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How credit crises lunched ?
what is Emergency Economic Stabilization Act 2008 Structure and Change in Economic History By: Gholamhossein Davani IACPA,NYSSCPA,IMA,AIA,CFE Jan.2009
What it all comes down to is this : my opponent's view of the world sees a long slow decline for our country, an inevitable fall mandated by impersonal historic forces. But America is not in decline. America is a rising nation. I see America as the leader, a unique nation with a special role in the world. This has been called the American century because in it we were the dominant force for good in the world. We saved Europe, cured polio, went to the moon and lit the world with our culture. Now we are on the verge of a new century. I say it will be another American century. GW. Bush Aug.1988 Elect Lecture New Orleans
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Blaming fair-value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick.''
Dane Mott , JPMorgan Chase & Co.
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The Dow Jones Industrial Average (DJIA) doubled in just a decade from 7,022 on 13 February 1997 to a peak of 14,164 on 9 October 2007. It was a Golden Decade of continuous growth in share values and economic prosperity. But, in the 13 months since last October, virtually all this growth has evaporated & we are almost back to where we started in 1997. Truly a decade of Boom to Bust! Update 20 November, 2008: The second new low this week. I thought we were near the bottom but, not after today. The market reached a new low of 7552, a fall of 46.7 %, from its all time peak on 9 October 2007. This crash entered the charts a few weeks ago but, as the market continues to dive, this millennium crash today reached NUMBER 5 in the all time worst crashes!
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Calculate loss
If you had $1000 on 3 September 1929, it would have been worth only $108.14 (89.2% loss) by July 8th, 1932. Full recovery of this loss didn t occur until 1954, 22 years later! Date Started: 4/17/1930 Date Ended: 7/8/1932 Total Days: 813 Starting DJIA: 294.07 Ending DJIA: 41.22 Total Loss: -86.0%
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Three days that shook the world(1214 Sep.2008)
On Sunday, September 14, it was announced that Lehman Brothers would file for bankruptcy after the Federal Reserve Bank declined to participate in creating a financial support facility for Lehman Brothers
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The amoral Elephant
The March Of Folly From 1929 To 2008
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1nd Worst Stock Market Crash 1930-1932
This is the grand daddy of them all. Investors lost 86% of their money over this 813 day beast. This market crash combined with the 1929 crash, makes up the Great Depression. In just two months, September and October, the stock market had lost 40 percent of its value. Black Tuesday usually marks the point where the Roaring 20 s ended and the Great Depression started. The stock market continued to fall until bottoming out in July of 1932.
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2nd Worst Stock Market Crash 1937-1938
Key events: Legacy of Great Depression, war scare and Wall street scandals Date Started: 3/10/1937 Date Ended: 3/31/1938 Total Days: 386 Starting DJIA: 194.40 Ending DJIA: 98.95 Total Loss: -49.1%
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3rd Worst Stock Market Crash 1906-1907
Key events: The Panic of 1907 due to a credit crunch in New York, as well as gloom due to President Roosevelt s antitrust drive Date Started: 1/19/1906 Date Ended: 11/15/1907 Total Days: 665 Starting DJIA: 75.45 Ending DJIA: 38.83 Total Loss: -48.5%
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4th Worst Stock Market Crash 1929
Key events: End of the roaring twenties, and kicked off the Great Depression Date Started: 9/3/1929 Date Ended: 11/13/1929 Total Days: 71 Starting DJIA: 381.17 Ending DJIA: 198.69 Total Loss: -47.9%
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5th Worst Stock Market Crash 1919 1921
Key events: Followed a post war boom, bursting of the first big tech bubble- the automobile sector (but after bottoming, this decade saw tremendous growth in the stock market and the economy, often called the roaring twenties) Date Started: 11/3/1919 Date Ended: 8/24/1921 Total Days: 660 Starting DJIA: 119.62 Ending DJIA: 63.9 Total Loss: -46.6%
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6th Worst Stock Market Crash 1901 1903
Key events: Assassination of President William McKinley; a severe drought causing alarm about US food supplies Date Started: 6/17/1901 Date Ended: 11/9/1903 Total Days: 875 Starting DJIA: 57.33 Ending DJIA: 30.88 Total Loss: -46.1%
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7th Worst Stock Market Crash 19731974
Key events: Vietnam war, Watergate scandal Date Started: 1/11/1973 Date Ended: 12/06/1974 Total Days: 694 Starting DJIA: 1051.70 Ending DJIA: 577.60 Total Loss: -45.1%
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8th Worst Stock Market Crash 1939 1942
Key events: World War 2, attack on Pearl Harbour Date Started: 9/12/1939 Date Ended: 4/28/1942 Total Days: 959 Starting DJIA: 155.92 Ending DJIA: 92.92 Total Loss: -40.4%
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9th Worst Stock Market Crash 1916 1917
Key events: US being drawn into World War 1 Date Started: 11/21/1916 Date Ended: 12/19/1917 Total Days: 393 Starting DJIA: 110.15 Ending DJIA: 65.95 Total Loss: -40.1%
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10th Worst Stock Market Crash 2000 - 2002
Key events: Tech bubble bursting, September 11th terrorist attack Date Started: 1/15/2000 Date Ended: 10/9/2002 Total Days: 999 Starting DJIA: 11,792.98 Ending DJIA: 7,286.27 Total Loss: -37.8%
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Breaking the buck
Money market funds seek a stable $1.00 net asset value (NAV): they aim never to lose money. If a fund's NAV drops below $1.00, one says that the fund "broke the buck". This has rarely happened: as of September 16, 2008, two money funds have broken the buck (in the 37 year history of money funds), and from 1971 to September 15, 2008, there was only one failure. The Community Bankers US Government Fund broke the buck in 1994, paying investors 96 cents per share. This was the first failure in the then 23 year history of money funds, and there were no further failures for 14 years. The fund had invested a large percentage of its assets into adjustable rate securities. As interest rates increased, these floating rate securities lost value. This fund was an institutional money fund, not a retail money fund, thus individuals were not directly affected. No further failures occurred until September 2008, a month that saw tumultuous events for money funds.
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The world s largest companies in detail (Top 10)
Rank Company
1 2 3 4 5 6 7 8 9 10 Wal-Mart Exxon Mobil Shell BP GM Toyota Chevron Daimler ConocoPhillips Total
Country Business Turnover in USD Million
USA USA Energy NL Energy UK Energy USA Car Japan Car USA Energy Germany Car USA Energy France Energy Commerce 348650 335086 318845 262285 207349 204773 195341 190200 167578 166486
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The world s most valuable companies in detail (Top 10)
Rank Company Country Business Market capitalization in USD Million
1 2 3 4 5 6 7 8 9 10
Petro china China Energy Exxon USA Energy GE USA Conglomerate China Mobile China Telco I&C of China China Bank Microsoft USA Software Gas prom Russia Energy Shell Netherlands Energy AT & T USA Telco China P & CH China Energy
723794 511887 374637 354025 338412 333054 331825 264330 252051 249608
(Data Source: FAZ: America varlet Führungsrolle, in FAZ, No 4, January 5th, 2008, page 11)
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Equity and Debt Capital Markets
Citigroup ranked as the leading book runner for global securities in the first quarter 2006 with US$178.8 billion in underwriting proceeds, compared to a US$152 billion in underwriting a year ago when the firm also took first place. In terms of global underwriting fees, based upon information calculated by Freeman & Company, imputed fees in the opening period of 2006 jumped to over US$8.9 billion from US$7.78 billion a year ago. Citigroup generated the most underwriting fees in the current quarter with US$788.5 million. Global Debt, Equity and Equity related Q1 2006 ($US m) 1. Citigroup 2. JP Morgan 3. Morgan Stanley 4. Deutsche Bank AG 5. Goldman Sachs 6. Merrill Lynch 7. Credit Suisse 8. RBS 9. Barclays unranked: Macquarie Bank $178,780 $130,307 $121,445 $118,763 $102,160 $101,534 $97,448 $74,552 $72,083 $722
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M&A
Citigroup claimed the title of top global financial advisor for announced M&A transactions, advising on 80 transactions valued at over US$340.7 billion in Q1 2006. This represented a 244% increase in deal volume from the comparable time period last year. Goldman Sachs ranked second with US$337.5 billion in M&A activity while JP Morgan rounded out the top three with deals valued at US$274 billion. (US$m) 1. Citigroup 2. Goldman Sachs 3. JP Morgan 4. Lehman Brothers 5. Merrill Lynch 6. UBS 7. Morgan Stanley 8. Deustche Bank 9. BNP 10. Rothschild 11. Credit Suisse 12. Evercore 13. HSBC 14. Lazard 15. Rohatyn 16. Calyon 17. ABN AMRO $340,671 $337,456 $274,044 $265,487 $224,324 $208,724 $196,630 $165,511 $145,809 $133,209 $131,699 $120,162 $114,209 $95,866 $89,432 $72,208 $70,72
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UK RESCUE PLANS
Much of the current crisis has been caused by the banks' unwillingness to lend to each other, so the UK government has come up with a plan to inject billions of pounds in capital and to guarantee loans in the hope that lending will resume.
