Posts Tagged ‘regulation’

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Anti-Trust Cops Anti-Nasdaq/NYSE Takeover

Tuesday, May 17th, 2011

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(photo credit: banspy)

What happens when the two largest stock exchanges in the U.S. become one big mega-exchange? A monopoly, that’s what! In case you don’t remember from history or economics class (or the game Monopoly), a monopoly is when one company controls an entire market, making it hard or impossible for smaller companies to fairly compete. (The market, in this case, being the market of stock markets.)

That’s why anti-trust regulators at the Justice Department have shut down Nasdaq’s attempted hostile takeover of the New York Stock Exchange. The takeover is hostile because the NYSE already has a deal with German bank Deutsche Borse to be acquired for $10 billion, and it’s so not interested in starting a relationship with Nasdaq right now.

The New York Stock Exchange and Nasdaq have been competing for years, which keeps them both in customer-pleasing, price-cutting mode. Without that competition, NYSEasdaq could charge whatever it wanted and still crush what little competition would be left.

It could even become… too big to fail!

Even the Most Respected Investors in the World Make Mistakes

Wednesday, May 4th, 2011

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(credit: jmv)

You may not have heard yet, but there’s been some interesting drama in the house of the country’s most-worshipped investor – the Oracle of Omaha, Mr. Warren Buffet. One of the top execs at his company (Berkshire Hathaway) seems to have, well, cheated at the game. David Sokol looked like he was next in line to replace Buffet when he eventually retires. But then he pulled a little thing called insider trading.

He bought a bunch of shares in a company, and then convinced Buffet that Berkshire Hathaway should buy that company, which raised the price of the shares and made Sokol a tidy profit. Unfortunately for everyone, that’s illegal. (For the record, Sokol so far denies doing anything wrong.)

There are many ways the company could have handled it – they could have tried to cover it up, or denied the whole thing and given Sokol a big bonus. But to his credit, Berkshire’s famous leader just fessed up. At the company’s annual meeting, where company executives meet with investors, explain their decisions, and take feedback, Buffet basically said that his top aide had done a terrible thing. He also heaped some blame on himself, saying that he wasn’t skeptical enough when Sokol came to him with the proposal.

Now Sokol is out of a job and the company is moving forward. Easy as that. The truth is, bad things happen all the time. But in business as in the rest of life, all it really takes to make things right again is to take responsibility for what happened, fix what you can fix, and move on.

A Refreshing New Wall Street Scandal

Wednesday, April 27th, 2011

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(credit: REUTERS/ Shannon Stapleton)

Ah, spring! Baby birds stretch their wings, trees release deadly spores, and Wall Street awakens from its long post-Ponzi slumber. You know, Ponzi. Scheme. Ponzi scheme. Madoff?

This guy.

But we digress. Today’s news is about Raj Rajaratnam, the founder of a successful hedge fund called Galleon Group. He’s been accused of insider trading – this is, unfairly using information from outside sources in order to make a big profit for his company (and himself).

Here’s what you need to know about Bernie and Raj:

  • 1. Madoff has already been tried, convicted, and sent to prison for 150 years. Raj is just on trial – and he’s still innocent until proven guilty. If he is proven guilty, though, he’ll be in the clink with Bernard for up to 25 years.
  • 2. Madoff ran a Ponzi scheme – he collected money from new investors and handed much of it over to existing investors, calling it a return on their investment. In other words, he just moved the money around instead of investing it. It involved a huge network of people, funds, customers, billions of dollars, and many, many handshakes.
  • Galleon Group is accused of insider trading by using a small network of tipsters from different companies. These tipsters [allegedly] shared valuable corporate secrets with Galleon, and Galleon [allegedly] used that information to make a killing on the trading floor. All very fine line behavior.

What would you do if someone gave you valuable information about a potential investment win?

Today in Tapping the Brakes… Spain Slows Down to Save on Gas

Sunday, March 13th, 2011

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(photo credit: masochismtango)

Sustainability is in again! While China tries to prevent its economy from growing out of control, Spain is slowing down for a totally different reason.

  • Uprisings in the Middle East – particularly Libya – have hit Spain in the gas tank, and transit authorities are already trying to adapt. Beginning March 7th, drivers will have to slow down from 120 to 110 kilometers per hour on most main roads.
  • Spain’s Deputy Prime Minister says the measure is extreme, and promises to change back as soon as possible. Supporters say that by saving at the pump, citizens will spend more of their money “going for tapas” and strengthening the economy.
  • According to one estimate, the new speed limit will reduce fuel costs by 15%. But Spaniards are skeptical, and some say this is just a sneaky way for the government to raise revenues by handing out more speeding tickets.

