Posts Tagged ‘financial crisis’

The Claw[backs]

Friday, July 8th, 2011

noosey-neckties.jpeg
(photo credit: mangpages)

It’s kind of an understatement to say that taxpayers were peeved when they ended up footing the bill for the government bailout of the “too big to fail” banks. So they may take some comfort in a new FDIC rule that will seriously punish the leaders of failed financial institutions. Among other things, it says that any executive responsible for the collapse of a major financial firm is subject to spooky-sounding “clawbacks.”

Clawbacks are the equivalent of making an executive return two years worth of their salary to the government if a government agency has to step in and handle the collapse. Big banks will also be required to have a plan in place before they go up in flames, to avoid the kind of sweeping support the government was forced to provide in 2008 and 2009.

That’s a lot of pressure on a relatively small number of people. What do you think – whose responsibility is it to keep a financial institution on the straight and narrow? Should employees lower on the corporate totem pole be punished as well?

Financial Crisis Inquiry Commission: Stop Fighting, Guys – It’s Everyone’s Fault

Thursday, February 3rd, 2011

“The 2008 financial crisis was ‘avoidable’ and brought on by the actions of government officials and private-sector players, according to a blue-ribbon panel’s draft report that spreads blame broadly for the meltdown.

The Financial Crisis Inquiry Commission’s draft report singles out federal banking regulators for particularly sharp criticism, saying that ‘the prime example’ of the system’s shortcomings was ‘the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages’ over the past decade. But the report also has harsh words for both ‘captains of finance’ and Main Street lenders.”

What do you think?

Who do you think has earned more blame for these bad business decisions – businesspeople or the regulators that are supposed to be setting and enforcing regulations? How have you been affected by the financial crisis?

Important Credit Ratings Agencies “Provided Little Or No Value”

Friday, December 10th, 2010

Ten credit ratings agencies are in charge of predicting risk for investors worldwide. So why didn’t they predict the economic crisis?

  • Agencies like Moody’s and Standard & Poor’s rate the quality of companies, bonds, even countries. Investors use this information to decide whether a particular investment is a safe bet.
  • In the financial reform bill that passed this July, the government called them out for ineffective ratings and serious conflicts of interest.
  • In many lawsuits against the agencies, they’ve said that the First Amendment protects their right to assess investment risks whether they end up being right or wrong. But because they’re regulated by the government, they’re supposed to be trusted and non-biased sources of information for the public.
  • The conflict of interest appears when a credit rating agency wants to do business with a particular company. In that case, it may be tempted to give that company a higher rating than it really deserves.

Facts & Figures

  • The ratings industry is worth about $6 billion worldwide
  • $3 billion of that is in the U.S. market
  • Fitch, Moody’s, and S&P control 97% of all U.S. ratings
  • Moody’s rated 42,625 mortgage-backed securities (you know, the ones that blew up the real estate market) as AAA – the same rating as ultra-secure U.S. Treasury bonds

Best Quote

“Activities of credit rating agencies are fundamentally commercial in character and should be subject to the same standards of liability and oversight as apply to auditors, securities analysts and investment bankers.” – from the Dodd-Frank financial reform bill

When The Economy Hurts, Allowances Suffer, Too

Monday, September 20th, 2010

Grown-ups aren’t the only ones feeling the global recession…

  • Research shows that the average weekly allowance for kids aged 8 – 15 in the UK has fallen since 2009. This is the first time that the average allowance has fallen below £6 since 2003.
  • The study also showed differences in allowance based on gender (boys scored 40 pence more than girls each week) and location (children from Wales made more than children in London, who made way more than children in the South West of England).
  • Despite the cutback, British children are still saving almost 37% of their pocket money every week!

Facts & Figures

  • In 2005, allowances peaked at about £8.37 per week, in 2009, the average was £6.24, and in 2010 it was down to £5.89
  • Welsh kids take in £7.77 per week; children in the South West of England make £5.05
  • Londoners saw the biggest loss this year – their allowances went down by almost £4 a week

Best Quote

“It is encouraging to see that children are still saving, despite the amount of pocket money falling.” – Flavia Palacios Umana, Head of Savings Products at Halifax

The World’s Economies Try To Prevent Another Crisis

Monday, June 28th, 2010

Banks might have to operate under tighter rules in order to avoid another global financial slump.

