As a follow-up to a recent journal entry on rising petrol prices, I found an article this morning that forcasted a possible very chilly winter for consumers. Analysts have warned that a 15 per cent increase in gas bills in the new year may be the result of higher wholesale gas prices. Suppliers such as Npower and British Gas are expected to start raising charges in February, while Russian gas giant Gazprom, which supplies a quarter of Europe's gas, announced last week that European consumers should expect prices to rise by almost a fifth.
Title: Cold comfort for gas customers with bills set to soar
Date: 12/02/07
Source: The Observer
Allan Asher, chief executive of consumer group Energywatch, thinks raising the prices is a scam. He accused the industry of 'tacitly colluding' to talk up the price of wholesale gas to justify charging higher rates. Tactics included exaggerating the possibility of cold weather or supply problems, he said. 'Warning of higher prices becomes a self-fulfilling prophecy. It's a way of softening the market ahead of a rise.' Also, it may be interesting to learn that in the past year, wholesale gas prices have fallen by 50 per cent, with wholesale electricity costs down by about 30 per cent. Yet utility bills have only fallen by a fraction of that amount. The average gas bill for an Npower customer is only 15 per cent less than a year ago and British Gas, the UK's the largest gas supplier, charges 20 per cent less than last year.
A spokesman for parent company Centrica said: 'British Gas intends to remain competitive as we have been all this year after leading the industry down in March and April.' Gazprom negotiates its annual gas export contracts in December. Two years ago it threatened to turn off the taps after gas negotiations with neighbouring Ukraine broke down, sending prices in Europe soaring.
Whether raising the gas prices is a scam or not, an increase in gas bills is going to happen. If it indeed happens to be a scam, I personally think its a shame to make consumers suffer just so the gas industry can soften the market ahead of a rise. If gas companies wanted to remain competitive, as British Gas intends to be, shouldn't they work to keep gas prices lower while all of the other companies raise their prices? That way more people would switch to their company therefore making them successfully competitive. On top of remaining competitive, everyone would benefit: consumers would be getting gas at a lower price and the gas company would still be able to soften the market without raising prices because of their increase in clientele. This method makes more sense to me rather than talking up the raise in wholesale gas prices to justify raising prices. Perhaps the increase in wholesale gas prices is more severe than I am making it out to be, but I just don't see the sense in increasing gas bills when it could be avoided.
Sunday 2 December 2007
Saturday 1 December 2007
12/01/07
Given that the European Union (EU) has been a major topic of discussion in our UK economy class, I found it very suiting to write a journal entry about a problem UK business leaders currently have with the EU. The Portuguese presidency of the EU is devising plans for a temporary and agency workers directive, which proposes that temporary workers, after just six weeks in a job, should be given the same pay and benefits as full-time staff, including pensions, sick pay and holiday entitlements. Worried that this will decrease the flexibility of the UK labor market as well as create obstacles to getting people back into work, British employers have called on Gordon Brown to stand firm against these attempts by the European Union. According to UK business leaders, temporary and agency workers should occupy the same job for at least six months and not six weeks before being given the same rights as their full-time colleagues.
Title: Employers attack EU workers’ rights plan
Date: 12/01/07
Source: Financial Times
Apparently, British employers are not alone in their disapproval of the proposed directive. David Frost, director-general of the British Chambers of Commerce, says: “It is quite clear that the economic position is likely to deteriorate in the coming months. So it would be crazy to do anything to make the UK a less competitive place.” The CBI, which also opposes the proposals, has estimated that up to 250,000 jobs could be jeopardized if employers were inhibited from using agency staff to fill temporary employment gaps and meet seasonal peaks in demand or one-off orders and contracts. John Hutton, business and enterprise secretary, told the TUC annual conference in September that ministers would not give in to demands on temporary workers’ rights if it damaged Britain’s flexible labor market.
Even though employers have plenty of support in their opposition of the directive, they still have legitimate fears. For instance, while the government seems to agree with employers and have resolved to stand firm against the proposal, employers are concerned that ultimately the government may be tempted to make concessions in return for an offer from the Portuguese presidency to secure permanent exemption for the UK from the EU working time directive limiting the length of the working week to 48 hours. Business leaders also fear that Mr. Hutton, who is expected to attend Wednesday's meeting of EU employment ministers, may be unable to gain sufficient support from other member states to block any “unwelcome” measures included in a temporary and agency workers directive. To add onto this, there are doubts about the continued support of both Poland and Germany for the British position. Until Wednesday after the conclusion of the meeting, business leaders will be on edge about this new workers' rights proposal.
I was interested in this article not only because the EU is a major topic of class discussion but also because of my involvement with workers' rights for my common course final project. After reading this article, I honestly don't see how this proposal would make the UK labor market less flexible, create obstacles to getting people back into work, or make the UK a less competitive place. If anything, it should make it more competitive and create less obstacles in getting people back into work because more people will want to join the labor force as temporary or agency workers to reap the benefits. Maybe this is just my ignorance in economics talking, but it seems to me like the main reason as to why business leaders are opposing this proposal is because they don't want to dish out any more money and/or benefits than they already have to.
Title: Employers attack EU workers’ rights plan
Date: 12/01/07
Source: Financial Times
Apparently, British employers are not alone in their disapproval of the proposed directive. David Frost, director-general of the British Chambers of Commerce, says: “It is quite clear that the economic position is likely to deteriorate in the coming months. So it would be crazy to do anything to make the UK a less competitive place.” The CBI, which also opposes the proposals, has estimated that up to 250,000 jobs could be jeopardized if employers were inhibited from using agency staff to fill temporary employment gaps and meet seasonal peaks in demand or one-off orders and contracts. John Hutton, business and enterprise secretary, told the TUC annual conference in September that ministers would not give in to demands on temporary workers’ rights if it damaged Britain’s flexible labor market.
Even though employers have plenty of support in their opposition of the directive, they still have legitimate fears. For instance, while the government seems to agree with employers and have resolved to stand firm against the proposal, employers are concerned that ultimately the government may be tempted to make concessions in return for an offer from the Portuguese presidency to secure permanent exemption for the UK from the EU working time directive limiting the length of the working week to 48 hours. Business leaders also fear that Mr. Hutton, who is expected to attend Wednesday's meeting of EU employment ministers, may be unable to gain sufficient support from other member states to block any “unwelcome” measures included in a temporary and agency workers directive. To add onto this, there are doubts about the continued support of both Poland and Germany for the British position. Until Wednesday after the conclusion of the meeting, business leaders will be on edge about this new workers' rights proposal.
I was interested in this article not only because the EU is a major topic of class discussion but also because of my involvement with workers' rights for my common course final project. After reading this article, I honestly don't see how this proposal would make the UK labor market less flexible, create obstacles to getting people back into work, or make the UK a less competitive place. If anything, it should make it more competitive and create less obstacles in getting people back into work because more people will want to join the labor force as temporary or agency workers to reap the benefits. Maybe this is just my ignorance in economics talking, but it seems to me like the main reason as to why business leaders are opposing this proposal is because they don't want to dish out any more money and/or benefits than they already have to.
12/01/07
Reading through today's business section of the Guardian online newspaper, I was particularly drawn to a specific article which was located in the upper left-hand corner. It of course deals with the current credit crunch turmoil as well as rising petrol prices, and is also a topic we have been discussing in class. Because of the concern caused by the two factors named above, consumer confidence has been pushed to its lowest level since the invasion of Iraq in March 2003.
Title: Consumer confidence at four-year low
Date: 12/01/07
Source: The Guardian
The leading market research organization, GfK/NOP, released a survey yesterday morning which showed that consumer confidence fell for the third consecutive month in November. The five core measures that make up the monthly index also all showed a decline, falling to -10 in November from -8 the previous month, even though analysts only predicted a drop to -9. In addition to these findings, the major purchases measure, which records whether people feel the time is right for a large acquisition, fell to its lowest level since 1995. As a result, GfK/NOP warned that the drop in confidence could be bad news for retailers this Christmas.
The fall in confidence stems from people's pessimism about both their personal finances and the general financial situation over the last 12 months, and also in the year ahead. "With petrol prices racing past £1 a litre, food prices on the increase and the prospect of higher mortgages and loan fees on the horizon resulting from the credit crunch, even the most optimistic seem to view their glass as half empty," said Rachael Joy. To add to this, on Thursday the Bank of England governor Mervyn King warned MPs that the short-term outlook for the economy was "rather uncomfortable" and "highly uncertain."
For any UK citizen, regardless of their background or profession, this is bad news. As a result of everything being at their lowest levels, the economy is only going to suffer more than it already has. The credit crunch and rising petrol prices have done an incredible amount of damage already and, unfortunately, I don't see conditions improving anytime soon. In a rather recent article, King said that the long-term outlook for the economy is one of a return of growth to its average rate and the lowering of inflation back to its target. With his dire short-term outlook of uncomfortableness and uncertainty, however, it's rather hard to have any hope for the future. With the holiday season right around the corner and GfK/NOP's warnings, hopefully it will still be a Merry Christmas.
Title: Consumer confidence at four-year low
Date: 12/01/07
Source: The Guardian
The leading market research organization, GfK/NOP, released a survey yesterday morning which showed that consumer confidence fell for the third consecutive month in November. The five core measures that make up the monthly index also all showed a decline, falling to -10 in November from -8 the previous month, even though analysts only predicted a drop to -9. In addition to these findings, the major purchases measure, which records whether people feel the time is right for a large acquisition, fell to its lowest level since 1995. As a result, GfK/NOP warned that the drop in confidence could be bad news for retailers this Christmas.
The fall in confidence stems from people's pessimism about both their personal finances and the general financial situation over the last 12 months, and also in the year ahead. "With petrol prices racing past £1 a litre, food prices on the increase and the prospect of higher mortgages and loan fees on the horizon resulting from the credit crunch, even the most optimistic seem to view their glass as half empty," said Rachael Joy. To add to this, on Thursday the Bank of England governor Mervyn King warned MPs that the short-term outlook for the economy was "rather uncomfortable" and "highly uncertain."
For any UK citizen, regardless of their background or profession, this is bad news. As a result of everything being at their lowest levels, the economy is only going to suffer more than it already has. The credit crunch and rising petrol prices have done an incredible amount of damage already and, unfortunately, I don't see conditions improving anytime soon. In a rather recent article, King said that the long-term outlook for the economy is one of a return of growth to its average rate and the lowering of inflation back to its target. With his dire short-term outlook of uncomfortableness and uncertainty, however, it's rather hard to have any hope for the future. With the holiday season right around the corner and GfK/NOP's warnings, hopefully it will still be a Merry Christmas.
Friday 30 November 2007
11/30/07
Surprise surprise...the crisis has hit yet again. Zoe Cruz, the most senior woman on Wall Street, became the latest high-profile casualty of the US subprime mortgage meltdown when she lost her job Thursday as co-president of Morgan Stanley. Ms. Cruz’s counterpart at Bear Stearns has also been ousted. This news came three weeks after Morgan Stanley revealed it had lost more than $3.7bn on a subprime mortgage bet that went disastrously wrong. Along with Cruz and her counterpart, the jobs of the chief executives of UBS, Merrill Lynch and Citigroup have also been claimed as a result of the crisis.
Title: Subprime crisis claims top Morgan banker
Source: Financial Times
Date: 11/30/07
Ms. Cruz, 52, who ran Morgan Stanley’s fixed income business, was made co-president in 2005 by Philip Purcell, fuelling the revolt that eventually led to his ousting as chairman and chief executive. Cruz's promotion prompted the departure of Vikram Pandit, who had been her boss, and several other senior executives who refused to return following Mr. Purcell’s departure unless she was removed. John Mack, Morgan Stanley’s chairman and chief executive, initially decided to take no action against Ms. Cruz after discussing the matter with his board. Mr. Mack said Cruz had made enormous contributions to the company in her 25 years of service. “She has helped to build some of our most important and successful businesses and worked tirelessly to strengthen and grow our global franchise.” But after a longer “post-mortem," he concluded that changes were needed. The new co-presidents are Walid Chammah, a former head of investment banking who recently moved to London to head Morgan Stanley International, and James Gorman, who joined from Merrill Lynch last year and now heads the wealth management arm.
As a result of the subprime mortgage crisis, the market has deteriorated further in recent weeks, increasing the potential loss on Morgan Stanley’s remaining mortgage-linked investments. However, insiders say no further problems have been uncovered and the maximum potential loss from its subprime exposure remains at the stated $6bn.