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The government has also nationalized or part-nationalised some leading UK banks struggling to survive the crisis.
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BILLION-DOLLAR BAIL-OUTS
Governments have spent billions of dollars on rescue packages, led by the US with its $700bn rescue package.
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FINANCIAL CRISIS: HOW IT HAPPENED
FINANCIAL CRISIS: HOW IT HAPPENED
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FINANCIAL CRISIS: HOW IT HAPPENED
FINANCIAL CRISIS: HOW IT HAPPENED
Most analysts link the current credit crisis to the sub-prime mortgage business, in which US banks give high-risk loans to people with poor credit histories. These and other loans, bonds or assets are bundled into portfolios - or Collateralized Debt Obligations (CDOs) - and sold on to investors globally.
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FINANCIAL CRISIS: HOW IT HAPPENED
FINANCIAL CRISIS: HOW IT HAPPENED
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FINANCIAL CRISIS: HOW IT HAPPENED
Seeking a long-term solution, the US government agrees a $700bn bail-out that will buy up Wall Street's bad debts in return for stake in the banks. The US government plans to borrow the money from world financial markets and hopes it can sell the distressed assets back once the housing market has stabilized.
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FINANCIAL CRISIS: HOW IT HAPPENED
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FINANCIAL CRISIS: HOW IT HAPPENED
Lehman worse than Enron, say PricewaterhouseCoopers After a closed-doors creditors meeting at the 02 Dome, Lehman s administrators PwC told reporters that the collapse of the financial services firm was ten times bigger and more complicated than Enron. Tony Lomas, lead administrator, said PwC had identified more than a trillion dollars worth of assets and liabilities that were yet to be accounted for. Since the biggest Big Four firm was appointed on 15 September, it has recovered $5 billion out of a potential $550 billion s worth of outstanding obligations. Client assets of $22.3 billion have been also identified. Amongst the 400 trade creditors identified so far is PricewaterhouseCoopers itself, the Bank of England, and the Financial Services Authority.
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History of bankruptcy in USA
The following is a list of the top 10 bank failures since 1934, based on the size of their assets, as reported by the Federal Deposit Insurance Corp. 1. Washington Mutual of Henderson, Nevada and Park City, Utah; seized Sept. 25, 2008 with $307 billion in assets as of June 30, 2008 2. Continental Illinois of Chicago, collapsed in 1984 with $40.0 billion in assets 3. First Republic Bank Corp of Dallas, failed in 1988 with $32.5 billion in assets 4. Indy Mac Bank FSB of Pasadena, California, collapsed in July 2008 with assets of $32 billion 5. The American Savings & Loan Assoc. of Stockton, California, failed in 1988 with assets of $30.2 billion 6. Bank of New England Corp collapsed in 1991 with assets of $21.7 billion 7. MCorp of Dallas, failed in 1989 with assets of $15.6 billion 8. Gilbraltar Savings of Simi Valley, California, collapsed in 1989 with assets of $15.1 billion 9. First City Bancorp of Houston, failed in 1988 with assets of $13.0 billion 10. Homefed Bank FA of San Diego, failed in 1992 with assets of $12.2 billion
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BANKS AFFECTED BY THE GLOBAL CRISIS - 2008 Giants of the business world, such as Lehman Brothers and Merrill Lynch, have crumbled or been bought out.
Bank Fannie Mae Freddie Mac Lehman Bros Merrill Lynch AIG HBOS WaMu Fortis Bradford & Bingley Wachovia Glitnir Hypo Real Estate RBS Lloyds TSB Date 07 Sep 07 Sep 15 Sep 15 Sep 16 Sep 17 Sep 25 Sep 28 Sep 29 Sep 29 Sep 29 Sep 06 Oct 13 Oct 13 Oct Status Nationalized Nationalized Collapsed Taken over Part-nationalised Taken over Collapsed and sold Nationalized Nationalized Taken over Nationalized Rescue package Part-nationalised Part-nationalised Website Fannie Mae Freddie Mac Lehman Bros Merrill Lynch AIG HBOS WaMu Fortis Bradford & Bingley Wachovia Glitnir Hypo Real Estate RBS Lloyds TSB 34
Source: BBC news. Finance crisis: In graphics Dayarayan Auditing & Financial Services Firm
Who were Bankrupt in credit crises
Washington Mutual WaMu Bear Streamrn American International Group (AIG Amaranth Advisors Lehman Brothers Bank Fanni Mae Freddie Mac Merrill Lynch UBS and Next ?? Dayarayan Auditing & Financial
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Who were investor of Fannie Mae & Freddie Mac !!
China Japan Russian South Korea Taiwan 359.9 BL.$ 228.2 75.3 63 54.9
Source: The Fannie/Freddie bailout: What next Business week, New York 22,Sep.2008
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Stock Market Crash Time Line
The most famous crash happened on October 29, 1929. The second Crash was happened on October 1987 The third Crash was happened on 2001 Enron,Worldcom,Parmalat, . And now biggest world crisis in globalization age ! 2008
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Trends In Mutual Fund Investing October 2008
Washington, DC, November 25, 2008 - The combined assets of the nation's mutual funds decreased by $1.087 trillion, or 10.2 percent, to $9.600 trillion in October, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI. Total Net Assets of Mutual Funds (billions of dollars)
Oct 08Sept 08% chg Dec 07 Stock Funds3,935.44,954.8R20.66,521.4RHybrid Funds511.4600.8R-14.9713.4RTaxable Bond Funds1,211.91,318.9R-8.11,305.1RMunicipal Bond Funds350.8370.7R5.4373.8RTaxable Money Market Funds3,102.92,971.7R4.42,642.1RTaxFree Money Market Funds487.2469.8R3.7465.1RTotal9,599.610,686.7R10.212,020.9RR=Revised data
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What are Fannie Mae and Freddie Mac?
The Federal National Mortgage Association (Fannie Mae ) and Federal Home Loan Mortgage Corporation (Freddie Mac) are the largest purchasers and insurers of mortgages in the country.
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Why were they created?
Fannie Mae was founded - in 1938 - during the Great Depression with a simple purpose in mind: to give lower- and middle-income Americans more access to the Great American Dream of home ownership with a reasonable interest rate. It did it by guaranteeing if a homeowner defaulted on a loan the bank would get paid. The money they provide to banks to lend to people also is supposed to help stabilize the mortgage market in times of stress by ensuring sufficient resources for loans. First established as a government agency, Fannie Mae in 1968 became a private, shareholder-owned company with a charter from Congress requiring the company to support the housing finance system. Freddie Mac was established in 1970 to expand the secondary market for mortgages in the U.S. Today Fannie and Freddie hold a pivotal place in the home loan market - one that has grown to include special advantages, such as guaranteed lines of credits from the U.S. Treasury, exemption from state and local taxes and limited government oversight.