Facts & Figures

  • Spain usually imports 13% of its oil from Libya
  • Other measures in place are designed to cut total national fuel consumption by 5%
  • 110 kilometers per hour is equivalent to 68 miles per hour

Best Quote

“We are going to go a bit slower and in exchange we will consume less petrol and pay less money.” – Alfredo Perez Rubalcaba, Deputy Prime Minister

>> What do you think?

Could a small change in the speed limit be a sustainable way of reducing dependence on oil?

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?

Competitive Culture = Cutting Corners?

Wednesday, November 24th, 2010

U.S. officials have been snooping around and raiding the offices of certain hedge funds recently, and there seems to be a cultural connection between them all…

  • Many of the hedge funds being investigated for insider trading were started by former traders for SAC (a private investment management firm).
  • SAC allow its employees to trade small amounts of company money once they’re hired, and if they do well they’re given more power. If they don’t do well, they get the boot.
  • This competitive culture creates a tension – SAC traders want to succeed professionally but don’t want to join Bernie Madoff in the clink for all eternity. Sometimes, the best intentions can land you there anyway.

Facts & Figures

  • SAC employs 800 people, including 20 lawyers and other nitpickers charged with keeping things in line with regulation
  • Level Global Investors LP and Diamondback Capital Management LLC, two hedge funds started by former SAC traders, were some of the first to be raided by federal agents
  • Richard Choo-Beng Lee, another former SAC employee, pled guilty to insider trading last year

Best Quote

“That eat-what-you-kill culture is highly competitive. A set-up where you have traders running their own portfolios instead of feeding into a centralized investment may make it more tempting for them to cut corners.” – Craig Lilly, an attorney at Greenberg Traurig LLP

Who is watching the banks?

Tuesday, December 22nd, 2009

Since banks play such an important role in the economy and in your life (assuming you’re not keeping your money under a mattress), they are are heavily watched by several government agencies.

The government wants your money to be safe and to ensure that any business calling itself a bank subscribes to a very high operation standard – you shouldn’t worry if the local bank on the corner is legit. That being said, there are three main federal organizations along with individual state agencies that regulate banking on both a national and local level.

The main federal organizations focus on different areas, but work together to ensure that the banking system runs smoothly:

  • Comptroller of the Currency – approves new banks, issues banking laws, and makes sure banks are following the law
  • Federal Reserve Board – provides financial services to banks, watches out for risky behavior, and maintains stability of banking system
  • Federal Depositors Insurance Corporation – insures people’s money against any possible bank failures

State agencies act in similar capacities (regulation, enforcement, and oversight), but only for banks within their borders. All in all, these federal and state agencies are carefully monitoring and analyzing every bank to make sure your money is safe.

Regulation is…

Tuesday, October 20th, 2009

Regulation is when government or other agencies supervise companies to control certain behaviors and activities. For example, the Environmental Protection Agency supervises companies and organizations to make sure their activities don’t negatively impact the environment through pollution or irresponsible use of resources.

What does it mean to say “the Fed is raising the interest rate?”

Wednesday, September 23rd, 2009

At any given time, there are countless different interest rates for countless different transactions at countless different institutions. The government doesn’t control all of them – how could it? But then how can you say the Fed has raised or lowered interest rates?

The Fed, or the Federal Reserve, is the whole country’s bank. It operates out of 12 different locations and it lands money to commercial banks, which in turn land money to us. The Federal Reserve Board is the agency that controls this bank and its job is to maintain a secure financial system throughout the country. The Fed’s primary concern is to regulate our economy’s rate of growth – if the economy grows too quickly, we get swamped by inflation, and if it grows too slowly, we could enter a recession.

Because the Fed lands money to all other banks, its interest rate affects all other interest rates, which adjust to accommodate the Fed’s behavior. So when the Fed decides the economy is growing too fast, it raises its own interest rate – raising all other interest rates in a kind of domino effect – and slows down spending that way. If the Fed wants to try to increase economic growth, it lowers its interest rate, which usually increases spending. While interest rates can vary from institution to institution, they’re all proportional to the country’s most important interest rate: the Federal Reserve’s.

A Bailout is…

Friday, August 21st, 2009

A bailout is major financial support from a government to a failing business so that it doesn’t collapse and cause even greater harm to the economy as a whole. Usually the business will be subject to tighter government regulation as a result of accepting the financial support.

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