After I read this article, I couldn't help but think that Ms. Cruz's ousting was a result of discrimination. The article gave no concrete reason(s) as to why she was fired besides the crisis, and it was also stated that after her promotion, several male executives refused to work under her. Although several other employees were listed as being fired, it became especially apparent to me that Cruz's departure was unfair and unjust. Maybe there has been some past problems with Cruz that I am unaware of, but judging by Mr. Mack's comments, I find that highly doubtful. To further my opinion, two new male presidents were hired. Now I am not some gung-ho feminist that thinks every little thing is an injustice to the female gender, but this case just strikes me as being particularly discriminating. The article also stated that she was approached about becoming chief executive of Merrill Lynch, but that job went to John Thain. Every piece of evidence here screams injustice. From what I've read Cruz is an extremely brilliant female who is capable of many things, so I do not understand why she was fired. Yes, the crisis has caused a great amount of turmoil and it could be the reason as to why she was ousted, but something just doesn't feel right to me here. I hope to do some more investigation into this topic and will hopefully get back to you soon about any findings I come across.
Title: Subprime crisis claims top Morgan banker
Source: Financial Times
Date: 11/30/07
Ms. Cruz, 52, who ran Morgan Stanley’s fixed income business, was made co-president in 2005 by Philip Purcell, fuelling the revolt that eventually led to his ousting as chairman and chief executive. Cruz's promotion prompted the departure of Vikram Pandit, who had been her boss, and several other senior executives who refused to return following Mr. Purcell’s departure unless she was removed. John Mack, Morgan Stanley’s chairman and chief executive, initially decided to take no action against Ms. Cruz after discussing the matter with his board. Mr. Mack said Cruz had made enormous contributions to the company in her 25 years of service. “She has helped to build some of our most important and successful businesses and worked tirelessly to strengthen and grow our global franchise.” But after a longer “post-mortem," he concluded that changes were needed. The new co-presidents are Walid Chammah, a former head of investment banking who recently moved to London to head Morgan Stanley International, and James Gorman, who joined from Merrill Lynch last year and now heads the wealth management arm.
As a result of the subprime mortgage crisis, the market has deteriorated further in recent weeks, increasing the potential loss on Morgan Stanley’s remaining mortgage-linked investments. However, insiders say no further problems have been uncovered and the maximum potential loss from its subprime exposure remains at the stated $6bn.
After I read this article, I couldn't help but think that Ms. Cruz's ousting was a result of discrimination. The article gave no concrete reason(s) as to why she was fired besides the crisis, and it was also stated that after her promotion, several male executives refused to work under her. Although several other employees were listed as being fired, it became especially apparent to me that Cruz's departure was unfair and unjust. Maybe there has been some past problems with Cruz that I am unaware of, but judging by Mr. Mack's comments, I find that highly doubtful. To further my opinion, two new male presidents were hired. Now I am not some gung-ho feminist that thinks every little thing is an injustice to the female gender, but this case just strikes me as being particularly discriminating. The article also stated that she was approached about becoming chief executive of Merrill Lynch, but that job went to John Thain. Every piece of evidence here screams injustice. From what I've read Cruz is an extremely brilliant female who is capable of many things, so I do not understand why she was fired. Yes, the crisis has caused a great amount of turmoil and it could be the reason as to why she was ousted, but something just doesn't feel right to me here. I hope to do some more investigation into this topic and will hopefully get back to you soon about any findings I come across.
Thursday 29 November 2007
11/29/07
Reading through the Guardian online this morning I came across a very interesting article concerning three British bankers, nicknamed the "Natwest Three." Less than 18 months after their extradition to America prompted a political storm and allegations of injustice, David Bermingham, Gary Mulgrew and Giles Darby abandoned their declarations of innocence and pleaded guilty to stealing $7.3m (£4m) in a highly sophisticated transatlantic fraud linked to the collapse of the infamous and controversial energy trading powerhouse Enron. Although only owning up to one of seven charges of wire fraud under a deal struck with the US government, the men face 37 months in prison and must also pay back the $7.3m gains to the owner of Natwest, the Royal Bank of Scotland.
Title: Natwest Three plead guilty to $7.3m Enron-linked transatlantic fraud
Source: The Guardian
Date: 11/29/07
As I mentioned before, the charges stem from a highly sophisticated transatlantic fraud linked to Enron. In 2000, the men, who previously worked for Natwest's investment banking arm, concocted a deal with two senior Enron executives (who have since been jailed). In this deal, Natwest sold its stake in an Enron-related venture in the Cayman Islands for a knockdown price, and the men shared a secret profit on the side of $20m with their Enron counterparts. After being found out and extradited to America, the men were electronically tagged, restricted from working, banned from associating with each other and subjected to a curfew. Because these restrictions were emotionally and financially draining, Bermingham, Mulgrew and Darby decided to plead guilty to their charges and face jail time. Kenneth Kaiser, assistant director of the FBI's criminal investigative division, said the guilty pleas showed "the extent of the fraud at Enron went well beyond US borders."
This case involving the "Natwest Three" has prompted a debate about the fairness of Britain's extradition arrangements with the US. According to critics, Britain requires only basic information from foreign law enforcement agencies to send its citizens abroad. In contrast, though, the US demands evidence of "probably cause" and suspects are screened by a grand jury. Eoin O'Shea, an extradition expert at Simmons & Simmons in London, said: "It's a far less rigorous test in England now for extradition than it used to be. British defendants are at much greater risk than they once were." Supporters of Bermingham, Mulgrew and Darby argue that the men should have been tried in Britain instead of the US, but the electronic nature of international business has made the jurisdiction of fraud an argumentative basis. O'Shea added, "We're in a much more globalized world and crime is one of the most globalised of industries."
Since the initial hearing, Bermingham, Mulgrew and Darby remain on bail pending a formal sentencing hearing in February. The men have also applied for a prisoner exchange program in the hope of spending their sentences in a British jail.
It is now 2007 and the deal the "Natwest Three" made with executives of Enron occurred in 2000. The collapse of Enron occurred several years ago, and these men are only now being prosecuted? Am I the only one who sees a slight problem with this? Shouldn't the men have been found guilty years ago? Maybe I am missing something but it seems to me like their charges of fraud are long overdue. These men, in conjunction with directors at Enron, cheated many people out of money and pocketed ill-gotten gains as a result. I don't care how emotionally or financially draining this whole process has been for these men, they deserve their punishment. In fact, I believe they should be jailed for way longer than 37 months and be required to pay back way more money than $7.3m. These men have committed a crime of upmost significance and as such should be handled in such a way that requires them to pay back all of their wrongs. As the saying goes, "what goes around comes around," and the "Natwest Three" are finally getting the come around.
Wednesday 21 November 2007
Lehman Brothers
This morning, the Bucknell in London UK economy class visited the Lehman Brothers office where John Candillier, a Bucknell Alum, is a managing director for European equity sales trading. While there, Mr. Candillier took us to his desk (which, by the way, had three separate computers-as did every other desk) and explained in detail how the trading business worked. To further explain himself and demonstrate his points, Mr. Candillier showed us several company's trading portfolios. To further our experience, Mr. Candillier took two calls from clients. Since he is a MD, he had several of his workers run shares for him, which I found to be very interesting; the teamwork involved in sales trading is phenomenal. Everyone works together as a team to make profits not only for their clients but also for themselves. I'm not quite sure of the exact number, but I do know Mr. Candillier said that they do millions of trades a day and make/lose millions of dollars/pounds while doing them. By the end of his talk it was obvious that Mr. Candillier was extremely intelligent and talented and was very passionate about his profession.
After our lecture by Mr. Candillier's desk, we were then shown a presentation on exactly what the Lehman Brothers company did and all of the success it has acquired over the years. Two recruiting employees also spoke at the presentation about possible summer internships.
Even though I am most likely not going to have a career in sales trading, I still greatly enjoyed my visit to Lehman Brothers. I learned a great deal about this realm of economics and got to experience first-hand what it's like to be a sales trader. It got quite noisy in room with all of the yelling and telephones ringing, but nonetheless it was still exciting, although that kind of profession would be way too stressful for an already stressed-out person such as myself. Mr. Candillier was an excellent host and lecturer and was extremely helpful in explaining equity sales trading and all of the other aspects of Lehman Brothers.
After our lecture by Mr. Candillier's desk, we were then shown a presentation on exactly what the Lehman Brothers company did and all of the success it has acquired over the years. Two recruiting employees also spoke at the presentation about possible summer internships.
Even though I am most likely not going to have a career in sales trading, I still greatly enjoyed my visit to Lehman Brothers. I learned a great deal about this realm of economics and got to experience first-hand what it's like to be a sales trader. It got quite noisy in room with all of the yelling and telephones ringing, but nonetheless it was still exciting, although that kind of profession would be way too stressful for an already stressed-out person such as myself. Mr. Candillier was an excellent host and lecturer and was extremely helpful in explaining equity sales trading and all of the other aspects of Lehman Brothers.
11/21/07
Among all of the mayhem and madness that is the current financial market crisis, perhaps there is one glimmering light. While virtually every other share has lost pretty much all of the gains they made yesterday, the oil sector has continued to rise and make profit. BG is 2.5% higher at 997p, Royal Dutch Shell is up 1.5% and BP is up 0.5%. The fact that the crisis has not damaged oil shares (yet--who knows, it may strike them eventually) may come as no surprise given the price per barrel, which is nearing $100.
Title of Article: Oil gleams in the gloom
Source: The Guardian
Date: 11/21/07
As oil shares continue to do well, banks and other companies are meanwhile still facing incredible pressure because of the crisis. The stricken mortgage bank Northern Rock has gone down another 14%. While they have received an offer from both Cerberus and JC Flowers, one of the offers was pitched well below yesterday's closing price. Alliance & Leicester, who recently had to dispel rumors about funding problems or a black hole in its accounts, went down another 5%. Buy-to-let lender Paragon, which revealed the scars of the credit crunch yesterday, fell another 25p to 100p. Credit Suisse today cut its price target for the company to 145p from 225p. As the increase in oil shares may have come to no surprise, with all of the above mentioned it may also come as no surprise to hear that the FTSE (Financial Times Stock Exchange) was sitting 90.8 points lower at 6135.7 by mid-morning.
This morning, the Bank of England minutes revealed a 7-2 vote in favor of keeping rates on hold this month. Martin Slaney, head of spread betting at GFT Global Markets, said: "The closeness of the vote suggests rates will be kept on hold for a few more months as the Bank hovers in wait-and-see mode to monitor whether the negative effects of the credit crisis on growth are outweighing inflationary concerns over food and energy prices."
In summation, I could not have put it any better than David Buik at Cantor Index. "Fear, uncertainty, sub-prime lending, credit crisis, downgrading of growth in the US, oil towards $100 a barrel and sentiment shot to ribbons makes a rather toxic and unpalatable cocktail for investors to digest." The fact that one sector of the market is continuing to thrive (oil) means that virtually every other sector is in turmoil on account of the financial market crisis. Investors, among others, are getting nailed, shares are decreasing, people are losing a great amount of money, and, in some cases, companies are going out of business. The crisis has caused a great amount of trouble not only for those in the economic world but also for society as a whole. There's hardly any consumer confidence anymore and, unfortunately, there are no quick and easy resolutions. Getting out of this crisis alive is going to take a lot of time; I've read articles that estimate two to three years until start conditions improve. However long it takes, I'm sure even more problems are going to arise, which will require strategic recovery planning and preventative measures for the future.
Title of Article: Oil gleams in the gloom
Source: The Guardian
Date: 11/21/07
As oil shares continue to do well, banks and other companies are meanwhile still facing incredible pressure because of the crisis. The stricken mortgage bank Northern Rock has gone down another 14%. While they have received an offer from both Cerberus and JC Flowers, one of the offers was pitched well below yesterday's closing price. Alliance & Leicester, who recently had to dispel rumors about funding problems or a black hole in its accounts, went down another 5%. Buy-to-let lender Paragon, which revealed the scars of the credit crunch yesterday, fell another 25p to 100p. Credit Suisse today cut its price target for the company to 145p from 225p. As the increase in oil shares may have come to no surprise, with all of the above mentioned it may also come as no surprise to hear that the FTSE (Financial Times Stock Exchange) was sitting 90.8 points lower at 6135.7 by mid-morning.
This morning, the Bank of England minutes revealed a 7-2 vote in favor of keeping rates on hold this month. Martin Slaney, head of spread betting at GFT Global Markets, said: "The closeness of the vote suggests rates will be kept on hold for a few more months as the Bank hovers in wait-and-see mode to monitor whether the negative effects of the credit crisis on growth are outweighing inflationary concerns over food and energy prices."
In summation, I could not have put it any better than David Buik at Cantor Index. "Fear, uncertainty, sub-prime lending, credit crisis, downgrading of growth in the US, oil towards $100 a barrel and sentiment shot to ribbons makes a rather toxic and unpalatable cocktail for investors to digest." The fact that one sector of the market is continuing to thrive (oil) means that virtually every other sector is in turmoil on account of the financial market crisis. Investors, among others, are getting nailed, shares are decreasing, people are losing a great amount of money, and, in some cases, companies are going out of business. The crisis has caused a great amount of trouble not only for those in the economic world but also for society as a whole. There's hardly any consumer confidence anymore and, unfortunately, there are no quick and easy resolutions. Getting out of this crisis alive is going to take a lot of time; I've read articles that estimate two to three years until start conditions improve. However long it takes, I'm sure even more problems are going to arise, which will require strategic recovery planning and preventative measures for the future.