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So they are owned by the government?
No ! ! Both Fannie (FNM/NYSE) and Freddie (FRE/NYSE) are now publicly owned and their stock is traded on the open market.
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What problems do they currently face?
Over the past year, mortgages have defaulted at a faster rate, and companies have had to take billions of dollars in losses. Fannie and Freddie are required by their government regulator to have a financial cushion - cash or securities to fall back on. With losses rising, that cushion has been dwindling. That has forced them to raise new money during a time where it has been expensive and difficult to do so. Most of the mortgages Fannie and Freddie insure or own are traditional, prime mortgages that are among the safest in the market. The pair backed very few of the exotic sub prime mortgages that have caused the most problems over the past year.
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The Emergency Economic Stabilization Act of 2008 , Div. A, enacted October 3, 2008), commonly referred to as a bailout of the U.S. financial system, is a law authorizing the United States Secretary of the Treasury to spend up to US$700 billion to purchase distressed assets, especially mortgage-backed securities, from the nation's banks. The Act was proposed by U.S. President George W. Bush and Treasury Secretary Henry Paulson during the global financial crisis of September October 2008.
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What happens in a government bailout?
In a bailout scenario, called a conservator ship, Fannie and Freddie's regulator - the Office of Federal Housing Enterprise Oversight - would take control of the companies and oversee their operations. Treasury Secretary Henry Paulson says the government wants to keep the companies operating in their current form without a government takeover.
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What has the Federal Reserve done to help Fannie and Freddie?
Sen. Christopher Dodd, D-Conn., said the Federal Reserve was considering opening up its discount borrowing window to Fannie or Freddie. He cited conversations with Fed Chairman Ben Bernanke and Paulson. But a Fed spokeswoman said the central bank had not talked with Fannie and Freddie about the emergency lending program. The spokeswoman declined to discuss any other options being considered.
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U.S. Treasury Secretary Henry Paulson proposed a plan under which the U.S. Treasury would acquire up to $700 billion worth of mortgage-backed securities. The plan was immediately backed by President George W. Bush and negotiations began with leaders in the U.S. Congress to draft appropriate legislation. President Bush meets with Congressional members, including presidential candidates John McCain and Barack Obama, at the White House to discuss the bailout, September 25, 2008 Consultations among Treasury Secretary Henry Paulson, Chairman of the Federal Reserve Ben Bernanke, U.S. Securities and Exchange
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Can they fail?
If they did, says Brad Neigel, a senior analyst at Aite Group, a financial services research firm, "It would be the collapse of the entire mortgage industry as we know it. A government takeover would be the last option of choice, Neigel added.
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How do Fannie and Freddie's current problems affect
If the government were to step in to help the pair, it would likely lead to lower interest rates on mortgages because investors would be assured of repayment, said Dan Green, a certified mortgage planning specialist and author of the mortgage reports. COM. But those declines in rates would probably be offset by an increase in fees, Green added.
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Lehman History
1840 1859 The history of Lehman Brothers parallels the growth of the United States and its energetic drive toward prosperity and international prominence. What would evolve into a global financial entity began as a general store in the American South. Henry Lehman, an immigrant from Germany, opened his small shop in the city of Montgomery, Alabama in 1844. Six years later, he was joined by brothers Emanuel and Mayer, and they named the business Lehman Brothers. 1850 Henry, Emanuel and Mayer Lehman founded the Firm in Montgomery, Alabama
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Where were auditors ?!
Ernst & Young gave Lehman a clean bill of health in a July 10 report to the SEC for the quarter ended May 31. Despite the growing financial crisis, auditors expressed no reservations about the value of the company's derivatives or any scenarios under which the company might be unable to meet its obligations. Two months later, Lehman collapsed !!
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Lehman auditor's report 2007:
"Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances."
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What was Deloitte s Opinion
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Tread way Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board United States), the consolidated financial statements as of and for the year ended December 31, 2007 of the Company and our report dated February 26, 2008 expressed an unqualified opinion on those financial statements. Deloitte & Touche LLP Washington, DC .February 26, 2008
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Stability of Freddie MAC 2007
Freddie Mac plays a vital role by moderating cyclical swings in the housing sector, equalizing the flow of mortgage funds regionally throughout the United States and making mortgage funds available in a variety of economic conditions.
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Board Directors report
it is important to note that the accounting change from the previous model results in an increase in our guarantee obligation balance for PCs held by us and a decrease in our guarantee obligation balance because our guarantee obligation is not re-measured at fair value when PCs previously purchased by us are subsequently sold. As such, the change in the income on guarantee obligation line item is not distinguished between no longer extinguishing our guarantee obligation and our guarantee obligation amortization change, as doing so is not operationally feasible given activity levels in the various periods presented. This diaÇculty highlights the fact that the change will provide financial statement users with improved transparency of operating results under the new method, in that it presents results using a single model.
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I, Richard F. Syron, certify that:
I have reviewed this Information Statement of the Federal Home Loan Mortgage Corporation, or Freddie Mac; Based on my knowledge, this Information Statement does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Information Statement; and . Based on my knowledge, the consolidated financial statements, and other financial information included in this Information Statement, fairly present in all material respects the financial condition, results of operations and cash flows of Freddie Mac as of, and for, the periods presented in this Information Statement. Date: February 28, 2008 Richard
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AIG s Social Responsibility
AIG recognizes that its investments in support of our customers, employees and the communities in which we operate are critical to our success. AIG s ongoing efforts to be an outstanding corporate citizen and promote responsible and sustainable business practices are essential to our long-term business objective of creating value for our shareholders and serving the interests of our clients.
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It is funny!!
The complaint alleges that the defendant underwriters violated Section 12(a)(2) of the Securities Act of 1933. Plaintiff alleges that the Offering Circular and other offering materials for the $6 billion preferred stock offering, failed to warn investors about Freddie Mac's fatal exposure to mortgage-related losses, poor underwriting standards and risk management procedures, and the negative impact of those failings on the adequacy of Freddie Mac's capital. Defendants were underwriters of the Series Z Preferred initial public offering. They sold the shares to the public in a firm commitment underwriting at $25 per share less than a year ago. The shares now trade at $2 per share.
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outstanding claims against the biggest six Auditors under fire !
BDO Seidman last August a jury ordered BDO Seiman to pay $521m in damages for its negligence in a Portuguese bank audit, almost as much as the firm s estimated revenue for that year. KPMG A US Justice Department report concluded that KPMG either helped perpetrate the fraud at New Century or deliberately ignored it. Class action lawsuits are also pending. KPMG also faces a lawsuit by Fannie Mae, which is trying to reclaim more than $2 billion from its old auditors. KPMG already paid $400 million to settle the SEC s case against it related to Fannie Mae. Ernst and Young will likely face lawsuits related to the bankruptcy of its audit client, Lehman Brothers. PwC lawsuits are likely for its audit of what was once the world s largest insurance company, AIG. Deloitte- Washington Mutual fund Madoff scandal- Friehling & Horowitz Auditing firm has not peer review more than 15 years !!!.
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Emergency Economic Stabilization
plan was expected to be announced for the Treasury to buy equity stakes in 9 American Banks, and potentially thousands of smaller banks, using the first $250 billion dollars allotted to the program. The banks receiving money would include Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. (including Merrill Lynch), Citigroup Inc., Wells Fargo & Co., Bank of New York Mellon and State Street Corp.
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Action Plan !!
