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What’s with all the yelling and hand signals?

Monday, October 5th, 2009

You’ve seen it in movies: the guys in suits yelling and screaming, making hand signals reminiscent of those on a baseball field. So what’s all the yelling about? It’s called “open outcry” and it’s a method brokers use on trading floors to verbally make bids and offers. Palms up and out means sell. Palms in and up means buy. One set of fingers is used for numbers 1-5. Turn the other hand on its side and those fingers become 6-10. For 1-9, touch your chin. For blocks of 10, touch your forehead. For blocks of 100, make a fist and touch your forehead. And so on, whew!

As trading moves from physical floors to the electronic exchanges, open outcry is becoming obsolete. Many support this shift, citing electronic trading as faster, cheaper, and more efficient. On the other hand, many brokers insist face-to-face trades allow them to be more strategic in their executions, especially due to the cues they take from open outcries, whatever they are – hands up, palms out, high five! Fist to the sky!

What’s the difference between a regular bond and a junk bond?

Friday, October 2nd, 2009

“Junk” bonds are considered higher risk and lower quality than other bonds. Because of this, they promise a higher interest rate than normal. So, the higher rate gives you the possibility of higher returns but it also comes with a greater risk of default.

Junk bonds get the name “junk” from their low bond credit ratings. Companies like Standard & Poor’s and Moody’s Investors Service rate bonds to measure their riskiness – the lower the risk, the higher the quality, and vice versa. S&P’s “AAA” or Moody’s “Aaa” are the highest ratings a bond can get. Highly rated bonds are called investment grade. Anything below BB or Bb is deemed junk.

Debt is…

Friday, October 2nd, 2009

Debt is an amount owed to a person or organization for funds borrowed. For example, if you were to get a loan to pay for college, you are in debt and owe the bank however much you  borrowed plus a pre-determined cost in the form of interest.

World Leaders Share The Wealth… And The Responsibility

Friday, October 2nd, 2009

Group of 8 nations made the mess, so why are 12 poorer countries so eager to help them clean up?

  • In an effort to diversify the group and include the perspectives of increasingly powerful economies like those of India and China, the Group of 7 (recently a Group of 8) has decided to permanently expand to become the Group of 20.
  • The financial crisis made it clear that global economic decision-making power could not be concentrated in the hands of a small group of relatively similar, largely Western economies.
  • It’s not clear whether the new, larger economic forum will actually address issues of concern to the less wealthy new members (notably around international trade issues), or continue to focus on the crises and economic issues most relevant to the “old boys’ club.”

Facts & Figures

  • The Group of 7 was comprised of the United States, Britain, Canada, France, Germany, Italy and Japan for more than 30 years. The addition of Russia in the 1990s made it a Group of 8.
  • The new Group of 20 is actually made up of 19 countries plus the European Union.
  • Besides the EU, the new member nations are: Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Saudi Arabia, South Africa, South Korea, and Turkey.

Best Quote

“Leaders of the G-20 nations have an opportunity to clarify that legitimate government actions, like trade enforcement, are not acts of protectionism.” – Sherrod Brown, Democratic Ohio Senator

A Government Bond is…

Friday, October 2nd, 2009

A government bond (in the U.S.) is issued by the United States Treasury and is considered one of the safest securities in the investment world. Bonds are issued to raise money and in exchange, the purchaser receives a predictable fixed interest rate for the duration of the bond.

Financial Crisis? Banks Say “Play Ball!”

Friday, September 25th, 2009

Financial institutions are forming increasingly tight and profitable relationships with athletic organizations like sports teams – melding finance and sports and showing how finance intersects with many different aspects of modern life.

  • Banks’ investment in sports has increased with its ‘gentrification’ – stadiums are newer, seats are more comfortable, and tickets are more expensive.
  • An exclusive deal with a team can be a source of great revenue by bringing in retail customers (through affiliated debit and credit cards), managing the wealth of a team’s players and owners, or arranging the financing for a new stadium.
  • There are indirect benefits as well – Swiss bank UBS uses its sponsorship of Alinghi, a sailing team, to enthuse its employees.

Facts & Figures

  • In North America, sponsorship of sports by all companies grew by 11.2% in 2007 and 14.8% in 2008, but is expected to grow by only 1.8% in 2009.
  • In 2007, Lloyds TSB (now Lloyd Banking Group) pledged to support the 2012 Olympic games with $124 million.
  • Bank of America claims to make a $3 profit for every $1 spent on sports marketing.

Best Quote

“What people don’t see is how we’re using the Olympic access for our training and development. This is timely. If ever Lloyds needed Olympians, it is now.” — Sally Hancock, Director of Group Sponsorship at Lloyd Banking Group

Bailing Out From The Bailout…

Friday, September 25th, 2009

Some banks are doing their best to free themselves of the regulatory requirements imposed on them to ensure the TARP bailout money is put to good use.