Tuesday 20 November 2007
11/20/07
As an update to my journal entry on the 7th of November, which discussed the decrease in the power of the dollar and the possibility of China shifting its foreign reserves out of dollars, I decided to do a journal entry today on a similar article found within today's Financial Times.
Title of Article: Weak dollar alarms Chinese
Source: Financial Times
Date: 11/20/07
It has been found that the dollar has dropped significantly (16 percent) this year against the other major currencies of the world. Because of the ongoing decline of the dollar, yesterday, China's Premier Wen Jiabao told a business audience in Singapore that China's reserves are under unprecedented pressure, and added that they are concerned about how they are going to preserve the value of their reserves, which is now around $1,430bn (£698bn). Apparently this feeling of concern is shared by several global policymakers as the dollar is the world's main reserve currency.
Despite global concern, several top international economic officials are in support of a strong dollar, including China. Zhou Xiaochuan, China's central bank chief, said Beijing wanted to see and are in support of a strong dollar because it would help to ensure an orderly resolution to the recent market instability caused by US mortgage lending problems. US Treasury secretary Hank Paulson commented that a strong dollar is in the nation's interest and expressed his belief that while the US economy has had its ups and downs, the long-term economic strength will allow for the re-establishment of the dollar in the currency market. Paulson's optimistic outlook on the future of the dollar is shared by other US officials, including our President, who are all becoming increasingly vocal on the dollar to signal they are not indifferent to its fate. This increase in global communication about the dollar has been termed an "uncoordinated verbal intervention" by Stephen Jen, who is the head of currency research at Morgan Stanley.
As I had discussed in my November 7th journal entry, I am still worried about the future of America as a result of the weakening of the dollar. I still fear that another country may supersede us in dominance and power and the America as we used to know it will become a thing of the past. Hopefully this "verbal intervention" as Jen put it will help the dollar rebound and regain it's power as a global powerhouse within the currency market, but at the same time, all of my fears could come to fruition. I sincerely hope the latter is not the case. As an optimist I believe that with time conditions will improve and the dollar will regain its power, just as I also believe that the current market turmoil will clear up in the US as well as in the UK. In my entry about a November 15th Guardian article which discussed the outlook for the UK economy after the current financial market turmoil, I mentioned that officials need to develop a plan to restore the UK economy. I believe the same is required of US officials to not only restore the economy but also the power of the dollar. A substantial amount of time and planning will need to be put into this effort, but I believe that if this is done, the economy will be repaired and back to running smoothly.
Title of Article: Weak dollar alarms Chinese
Source: Financial Times
Date: 11/20/07
It has been found that the dollar has dropped significantly (16 percent) this year against the other major currencies of the world. Because of the ongoing decline of the dollar, yesterday, China's Premier Wen Jiabao told a business audience in Singapore that China's reserves are under unprecedented pressure, and added that they are concerned about how they are going to preserve the value of their reserves, which is now around $1,430bn (£698bn). Apparently this feeling of concern is shared by several global policymakers as the dollar is the world's main reserve currency.
Despite global concern, several top international economic officials are in support of a strong dollar, including China. Zhou Xiaochuan, China's central bank chief, said Beijing wanted to see and are in support of a strong dollar because it would help to ensure an orderly resolution to the recent market instability caused by US mortgage lending problems. US Treasury secretary Hank Paulson commented that a strong dollar is in the nation's interest and expressed his belief that while the US economy has had its ups and downs, the long-term economic strength will allow for the re-establishment of the dollar in the currency market. Paulson's optimistic outlook on the future of the dollar is shared by other US officials, including our President, who are all becoming increasingly vocal on the dollar to signal they are not indifferent to its fate. This increase in global communication about the dollar has been termed an "uncoordinated verbal intervention" by Stephen Jen, who is the head of currency research at Morgan Stanley.
As I had discussed in my November 7th journal entry, I am still worried about the future of America as a result of the weakening of the dollar. I still fear that another country may supersede us in dominance and power and the America as we used to know it will become a thing of the past. Hopefully this "verbal intervention" as Jen put it will help the dollar rebound and regain it's power as a global powerhouse within the currency market, but at the same time, all of my fears could come to fruition. I sincerely hope the latter is not the case. As an optimist I believe that with time conditions will improve and the dollar will regain its power, just as I also believe that the current market turmoil will clear up in the US as well as in the UK. In my entry about a November 15th Guardian article which discussed the outlook for the UK economy after the current financial market turmoil, I mentioned that officials need to develop a plan to restore the UK economy. I believe the same is required of US officials to not only restore the economy but also the power of the dollar. A substantial amount of time and planning will need to be put into this effort, but I believe that if this is done, the economy will be repaired and back to running smoothly.
Monday 19 November 2007
11/19/07
Perusing through the online Guardian newspaper this afternoon I found one particular article, dated from the 15th of November, which caught my eye. It is very relevant to the topics we've been discussing in class and was also very interesting to read as it discussed the outlook for the UK economy over the next year as a result of the current financial market turmoil. According to Mervyn King, governor of the Bank of England, the period ahead will be marked by slower growth, rising inflation, a weakening housing market and a falling pound. With this, King signalled that the next year will be the toughest for Britain in a decade.
Title of Article: Bank's grim warning over UK economy
Source: The Guardian
Date: 11/15/07
On Wednesday, the 14th of November, Mervyn King issued a stark warning of an economic slowdown to the Britain society. In addition to the aspects mentioned in the introduction paragraph above, King also warned investors of a sharp fall in share prices and stressed that even the two quarter-point cuts in interest rates pencilled in to the Bank's forecasts would not spare consumers from a painful period of belt-tightening next year. In fact, King gave no hint that interest rates would be cut any further soon.
King cited 2009 as the year when growth will pick up and inflation will be brought under control. With oil prices as high as they are now ($100 per barrel) and the fact that food prices have increased by 10% in just the last three months, King hinted that it would be some time before the Bank responded to economic weakness by cutting the cost of borrowing. The combination of the tougher borrowing conditions imposed by lenders in the wake of the credit crunch and Threadneedle Street's monetary policy committee raising interest rates five times between August 2006 and July of this year could and most likely will spell the end of the UK's recent property boom. As house price inflation is easing and commercial property prices are falling, it is believed that residential and commercial property investments are likely to moderate at a rather sharp rate. With tighter credit conditions in the future, the personal saving rate is likely to rise, which will ultimately decrease consumer spending.
As mentioned in the introduction, King warned of a fall in the power of the pound. He said that the pound would need to fall in order to boost exports and to close the UK's £7bn a month trade deficit in goods. While the pound has been extremely powerful against the dollar recently, it has hit a four-year low against the euro. This lowering in strength may serve as a forecast to its overall decrease in power.
King also mentioned that equity prices are on average higher now than they were in August. He said that this was also true around the world and in emerging markets--they're 20% higher. A fall in equity markets, the governor said, could have a bigger impact on the world economy than the recent credit squeeze.
While the outlook for the UK economy in the near term is one of slowing growth and rising inflation, King said that the long term outlook is a return of growth to its average rate and the lowering of inflation back to its target.
After reading this article, I couldn't help but think about crises that occurred in the past and relating them to the current turmoil the UK is experiencing. After any situation as serious and severe as this one, it will always take a substantial amount of time and planning before the economy is repaired and back to running smoothly. Take, for example, the Great Depression in America. The economy slumped considerably and conditions worsened for everyone. As bad as the Depression was, America prevailed and became strong once again (although now the economy is suffering again as a result of the same crisis going on in the UK). What I'm trying to say here is that things take time to resolve. Once UK officials have a plan then their long term outlook of returning growth to its average rate and lowering inflation back to its target will come to fruition. Interest rates will also most likely go down, the housing market will be back up to par, the pound will level and equity will increase. If officials work together and devise a way to "pick up the pieces" caused by the financial market crisis, I am confident that the economy will once again pick up and things will be returned to how they were before the crisis hit. I'm not exactly sure how the officials will do this in terms of the specific regulations and changes they need to make because I am not very educated in this department, but I am confident that they will find a way.
Title of Article: Bank's grim warning over UK economy
Source: The Guardian
Date: 11/15/07
On Wednesday, the 14th of November, Mervyn King issued a stark warning of an economic slowdown to the Britain society. In addition to the aspects mentioned in the introduction paragraph above, King also warned investors of a sharp fall in share prices and stressed that even the two quarter-point cuts in interest rates pencilled in to the Bank's forecasts would not spare consumers from a painful period of belt-tightening next year. In fact, King gave no hint that interest rates would be cut any further soon.
King cited 2009 as the year when growth will pick up and inflation will be brought under control. With oil prices as high as they are now ($100 per barrel) and the fact that food prices have increased by 10% in just the last three months, King hinted that it would be some time before the Bank responded to economic weakness by cutting the cost of borrowing. The combination of the tougher borrowing conditions imposed by lenders in the wake of the credit crunch and Threadneedle Street's monetary policy committee raising interest rates five times between August 2006 and July of this year could and most likely will spell the end of the UK's recent property boom. As house price inflation is easing and commercial property prices are falling, it is believed that residential and commercial property investments are likely to moderate at a rather sharp rate. With tighter credit conditions in the future, the personal saving rate is likely to rise, which will ultimately decrease consumer spending.
As mentioned in the introduction, King warned of a fall in the power of the pound. He said that the pound would need to fall in order to boost exports and to close the UK's £7bn a month trade deficit in goods. While the pound has been extremely powerful against the dollar recently, it has hit a four-year low against the euro. This lowering in strength may serve as a forecast to its overall decrease in power.
King also mentioned that equity prices are on average higher now than they were in August. He said that this was also true around the world and in emerging markets--they're 20% higher. A fall in equity markets, the governor said, could have a bigger impact on the world economy than the recent credit squeeze.
While the outlook for the UK economy in the near term is one of slowing growth and rising inflation, King said that the long term outlook is a return of growth to its average rate and the lowering of inflation back to its target.
After reading this article, I couldn't help but think about crises that occurred in the past and relating them to the current turmoil the UK is experiencing. After any situation as serious and severe as this one, it will always take a substantial amount of time and planning before the economy is repaired and back to running smoothly. Take, for example, the Great Depression in America. The economy slumped considerably and conditions worsened for everyone. As bad as the Depression was, America prevailed and became strong once again (although now the economy is suffering again as a result of the same crisis going on in the UK). What I'm trying to say here is that things take time to resolve. Once UK officials have a plan then their long term outlook of returning growth to its average rate and lowering inflation back to its target will come to fruition. Interest rates will also most likely go down, the housing market will be back up to par, the pound will level and equity will increase. If officials work together and devise a way to "pick up the pieces" caused by the financial market crisis, I am confident that the economy will once again pick up and things will be returned to how they were before the crisis hit. I'm not exactly sure how the officials will do this in terms of the specific regulations and changes they need to make because I am not very educated in this department, but I am confident that they will find a way.
Sunday 18 November 2007
11/16/07
In keeping up with the current financial crisis, I found it appropriate to do a journal entry on the losses UK bank Barclays suffered as a result of this whole ordeal. It turns out that Britain's third largest bank calculated a £1.3bn hit on the sub-prime mortgage crisis. This writedown is very descriptive and includes £700m against the bank's top-rated mortgage-backed securities, £400m for mezzanine finance exposures and £400m on other sub-prime positions. In addition to this, Barclays said it had written off £500m during July, August and September, and £800m in October alone as the result of a "second leg down" in the sub-prime market when credit rating agencies downgraded a huge number of CDOs (according to BarCap chief Bob Diamond). Since last Friday, rumors had been swirling about the losses the bank could be facing, some rumors put the losses as high as £10bn. While £1.3bn is a great deal less than £10bn, it is still quite a bit of money to lose as a result of the recent financial turmoil surrounding the US and the UK.
Title of Article: Barclays calculates £1.3bn sub-prime loss
Source: The Guardian
Date: 11/16/07
In order to make "consciously conservative" write-off estimates, John Varley, the bank's chief executive, said the bank had carefully analyzed its past and current situation and looked ahead at potential defaults. According to Varley, this recent extensive disclosure by Barclays "demonstrates the strength and resilience of [its] performance during the year and in particular during the turbulent month of November." However descriptive it may have been, however, there is still some ambiguity. Philip Richards, analyst at Execution, says that "they've given us some clarity but the numbers are still pretty big" and points to Barclays' £5bn exposure to CDOs (collateralized debt obligations), £5.4bn for its whole loans and trading book, and a £7.3bn exposure from unsold leveraged finance underwriting positions.
