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.
Friday 30 November 2007
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.
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