The law which created the fund gives the Treasury $250 billion immediately, then requires the President to certify that an additional $100 billion in funds are needed, and finally $350 billion are subject to Congressional approval
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What will the housing bill do? (1)
Provisions of the housing bill that President Bush signed into law on Wednesday, July 30, 2008: Gives the Federal Housing Administration $300 billion in new lending authority and relaxes standards to provide affordable, fixed-rate mortgages to an estimated 400,000 debt-ridden homeowners. Any losses will be covered by an affordable housing fund financed by Fannie Mae and Freddie Mac, the government-sponsored companies that finance mortgages. Allows the Treasury Department temporary authority to lend money to Fannie and Freddie or buy their stock to avert a collapse of one or both of the mortgage giants. The authority expires on Dec. 31, 2009.
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What will the housing bill do? (2)
Creates a new regulator and tighten controls on Fannie and Freddie, including power for the regulator to approve pay packages for company executives. Creates a new affordable housing fund drawn from their profits. Permanently raises the limit on the loans they may buy to $625,000 in the highest-cost areas. Allows them to buy loans 15 percent higher than the median home price in certain cities. Provides $3.9 billion in grants to the hardest-hit communities for buying and fixing up foreclosed property
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Potential effects The maximum cost of a $700 billion bailout would be $2,295 estimated cost per American (based on an estimate of 305 million Americans), or $4,635 per working American (based on an estimate of 151 million in the work force). It should be noted however, that it makes little sense to merely divide the number 700 billion by the number of Americans or even by the number of American families, as the debt would not be paid in this fashion even if it were all entirely used and squandered. America pays the interest on its debt, and many Americans do not make a significant contribution to this payment or to taxes in general. The bulk of this money would be spent to purchase mortgage backed securities, ultimately backed by American homeowners, which possibly could be sold later at a profit, by the government. Economist Michael Hudson predicts that the bailout would cause hyperinflation and dollar collapse. However, there is no persuasive evidence of prices rising and the U.S. Dollar. has actually risen to higher levels than before the plan's announcement Indeed, during the week before and after the EESA was agreed, investment bank UBS was continually flatly rejecting that bailouts such as these were inflationary, emphasizing instead that they were antideflationary, not inflationary. The 2008 federal budget submitted by the president is $2,900 billion, meaning a $700 billion bailout would constitute a 24% increase to $3,600 billion, which would in fact far exceed the $3,100 billion 2009 budget. The total government commitment and proposed commitments so far in its current and proposed bailouts is reportedly $1 trillion compared to the $14 Dayarayan Auditing & Financial trillion United States economy. 63
Services Firm
I didn t want to have to do that !
Henry Paulson U.S. Treasury Secretary There is much more volatility and uncertainty in the market. We will see a big change in trading habits over the next few years," Economic Hit Man
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Manager on side shareholders inside
Remarkably, Mr. Viniar was able to do all of the above, and for that he earned $58.5 million in total compensation in 2007, including a $22.6 million bonus and $21.1 million in stock. All told, his pay was at least 21/2 times richer than that of any other CFO on Wall Street . Mr. Viniar's comp was also more than 23 times the average $2.5 million raked in by the finance chiefs on FW's list of 1,000 CFOs at publicly traded companies.
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Who were main Planner !!
The original proposal was three pages, as submitted to the United States House of Representatives .The purpose of the plan was to purchase bad assets, reduce uncertainty regarding the worth of the remaining assets, and restore confidence in the credit markets. The text of the proposed law was expanded to 110 pages
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What is Socialism for the rich and capitalism for the poor
Socialism for the rich and capitalism for the poor is a classical political-economic argument, formulated around 1970, stating that in the advanced capitalist societies, what actually happens is that the state gives much more resources to help the rich than the poor. The argument has different formulations, one of the most common is, the capitalist political economy toward big corporations is "privatizing profits and socializing losses."
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New Ways of Making Money
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What Are Derivatives?
A derivative is a financial contract whose value is linked to the price of an underlying commodity, asset, rate, index or the occurrence or magnitude of an event. The term derivative refers to how the price of these contracts is derived from the price the underlying item. It was like riding a tiger, not knowing how to get off without being eaten !?
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Warren Buffett
Chairman s Letter to shares holders of Berkshire Hathaway
Financial instruments are time bombs and "financial weapons of mass destruction their buyers and sellers, but the whole economic system. Large amounts of risk have become concentrated in the hands of relatively few derivatives dealers ... which can trigger serious systemic problems . During the past 37 years, the company has delivered an average annual return of 22.6%. Since 1965 the company's book value has gone up by 194,936%. BBC News-Tuesday, 4 March, 2003
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Some Figures and Statistics
Global equity capital $51.2 trillion (Wikipedia: Reuters March 2007) $165 trillion "total traded securities" (Economist, 19/01/2008) Global physical trade Daily ForEx trade volume $3.2 Trillion (BIS 2007) Total Derivatives Nominal $516 trillion (BIS 2007) Total Derivatives Value $11.1 trillion (BIS 2007) Total Swaps Nominal $408 trillion, 79% of all derivatives % Interest Rate Swaps 75 (BIS 2007)
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Free market ideology comes down to socialism for the rich, capitalism for everybody else.
Market watch reminds us that the U.S. gross domestic product (GDP) is about $15 trillion. The GDP of all nations combined is approximately $50 trillion. The total value of all the real estate in the world is estimated at $75 trillion and the total value of all the world's stocks and bonds is about $100 trillion. But there's a $500 trillion market in derivatives! (Source: By Gonsalves, AlterNet. Posted September 22, 2008. Sean)
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What problems do they currently face?
Over the past year, mortgages have defaulted at a faster rate, and companies have had to take billions of dollars in losses. Fannie and Freddie are required by their government regulator to have a financial cushion - cash or securities to fall back on. With losses rising, that cushion has been dwindling. That has forced them to raise new money during a time where it has been expensive and difficult to do so. Most of the mortgages Fannie and Freddie insure or own are traditional, prime mortgages that are among the safest in the market. The pair backed very few of the exotic sub prime mortgages that have caused the most problems over the past year.
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Some recent cases of market manipulation using derivatives:
Avista Energy, electricity, in 1998. Enron, electricity, 1998. Enron, etal, electricity and gas, 2000 and 2001. Arcadia, crude oil, in 2001. Salomon Brothers, U.S. Treasury securities, 1991. Individual traders, U.S. Treasury securities, 1992. Fenchurch, U.S. Treasury securities, 1993. Ferruzzi, soybeans, 1989. Sumitomo, copper, 1995 through 1996.
Source: Backgrounder Derivatives By :Randall Dodd http://www2.gsb.columbia.edu/ipd/j_derivatives.html
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A mortgage-backed security (MBS) is an assetbacked security whose cash flows are backed by the principal and interest payments of a set of mortgage loans. Payments are typically made monthly over the lifetime of the underlying loans. However not all securities backed by mortgages are considered mortgage-backed security (MBS). Housing Bonds (Mortgage Revenue Bonds) are backed by the mortgages which they fund, but aren't classified as mortgage-backed security (MBS).
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The secondary mortgage market is the market for the sale of securities or bonds collateralized by the value of mortgage loans. The mortgage lender, commercial banks, or specialized firm will group together many loans and sell grouped loans as securities called collateralized mortgage obligations (CMOs). The risk of the individual loans is reduced by that aggregation process. citation needed] These securities are collateralized debt obligations (CDOs). The CDOs are sometimes further grouped in other CDOs. Mortgage delinquencies, clarify] defaults, and decreased real estate values can make these CDOs difficult to evaluate. This happened to BNP Paribas in August, 2007, causing the central banks to intervene with liquidity.
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The bond market (also known as the debt, credit, or fixed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds. As of 2006, the size of the international bond market is an estimated $45 trillion, of which the size of the outstanding U.S. bond market debt was $25.2 trillion. Nearly all of the $923 billion average daily trading volume (as of early 2007) in the U.S. bond market takes place between broker-dealers and large institutions in a decentralized, overthe-counter (OTC) market. However, a small number of bonds, primarily corporate, are listed on exchanges. References to the "bond market" usually refer to the government bond market, because of its size, liquidity, lack of credit risk and, therefore, sensitivity to interestrates. Because of the inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve.