  • Some of the world’s largest economies are designing major regulations for banks that would ensure they are prepared to absorb large financial losses and avoid another financial meltdown.
  • The negotiations, called Basel III, require banks to have secure and defined assets that they can hold against short- and long-term financial losses. But after a meeting on Sunday it seems that it could be years before these regulations are put into place.
  • Banks are reluctant to adopt these regulations. They argue that they could slow the global recovery from the recent economic crises.

Facts & Figures

  • If Basel III is put into place, the economic growth of the United States and Japan could fall 3% by 2015

Best Quote

“The quality and amount of capital in the banking system must be significantly higher to improve loss absorbency and resiliency.”  - Mr. Draghi, Governor, Bank of Italy.

Goldman Takes One For The Team, Offers $500,000,000 Olive Branch

Thursday, November 19th, 2009

In an unusual display of corporate responsibility, Goldman Sachs admits its part in the financial crisis and tries to make nice with the small business community.

  • Goldman CEO Lloyd Blankfein made a statement acknowledging his company’s role in the global meltdown and offering an apology for its actions.
  • Attached to the apology is a $500 million donation to go toward supporting small businesses, which will be administered by rock star investor and Berkshire Hathaway CEO Warren Buffet.
  • The company has recently been the object of public outrage for issuing record executive bonuses after accepting bailout funds funded with taxpayer money (which it has since repaid).

Facts & Figures

  • Goldman’s compensation and bonuses this year already total $17 billion and could reach $23 billion by the end of the year.
  • The $500 million pledge represents approximately 2% of compensation funds set aside for 2009.
  • In the third quarter of 2009, Goldman Sachs earned more than $100 million on 36 different trading days.

Best Quote

“We participated in things that were clearly wrong and have reason to regret. We apologize.” – Lloyd Blankfein, CEO of Goldman Sachs

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

Nonprofits In Debt? Businesses Aren’t The Only Ones Going Bankrupt

Thursday, September 24th, 2009

While nonprofits are somewhat restricted when it comes to investing, they can basically act like any hedge fund or corporation. In the past, this leeway allowed nonprofits to grow their assets enormously, but right now it’s causing them some financial headaches.

  • For a while now, nonprofits have been actively making risky investment decisions and racking up debt. This high-risk, high-return investing style allowed many colleges, museums, and nonprofits to expand rapidly.
  • A large portion of the debt is from tax-exempt bonds that nonprofits were allowed to issue – cheap debt, with potentially high returns. After the financial crisis, nonprofits’ assets plummeted in value, yet they still had huge debt obligations.
  • Without an increase in revenues (through donations or property sales), many charities are going to end up bankrupt!

Facts & Figures

  • According to the IRS, the value of tax-exempt bonds issued by nonprofits rose from $98 billion in 1993 to $311 billion in 2006.
  • Brandeis University has $208 million in tax-exempt bond debt and is selling its art collection to pay for it.
  • Copia, a culinary institution in California, went bankrupt because of $78 million in bond debt.

Best Quote

“[O]ver the next several years nonprofits across the country will have to renegotiate bond covenants, reduce services, cut staff or actually default and face foreclosures, repossessions, and in some cases, even bankruptcy.” – Norman I. Silber, Law Professor at Hofstra University

Does The Financial Crisis Mean The End Of Bollywood?!

Friday, June 12th, 2009

The financial crisis is reaching into industries across the globe – even ones which have experienced recent surges in popularity.

  • In recent years, studios, media companies, and financial institutions began to invest heavily in Bollywood films, as India’s growing middle class could more easily afford such leisurely activities.
  • Now, this $2 billion a year industry must adjust to the global financial downturn by curbing production and budget costs, and ultimately the amount of films that will be made.
  • Producers are negotiating for lower rates from actors, choreographers, and the film crew in an effort to keep costs down.

Facts & Figures

  • Bollywood received $140 million in 2007 and $700 million in 2008 but so far only $25 million in 2009 from foreign aid through mergers and acquisitions.
  • In 2008, Bollywood produced 1,000 films but in 2009, only 700 films are projected to be completed.
  • The average budget for a Bollywood film is $2 million and only 14 films Bollywood films have ever made more than $20 million at the box office.

Best Quote

“Everybody is going to bleed a little bit. Anything with a big star associated with it will find a way but a lot of smaller films are going to have trouble.” – Siddharth Roy Kapur, CEO of UTV Motion Pictures (one of India’s biggest film production companies)