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In the first place, the most important consideration is the client, if you work in PWM in a bank and that bank does not offer an investment vehicle a client is interested in, a wealth manager may allocate some of those assets to a competitors bank.
A. Buy-side= These are going to be mutual fund retirement fund managers that get a Percentage fee on Assets under management (AUM)
Sell Side= Fees which can be assessed for transaction costs or premium
The potential conflicts of interest drove the need to separate research and investment banking. There was the potential for the sell-side analysts to only recommend companies which their bank was also their investment bank. This created the potential of analysts becoming skewed and only recommending companies in which their bank already managed.
Q5. How have the U.S. enforcement actions against sell-side research in 2003 heightened the issue of declining research revenues?
The NASD and the NYSE announced enforcement against 10 investment banks for a total of 1.4 billion to be paid in penalties and other fines. Banks also had to comply with new requirements that included the potential for the investment banking department to skew the research department, and making independent research available to consumers. These actions highlighted the fact that research was no longer becoming a profitable source of income to banks. The lack of clear revenue routes to research also play a role in the decreased role of research.
Q6. What are the objectives of Regulation FD? What are the concerns about this U.S.-based regulation?
The objectives of the FD or Fair Disclosure act are to disallow companies management to selectively release information that could be harmful to a companies stock price. This regulation requires companies to file any potential stock moving announcements to the SEC. This levels the playing field and allows all investors to receive the news at the same time. The critics of this act argue that because information now has to be assimilated through attorneys and the SEC the quality and quantity of the information is diminished and that they overall receive the same amount of information as prior to the regulation.
Business risk includes industry specific characteristics, the position within the industry, the diversity of the company, the profitability in comparison with the business peers and the management quality
Financial risk includes the accounting, corporate governance, risk tolerance, adequacy of cash flows, capital structure/asset protection and financial flexibility.
The three main credit rating agenciers of Moody’s, Standard & Poors and Fitch had all provided their highest credit ratings to many of the MBS’s up through 2007. Once some of these subprime MBS’s defaulted, the values dropped, spuring the agencies to downgrade many of the securities in this asset class across the board, further exacerbating the decline in value.
The credit agencies have been criticised due to the fact that they were being paid large fees to “rate” many of the MBS’s by the investment banks, and were not doing full due diligence in understanding the product in which they gave their highest ratings. Because they rated these assets with their highest rating, pension funds and other funds which required investment grade assets were able to invest, and in turn took large losses during the financial crisis. This also posed the question of why the firms did not downgrade the MBS’s as soon as they could have.
In 2001, the NYSE switched from a fractional pricing system (stock priced in increments of 1/8 of a dollar) to a decimal pricing system (stock priced in increments as small as 1 cent). Explain how this might encourage front-running by traders?
Contracts may have counter-party risk
Securities are settled instantly, the buyer pays the money and the seller delivers the product, Derivatives however are an outstanding obligation between the buyer and seller. This is why derivative exchanges require mark-to-market adjustments to collateral. Much more risk management intensive than securities.
Flexibility of issuance and limited regulatory oversight
Interest income is exempt from witholding tax
Easier for large credit worth multinational countries.
Because banks may not have the capital required to fund their operations, so the turn to the eurobond market.
Because the Japanese government guaranteed the assets of LTCB not to fall below 20%, and would buy any of those assets that did, it effectively gave companies a guarantee of profits(or at least not large losses) on their investments. This effectively was a put option as you have insurance that your asset will not fall below a specified price or in this case percentage.
China wanted to keep the money of the Chinese residents controlled only in A shares. US companies, foreign investors and now Chinese residents can now also purchase B shares, which are traded in Hong Kong or Shanghai and are denominated in renminbi, but are traded in U.S. dollars in Shanghai or Shenzhen in Hong Kong.
The China Securities Regulatory Commission will soon publish revised regulations on qualified foreign institutional investors to accelerate the approval process, lower the requirement standards and expand the investment areas for overseas fund managers.
Currency(Zimbabwe hyperinflation), political(Venezuela), liquidity(companies may not trade or may not be able to find buyers or sellers), accounting(ask summer) , tax(french millionaire tax?) and volatility risks.