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Bond market volatility For market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevant; principal and interest are received according to a pre-determined schedule. But participants who buy and sell bonds before maturity are exposed to many risks, most importantly changes in interest rates. When interest rates increase, the value of existing bonds fall, since new issues pay a higher yield. Likewise, when interest rates decrease, the value of existing bonds rise, since new issues pay a lower yield. This is the fundamental concept of bond market volatility: changes in bond prices are inverse to changes in interest rates. Fluctuating interest rates are part of a country's monetary policy and bond market volatility is a response to expected monetary policy and economic changes. Economists' views of economic indicators versus actual released data contribute to market volatility. A tight consensus is generally reflected in bond prices and there is little price movement in the market after the release of "in-line" data. If the economic release differs from the consensus view the market usually undergoes rapid price movement as participants interpret the data. Uncertainty (as measured by a wide consensus) generally brings more volatility before and after an economic release. Economic releases vary in importance and impact depending on where the economy is in the business cycle.
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Bond investments Investment companies allow individual investors the ability to participate in the bond markets through bond funds, closed-end funds and unitinvestment trusts. In 2006 total bond fund net inflows increased 97% from $30.8 billion in 2005 to $60.8 billion in 2006. Exchange-traded funds (ETFs) are another alternative to trading or investing directly in a bond issue. These securities allow individual investors the ability to overcome large initial and incremental trading sizes.
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Bond market Bond · Debenture · Fixed income Types of bonds by issuer Agency bond · Corporate bond (Senior debt, Subordinated debt) · Distressed debt · Emerging market debt · Government bond· Municipal bond· Sovereign bond Types of bonds by payout Accrual bond · Auction rate security · Callable bond · Commercial paper · Convertible bond · Exchangeable bond · Fixed rate bond · Floating rate note · Highyield debt · Inflation-indexed bond · Inverse floating rate note · Perpetual bond · Puttable bond · Reverse convertible · Zerocoupon bond Securitized Products Asset-backed security · Collateralized debt obligation · Collateralized mortgage obligation · Commercial mortgage-backed security · Mortgage-backed security
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Derivatives Bond option · Credit derivative · Credit default swap · CLN Pricing Accrued interest · Bond valuation · Clean price · Coupon · Day count convention · Dirty price · Maturity · Par value Yield analysis Nominal yield · Current yield · Yield to maturity · Yield curve · Bond duration · Bond convexity · TED spread Credit and spread analysis Credit analysis · Credit risk · Credit spread· Yield spread· Z-spread · Option adjusted spread Interest rate models Short rate models · Rendleman-Bartter · Vasicek · Ho-Lee · Hull-White · Cox-IngersollRoss · Chen · Heath-Jarrow-Morton · Black-Derman-Toy · Brace-Gatarek-Musiela Organizations Commercial Mortgage Securities Association (CMSA) International Capital Market Association (ICMA) (Securities Industry and Financial Markets Association (SIFMA)
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All CDS positions (CDS = credit default swaps) have to be cleared and processed. Their sum has been estimated about 1400 to 1600 billion USD. (The total market size is 62000 billion USD). The total of mortgage based securities (e.g. mortgage backed securities) that have been issued from Freddie Mac and Fannie Mae counts for 5500 billion USD. This is nearly 50 % of the US market, which counts for 12000 billion USD. The US government is ready to invest 200 billion USD in preferred shares. The sum of all public spending was 2700 billion USD in 2007. The month the US government will spend 5 billion USD for bond issues of Freddie and Fannie. Two month ago the Congressional Budget Office estimated the financial burden resulting to rescue Freddie Mac and Fannie Mae. The forecast was 25 billion USD. Indeed the cost of this rescue measure will account for 300 billion USD (outcome of a new forecast). This amount would nearly twice the number in terms of US net raising of credit in 2007. (Source:http://www.eddielogic.com/)
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Storm in Accounting profession (1)
FASB Adopts Guidance to Ease Crisis
"fair value" accounting where there is no market for a security. Fair value accounting, also known as "markto-market" accounting, requires banks to value their mortgage-related assets at current market prices. Devastated by the write-downs they have taken on mortgage assets since the collapse of the housing market, banks - with the backing of congressional Republicans - have been pushing hard for the Securities and Exchange Commission to suspend the requirement
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Storm in Accounting profession (2)
But critical says That suspending the fair value rule would muddy the validity of financial statements and encourage exactly the kind of dodgy accounting that defined the Enron era of corporate scandals earlier in the decade.
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Storm in Accounting profession (3)
Recent professional guidance, such as SAS 99, Consideration of Fraud in a Financial Statement Audit, and Public Company Accounting Oversight Board (PCAOB) Auditing Standard 2, has brought more attention to the auditor's responsibility to uncover the warning signs of fraud, but there is still some ambiguity about where the auditor's responsibility ends and the fraud examiner's begins.
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Storm in Accounting profession (4)
New accounting Standard (FASB) Under the change, when an active market for a security doesn't exist, companies will be allowed to use their managers' estimates of value, taking into account expected future cash flows and risk discount rates.
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Storm in Accounting profession (5)
Noteworthy language in the relief regarding market transparency, oversight and audit, and mark-to-market (MTM) FAS157 treatment: Section 114. Market Transparency. 48-hour Reporting Requirement: The Secretary is required, within 2 business days of exercising authority...
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The FRC Guidance on Audit Committees (formerly known as the Smith Guidance) was first published in 2003 and updated in 2005. It is intended to assist company boards when implementing the sections of the Combined Code on Corporate Governance dealing with audit committees and to assist directors serving on audit committees in carrying out their role.
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A new edition of the guidance was issued in October 2008. A limited number of changes have been made to implement some of the recommendations of the Market Participants Group (MPG), which was established to provide advice to the Financial Reporting Council on market-led actions to mitigate the risk that could arise in the event of one of more of the Big Four audit firms leaving the market. The Group s final report, containing 15 recommendations to enhance the efficiency of the UK audit market, was published in October 2007
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Helpless standards
The amendments arise as a consequence of the amendments to IAS 39 and IFRS 7 published by the International Accounting Standards Board (IASB) on 13 October 2008. The amendments issued by the IASB address the desire expressed in a number of quarters, including EU leaders and finance ministers, to reduce the differences between IFRS and US Generally Accepted Accounting Principles. In moving to issue the amendments, the ASB like the IASB has not followed its normal due process, given the need to take urgent action to address the rare circumstances of the current credit crisis. The ASB wants to ensure that entities applying FRS 26 and FRS 29 have the same ability to be able to make reclassifications as those applying IFRS. Entities may use the reclassification amendments, if they so wish, from 1 July 2008.
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In September 2008, the IASB and FASB issued a progress report and a timetable for completion for the projects initially discussed in their 2002 Memorandum of Understanding. Both Boards are clearly working hard to bring the standards more in line with one another. In addition, the SEC recently removed the reconciliation requirement for foreign issuers to reconcile their financial statements from IFRS to U.S. GAAP; and certain U.S. companies may file their financial statements under IFRS starting for years ending December 15, 2009. In addition, the SEC has recently issued a release with a proposed roadmap for the potential mandatory adoption of IFRS in the U.S. With the fast pace of the convergence project, understanding the differences between IFRS and U.S. GAAP is becoming more important for businesses of all sizes. This course outlines the major differences between IFRS and U.S. GAAP. Objectives: Recognize the significant differences and similarities between U.S. GAAP and IFRS Analyze financial statements prepared in accordance with IFRS Standardize reporting in an international environment
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ACCA's written evidence to the Committee contains eight recommendations to help frame the final report from the Committee: There is a need to separate the activities of retail (i.e. taking deposits and making loans) from all other forms of banking. We welcome the Government's moves to ring-fence depositor accounts, as this is key. ACCA recommends that remuneration design needs to be carefully thought through with a clear eye to any unintended consequences as far as humanly possible. Remuneration design should be linked to cash flow and clear performance measure, rather than profitability and less well-defined measures of performance. Banks are already heavily regulated, but the regulations are not supervised very effectively. ACCA recommends that existing regulation for banking institutions is more effectively supervised. Ethical behavior and professionalism has to be at the heart of any solution. There is a role for regulators, credit rating agencies, institutional investors and analysts in understanding and better explaining to the wider world what the banks are doing. This has implications for the training of these professions and the effectiveness of their communications. There is a continuing need for convergence to international reporting standards. The principles outlined in the OFR should be considered, and organizations should think about how these can be injected into their reporting. ACCA is doing this and the principles are proving useful.