  • Early repayment of bailout funds may be a sign that the financial industry is recovering from last year’s crisis, but it’s not yet clear whether banks that repay will change any of their business practices.
  • These ten companies will no longer be subject to TARP-related oversight and restrictions by the government, giving them a potential competitive advantage over companies that have not repaid.
  • The U.S. Treasury began buying stakes in struggling financial institutions in October 2008, with the expectation that it would hold onto those investments for at least 3 years. But Congress recently forced the administration to allow some banks to exit the arrangement just eight months later.
  • The federal government will no longer have a direct stake in banks that repay, but it will continue owning warrants and, according to President Obama, will continue to closely monitor the business practices of all financial institutions.

Facts & Figures

  • Since October, the government has spent $199 billion on TARP funding for 600 different companies. The 10 companies now repaying the funds represent $68 billion of that total.
  • The big ten: J.P. Morgan, Goldman Sachs, Morgan Stanley, U.S. Bancorp, BB&T Corp., American Express Co., Capital One Financial Corp., Bank of New York Mellon Corp., State Street Corp., and Northern Trust Corp.
  • TARP restrictions addressed: “executive pay, dividend increases, hiring certain foreign workers for U.S. jobs, and lavish spending on corporate jets and conferences, which fueled a public backlash.”

Best Quote

“These are challenging times, and that’s not going to change simply because we repaid TARP.” – Michael Cavanagh, CFO at J.P. Morgan

Bernie Goes From The Penthouse To The Big House

Friday, September 25th, 2009

When something seems too good to be true, it’s probably because it is. Consider this a cautionary tale…

  • Bernard Madoff was sent to jail on March 12th after pleading guilty to one of the biggest fraud scandals in history. Many believe the international attention of Madoff’s fall has worsened our “national crisis of confidence and distrust of the financial system.”
  • His crime: a global, multi-billion dollar Ponzi scheme.
  • The jailing came 3 months after Madoff’s infamous confession of his crime to his sons. Madoff insisted two sons worked for a part of his business that was separate from the Ponzi scheme. Yet the court says they were “one.”

Facts & Figures

  • Madoff faces a maximum 150-year sentence, but will most likely get as little as 20.
  • Many of Madoff’s investors lost all of their money, and one even committed suicide.
  • If he’s sent to a general population prison, his new reality would look like this: a TV in a common area, a ping-pong table, library visits, a rooftop basketball court every other day, and a khaki prison uniform.

Best Quote

“I realized that my arrest and this day would inevitably come.” – Bernard Madoff

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Asia Is Going Green And Leaving The U.S. In The Dust

Friday, September 25th, 2009

If you thought that the U.S. and Europe were the powerhouses of green technology, you should probably check out what Asia is proposing to do below. Just a hint: it involves a lot of money!

  • In August, leaders from China, Japan, and South Korea will try to work out a plan that proposes sharing resources and technology to create a green-technology powerhouse.
  • Japan and South Korea have highly advanced technology sectors while China is one of the strongest manufacturing powers in the world. By combining forces, they hope to easily dominate the green economy.
  • The U.S. and Europe may respond to the Asian countries’ effort with renewed intensity and investment or could find themselves falling behind in a new low-carbon economy.

Facts & Figures

  • In their economic stimulus programs, green investments account for 81% of South Korea’s and 38% of China’s spending – the U.S.’s is at 12%.
  • Estimates put Europe’s investment in clean energy at $50 billion for 2008, while North America’s is only at $30 billion.
  • In June 2009, the U.S. started a $25 billion program to help car makers retool their assembly lines for more fuel-efficient car production.

Best Quote

“[South Korea hopes to create] a new paradigm of qualitative growth which uses less energy and is more compatible with environmental sustainability.” – Han Seung-Soo, Prime Minister of South Korea

Twitter Wins Big Time Funding

Thursday, September 24th, 2009

Even though Twitter does not have a revenue stream and they’re still figuring out how exactly they can make money, the company has managed to raise $100 million in new funding!

  • The online social networking and messaging service is about to close its most recent round of funding with $100 million raised from fewer than ten investors.
  • The investors are made up of venture capitalist firms, private equity firms, and even a mutual fund company – T. Rowe Price.
  • In terms of generating a sustained revenue stream, Twitter is looking into options such as advertising and business services.

Facts & Figures

  • Investors have valued Twitter at about $1 billion, which is up from a previous valuation earlier this year that estimated the company to be worth about $255 million.
  • Twitter is expected to have 25 million users by the end of 2009.
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