Securitization and US sub-prime crisis
In the financial market of US, sub prime crisis was as a result of collapse of the unregulated $3 trillion over the counter market for complex structured assets, which included residential mortgages in the US. This structured asset crisis represented a sharp reversal on how global investors view all securitized assets and custom derivative structures, such as collateralized debt obligations (CDOs) when it happened in 2007. In risk analysis of the incidence, crisis was about how banks package loans and other assets using complex derivative structures, ratings from Moody’s and S&P, private mortgage insurance and less of credit quality of the mortgage loans behind a given bond issue. The crisis can be also attributed to conflict of vision from economics and market stakeholders. The economists argued that securitized assets that developed by the GSEs to liquefy the market for residential mortgages would be more transparent and thus more efficient than bank assets in the market, secondly the securitization market grew beyond the US market for GSE paper, this meant that intermediary role of the commercial banking industry was expected to decline and banks would instead focus more efforts on acting as agent and sponsor for these perfectly transparent and liquid vehicle.
While the commission argued that rapid acceleration of financial technology, created classes of assets which neither the academic community nor regulators expected. However the deep look into the matter is that regulators and US Congress enabled this outcome. Because unlike a fairly simple GSE obligations or even OTC interest rate swaps which are standardized and thus quite liquid, CDOs and other OTC derivatives blossomed into dozens of hideously complex and opaque permutations. That was facilitated by flawed securitization model in the place of the implicit guarantee of the US Treasury with GSE paper and Wall Street substituted a paid rating from Moody’s or S&P and a guarantee from thinly capitalized municipal bond insurers or even hedge funds. As a result this errors resulted to an enormous market that comprised of unregistered securities which appeared to be deliberately opaque and are thus unstable that did not have virtual no support from dealers or investors. Therefore in return it meant that banks retain de facto liability in the entire transaction. Hence it resulted to unstable market which had effects to the global economy and market, impact on the consumer and global banking. All this events neither the US congress nor the regulators did not project and control.
Capital structure
In business world the concept of capital structure refers to permanent long-term financing of a firm which includes preferred stock, common stock and long term debt. In this sense the capital structure is different from financial structure due to its components such as retained earnings, accounts payable and short-term debt. Capital structure of the firm is advantageous to the debt since it reduces taxes through tax shield and also reduces managerial discretion when firm has few positive investment opportunities. However bankruptcy costs may be significant to extend that may affect operation of business. Capital structure is important to the extend that it has an advantage to Equity since it increases managerial discretion when firm has more positive investment opportunities while outside investors have poor ability to choose good firms to invest. The optimal Capital Structure encompasses trading off costs and benefits in a transaction.
In order to understand the capital structure decisions the guiding theories includes the pecking order and trade-off theories. Whereby trade off theory states that business organizations trades off the benefits of additional debt like reduced agency costs of free cash flow and tax deductibility of interest expenses against the costs, which is bankruptcy risk in which the margin equate the two components. The trade off theory therefore enables the firms to set a level of debt, where the marginal benefit of debt which is in form of tax deductibility of interest payments, possible mitigation of agency costs and exact offsets of the marginal cost of debt in the form of bankruptcy costs in the transaction.
While the theory of pecking order states that adverse selection issues in raising funds by different methods dominate other considerations in the trade off theory. Such issues are like a hierarchy of funds results which are not factored in the trade off theory. For instance when the firm wishes to source funds, the firm shall first use its internal funds, if it’s not sufficient it can go for debt and then lastly can resort to equity finance when such options are exhausted. On the entire issue of capital structure, there is other factor that affects structure such as the dividend imputation would lowers the cost of capital and thus increases profit of the firm in getting the equity.
- Collaterised debt obligation is the sophisticated financial tools that allows for the repackaging of the company or individual loans into products that can be sold on the capital market. For example are the auto loans, credit card debts, corporate debts. These transactions usually have collateral behind them. Creat3ed to provide more liquidity in the economy by allowing banks and corporations to sell off which frees more capital to invest to the business.
- The term Credit derivative swaps refers to financial instrument whose value and price derives from credit worthiness of the obligation of a third party which is isolated and traded in the capital market. Therefore credit derivative swaps is a bilateral contract between a protection buyer and seller in the credit derivatives market.
The obligation imposed by the securities and exchange Act of 1934
In the SEC (Securities and Exchange Commission) issues on the final rules on regulation of analyst certification. SEC adopted AC (Regulation Analyst Certification) which is under the Securities Exchange Act of 1934 in law. In addition broker dealers should obtain certifications and maintain records regarding research analysts’ public appearances of the transaction. The AC also imposes compliance and responsibilities on foreign securities firms whose research is disseminated in the U S.