Surprisingly enough, the huge scale of the write-downs has not held the bank back. The BarCap business has still generated huge profits--£1.9bn in the first 10 months of the year, which is ahead of last year's October total. In the full 2006 year BarCap made a record £2.2bn. Diamond said that other parts of the BarCap business had been making profits with "strong growth" across commodity, equity, currency and interest rate products, and "excellent contributions from continental Europe and Asia and good results in UK markets." Varley added to this that Barclays has been "firing on a lot of cylinders."
Since its onset in August, the crisis has caused a plethora of problems. Not only has it caused numerous amounts of companies a great deal in losses, but it has also virtually destroyed the structure and stability of the sub-prime market. In the beginning of the article, Diamond described the sub-prime market as "a mess" that would take up to two years to be sorted out. This opinion is most likely shared by many if not all financial experts and demonstrates the problems that the crisis has presented. From our discussions in class and from the news reports I've read, I can only agree with Diamond's statement. The market is literally a mess right now and will most likely take an army of people and a great deal of time and planning to rehabilitate it.
Title of Article: Barclays calculates £1.3bn sub-prime loss
Source: The Guardian
Date: 11/16/07
In order to make "consciously conservative" write-off estimates, John Varley, the bank's chief executive, said the bank had carefully analyzed its past and current situation and looked ahead at potential defaults. According to Varley, this recent extensive disclosure by Barclays "demonstrates the strength and resilience of [its] performance during the year and in particular during the turbulent month of November." However descriptive it may have been, however, there is still some ambiguity. Philip Richards, analyst at Execution, says that "they've given us some clarity but the numbers are still pretty big" and points to Barclays' £5bn exposure to CDOs (collateralized debt obligations), £5.4bn for its whole loans and trading book, and a £7.3bn exposure from unsold leveraged finance underwriting positions.
With the exception of the criticism from Richards, the descriptive write-down analysis by Barclays has received praise. Analyst Alex Potter at Collins Stewart said the statement was confidence-inspiring and commended Barclays officials by saying that they went though their situation with a fine-tooth comb and made some realistic decisions. Analysts at Credit Suisse said that the statement was useful and will put a backstop, at least for now, on the speculation that much bigger losses had emerged.
Since its onset in August, the crisis has caused a plethora of problems. Not only has it caused numerous amounts of companies a great deal in losses, but it has also virtually destroyed the structure and stability of the sub-prime market. In the beginning of the article, Diamond described the sub-prime market as "a mess" that would take up to two years to be sorted out. This opinion is most likely shared by many if not all financial experts and demonstrates the problems that the crisis has presented. From our discussions in class and from the news reports I've read, I can only agree with Diamond's statement. The market is literally a mess right now and will most likely take an army of people and a great deal of time and planning to rehabilitate it.
Wednesday 14 November 2007
The Role of the Bank of England in the Gold Market
In light of the fact that gold has been an ever popular topic of discussion within our UK Economy class, while visiting the Bank of England on October 31st, I decided to find information on the role of the Bank in the gold market. There are many facets to this topic; the first to be discussed is the Bank’s management of the UK’s official gold reserves on behalf of the Government. Another aspect is the Bank’s involvement in the gold market, in particular the Bank’s provision of custodial and account management services to central banks and to commercial firms active in the London market. This reflects its role in seeking to ensure the efficiency and effectiveness of the UK financial sector. The final aspect of discussion is the Bank’s contribution to the self-regulation of the wholesale gold market.
In regards to the official reserves, the UK is a little unusual, although certainly not unique, in that the official reserves of foreign currency and gold are held on the balance sheet of the Government rather than of the central bank. The Bank of England’s role is to manage the reserves portfolio, embracing both foreign currency assets and liabilities, on behalf of the Government or more specifically the Treasury, the Finance Ministry. The Bank performs this role according to a Remit, which the Treasury sets for the Bank each year. Strategic decisions about the reserves portfolio, such as high-level asset allocation, are taken by the Treasury. The Bank provides analysis and advice to assist the Treasury in making these decisions; it implements the decisions that the Treasury makes and also manages the reserves on a day-to-day basis. In (relatively) recent years, the Bank’s management of the official gold reserves has also taken place within the framework of the 1999 Central Bank Agreement on Gold. In the context of gold, perhaps the most significant strategic move was the Government’s decision to reduce the holdings of gold in the reserves by just over half as a portfolio diversification measure. This was achieved through the series of auctions that the Bank conducted between 1999 and 2002. Despite the decrease in holdings, the UK still remains a significant holder of gold; it has around 315 tons, which is worth over $3½ billion, making the UK still among the largest twenty official holders.
Like many other central banks, whether or not they have the reserves on their own balance sheet, the Bank’s day-to-day management of the gold holdings in the reserves is aimed at achieving a return on them; this is done by lending a portion to the market. As is increasingly common among central banks, the Bank has a strategic benchmark for this gold lending portfolio, which is, in its case, set by the Treasury. The Bank is able, subject to market and credit risk limits, to adjust the maturity distribution of the actual portfolio, relative to that of the benchmark, in search of additional returns. The return on the actual portfolio relative to the benchmark measures the value that the Bank has been able to add by this ‘active management.’ Within fairly recent years, gold lending rates have been extremely low. Commentators seem to be in broad agreement as to why that is. There has been a low interest rate environment globally, and one might expect that to influence interest rates on gold. But there are also factors specific to the gold market. In particular, much, although not all, gold lending ultimately facilitates the hedging by gold producers of their future output. And, as is well known, producer hedge books have become smaller. Over a matter of years, a number of central banks withdrew some of their gold from the lending market. Gold Fields Mineral Services estimated that outstanding lending by the official sector was 266 tons lower at the end of 2002 than it had been a year earlier. In reality this just reflects lower demand from the ultimate borrowers, communicated via the interest rate. In the context of short-term rates in the single digit basis points, one might perhaps have expected official lending to fall further, when allowance is made for the compensation necessary to take account of credit risk and transaction costs.
The next topic of discussion is the Bank’s involvement in the gold market. Comparative international data on turnover in the wholesale gold market is sparse, but London is generally considered to be the most significant center for spot and forward purchases and sales, over-the-counter gold derivatives, and, in particular, for gold lending. What is the Bank of England’s place in this? First, it is a very significant custodian of physical gold. Primarily this is gold that belongs to other central banks, but the Bank also stores gold in its vaults on behalf of a number of commercial firms that are active in the market. In fact, most of the gold it stores is not its own. The Bank is certainly not unique among central banks in this custodial role. Most notably, the US Federal Reserve also offers this service to other central banks, although not to private sector institutions. The Fed has the advantage of being located on bedrock so it is able to pile its holdings up to the ceiling, but the Bank is limited to a certain number of bars per pallet because of London’s clay. With this, though, there are many commercial firms providing vaulting facilities in London and elsewhere around the world. Most often, however, commercial bank storage services are conducted on an unallocated basis. This means that the owner has a claim on the commercial bank, where it is held for a certain amount of gold, but does not have title to specific bars. What the Bank provides is an account management service on an allocated basis. That means that those holding gold at the Bank, particularly other central banks, have the reassurance of knowing that they have title to specific bars; but they are also able to mobilize those gold holdings conveniently by making or receiving so-called ‘electronic book entry transfers’ between their account at the Bank and the account of their counterpart. Such a transfer does not require gold to be physically moved within the Bank’s vaults; rather, title to the bars in question is transferred within the Bank’s IT systems. The Bank is probably unique in offering this kind of account management service on the scale that it does, and to a large number both of central bank and private sector participants in the market. The significance of this facility is that it provides an important element of the infrastructure that brings market participants together. This system is one that has grown up organically over a long period of time, and very much in response to representations from the central bank customers and from the London market itself. It has no doubt been a factor in London, maintaining its position as the most significant international center in the wholesale gold market. However important this factor may be, other factors have been even more significant. One of these factors is the establishment and promotion by the LBMA of London Good Delivery standards. Many aspects of the wholesale market could not exist in the absence of the general acceptability of different bars within the London clearing system. Such is the confidence in this market standard that the term London Good Delivery is recognized and respected worldwide.
A further activity, one that grew out of the Bank’s custodial role, is that it is prepared to accept gold deposits from other central banks, which it lends on to the market in its own name, at a margin to reflect the cost and credit risk incurred. Central bank customers thereby gain the convenience of being able to generate a return on part of their gold holdings while only having to manage a single front and back office relationship. The assets and liabilities denominated in gold on the Bank’s own balance sheet derive entirely from this borrowing and lending activity. Since these figures are published on its website each month in accordance with the IMF’s disclosure standards, anyone who is interested may track this business from there. While the Bank is satisfied with its assistance in the development of the market in these ways, it is not wholly selfless. The Bank does charge fees for the facilities it provides. More broadly these activities reflect the Bank’s role in seeking to ensure the effectiveness of the UK’s financial services, which it does in part by supporting the development of an efficient financial infrastructure.
The final topic of discussion is the Bank’s role in the regulation of the gold market in the UK. This is, in fact, a very limited one. Since the establishment of the Financial Services Authority in 1998, it has been the regulator of individual institutions. The wholesale bullion market is considered to be an inter-professional market, or, in the distinctive parlance of the UK regulatory framework, a ‘non-investment products’ market. This means that, in general, the principle of ‘caveat emptor’ applies and the market is expected to be self-regulating. The same is true, as it should be, of the foreign exchange and cash money markets in the UK. As has always been the case, the Bank of England contributes to the self-regulation of all these markets. Nowadays it does that by facilitating the production of the Non-Investment Products Code, known by its acronym, the NIPs Code. This is a code of good practice for participants in these wholesale, over-the-counter markets, covering such things as dealing procedures and conventions. It provides a framework for market participants to gauge what is, and what is not, reasonable and professional conduct. The NIPs Code is produced and maintained jointly by the London Foreign Exchange Joint Standing Committee, for which the Bank of England provides a Chairman and a secretariat; by the Money Markets Liaison Group, for which it provides a similar service; and by the Management Committee of the LBMA. The Financial Services Authority has also participated in the development of the Code and says that it expects the management of authorized firms to take due account of it. The LBMA has endorsed the NIPs Code on behalf of the bullion market, and is consulted on all proposed changes to the Code. With this, it should become apparent that the Bank works very closely with the LBMA in a variety of contexts. Representatives of the Bank are invited to attend meetings of the Management and Physical Committees of the LBMA as observers, and beyond that the two groups have a very close ongoing working relationship.
While rates, sales and information on gold is liable to changes and updates at any time, I hope that this report has given an accurate and intimate look into the role of the Bank in the gold market. As has been hopefully displayed, the Bank plays a vital role in the regulation of gold and also works with a variety of other groups to handle the many facets of the market. I greatly enjoyed my tour of the Bank of England and learned a great deal while there in addition to the topic I have just discussed.
In regards to the official reserves, the UK is a little unusual, although certainly not unique, in that the official reserves of foreign currency and gold are held on the balance sheet of the Government rather than of the central bank. The Bank of England’s role is to manage the reserves portfolio, embracing both foreign currency assets and liabilities, on behalf of the Government or more specifically the Treasury, the Finance Ministry. The Bank performs this role according to a Remit, which the Treasury sets for the Bank each year. Strategic decisions about the reserves portfolio, such as high-level asset allocation, are taken by the Treasury. The Bank provides analysis and advice to assist the Treasury in making these decisions; it implements the decisions that the Treasury makes and also manages the reserves on a day-to-day basis. In (relatively) recent years, the Bank’s management of the official gold reserves has also taken place within the framework of the 1999 Central Bank Agreement on Gold. In the context of gold, perhaps the most significant strategic move was the Government’s decision to reduce the holdings of gold in the reserves by just over half as a portfolio diversification measure. This was achieved through the series of auctions that the Bank conducted between 1999 and 2002. Despite the decrease in holdings, the UK still remains a significant holder of gold; it has around 315 tons, which is worth over $3½ billion, making the UK still among the largest twenty official holders.
Like many other central banks, whether or not they have the reserves on their own balance sheet, the Bank’s day-to-day management of the gold holdings in the reserves is aimed at achieving a return on them; this is done by lending a portion to the market. As is increasingly common among central banks, the Bank has a strategic benchmark for this gold lending portfolio, which is, in its case, set by the Treasury. The Bank is able, subject to market and credit risk limits, to adjust the maturity distribution of the actual portfolio, relative to that of the benchmark, in search of additional returns. The return on the actual portfolio relative to the benchmark measures the value that the Bank has been able to add by this ‘active management.’ Within fairly recent years, gold lending rates have been extremely low. Commentators seem to be in broad agreement as to why that is. There has been a low interest rate environment globally, and one might expect that to influence interest rates on gold. But there are also factors specific to the gold market. In particular, much, although not all, gold lending ultimately facilitates the hedging by gold producers of their future output. And, as is well known, producer hedge books have become smaller. Over a matter of years, a number of central banks withdrew some of their gold from the lending market. Gold Fields Mineral Services estimated that outstanding lending by the official sector was 266 tons lower at the end of 2002 than it had been a year earlier. In reality this just reflects lower demand from the ultimate borrowers, communicated via the interest rate. In the context of short-term rates in the single digit basis points, one might perhaps have expected official lending to fall further, when allowance is made for the compensation necessary to take account of credit risk and transaction costs.