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Into account market capitalization Chinese and European companies have gained more importance. Opposite to this development the importance of North American companies as well as Japanese Companies declined. Among the top 100 most valuable companies firms from China were able to more than double their market value (+123 per cent). American companies had to face a decline of 10 per cent. Within the list of top 100 world s largest companies three countries head the list: United States, UK, and China. This list represents an example of the increasing importance of emerging markets (countries), in particular China. (Note: Another example for the importance of emerging market countries were recent measures by sovereign wealth funds. Of course, it cannot be for granted that the enormous market capitalization of Chinese companies will be stable for the future. But it illustrates very well that the importance of US companies have been declined. In addition the weak USD, the sub prime crisis and the weak economic development did influence the position of US companies in that list. Due to the stronger EURO companies from Europe were able to achieve a better position. But see for yourself in the following to tables. Table A contains the world s largest companies in terms of their turnover; table B contains the world s most valuable companies in terms of market capitalization.
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Sources
http://www.cbsnews.com/elements/2008/07/ 16/in_depth_business/whoswho4265160.sht ml American Banker- October 15. 2008, where were auditors Fannie Mae report spotlight, Accounting errors. Bloomberg.com. Feb. 24, 2006
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what is Emergency Economic Stabilization Act 2008 Structure and Change in Economic History By: Gholamhossein Davani IACPA,NYSSCPA,IMA,AIA,CFE Jan.2009
What it all comes down to is this : my opponent's view of the world sees a long slow decline for our country, an inevitable fall mandated by impersonal historic forces. But America is not in decline. America is a rising nation. I see America as the leader, a unique nation with a special role in the world. This has been called the American century because in it we were the dominant force for good in the world. We saved Europe, cured polio, went to the moon and lit the world with our culture. Now we are on the verge of a new century. I say it will be another American century. GW. Bush Aug.1988 Elect Lecture New Orleans
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Blaming fair-value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick.''
Dane Mott , JPMorgan Chase & Co.
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The Dow Jones Industrial Average (DJIA) doubled in just a decade from 7,022 on 13 February 1997 to a peak of 14,164 on 9 October 2007. It was a Golden Decade of continuous growth in share values and economic prosperity. But, in the 13 months since last October, virtually all this growth has evaporated & we are almost back to where we started in 1997. Truly a decade of Boom to Bust! Update 20 November, 2008: The second new low this week. I thought we were near the bottom but, not after today. The market reached a new low of 7552, a fall of 46.7 %, from its all time peak on 9 October 2007. This crash entered the charts a few weeks ago but, as the market continues to dive, this millennium crash today reached NUMBER 5 in the all time worst crashes!
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Calculate loss
If you had $1000 on 3 September 1929, it would have been worth only $108.14 (89.2% loss) by July 8th, 1932. Full recovery of this loss didn t occur until 1954, 22 years later! Date Started: 4/17/1930 Date Ended: 7/8/1932 Total Days: 813 Starting DJIA: 294.07 Ending DJIA: 41.22 Total Loss: -86.0%
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Three days that shook the world(1214 Sep.2008)
On Sunday, September 14, it was announced that Lehman Brothers would file for bankruptcy after the Federal Reserve Bank declined to participate in creating a financial support facility for Lehman Brothers
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The amoral Elephant
The March Of Folly From 1929 To 2008
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1nd Worst Stock Market Crash 1930-1932
This is the grand daddy of them all. Investors lost 86% of their money over this 813 day beast. This market crash combined with the 1929 crash, makes up the Great Depression. In just two months, September and October, the stock market had lost 40 percent of its value. Black Tuesday usually marks the point where the Roaring 20 s ended and the Great Depression started. The stock market continued to fall until bottoming out in July of 1932.
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2nd Worst Stock Market Crash 1937-1938
Key events: Legacy of Great Depression, war scare and Wall street scandals Date Started: 3/10/1937 Date Ended: 3/31/1938 Total Days: 386 Starting DJIA: 194.40 Ending DJIA: 98.95 Total Loss: -49.1%
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3rd Worst Stock Market Crash 1906-1907
Key events: The Panic of 1907 due to a credit crunch in New York, as well as gloom due to President Roosevelt s antitrust drive Date Started: 1/19/1906 Date Ended: 11/15/1907 Total Days: 665 Starting DJIA: 75.45 Ending DJIA: 38.83 Total Loss: -48.5%
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4th Worst Stock Market Crash 1929
Key events: End of the roaring twenties, and kicked off the Great Depression Date Started: 9/3/1929 Date Ended: 11/13/1929 Total Days: 71 Starting DJIA: 381.17 Ending DJIA: 198.69 Total Loss: -47.9%
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5th Worst Stock Market Crash 1919 1921
Key events: Followed a post war boom, bursting of the first big tech bubble- the automobile sector (but after bottoming, this decade saw tremendous growth in the stock market and the economy, often called the roaring twenties) Date Started: 11/3/1919 Date Ended: 8/24/1921 Total Days: 660 Starting DJIA: 119.62 Ending DJIA: 63.9 Total Loss: -46.6%
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6th Worst Stock Market Crash 1901 1903
Key events: Assassination of President William McKinley; a severe drought causing alarm about US food supplies Date Started: 6/17/1901 Date Ended: 11/9/1903 Total Days: 875 Starting DJIA: 57.33 Ending DJIA: 30.88 Total Loss: -46.1%
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7th Worst Stock Market Crash 19731974
Key events: Vietnam war, Watergate scandal Date Started: 1/11/1973 Date Ended: 12/06/1974 Total Days: 694 Starting DJIA: 1051.70 Ending DJIA: 577.60 Total Loss: -45.1%
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8th Worst Stock Market Crash 1939 1942
Key events: World War 2, attack on Pearl Harbour Date Started: 9/12/1939 Date Ended: 4/28/1942 Total Days: 959 Starting DJIA: 155.92 Ending DJIA: 92.92 Total Loss: -40.4%
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9th Worst Stock Market Crash 1916 1917
Key events: US being drawn into World War 1 Date Started: 11/21/1916 Date Ended: 12/19/1917 Total Days: 393 Starting DJIA: 110.15 Ending DJIA: 65.95 Total Loss: -40.1%
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10th Worst Stock Market Crash 2000 - 2002
Key events: Tech bubble bursting, September 11th terrorist attack Date Started: 1/15/2000 Date Ended: 10/9/2002 Total Days: 999 Starting DJIA: 11,792.98 Ending DJIA: 7,286.27 Total Loss: -37.8%
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Breaking the buck
Money market funds seek a stable $1.00 net asset value (NAV): they aim never to lose money. If a fund's NAV drops below $1.00, one says that the fund "broke the buck". This has rarely happened: as of September 16, 2008, two money funds have broken the buck (in the 37 year history of money funds), and from 1971 to September 15, 2008, there was only one failure. The Community Bankers US Government Fund broke the buck in 1994, paying investors 96 cents per share. This was the first failure in the then 23 year history of money funds, and there were no further failures for 14 years. The fund had invested a large percentage of its assets into adjustable rate securities. As interest rates increased, these floating rate securities lost value. This fund was an institutional money fund, not a retail money fund, thus individuals were not directly affected. No further failures occurred until September 2008, a month that saw tumultuous events for money funds.