The emphasis is that the certification by the research analyst must adhere to the following;
- Should attest that the views expressed in the report accurately reflect the analyst’s personal views about the subject issuers or security.
- Should disclose whether or not the analyst’s compensation was or is or will be tied to the specific recommendations.
However there is a conditional exemption from U S registration for foreign broker dealers that engage in certain direct and indirect activities involving U S investors and securities markets which include the provision of research to US individuals. Therefore the strict compliance is required so that the entire transaction would be more beneficial to all shareholders by including a tender offer.
Preparedness of the European Union for monetary union as compared to ASEAN
The European Union economic integration and formation of a single currency was not an easy task that was achieved overnight. But instead a rapid process was initiated to enable it prepare for the monetary union. This can be traced back to 1958 when six European countries formed the EEC body (European Economic Community) that aimed to create a free trade area and to avoid another war like World War II in the future times. After growing to 15 countries, EEC formed the EU (European Union). This made the EU to undergo the formalization processes of the Union that made the countries to sign Maastricht treaty that served as a blue print for the formation of a monetary union and enabled the countries to politically commit to forego their independent monetary policies and join a monetary union as a block. In order to realize this vision11 countries of the European Union (EU) locked their exchange rates and adopted the euro as their common currency in January 1st 1999. In addition to that the enabling factors included the political commitment and the fact that member countries were at par economical.
This is in contrast to the ASEAN (Association of South East Asian Nations), which came as a result of financial crisis that created a need for a greater level of economic integration. In that regard the ASEAN economic block was anti-communist and political organization due to division a rising from ideological conflicts and wars, which made the scarce resources to be wasted on defending themselves against each other rather than developing each other. The block had first of all the minimal resources that could sustain the integration for instance the land of about 4.5 million km and total GDP of US$737 billion. The member countries hold to different political ideologies, religions, and languages. In addition to that countries were varied economically both structural and operational models used, whereby some countries have open financial markets while others have closed ones. In addition to economic variation some countries are still struggling to survive economically while other have already developed, therefore ASEAN lacked economies of scale. For instance Singapore is advanced countries in the world and Vietnam is still at the beginning stages of establishing itself in economy.
The depositary receipt process
In the stock market the term DRs (Depositary receipts) are securities issued by a depositary representing underlying shares of a corporation which have been placed with the depositary. DRs are purchased by investors (holders) according to terms of the deposit agreement of the transaction. In the security issues, depositary acts as a bridge between the DR holders and the issuer in the market. Non-US corporation use depositary receipts to raise capital establish brand equity in the US and improve share valuation. This is done by purchasing the capital on the stock market from investors; these foreign firms are offering a competitive rate and efficiencies on the stock market. Therefore the foreign firms sourcing for the funds cooperate with all stakeholders for business gain and prosperity. But in the issue of depositary receipts is an outstanding issue during the issuance of the DRs to investors in the target market. Therefore the remote deposit capture enables the community and regional financial institutions to take advantage of the Check Clearing Act referred to as Check 21 to gain efficiencies.
This efficiency is in terms of processing and provides their customers with the ability to accelerate funds availability improve their internal reporting capabilities and streamline deposit preparation. Through the use of check 21, it levels the transactional and operational field between community financial institutions and large competitors. This institution will include the Community Banks, Regional and Rural Banks, Credit Union and Lockbox Providers. In addition check 21 help to reduce paper work, combat rampant fraud and streamline check processing. The other benefits of check 21 systems include later deposit cutoffs, fewer uncontrollable delays in posting checks, better operational continuity and reduced transportation and processing costs
Globalization of financial markets
In today’s business world globalization has made way for free trade and has enhanced communication between various parts of the world making the world as one global village. Globalization has potential to make this world a better place to live in because has the abilities to change political scenario that can help to address the global challenges. This includes raising rates of unemployment, economic recession, poverty, food crisis and the climatic conditions in a joint venture. In the sense of business the marginalized shall get a chance to exhibit in the world financial market to trade. In addition globalization leads to efficient use of resources and benefits.
Advantages of globalization includes: the firms and people have unlimited access to wide variety of products of different countries since there is a worldwide market. Leads to steady cash flow into the developing countries that gradually decrease the dollar difference therefore fostering development. Globalization as a result of creating a worldwide market will increase in the productivity of goods and services to explore the diverse of opportunities. Influences political and leadership decisions that are people oriented since the globe shares similar financial interests.
In addition there is social benefits and technological development that reduces the brain drain effect.
However the disadvantages of globalization includes; the job loss to Europeans since most firms are outsourcing work to the Asian countries because of low labor cost and translates to high company profits. This leads to immense pressure to employed Europeans who are under the threat of the business being outsourced from other countries. Can lead to the emergence of sophisticated form of colonization since countries that are at the receivers’ end are giving up to the ends of foreign companies and their policies.