The next topic of discussion is the Bank’s involvement in the gold market. Comparative international data on turnover in the wholesale gold market is sparse, but London is generally considered to be the most significant center for spot and forward purchases and sales, over-the-counter gold derivatives, and, in particular, for gold lending. What is the Bank of England’s place in this? First, it is a very significant custodian of physical gold. Primarily this is gold that belongs to other central banks, but the Bank also stores gold in its vaults on behalf of a number of commercial firms that are active in the market. In fact, most of the gold it stores is not its own. The Bank is certainly not unique among central banks in this custodial role. Most notably, the US Federal Reserve also offers this service to other central banks, although not to private sector institutions. The Fed has the advantage of being located on bedrock so it is able to pile its holdings up to the ceiling, but the Bank is limited to a certain number of bars per pallet because of London’s clay. With this, though, there are many commercial firms providing vaulting facilities in London and elsewhere around the world. Most often, however, commercial bank storage services are conducted on an unallocated basis. This means that the owner has a claim on the commercial bank, where it is held for a certain amount of gold, but does not have title to specific bars. What the Bank provides is an account management service on an allocated basis. That means that those holding gold at the Bank, particularly other central banks, have the reassurance of knowing that they have title to specific bars; but they are also able to mobilize those gold holdings conveniently by making or receiving so-called ‘electronic book entry transfers’ between their account at the Bank and the account of their counterpart. Such a transfer does not require gold to be physically moved within the Bank’s vaults; rather, title to the bars in question is transferred within the Bank’s IT systems. The Bank is probably unique in offering this kind of account management service on the scale that it does, and to a large number both of central bank and private sector participants in the market. The significance of this facility is that it provides an important element of the infrastructure that brings market participants together. This system is one that has grown up organically over a long period of time, and very much in response to representations from the central bank customers and from the London market itself. It has no doubt been a factor in London, maintaining its position as the most significant international center in the wholesale gold market. However important this factor may be, other factors have been even more significant. One of these factors is the establishment and promotion by the LBMA of London Good Delivery standards. Many aspects of the wholesale market could not exist in the absence of the general acceptability of different bars within the London clearing system. Such is the confidence in this market standard that the term London Good Delivery is recognized and respected worldwide.
A further activity, one that grew out of the Bank’s custodial role, is that it is prepared to accept gold deposits from other central banks, which it lends on to the market in its own name, at a margin to reflect the cost and credit risk incurred. Central bank customers thereby gain the convenience of being able to generate a return on part of their gold holdings while only having to manage a single front and back office relationship. The assets and liabilities denominated in gold on the Bank’s own balance sheet derive entirely from this borrowing and lending activity. Since these figures are published on its website each month in accordance with the IMF’s disclosure standards, anyone who is interested may track this business from there. While the Bank is satisfied with its assistance in the development of the market in these ways, it is not wholly selfless. The Bank does charge fees for the facilities it provides. More broadly these activities reflect the Bank’s role in seeking to ensure the effectiveness of the UK’s financial services, which it does in part by supporting the development of an efficient financial infrastructure.
The final topic of discussion is the Bank’s role in the regulation of the gold market in the UK. This is, in fact, a very limited one. Since the establishment of the Financial Services Authority in 1998, it has been the regulator of individual institutions. The wholesale bullion market is considered to be an inter-professional market, or, in the distinctive parlance of the UK regulatory framework, a ‘non-investment products’ market. This means that, in general, the principle of ‘caveat emptor’ applies and the market is expected to be self-regulating. The same is true, as it should be, of the foreign exchange and cash money markets in the UK. As has always been the case, the Bank of England contributes to the self-regulation of all these markets. Nowadays it does that by facilitating the production of the Non-Investment Products Code, known by its acronym, the NIPs Code. This is a code of good practice for participants in these wholesale, over-the-counter markets, covering such things as dealing procedures and conventions. It provides a framework for market participants to gauge what is, and what is not, reasonable and professional conduct. The NIPs Code is produced and maintained jointly by the London Foreign Exchange Joint Standing Committee, for which the Bank of England provides a Chairman and a secretariat; by the Money Markets Liaison Group, for which it provides a similar service; and by the Management Committee of the LBMA. The Financial Services Authority has also participated in the development of the Code and says that it expects the management of authorized firms to take due account of it. The LBMA has endorsed the NIPs Code on behalf of the bullion market, and is consulted on all proposed changes to the Code. With this, it should become apparent that the Bank works very closely with the LBMA in a variety of contexts. Representatives of the Bank are invited to attend meetings of the Management and Physical Committees of the LBMA as observers, and beyond that the two groups have a very close ongoing working relationship.
While rates, sales and information on gold is liable to changes and updates at any time, I hope that this report has given an accurate and intimate look into the role of the Bank in the gold market. As has been hopefully displayed, the Bank plays a vital role in the regulation of gold and also works with a variety of other groups to handle the many facets of the market. I greatly enjoyed my tour of the Bank of England and learned a great deal while there in addition to the topic I have just discussed.
Wednesday 7 November 2007
11/7/07
Frustration has been taken to a new level for all Americans in London this morning as the pound climbed to $2.10, the highest its been since 1981.
Title of Article: Dollar hits 26-year low against pound
Date: 11/7/07
Source: The Guardian
Just when you thought the exchange rate of the dollar against the pound couldn't get any worse, it has. By 10:30 this morning, one pound was worth $2.1053. This can be compared to January data when one pound was worth $1.96. The dollar, which has been weakening for several weeks, also hit a new all-time low against the euro; one euro is now worth $1.4703.
The weakening of the dollar may have been catalyzed by China's possible preparation to shift its foreign reserves out of dollars. China, as a result of their booming exports, now holds the largest reserves of foreign currency in the world, estimating around $1.434 trillion at the end of September. Cheng Siwei, vice chairman of China's National People's Congress, told a Beijing conference on Tuesday that China would "favor stronger currencies over weaker ones, and readjust accordingly." Xu Jian, a vice director of China's central bank, told the same conference that the dollar was "losing its status as the world currency."
Despite the power of China speculation, in general, the weakening of the dollar can be attributed to negative dollar sentiment, the slowdown in the American economy, the sub-prime mortgage crisis and the ongoing credit crunch.
As an American temporairily living in London, this is very upsetting, frustrating and unsettling news. Not only does everything now cost more than twice as much (which, by the way, does not make me, my bank account or my parents happy at all), but this news also demonstrates the weakening of American dominance and power. America used to be the "go-to" country--if you wanted to find a better way of life, you'd move to America; if another country needed help, they'd ask for America's help. The value of the dollar used to be so strong against the pound; now it's close to being one of the weakest of any developed country. I don't know how else to describe it, but I'm very worried about America's future. Will we be superseded by another country in dominance and power? Will the dollar continue to weaken? Will America as we all used to know it be a permanent thing of the past? Perhaps our economy will rebound and regain it's powerful status, or maybe these fears will come to fruition. I hope the latter is not the case, but only time will tell what happens to the power of the dollar and the status of America.
Title of Article: Dollar hits 26-year low against pound
Date: 11/7/07
Source: The Guardian
Just when you thought the exchange rate of the dollar against the pound couldn't get any worse, it has. By 10:30 this morning, one pound was worth $2.1053. This can be compared to January data when one pound was worth $1.96. The dollar, which has been weakening for several weeks, also hit a new all-time low against the euro; one euro is now worth $1.4703.
The weakening of the dollar may have been catalyzed by China's possible preparation to shift its foreign reserves out of dollars. China, as a result of their booming exports, now holds the largest reserves of foreign currency in the world, estimating around $1.434 trillion at the end of September. Cheng Siwei, vice chairman of China's National People's Congress, told a Beijing conference on Tuesday that China would "favor stronger currencies over weaker ones, and readjust accordingly." Xu Jian, a vice director of China's central bank, told the same conference that the dollar was "losing its status as the world currency."
Despite the power of China speculation, in general, the weakening of the dollar can be attributed to negative dollar sentiment, the slowdown in the American economy, the sub-prime mortgage crisis and the ongoing credit crunch.
As an American temporairily living in London, this is very upsetting, frustrating and unsettling news. Not only does everything now cost more than twice as much (which, by the way, does not make me, my bank account or my parents happy at all), but this news also demonstrates the weakening of American dominance and power. America used to be the "go-to" country--if you wanted to find a better way of life, you'd move to America; if another country needed help, they'd ask for America's help. The value of the dollar used to be so strong against the pound; now it's close to being one of the weakest of any developed country. I don't know how else to describe it, but I'm very worried about America's future. Will we be superseded by another country in dominance and power? Will the dollar continue to weaken? Will America as we all used to know it be a permanent thing of the past? Perhaps our economy will rebound and regain it's powerful status, or maybe these fears will come to fruition. I hope the latter is not the case, but only time will tell what happens to the power of the dollar and the status of America.
Tuesday 30 October 2007
10/30/07
Always a relevant and ever-important topic to our economics class, an article within today's Guardian stated that the crisis has struck again. UBS, Europe's largest bank, announced a third-quarter pre-tax loss of £300m and issued a warning to investors that it could face further write-downs of assets due to the subprime mortgage crisis.
Title of Article: UBS posts £300m loss
Source: The Guardian
Date: 10/30/07
Higher than the market expected, the £300m loss comes as UBS's first blow in five years. Although the bank expected to end with profitability in the fourth quarter of this turbulent year, they are now expecting to suffer further losses in the final quarter. The banking sector of UBS, already shocked by Merrill Lynch's £4.35bn write down report and the departure of its chief executive Stan O'Neal, received further shock when news of the loss and further write downs hit. Fears that future returns would be significantly less than the recent past has caused UBS shares to fall by more than 1%.
Marcel Rohner, UBS's new CEO, said that the range of possible outcomes as a result of the write-downs was widening. Marco Suter, successor to Clive Standish, group chief financial officer (who was fired by Rohner in the wake of the crisis), said that it was "highly unlikely" that the scale of the write-downs in the fourth quarter would be as high as in the third quarter when the sub-prime crisis fully erupted. This would in turn force US and European central banks to pour billions into the financial markets.
UBS, which ended with profit in the corresponding quarter of 2006, said that it had reduced its exposure on residential mortgage-backed securities as well as collateral debt obligations in attempts to ameliorate their standings and decrease the potential for further losses in the fourth quarter. Rohner said that while their results for the third quarter were disappointing, he insisted that the bank was dealing with their weaknesses by making changes such as the ones listed above and are also making management changes and developing sharper risk assessments. Other banks such as Deutsche Bank and Credit Suisse are due to report their third quarter results on Wednesday but are promising investors that their exposure to the crisis is relatively under control and assurred them to not expect any results such as those endured by UBS.
When will it ever end?!? Day after day we receive more bad news as a result of the subprime crisis; who will it not effect? Already it's tarnished the image and ruined the standings of many major economic cooperations, and now it has hit Europe's largest bank. £300 million is not a light burden to carry; I wonder how UBS is going to get back out on top after this. The potential to deal the continent's largest bank its first loss in five years obvioulsy displays the power and seriousness this crisis contains. Some officials expect further losses in the fourth quarter while others claim that the write downs will not be as high as they were in the third quarter: only time will tell who is right. As for now, all we can do is hope that this awful crisis will just go away already and pray that UBS along with the other affected companies will regain their strength and prosperity.
Title of Article: UBS posts £300m loss
Source: The Guardian
Date: 10/30/07
Higher than the market expected, the £300m loss comes as UBS's first blow in five years. Although the bank expected to end with profitability in the fourth quarter of this turbulent year, they are now expecting to suffer further losses in the final quarter. The banking sector of UBS, already shocked by Merrill Lynch's £4.35bn write down report and the departure of its chief executive Stan O'Neal, received further shock when news of the loss and further write downs hit. Fears that future returns would be significantly less than the recent past has caused UBS shares to fall by more than 1%.
Marcel Rohner, UBS's new CEO, said that the range of possible outcomes as a result of the write-downs was widening. Marco Suter, successor to Clive Standish, group chief financial officer (who was fired by Rohner in the wake of the crisis), said that it was "highly unlikely" that the scale of the write-downs in the fourth quarter would be as high as in the third quarter when the sub-prime crisis fully erupted. This would in turn force US and European central banks to pour billions into the financial markets.
UBS, which ended with profit in the corresponding quarter of 2006, said that it had reduced its exposure on residential mortgage-backed securities as well as collateral debt obligations in attempts to ameliorate their standings and decrease the potential for further losses in the fourth quarter. Rohner said that while their results for the third quarter were disappointing, he insisted that the bank was dealing with their weaknesses by making changes such as the ones listed above and are also making management changes and developing sharper risk assessments. Other banks such as Deutsche Bank and Credit Suisse are due to report their third quarter results on Wednesday but are promising investors that their exposure to the crisis is relatively under control and assurred them to not expect any results such as those endured by UBS.