Suppose you are a wealth advisor and a client has asked for your recommendation on which of the BRIC countries poses the least risk and most opportunity for investment growth. Briefly compare the perceived risks and benefits of each of the countries and provide support for your selection.
India and China have had large growth, though China is slowing, India has potential to emerge as the next world leader of growth.
Brazil is beginning to emerge as a large leader in the world and houses the world’s third largest stock exchange by volume
Russia is sketchy(I have no idea) oil? mafia? consumer spending, and agreement to join the WTO. National resources, market opportunities, balanced labor cost, solid telecommunications.
A.The time it takes for promotion in the sales and trading path can be highly accelerated compared to IB. Also, IB typically will have higher employee compensation initially but could have opportunity to have greater pay in the future due to the ability to create greater revenue for the firm.B. IB advises to enhance shareholder value through mergers, divestitures, acquisitions and restructurings. IB also gives financial advice to clients and helping them raise, retire, or risk manage capital.
Q2. Describe what a Chinese Wall is and which U.S. regulator would be concerned with issues involving the wall.
A.A Chinese wall is an impermeable physical and legal separation between client-related traders and proprietary traders. It separates investment bankers and proprietary traders. The IBankers are privy to material, nonpublic information that cannot be shared outside a need-to-know basis.
B. The SEC would be most concerned with issues regarding the wall
Q3. What advancement in the mortgage market set the foundation for the subprime crisis and why?
A.Mortgage securitization. The complex nature of these MBSs masked some of the risks involved with owning them. This gave little incentive to commercial banks originating loans to scrutinize borrowers because these banks would sell loans and take them off the balance sheet. They would not adhere to strict mortgage underwriting standards. Also, many subprime loans were issued, which further complicated the situation.
Q4. Describe a Credit Default Swap (CDS). What are regulators trying to do to mitigate risk in the CDS market?
A.Derivatives contracts designed to spread risk and reduce exposure to credit events such as default and bankruptcy. One party purchases protection and pays a premium for that protection and the second party provides that protection in case the third party defaults or goes bankrupt.
B. Regulators are classifying CDSs as securities and the FASB now requires financial statement disclosure of the nature and terms of the credit derivative including future payments, the fair value of the derivative, and what provisions are available for collecting money from third parties.
Q5. **Under what scenarios will the SIV (Structured Investment Vehicle) market arbitrage model fail to work?
A.If the traded asset falls below the value of the of the short-term debt issued, the SIV falls into trouble.
B. If no money is coming in, or when outpayments are larger than in payments, such as when an SIV is paying on loans and those borrowers taking out mortgages are delinquent on payments affecting a MBS, the SIV will not work.
Q6. Why were U.S. investment banks allowed to operate at higher leverage ratios compared to commercial banks?
A.These banks were under Basel II guidelines, which allowed for management judgment and control over models that determine the risk weighting of assets, giving banks abilities to set their own capital requirements. The SEC and not the Federal Reserve regulated these banks.
A.Bear Stearns was the victim of many different rumors surrounding its liquidity and ability to remain solvent. The perception that Bear may be insolvent led to a self-fulfilling prophecy where Bear became insolvent due to others not wanting to trade with Bear amid rumors that Bear was failing. Perception became reality.
Q8. ***How do Asian and petrodollar investors fit into the genesis of the financial crisis during 2007-2008? Structure your answer around the themes of easy credit, excess liquidity and cheap debt.
A.Both Asian and petrodollar investors found it easy to become involved in foreign investments because of the cheap debt in the U.S. The Fed had lowered interest rates and less scrutiny was placed on those who wanted to borrow. That led to excess liquidity in the market and both Asian and petrodollar investors found it easy to borrow and invest borrowed money. The spreads between low interest rates from borrowing and high returns from investing led these investors to gobble up foreign assets and inflate their balance sheets.
A.A CDS could be used to hedge against a default or bankruptcy by the reference entity. It could also be used to speculate against an asset. If one is short the asset or expects the asset to go down in value or for the borrower to become delinquent or go bankrupt, that person would be speculating with a CDS by collecting the claim after buying the depreciated asset at a discount.
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