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The world s largest companies in detail (Top 10)
Rank Company
1 2 3 4 5 6 7 8 9 10 Wal-Mart Exxon Mobil Shell BP GM Toyota Chevron Daimler ConocoPhillips Total
Country Business Turnover in USD Million
USA USA Energy NL Energy UK Energy USA Car Japan Car USA Energy Germany Car USA Energy France Energy Commerce 348650 335086 318845 262285 207349 204773 195341 190200 167578 166486
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The world s most valuable companies in detail (Top 10)
Rank Company Country Business Market capitalization in USD Million
1 2 3 4 5 6 7 8 9 10
Petro china China Energy Exxon USA Energy GE USA Conglomerate China Mobile China Telco I&C of China China Bank Microsoft USA Software Gas prom Russia Energy Shell Netherlands Energy AT & T USA Telco China P & CH China Energy
723794 511887 374637 354025 338412 333054 331825 264330 252051 249608
(Data Source: FAZ: America varlet Führungsrolle, in FAZ, No 4, January 5th, 2008, page 11)
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Equity and Debt Capital Markets
Citigroup ranked as the leading book runner for global securities in the first quarter 2006 with US$178.8 billion in underwriting proceeds, compared to a US$152 billion in underwriting a year ago when the firm also took first place. In terms of global underwriting fees, based upon information calculated by Freeman & Company, imputed fees in the opening period of 2006 jumped to over US$8.9 billion from US$7.78 billion a year ago. Citigroup generated the most underwriting fees in the current quarter with US$788.5 million. Global Debt, Equity and Equity related Q1 2006 ($US m) 1. Citigroup 2. JP Morgan 3. Morgan Stanley 4. Deutsche Bank AG 5. Goldman Sachs 6. Merrill Lynch 7. Credit Suisse 8. RBS 9. Barclays unranked: Macquarie Bank $178,780 $130,307 $121,445 $118,763 $102,160 $101,534 $97,448 $74,552 $72,083 $722
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M&A
Citigroup claimed the title of top global financial advisor for announced M&A transactions, advising on 80 transactions valued at over US$340.7 billion in Q1 2006. This represented a 244% increase in deal volume from the comparable time period last year. Goldman Sachs ranked second with US$337.5 billion in M&A activity while JP Morgan rounded out the top three with deals valued at US$274 billion. (US$m) 1. Citigroup 2. Goldman Sachs 3. JP Morgan 4. Lehman Brothers 5. Merrill Lynch 6. UBS 7. Morgan Stanley 8. Deustche Bank 9. BNP 10. Rothschild 11. Credit Suisse 12. Evercore 13. HSBC 14. Lazard 15. Rohatyn 16. Calyon 17. ABN AMRO $340,671 $337,456 $274,044 $265,487 $224,324 $208,724 $196,630 $165,511 $145,809 $133,209 $131,699 $120,162 $114,209 $95,866 $89,432 $72,208 $70,72
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UK RESCUE PLANS
Much of the current crisis has been caused by the banks' unwillingness to lend to each other, so the UK government has come up with a plan to inject billions of pounds in capital and to guarantee loans in the hope that lending will resume.
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The government has also nationalized or part-nationalised some leading UK banks struggling to survive the crisis.
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BILLION-DOLLAR BAIL-OUTS
Governments have spent billions of dollars on rescue packages, led by the US with its $700bn rescue package.
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FINANCIAL CRISIS: HOW IT HAPPENED
FINANCIAL CRISIS: HOW IT HAPPENED
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FINANCIAL CRISIS: HOW IT HAPPENED
FINANCIAL CRISIS: HOW IT HAPPENED
Most analysts link the current credit crisis to the sub-prime mortgage business, in which US banks give high-risk loans to people with poor credit histories. These and other loans, bonds or assets are bundled into portfolios - or Collateralized Debt Obligations (CDOs) - and sold on to investors globally.
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FINANCIAL CRISIS: HOW IT HAPPENED
FINANCIAL CRISIS: HOW IT HAPPENED
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FINANCIAL CRISIS: HOW IT HAPPENED
Seeking a long-term solution, the US government agrees a $700bn bail-out that will buy up Wall Street's bad debts in return for stake in the banks. The US government plans to borrow the money from world financial markets and hopes it can sell the distressed assets back once the housing market has stabilized.
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FINANCIAL CRISIS: HOW IT HAPPENED
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FINANCIAL CRISIS: HOW IT HAPPENED
Lehman worse than Enron, say PricewaterhouseCoopers After a closed-doors creditors meeting at the 02 Dome, Lehman s administrators PwC told reporters that the collapse of the financial services firm was ten times bigger and more complicated than Enron. Tony Lomas, lead administrator, said PwC had identified more than a trillion dollars worth of assets and liabilities that were yet to be accounted for. Since the biggest Big Four firm was appointed on 15 September, it has recovered $5 billion out of a potential $550 billion s worth of outstanding obligations. Client assets of $22.3 billion have been also identified. Amongst the 400 trade creditors identified so far is PricewaterhouseCoopers itself, the Bank of England, and the Financial Services Authority.
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History of bankruptcy in USA
The following is a list of the top 10 bank failures since 1934, based on the size of their assets, as reported by the Federal Deposit Insurance Corp. 1. Washington Mutual of Henderson, Nevada and Park City, Utah; seized Sept. 25, 2008 with $307 billion in assets as of June 30, 2008 2. Continental Illinois of Chicago, collapsed in 1984 with $40.0 billion in assets 3. First Republic Bank Corp of Dallas, failed in 1988 with $32.5 billion in assets 4. Indy Mac Bank FSB of Pasadena, California, collapsed in July 2008 with assets of $32 billion 5. The American Savings & Loan Assoc. of Stockton, California, failed in 1988 with assets of $30.2 billion 6. Bank of New England Corp collapsed in 1991 with assets of $21.7 billion 7. MCorp of Dallas, failed in 1989 with assets of $15.6 billion 8. Gilbraltar Savings of Simi Valley, California, collapsed in 1989 with assets of $15.1 billion 9. First City Bancorp of Houston, failed in 1988 with assets of $13.0 billion 10. Homefed Bank FA of San Diego, failed in 1992 with assets of $12.2 billion
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BANKS AFFECTED BY THE GLOBAL CRISIS - 2008 Giants of the business world, such as Lehman Brothers and Merrill Lynch, have crumbled or been bought out.
Bank Fannie Mae Freddie Mac Lehman Bros Merrill Lynch AIG HBOS WaMu Fortis Bradford & Bingley Wachovia Glitnir Hypo Real Estate RBS Lloyds TSB Date 07 Sep 07 Sep 15 Sep 15 Sep 16 Sep 17 Sep 25 Sep 28 Sep 29 Sep 29 Sep 29 Sep 06 Oct 13 Oct 13 Oct Status Nationalized Nationalized Collapsed Taken over Part-nationalised Taken over Collapsed and sold Nationalized Nationalized Taken over Nationalized Rescue package Part-nationalised Part-nationalised Website Fannie Mae Freddie Mac Lehman Bros Merrill Lynch AIG HBOS WaMu Fortis Bradford & Bingley Wachovia Glitnir Hypo Real Estate RBS Lloyds TSB 34
Source: BBC news. Finance crisis: In graphics Dayarayan Auditing & Financial Services Firm
Who were Bankrupt in credit crises
Washington Mutual WaMu Bear Streamrn American International Group (AIG Amaranth Advisors Lehman Brothers Bank Fanni Mae Freddie Mac Merrill Lynch UBS and Next ?? Dayarayan Auditing & Financial
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Who were investor of Fannie Mae & Freddie Mac !!