When will it ever end?!? Day after day we receive more bad news as a result of the subprime crisis; who will it not effect? Already it's tarnished the image and ruined the standings of many major economic cooperations, and now it has hit Europe's largest bank. £300 million is not a light burden to carry; I wonder how UBS is going to get back out on top after this. The potential to deal the continent's largest bank its first loss in five years obvioulsy displays the power and seriousness this crisis contains. Some officials expect further losses in the fourth quarter while others claim that the write downs will not be as high as they were in the third quarter: only time will tell who is right. As for now, all we can do is hope that this awful crisis will just go away already and pray that UBS along with the other affected companies will regain their strength and prosperity.
Sunday 28 October 2007
National Railway Museum
On the 18th of October, the Bucknell in London group travelled to York and visited, among other things, the National Railway Museum. This extremely large building was filled with several important artifacts from the past pertaining to the railway industry such as replicas and restorations of historic locomotives who broke records and revolutionized railway transportation. It also had many different exhibitions; one of which was entitled "British Rail -- a Moving Story." This exhibition told the story of the company that ran the UK rail network for half a century. Several aspects were covered within this exhibition, but I was particularly interested in the topic that discussed journey times and ticket costs for a trip from London to Edinburgh as well the average weekly income of workers from 1948 to 1995. As I explored the exhibition and found information on this topic, I found it very interesting to compare the statistics between the years and see how economic conditions had changed from decade to decade.
In 1948, the journey time from London to Edinburgh was seven hours and fifty minutes. The cost of a first class single ticket was £4.30 and that of a standard single ticket was £2.57. The average weekly income of a worker was £5.75.
The travel time from London to Edinburgh surprisingly increased by four minutes in 1951 when it took seven hours and fifty-four minutes, but the prices for tickets as well as the average weekly income increased. The price for a first class single ticket had increased to £6.61 and it cost £4.01 for a standard single ticket. The average weekly income in 1951 was £9, a rather significant increase from 1948.
In 1960 the travel time from London to Edinburgh decreased to just over seven hours (7 hours, 2 minutes). The interesting statistic of 1960 as compared to 1951, however, lies in the ticket prices; they actually decreased. The price of a first class single ticket was £5.31 and a standard single ticket was £3.50. I cannot explain exactly why this decrease in ticket prices happened; I can only guess that the prices dropped to perhaps influence more people to use the train as their mode of transportation. There could be several reasons as to why this drop occurred; I however am unaware of the exact and correct reason. The average weekly income again raised substantially compared to earlier years as it was around £16.50.
The journey time from London to Edinburgh in 1970 decreased by a great amount as it took five hours and forty-one minutes. The ticket prices, however, increased since 1960. A first class single ticket was around £8.61 and a standard single ticket was around £5.61. The average weekly income also increased greatly to £32.35.
In 1985, it actually took a minute longer to travel to Edinburgh from London (5 hours, 42 minutes). However, there was a great increase in ticket costs and average weekly income. Tickets prices rose to £61.00 for a first class single ticket and £40.50 for a standard single ticket. The average weekly income rose to £171.00.
The last available information on this topic in the exhibition was for 1995. During this time, it took four hours and twelve minutes to travel from London to Edinburgh, and cost £92.00 for a first class single ticket and £63.00 for a standard single ticket. The average weekly income increased to £336.30.
The general decrease in journey time and increase in ticket prices and average weekly incomes (with the exception of a few key statistics in the years listed above) reflects the traditional economic tendencies of society. As time goes on, the efficiency of modes of transportation increase which causes travel time to decrease, and prices of tickets and incomes rise in turn as the standards of living increase and the price of other goods and services increase in quality. It was very interesting to tour the "British Rail -- a Moving Story" exhibition and gain more insight on how economic conditions have changed over a period of almost fifty years.
Tuesday 16 October 2007
10/17/07
After a very relaxing fall break, it's time to get back into the swing of things and update myself on what's happening in the UK economic world.
In addition to the most popular stories such as the growing disappointment with Brown and the continuing turmoil of Northern Rock, there is, surprisingly, (since the above topics seem to be the only things any newspaper talks about) other news in the UK which is of interest. One particular article in today's Guardian caught my attention. This article discusses a study that revealed that migrant workers within the UK are more skilled, reliable and hardworking than their British co-workers and are fueling the country's economic growth.
Title of Article: Migrants are a boon to UK economy, says study
Date: 10/17/07
An official study published just yesterday reported that migrant workers within the UK are fueling the country's economic growth by about £6 billion a year. Along with this finding the study also reported that these migrants, usually of Polish or other eastern European descent, are more hardworking and reliable than British workers. No discernable impact on unemployment and only a "modest dampening of wage growth" for British workers on the lower rungs of the income ladder has occurred as well. With the emergence of these findings, a forum is scheduled to meet today to discuss the findings and decide whether or not the restrictions on Romanian and Bulgarian migrants into Britian should be lifted.
Despite the advantages of migrant workers, some problems have indeed risen becuase of the massive influx of foreigners. (The net amount of migrants within Britian for this year is around 189,000; this number is down 28% when compared to last years figure which was around 262,000.) Due to migration, seven out of eight regions in England have reported pressure with housing situations and five out of eight regions have reported problems with crime and education. David Davis, the shadow home secretary, also made the comment that Labor ministers are ignoring the fact that relying on immigration to boost the economy is only a short-term answer.
In addition to the most popular stories such as the growing disappointment with Brown and the continuing turmoil of Northern Rock, there is, surprisingly, (since the above topics seem to be the only things any newspaper talks about) other news in the UK which is of interest. One particular article in today's Guardian caught my attention. This article discusses a study that revealed that migrant workers within the UK are more skilled, reliable and hardworking than their British co-workers and are fueling the country's economic growth.
Title of Article: Migrants are a boon to UK economy, says study
Date: 10/17/07
An official study published just yesterday reported that migrant workers within the UK are fueling the country's economic growth by about £6 billion a year. Along with this finding the study also reported that these migrants, usually of Polish or other eastern European descent, are more hardworking and reliable than British workers. No discernable impact on unemployment and only a "modest dampening of wage growth" for British workers on the lower rungs of the income ladder has occurred as well. With the emergence of these findings, a forum is scheduled to meet today to discuss the findings and decide whether or not the restrictions on Romanian and Bulgarian migrants into Britian should be lifted.
Despite the advantages of migrant workers, some problems have indeed risen becuase of the massive influx of foreigners. (The net amount of migrants within Britian for this year is around 189,000; this number is down 28% when compared to last years figure which was around 262,000.) Due to migration, seven out of eight regions in England have reported pressure with housing situations and five out of eight regions have reported problems with crime and education. David Davis, the shadow home secretary, also made the comment that Labor ministers are ignoring the fact that relying on immigration to boost the economy is only a short-term answer.
Even with these major problems, the significant advantages of migrants in the UK are speculated to outweigh the disadvantages caused by their immigration. Immigration minister Liam Byrne insists that Britian is better off with the migrants than without them as displayed by their diligence and aid in stimulating Britain's economic growth. In attempts to deal with the disadvantages, however, Byrne suggested that Britain needs to have a "new balance" in immigration policy so that communities without a history of taking in large amounts of people can better deal with the migrants moving into them.
I chose to discuss this article becuase I have a personal connection to it. Back in the States, my family employs many migrants, particularly Hispanics, to work on our orchards. With this, I whole-heartedly agree with the study in that these workers are extremely hard working and diligent; they may not be as reliable as their American co-workers (I believe the only American workers on our orchards are my uncles and my cousins, and maybe a few others that I am unsure of), but they still are a very important part of my family's business operation and success. I can totally see how it has been determined that they are the main constituents in the UK's economic growth, and I can only assume that they play a major part in the growth of the US economy as well. Many British workers (and American workers as well) are fighting to keep migrants out of the country with complaints that migrants take their jobs away from them and create more problems than benefits, but what these "native" workers need to realize is that migrants are helping to boost the economy so that British people can enjoy the lifestyles that they do (and take for granted). Yes, some migrant workers do end up replacing British workers, but that is only because they are more qualified for the position. If another British worker was more qualified, the same situation would happen. The article also stated that migrants on average earn more and so pay more tax than UK workers, so I really do not understand why so many British people are so adamant about getting rid of immigrants. I do think that there needs to be a balance in immigration policy so that the problems can be solved, but I definitely do not think that all immigrants should be forced to leave Britain. As Liam Byrne said, the British economy is better off with the migrants than without them.
Tuesday 2 October 2007
10/2/07
Although not very related to any class topics, this article interested me for personal reasons. Being so far away from home for months at a time poses problems when it comes to communication with one's family. Skype, a free telephone service via one's computer, solves this problem. This service is so easy to use and allows me to keep in touch with loved ones I left behind at home. Despite its success and prosperity, the internet auction website eBay is now admitting that it paid too much for the company when it bought the business in September 2005.
Title: EBay says it paid almost $1bn too much for Skype
Source: The Guardian (10/2/07)
Paying approximately $2.6bn, eBay is now coming out with a statement that it paid $1.43bn too much for the internet telephone company Skype. Along with this debt, it also has to pay $530m to former shareholders, one of which being Niklas Zennstrom, the founder of Skype and former chief executive. While $530m is quite a lot of money, if Skype had hit its target for revenue, profits and user numbers, eBay would have had to pay shareholders $1.7bn.
eBay had bought Skype with the intention of integrating Skype's telephone services with its auction site so that buyers and sellers could use Skype to contact eBay customer services. This could have boosted Skype's sales in that more people would be using its services, but with the recent news of eBay's overpayment, it looks like it didn't.
I am frankly surprised by this news. I know many people who rely on Skype as their means of communication with family and friends, including myself, so I would have figured that eBay would have been getting Skype for a great deal by paying what they did. This is perhaps showing my ignorance in the principles of economics, but eBay's overpayment it just doesn't make sense to me. Despite their overpayment, at least eBay doesn't have to pay shareholders nearly $2bn like they would have if Skype had reached its target prices. Maybe that's the only good news eBay has right now.
Title: EBay says it paid almost $1bn too much for Skype
Source: The Guardian (10/2/07)
Paying approximately $2.6bn, eBay is now coming out with a statement that it paid $1.43bn too much for the internet telephone company Skype. Along with this debt, it also has to pay $530m to former shareholders, one of which being Niklas Zennstrom, the founder of Skype and former chief executive. While $530m is quite a lot of money, if Skype had hit its target for revenue, profits and user numbers, eBay would have had to pay shareholders $1.7bn.
eBay had bought Skype with the intention of integrating Skype's telephone services with its auction site so that buyers and sellers could use Skype to contact eBay customer services. This could have boosted Skype's sales in that more people would be using its services, but with the recent news of eBay's overpayment, it looks like it didn't.
I am frankly surprised by this news. I know many people who rely on Skype as their means of communication with family and friends, including myself, so I would have figured that eBay would have been getting Skype for a great deal by paying what they did. This is perhaps showing my ignorance in the principles of economics, but eBay's overpayment it just doesn't make sense to me. Despite their overpayment, at least eBay doesn't have to pay shareholders nearly $2bn like they would have if Skype had reached its target prices. Maybe that's the only good news eBay has right now.
Wednesday 26 September 2007
9/26/07
In conjunction with our current events discussion this morning in class, I chose to write a journal entry about an article which discussed Northern Rock and the company's current situation.
Title: Northern Rock opts to cancel dividend
Source: Financial Times 9/26/07
Amid growing pressure from regulators and MPs, the troubled mortage lender bank Northern Rock decided to drop its controversial £59m pay-out, which the company had announced and planned on doing before it was hit by financial crisis. While the Association of British Insurers and other investors are pleased to learn of this move, RAB Capital, Northern Rock's hedge fund manager, took the news with much dismay. Philip Richards, runner of RAB, said that they disagree with the decision about the dividend in that the decision agrees with suggestions that the Bank of England and Treasury want to see Northern Rock's shareholders wiped out; RAB became Northern Rock's biggest shareholder last week through its Special Situations fund.
Despite RAB's discomfort with Northern Rock's move to cancel its dividend pay-out, other companies such as the Treasury, Financial Services Authority and UK Shareholder's Association are all coming to Northern Rock's aid. The Treasury and Financial Services Authority has hired the Slaughter & May law firm to work with Goldman Sachs to adivse on options for Northern Rock, and the UK Shareholder's Association has formed an action group for Northern Rock investors in order to oppose any quick sale of the bank. Since the initial announcement of the bail-out, however, most large banks have kept their distance from Northern Rock due to concerns about financing the £113.5bn balance sheet the company has accumulated as well as damage to their brand. As with many other current situations in the UK's economy, only time will tell what will happen to Northern Rock, if there even is a Northern Rock in the future. Until then, we'll all just have to wait around with our ears open and eyes peeled.
