product line that they are competing with for market share (e.g., HP’s Tablet product-line immediately comes to mind). Apple’s huge cash position basically enables it to “toy” with its product-line competitors and weed out those who cannot afford to stay in the game with them (i.e., just about everyone). But I’m sure that the remaining competitors are now reassessing (i.e., retooling) their competing product-line strategies in the wake of Steve Jobs’ unfortunate demise as Apple may no longer be able to disruptively innovate without him.
NOTE: Interested LinkedIn members are invited to join LinkedIn DT Group ‘Disruptive Technologies’ http://www.linkedin.com/groups?about=&gid=1027037&trk=anet_ug_grppro .
The Great Sirius XM (SIRI) Stock Debate!
More and more, Sirius XM stock (ticker symbol ‘SIRI’) appears to represent a good, low cost bet on making some attractive gains in the not too distant future. Nothing is ever guaranteed in life (other than the two main stays), but now seems to be very opportune time to get on the train at the beginning of what could be a very profitable ride based on the increasingly cost-effective commercial uses of satellite-based technologies (led by SIRI, for one). In a nutshell, the currently low price of SIRI stock coupled with its promising future based on the vertical integration of its product lines makes it a very inviting bet in my book. And the announcement today of the availability of Sirius XM’s new app for Android-powered smartphones (coupled with existing apps for BlackBerry and iPhone) is just the latest in a ever expanding portfolio of value adding products being offered. Finally, SIRI is starting to remind me of Apple’s stock in the late 1990′s, when it was priced around $2.00 per share and the introduction of Apple’s industry changing iPod products was just around the corner. Stay tuned!
Click on URL for the latest on SIRI stock: http://www.thestreet.com/quote/SIRI.html
Wall Street Bankers’ Bonus Abuse Issue!
The notion that Wall Street keeps its gravy train rolling by lining the pockets of our top-tier politicians with money and other influence-peddling gifts in order to condone the financiers’ actions is quite disturbing. In fact, the financiers’ claims per the paramount importance of their work as an excuse to enable them to get away with whatever they deem appropriate for themselves (e.g., awarding of excessive tax-payer financed bonuses, etc.) is very disturbing as it smacks of greed and self-centered conceit. But the biggest rub is that these absurd bonuses were largely financed via the billions of dollars in taxpayer-financed funds from the Troubled Asset Relief Program (TARP) and trillions in loans from both the Federal Reserve and the FDIC. These sources of aid money were designed to help the Wall Street financial institutions deemed too big to fail to survive their own terrible misdeeds, not to excessively reward their executives for jobs NOT well-done. This has got to be perhaps the biggest misappropriation of our hard-earned tax money that has ever transpired in the history of this country.
Finally, as long as big money talks and remains the primary influence driver in the current socio-political (or cultural) climates across the globe, then people in power will apparently continue to walk in the direction deemed appropriate by the big money purveyors (e.g., Goldman Sachs, George Soros, et al.). The condoning by governments of their large scale market manulation shenanigans for their personal gain at the expense of the taxpayers of the world speaks for itself. And their latest ploy of shorting the Euro while playing credit default swaps (CDOs) shows that there’s no shame on their part. Finally, even President Obama is softening up his tone towards the big banking entities and their actions. And speaking of being “too big to fail’, perhaps the US socio-economic system and federal government is falling under this same exact definition. This splitting up (i.e., per the splitting up of giant oil corporation Standard Oil over 100 years ago) is becoming a more realistic option over time in terms of gaining more value and growth opportunities from the resulting smaller entities that would result.
Massive Government Control of Free Markets Debate!
Quote of the Day –
“The case for free markets never was that markets are perfect … [but] that government control of markets, especially asset markets, has always been much worse.”
University of Chicago professor John Cochrane, per criticism from Paul Krugman, New York Times columnist and proponent of massive government intervention policies (click on URL below for his full rebuttal).
http://faculty.chicagobooth.edu/john.cochrane/research/Papers/krugman_response.htm