I personally think it was a good idea for Northern Rock to cancel their huge dividend. As the article mentions, the dividend pay-out would have alienated the government and resulted in an outflow of cash that would make the company particularly unattractive to bidders. With this, however, it is good that Northern Rock has a law firm working with Goldman Sachs, one of the biggest names in economics, to advise them on what their options are and what they can or should do next; Northern Rock has obviously made some bad decisions in the past so it is definitely a good thing for them to have advisors. As the old adage goes, time is the best and worst medicine, and as I have mentioned previously, only time will tell the destiny of this troubled bank.
Title: Northern Rock opts to cancel dividend
Source: Financial Times 9/26/07
Amid growing pressure from regulators and MPs, the troubled mortage lender bank Northern Rock decided to drop its controversial £59m pay-out, which the company had announced and planned on doing before it was hit by financial crisis. While the Association of British Insurers and other investors are pleased to learn of this move, RAB Capital, Northern Rock's hedge fund manager, took the news with much dismay. Philip Richards, runner of RAB, said that they disagree with the decision about the dividend in that the decision agrees with suggestions that the Bank of England and Treasury want to see Northern Rock's shareholders wiped out; RAB became Northern Rock's biggest shareholder last week through its Special Situations fund.
Despite RAB's discomfort with Northern Rock's move to cancel its dividend pay-out, other companies such as the Treasury, Financial Services Authority and UK Shareholder's Association are all coming to Northern Rock's aid. The Treasury and Financial Services Authority has hired the Slaughter & May law firm to work with Goldman Sachs to adivse on options for Northern Rock, and the UK Shareholder's Association has formed an action group for Northern Rock investors in order to oppose any quick sale of the bank. Since the initial announcement of the bail-out, however, most large banks have kept their distance from Northern Rock due to concerns about financing the £113.5bn balance sheet the company has accumulated as well as damage to their brand. As with many other current situations in the UK's economy, only time will tell what will happen to Northern Rock, if there even is a Northern Rock in the future. Until then, we'll all just have to wait around with our ears open and eyes peeled.
I personally think it was a good idea for Northern Rock to cancel their huge dividend. As the article mentions, the dividend pay-out would have alienated the government and resulted in an outflow of cash that would make the company particularly unattractive to bidders. With this, however, it is good that Northern Rock has a law firm working with Goldman Sachs, one of the biggest names in economics, to advise them on what their options are and what they can or should do next; Northern Rock has obviously made some bad decisions in the past so it is definitely a good thing for them to have advisors. As the old adage goes, time is the best and worst medicine, and as I have mentioned previously, only time will tell the destiny of this troubled bank.
Tuesday 18 September 2007
9/18/07
Today's Guardian Newspaper had a particular article that caught my attention, not only because it seemed to be an interesting article, but also because it is very pertinent to the topics we have been discussing in class. It deals with inflation rates and their relation to interest rates and the overall UK economy. It was a very insightful article and gave me a more powerful understanding of how an economy functions and how one aspect can have a waterfall effect on the many other economic facets within a country.
Title of Article: Inflation drops further
Source: Guardian (9/18/07)
Although not done intentionally, the inflation rate fell by 0.1 percentage points in August from July's 1.9% reading. This news was announced after the Bank of England made another £4.4 billion available to money markets in attempts to bring down the Libor (London interbank offered rate) interest rates closer to that of the bank rate, which is around 5.75%. With this decrease, the inflation rate is at its lowest level in more than a year, is significantly less than the spring all-time high of 3.1%, and is also below the Bank's 2% target for the second consecutive month. It also carries the potential to allow banks to lower interest rates if the ongoing chaos in financial markets continues.
The article credits the decrease in inflation rates to mortgage lenders cutting their exit administration fees as well as many gas and electric companies lowering their prices. With this, it makes sense that housing, water, electricity, gas and other fuels inflation has gone down to 2.8% from 3.5% in July, which is the lowest its been since March 2004.
Until recently, officials expected the interest rates to rise to 6% or over, but with the decrease in inflation rates, many are now expecting a cut to occur before Christmas. Howard Archer from Global Insight says the decrease is very encouraging but expects the Bank of England to be very cautious about lowering interest rates just yet given the record oil price and possible increase in food prices, as these two factors may cause the inflation rate to rise once again in the coming months. To judge whether or not interest rates should be trimmed, the Bank plans to monitor how the current credit crunch and Northern Rock crisis is affecting the economy and the outlook for growth and inflation, and says that if growth is being significantly hit and continues to dilute underlying inflationary pressures, officials will then be more likely to lower interest rates.
While it would be a welcome change to the now high interest rates, I believe the Bank of England is being very smart to be weary of lowering them just yet. I don't know very much about economics as of now, but I at least know that the field is very dynamic, and just because inflation rates are low right now it does not mean that they will be low for long. If the Bank lowers interest rates now, inflation rates may spike tomorrow and then the Bank would be in serious trouble. Therefore, the Bank should continue to do what it is doing now and just keep track of the inflation rate decrease, and not make any decisions to lower interest rates until the inflation rate decrease remains constant.
Title of Article: Inflation drops further
Source: Guardian (9/18/07)
Although not done intentionally, the inflation rate fell by 0.1 percentage points in August from July's 1.9% reading. This news was announced after the Bank of England made another £4.4 billion available to money markets in attempts to bring down the Libor (London interbank offered rate) interest rates closer to that of the bank rate, which is around 5.75%. With this decrease, the inflation rate is at its lowest level in more than a year, is significantly less than the spring all-time high of 3.1%, and is also below the Bank's 2% target for the second consecutive month. It also carries the potential to allow banks to lower interest rates if the ongoing chaos in financial markets continues.
The article credits the decrease in inflation rates to mortgage lenders cutting their exit administration fees as well as many gas and electric companies lowering their prices. With this, it makes sense that housing, water, electricity, gas and other fuels inflation has gone down to 2.8% from 3.5% in July, which is the lowest its been since March 2004.
Until recently, officials expected the interest rates to rise to 6% or over, but with the decrease in inflation rates, many are now expecting a cut to occur before Christmas. Howard Archer from Global Insight says the decrease is very encouraging but expects the Bank of England to be very cautious about lowering interest rates just yet given the record oil price and possible increase in food prices, as these two factors may cause the inflation rate to rise once again in the coming months. To judge whether or not interest rates should be trimmed, the Bank plans to monitor how the current credit crunch and Northern Rock crisis is affecting the economy and the outlook for growth and inflation, and says that if growth is being significantly hit and continues to dilute underlying inflationary pressures, officials will then be more likely to lower interest rates.
While it would be a welcome change to the now high interest rates, I believe the Bank of England is being very smart to be weary of lowering them just yet. I don't know very much about economics as of now, but I at least know that the field is very dynamic, and just because inflation rates are low right now it does not mean that they will be low for long. If the Bank lowers interest rates now, inflation rates may spike tomorrow and then the Bank would be in serious trouble. Therefore, the Bank should continue to do what it is doing now and just keep track of the inflation rate decrease, and not make any decisions to lower interest rates until the inflation rate decrease remains constant.
Tuesday 11 September 2007
9/5/07
Despite its plethora of intriguing and prevalent articles, a particular story in today's Financial Times caught my attention. As we all know, Chinese manufacturing companies are under intense scrutiny after several occurrences of potentially fatal product recalls. This article discusses how China is slowly getting to grips with product safety standards as well as the effect of the strong price pressure from the big western groups these Chinese manufacturers supply.
Title of Article: Testing Times
Source: Financial Times (9/5/07)
Whenever 21st century consumers in one country buy products from manufacturing industries working in 19th century conditions in another, there is bound to be problems. Such is the situation between US and UK business tycoons and several Chinese manufacturing industries. These very modern and prosperous countries have moved their production to the place with the lowest level of regulation (China), which has stirred up much controversy and caused great economic turmoil for all countries involved.
Over the recent years, US and UK buyers of Chinese goods have put enormous pressure on these companies to reduce the prices of their goods. This has in turn forced Chinese manufacturers to look for cheaper alternatives as well as cut corners on quality standards in order to win contracts with US and UK companies. On account of these resolutions, everything from dog food to toys and toothpaste have been recalled, and these recalls are the source of the intense attention put on and the tarnished image of China and its manufacturing companies.
The all too common occurrence of recalls has also led to unexpected visits from US and UK safety inspectors. Previously, inspections usually focused more on social compliance, labor conditions and environmental issues within each factory, but now more than ever inspections are mainly concerned with safety issues. These unannounced inspections have caused factory managers a great amount of stress and also disrupted work within the factories.
Before all the blame is put on the Chinese factories, one has to realize the faults within the US and UK companies. Firstly, these companies are demanding lower prices regardless of the conditions the Chinese workers face, and are not realizing the problems caused by making such demands. They are also waiting until the toys are shipped to their respective destinations (either in the US or UK) to test the products' safety and not requiring continual inspection and testing by the suppliers.
In light of these recalls and faults, all companies invovled are vowing to right their wrongs. US companies such as Wal-Mart are pursuing a drive to improve the monitoring of workplace conditions and has recently stepped up the testing of products in response to safety concerns. US and UK companies are also requiring routine safety checks of all products produced. Chinese companies are paying more attention to the manufacturing processes and securing the quality of their goods. Many of them have made needle detectors mandatory to check for any fragments of broken needles in their garments or plush toys and are also testing each of their products to ensure their safety and reliability. For example, one company has developed a "drop test" in which toys are dropped from 90 cm (a child's height), and tested to see if they fracture into shards that are either dangerously small or sharp. The Chinese government is also stepping in, demanding to see safety reports for toy shipments and requiring that the reports not be more than twelve months old. Executives complain that the government is "being more Catholic than the Pope."
Even though Chinese companies are complaining of the unexpected safety inspections and strict Chinese governmental regulations, in order to rid these companies of their bad image, I believe such precautions must be taken. If not, China may lose their reputation of having the world's best toy factories and largest volume of international product exports. If the promises of improvement made by US and UK buyers and Chinese producers do not come to fruition, the economies of all three countries could suffer even more than they already have.
Title of Article: Testing Times
Source: Financial Times (9/5/07)
Whenever 21st century consumers in one country buy products from manufacturing industries working in 19th century conditions in another, there is bound to be problems. Such is the situation between US and UK business tycoons and several Chinese manufacturing industries. These very modern and prosperous countries have moved their production to the place with the lowest level of regulation (China), which has stirred up much controversy and caused great economic turmoil for all countries involved.
Over the recent years, US and UK buyers of Chinese goods have put enormous pressure on these companies to reduce the prices of their goods. This has in turn forced Chinese manufacturers to look for cheaper alternatives as well as cut corners on quality standards in order to win contracts with US and UK companies. On account of these resolutions, everything from dog food to toys and toothpaste have been recalled, and these recalls are the source of the intense attention put on and the tarnished image of China and its manufacturing companies.
The all too common occurrence of recalls has also led to unexpected visits from US and UK safety inspectors. Previously, inspections usually focused more on social compliance, labor conditions and environmental issues within each factory, but now more than ever inspections are mainly concerned with safety issues. These unannounced inspections have caused factory managers a great amount of stress and also disrupted work within the factories.
Before all the blame is put on the Chinese factories, one has to realize the faults within the US and UK companies. Firstly, these companies are demanding lower prices regardless of the conditions the Chinese workers face, and are not realizing the problems caused by making such demands. They are also waiting until the toys are shipped to their respective destinations (either in the US or UK) to test the products' safety and not requiring continual inspection and testing by the suppliers.
In light of these recalls and faults, all companies invovled are vowing to right their wrongs. US companies such as Wal-Mart are pursuing a drive to improve the monitoring of workplace conditions and has recently stepped up the testing of products in response to safety concerns. US and UK companies are also requiring routine safety checks of all products produced. Chinese companies are paying more attention to the manufacturing processes and securing the quality of their goods. Many of them have made needle detectors mandatory to check for any fragments of broken needles in their garments or plush toys and are also testing each of their products to ensure their safety and reliability. For example, one company has developed a "drop test" in which toys are dropped from 90 cm (a child's height), and tested to see if they fracture into shards that are either dangerously small or sharp. The Chinese government is also stepping in, demanding to see safety reports for toy shipments and requiring that the reports not be more than twelve months old. Executives complain that the government is "being more Catholic than the Pope."
Even though Chinese companies are complaining of the unexpected safety inspections and strict Chinese governmental regulations, in order to rid these companies of their bad image, I believe such precautions must be taken. If not, China may lose their reputation of having the world's best toy factories and largest volume of international product exports. If the promises of improvement made by US and UK buyers and Chinese producers do not come to fruition, the economies of all three countries could suffer even more than they already have.
Wednesday 29 August 2007
8/29/07
As I perused The Guardian's online newspaper today, I came across two articles in which I wish to discuss. The first article pertains to Turkey and the EU (what we discussed in class today), and the second article has an interesting subject and also has US involvement.
Title of Article: Gul sworn in as Turkey's president
Source: The Guardian (8/29/07)
Link: http://www.guardian.co.uk/turkey/story/0,,2157875,00.html
Yesterday, Abdullah Gul, a British-educated economist as well as a Muslim democrat, was sworn in as the 11th president of Turkey. This election marks the end of the military and bureaucratic elite ruling, a title held by them for the past 84 years. Soon after he was elected, Gul vowed to be a more active president and push modernizing reforms, which he hopes will in turn promote Turkey's role in the world. Gul, who recently received praise for his handling of Turkey's bid to join the EU, vows to do such things because of the country's great desire to join the prestigious EU.
Gul also plans to leave the AK party, which he helped found, to impress his skeptics who aren't buying into his vow of impartiality (most likely another ploy to gain membership into the EU). Turkey would obviously benefit from being able to join the EU (although some residents most likely think otherwise), but only time will tell if Gul's attempts will pay off, or if members of the EU will again turn down Turkey's request on account of the impending movement of people freedom and the various other benefits Turkey will receieve if accepted.
Title of Article: PartyGaming revenues drop 70%
Source: The Guardian (8/29/07)
Link: http://business.guardian.co.uk/story/0,,2158213,00.html
PartyGaming, the world's most lucrative gaming market and operator of the PartyPoker and PartyCasino websites, posted a pre-tax loss of $47m (£23.4m) for the first half of 2007 on account of the recent US ban on all online gambling. Revenues also plunged for the business, down 70% to $212.5m. This US ban knocked PartyGaming out of the FTSE 100 index after wiping out three-quarters of its business.
On the brighter side, shares in the website rebounded by nearly 10% to 25p this morning, which is a welcome change from the sharp fall yesterday. Trading figures are still matching up to City expectations as well and the website is still averaging about 1,192 new members each day. Mitch Garber, the website's chief executive, is currently working with the US Department of Justice towards a satisfactory resolution; however, the website is planning to expand its business to China and Russia to make up for the loss of business in the US.
This is obviously a major setback for the PartyGaming business. Three-quarters of its business has just been wiped out, so it's going to be tough to try and regain their losses. Administrators are handling it well, however, with talks with the US and plans to expand their business to other foreign countries. Let's just hope that China and Russia don't put a ban on all online gambling as well or PartyGaming may have to call its bluff.
Title of Article: Gul sworn in as Turkey's president
Source: The Guardian (8/29/07)
Link: http://www.guardian.co.uk/turkey/story/0,,2157875,00.html
Yesterday, Abdullah Gul, a British-educated economist as well as a Muslim democrat, was sworn in as the 11th president of Turkey. This election marks the end of the military and bureaucratic elite ruling, a title held by them for the past 84 years. Soon after he was elected, Gul vowed to be a more active president and push modernizing reforms, which he hopes will in turn promote Turkey's role in the world. Gul, who recently received praise for his handling of Turkey's bid to join the EU, vows to do such things because of the country's great desire to join the prestigious EU.
Gul also plans to leave the AK party, which he helped found, to impress his skeptics who aren't buying into his vow of impartiality (most likely another ploy to gain membership into the EU). Turkey would obviously benefit from being able to join the EU (although some residents most likely think otherwise), but only time will tell if Gul's attempts will pay off, or if members of the EU will again turn down Turkey's request on account of the impending movement of people freedom and the various other benefits Turkey will receieve if accepted.
Title of Article: PartyGaming revenues drop 70%
Source: The Guardian (8/29/07)
Link: http://business.guardian.co.uk/story/0,,2158213,00.html
PartyGaming, the world's most lucrative gaming market and operator of the PartyPoker and PartyCasino websites, posted a pre-tax loss of $47m (£23.4m) for the first half of 2007 on account of the recent US ban on all online gambling. Revenues also plunged for the business, down 70% to $212.5m. This US ban knocked PartyGaming out of the FTSE 100 index after wiping out three-quarters of its business.
On the brighter side, shares in the website rebounded by nearly 10% to 25p this morning, which is a welcome change from the sharp fall yesterday. Trading figures are still matching up to City expectations as well and the website is still averaging about 1,192 new members each day. Mitch Garber, the website's chief executive, is currently working with the US Department of Justice towards a satisfactory resolution; however, the website is planning to expand its business to China and Russia to make up for the loss of business in the US.
This is obviously a major setback for the PartyGaming business. Three-quarters of its business has just been wiped out, so it's going to be tough to try and regain their losses. Administrators are handling it well, however, with talks with the US and plans to expand their business to other foreign countries. Let's just hope that China and Russia don't put a ban on all online gambling as well or PartyGaming may have to call its bluff.
Monday 27 August 2007
8/27/07
Title of Article: Five rate rises bring housing boom to August standstill
Source: The Guardian (8/27/07)
Link: http://business.guardian.co.uk/story/0,,2156784,00.html#article_continue
As per our discussion in class today with the UK (and US) housing market status, I found it rather fitting to use this article I found on the Guardian online website as my journal entry for the day. According to the article, five interest rate rises in just a year has caused the once booming and successful house-price market to record its slowest growth in twenty months for the month of August. Hometrack, the housing intelligence company, warns consumers of a weaker market in the months to come if nothing is done about this recent slow growth rate in house prices.
Richard Donnell, Hometrack's head of research, reports that the increase in interest rates over the past twelve months has pushed the average debt servicing costs to a fifteen-year high. High interest rates will most likely continue to hinder market activity levels as well as have an effect on house price inflation for the next twelve to eighteen months.
London has been the driving force behind the market boom, but now even this city is faltering. London still recorded a rise in prices in August, but this 0.1% increase is very minimal compared to the 1.8% increase seen in March.
Apparently, this slower growth in property prices has been going on for quite some time. In June, 27.9% of postal districts saw an increase in prices. This percentage dropped to 14.6 in July and dropped even more in August to 9.3%. Buyer confidence is weakening now which will, according to Donnell, create a snowball effect in which the market sentiment will be further underminded followed by weaker levels of demand and ultimately causing the rate of house price growth to become further underminded as well.
A sign of a weaker market is a decrease in the amount of people able to secure the asking price of their home. If this falls below 94%, there will be a greater chance of small month on month falls in underlying prices. The amount of people able to secure the asking price of their home was at a recent high of 95.6%; it has since fallen to 94.9%. With this, if this percentage gets much lower, the UK housing market may be seeing a smaller fall in underlying prices.
In my opinion, the housing market needs to lower their interest rates so that buyer confidence will rise once again and asking prices will be achieved. Increasing the interest rates increases the cost of money, so no wonder no one is buying and everything is at a stand still. They need to revamp the weak market, increase the percentage of postal districts seeing an increase in prices, and lower the average debt servicing costs. Lowering interest rates, however, may cause higher inflation, so a happy medium between interest rates and inflation needs to be reached. Maybe if interest rates were lowered just enough so that the inflation would balance with the rates, then the market can return back to its booming and successful self.
Source: The Guardian (8/27/07)
Link: http://business.guardian.co.uk/story/0,,2156784,00.html#article_continue
As per our discussion in class today with the UK (and US) housing market status, I found it rather fitting to use this article I found on the Guardian online website as my journal entry for the day. According to the article, five interest rate rises in just a year has caused the once booming and successful house-price market to record its slowest growth in twenty months for the month of August. Hometrack, the housing intelligence company, warns consumers of a weaker market in the months to come if nothing is done about this recent slow growth rate in house prices.
Richard Donnell, Hometrack's head of research, reports that the increase in interest rates over the past twelve months has pushed the average debt servicing costs to a fifteen-year high. High interest rates will most likely continue to hinder market activity levels as well as have an effect on house price inflation for the next twelve to eighteen months.
London has been the driving force behind the market boom, but now even this city is faltering. London still recorded a rise in prices in August, but this 0.1% increase is very minimal compared to the 1.8% increase seen in March.
Apparently, this slower growth in property prices has been going on for quite some time. In June, 27.9% of postal districts saw an increase in prices. This percentage dropped to 14.6 in July and dropped even more in August to 9.3%. Buyer confidence is weakening now which will, according to Donnell, create a snowball effect in which the market sentiment will be further underminded followed by weaker levels of demand and ultimately causing the rate of house price growth to become further underminded as well.
A sign of a weaker market is a decrease in the amount of people able to secure the asking price of their home. If this falls below 94%, there will be a greater chance of small month on month falls in underlying prices. The amount of people able to secure the asking price of their home was at a recent high of 95.6%; it has since fallen to 94.9%. With this, if this percentage gets much lower, the UK housing market may be seeing a smaller fall in underlying prices.
In my opinion, the housing market needs to lower their interest rates so that buyer confidence will rise once again and asking prices will be achieved. Increasing the interest rates increases the cost of money, so no wonder no one is buying and everything is at a stand still. They need to revamp the weak market, increase the percentage of postal districts seeing an increase in prices, and lower the average debt servicing costs. Lowering interest rates, however, may cause higher inflation, so a happy medium between interest rates and inflation needs to be reached. Maybe if interest rates were lowered just enough so that the inflation would balance with the rates, then the market can return back to its booming and successful self.
8/19/07
Title of Article: Banks in dark over final cost of credit turmoil
Source: Financial Times (8/19/07)
As we all know, there was a recent financial meltdown within the UK. This article discussed the problems banks now face because of the meltdown. All in all, bank companies are not exactly sure what the damage will be in the coming weeks; they really don't even know what the damage is to date. However, they do know that a big problem is lurking: they are unable to sell their leveraged loans, which means that they might have to mark them down; something they do not want to do, but, if forced, may have to.
According to analyst Howard Mason, the big bank company Citigroup could face up to 20% or 1.5 billion dollars in loses at the end of the quarter; however, Citigroup plans to cushion their huge loss by lowering staff pay. This, in my opinion, could cause tremendous problems. With lower pay, employees will most likely go on strike and create even more turmoil for the bank. A better, more efficient solution to their debt problems needs to be conjured up in order to avoid the impending doom Citigroup will face.
The worst performer over the past month has been Lehman Brothers as their shares have decreased 26%. This may or may not be the case in the coming weeks as sector share prices for all banks are likely to keep fluctuating for quite some time. Only time will tell what will happen to these big bank groups; who will end up on top...and on the bottom.
Since this article was about the turmoil banks may face due to the meltdown, I was puzzled when I came across this statement: "Bear Stearns jumped 13% and Lehman Brothers rose 6%." I don't know if I don't understand this because I have no background in Economics, but why would bank percentages increase at a time of financial turmoil? Also, the article mentioned that Lehman Brothers was the worst performer over the past month so how could their percentage rise? This is something I will definitely need to bring up with you, Professor Shackleford. Maybe you could tell me exactly what this percentage is and what it means for these bank companies.
Overall, I believe all banks will come out of this mess just fine, as long as they don't cause more problems by lowering staff pay or doing anything else of the sort (i.e. Citigroup). Banks can always borrow the money they need from the Fed, get out of debt, and return back to normal functioning. Unless another catastrophic event occurs, I believe we will be reading about the bounce-back banks will be going through in the next few weeks.
Source: Financial Times (8/19/07)
As we all know, there was a recent financial meltdown within the UK. This article discussed the problems banks now face because of the meltdown. All in all, bank companies are not exactly sure what the damage will be in the coming weeks; they really don't even know what the damage is to date. However, they do know that a big problem is lurking: they are unable to sell their leveraged loans, which means that they might have to mark them down; something they do not want to do, but, if forced, may have to.
According to analyst Howard Mason, the big bank company Citigroup could face up to 20% or 1.5 billion dollars in loses at the end of the quarter; however, Citigroup plans to cushion their huge loss by lowering staff pay. This, in my opinion, could cause tremendous problems. With lower pay, employees will most likely go on strike and create even more turmoil for the bank. A better, more efficient solution to their debt problems needs to be conjured up in order to avoid the impending doom Citigroup will face.
The worst performer over the past month has been Lehman Brothers as their shares have decreased 26%. This may or may not be the case in the coming weeks as sector share prices for all banks are likely to keep fluctuating for quite some time. Only time will tell what will happen to these big bank groups; who will end up on top...and on the bottom.
Since this article was about the turmoil banks may face due to the meltdown, I was puzzled when I came across this statement: "Bear Stearns jumped 13% and Lehman Brothers rose 6%." I don't know if I don't understand this because I have no background in Economics, but why would bank percentages increase at a time of financial turmoil? Also, the article mentioned that Lehman Brothers was the worst performer over the past month so how could their percentage rise? This is something I will definitely need to bring up with you, Professor Shackleford. Maybe you could tell me exactly what this percentage is and what it means for these bank companies.
Overall, I believe all banks will come out of this mess just fine, as long as they don't cause more problems by lowering staff pay or doing anything else of the sort (i.e. Citigroup). Banks can always borrow the money they need from the Fed, get out of debt, and return back to normal functioning. Unless another catastrophic event occurs, I believe we will be reading about the bounce-back banks will be going through in the next few weeks.
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