China Japan Russian South Korea Taiwan 359.9 BL.$ 228.2 75.3 63 54.9
Source: The Fannie/Freddie bailout: What next Business week, New York 22,Sep.2008
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Stock Market Crash Time Line
The most famous crash happened on October 29, 1929. The second Crash was happened on October 1987 The third Crash was happened on 2001 Enron,Worldcom,Parmalat, . And now biggest world crisis in globalization age ! 2008
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Trends In Mutual Fund Investing October 2008
Washington, DC, November 25, 2008 - The combined assets of the nation's mutual funds decreased by $1.087 trillion, or 10.2 percent, to $9.600 trillion in October, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI. Total Net Assets of Mutual Funds (billions of dollars)
Oct 08Sept 08% chg Dec 07 Stock Funds3,935.44,954.8R20.66,521.4RHybrid Funds511.4600.8R-14.9713.4RTaxable Bond Funds1,211.91,318.9R-8.11,305.1RMunicipal Bond Funds350.8370.7R5.4373.8RTaxable Money Market Funds3,102.92,971.7R4.42,642.1RTaxFree Money Market Funds487.2469.8R3.7465.1RTotal9,599.610,686.7R10.212,020.9RR=Revised data
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What are Fannie Mae and Freddie Mac?
The Federal National Mortgage Association (Fannie Mae ) and Federal Home Loan Mortgage Corporation (Freddie Mac) are the largest purchasers and insurers of mortgages in the country.
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Why were they created?
Fannie Mae was founded - in 1938 - during the Great Depression with a simple purpose in mind: to give lower- and middle-income Americans more access to the Great American Dream of home ownership with a reasonable interest rate. It did it by guaranteeing if a homeowner defaulted on a loan the bank would get paid. The money they provide to banks to lend to people also is supposed to help stabilize the mortgage market in times of stress by ensuring sufficient resources for loans. First established as a government agency, Fannie Mae in 1968 became a private, shareholder-owned company with a charter from Congress requiring the company to support the housing finance system. Freddie Mac was established in 1970 to expand the secondary market for mortgages in the U.S. Today Fannie and Freddie hold a pivotal place in the home loan market - one that has grown to include special advantages, such as guaranteed lines of credits from the U.S. Treasury, exemption from state and local taxes and limited government oversight.
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So they are owned by the government?
No ! ! Both Fannie (FNM/NYSE) and Freddie (FRE/NYSE) are now publicly owned and their stock is traded on the open market.
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What problems do they currently face?
Over the past year, mortgages have defaulted at a faster rate, and companies have had to take billions of dollars in losses. Fannie and Freddie are required by their government regulator to have a financial cushion - cash or securities to fall back on. With losses rising, that cushion has been dwindling. That has forced them to raise new money during a time where it has been expensive and difficult to do so. Most of the mortgages Fannie and Freddie insure or own are traditional, prime mortgages that are among the safest in the market. The pair backed very few of the exotic sub prime mortgages that have caused the most problems over the past year.
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The Emergency Economic Stabilization Act of 2008 , Div. A, enacted October 3, 2008), commonly referred to as a bailout of the U.S. financial system, is a law authorizing the United States Secretary of the Treasury to spend up to US$700 billion to purchase distressed assets, especially mortgage-backed securities, from the nation's banks. The Act was proposed by U.S. President George W. Bush and Treasury Secretary Henry Paulson during the global financial crisis of September October 2008.
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What happens in a government bailout?
In a bailout scenario, called a conservator ship, Fannie and Freddie's regulator - the Office of Federal Housing Enterprise Oversight - would take control of the companies and oversee their operations. Treasury Secretary Henry Paulson says the government wants to keep the companies operating in their current form without a government takeover.
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What has the Federal Reserve done to help Fannie and Freddie?
Sen. Christopher Dodd, D-Conn., said the Federal Reserve was considering opening up its discount borrowing window to Fannie or Freddie. He cited conversations with Fed Chairman Ben Bernanke and Paulson. But a Fed spokeswoman said the central bank had not talked with Fannie and Freddie about the emergency lending program. The spokeswoman declined to discuss any other options being considered.
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U.S. Treasury Secretary Henry Paulson proposed a plan under which the U.S. Treasury would acquire up to $700 billion worth of mortgage-backed securities. The plan was immediately backed by President George W. Bush and negotiations began with leaders in the U.S. Congress to draft appropriate legislation. President Bush meets with Congressional members, including presidential candidates John McCain and Barack Obama, at the White House to discuss the bailout, September 25, 2008 Consultations among Treasury Secretary Henry Paulson, Chairman of the Federal Reserve Ben Bernanke, U.S. Securities and Exchange
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Can they fail?
If they did, says Brad Neigel, a senior analyst at Aite Group, a financial services research firm, "It would be the collapse of the entire mortgage industry as we know it. A government takeover would be the last option of choice, Neigel added.
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How do Fannie and Freddie's current problems affect
If the government were to step in to help the pair, it would likely lead to lower interest rates on mortgages because investors would be assured of repayment, said Dan Green, a certified mortgage planning specialist and author of the mortgage reports. COM. But those declines in rates would probably be offset by an increase in fees, Green added.
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Lehman History
1840 1859 The history of Lehman Brothers parallels the growth of the United States and its energetic drive toward prosperity and international prominence. What would evolve into a global financial entity began as a general store in the American South. Henry Lehman, an immigrant from Germany, opened his small shop in the city of Montgomery, Alabama in 1844. Six years later, he was joined by brothers Emanuel and Mayer, and they named the business Lehman Brothers. 1850 Henry, Emanuel and Mayer Lehman founded the Firm in Montgomery, Alabama
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Where were auditors ?!
Ernst & Young gave Lehman a clean bill of health in a July 10 report to the SEC for the quarter ended May 31. Despite the growing financial crisis, auditors expressed no reservations about the value of the company's derivatives or any scenarios under which the company might be unable to meet its obligations. Two months later, Lehman collapsed !!
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Lehman auditor's report 2007:
"Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances."
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What was Deloitte s Opinion
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Tread way Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board United States), the consolidated financial statements as of and for the year ended December 31, 2007 of the Company and our report dated February 26, 2008 expressed an unqualified opinion on those financial statements. Deloitte & Touche LLP Washington, DC .February 26, 2008
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Stability of Freddie MAC 2007
Freddie Mac plays a vital role by moderating cyclical swings in the housing sector, equalizing the flow of mortgage funds regionally throughout the United States and making mortgage funds available in a variety of economic conditions.
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Board Directors report
it is important to note that the accounting change from the previous model results in an increase in our guarantee obligation balance for PCs held by us and a decrease in our guarantee obligation balance because our guarantee obligation is not re-measured at fair value when PCs previously purchased by us are subsequently sold. As such, the change in the income on guarantee obligation line item is not distinguished between no longer extinguishing our guarantee obligation and our guarantee obligation amortization change, as doing so is not operationally feasible given activity levels in the various periods presented. This diaÇculty highlights the fact that the change will provide financial statement users with improved transparency of operating results under the new method, in that it presents results using a single model.
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I, Richard F. Syron, certify that:
I have reviewed this Information Statement of the Federal Home Loan Mortgage Corporation, or Freddie Mac; Based on my knowledge, this Information Statement does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Information Statement; and . Based on my knowledge, the consolidated financial statements, and other financial information included in this Information Statement, fairly present in all material respects the financial condition, results of operations and cash flows of Freddie Mac as of, and for, the periods presented in this Information Statement. Date: February 28, 2008 Richard
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AIG s Social Responsibility
AIG recognizes that its investments in support of our customers, employees and the communities in which we operate are critical to our success. AIG s ongoing efforts to be an outstanding corporate citizen and promote responsible and sustainable business practices are essential to our long-term business objective of creating value for our shareholders and serving the interests of our clients.
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It is funny!!
The complaint alleges that the defendant underwriters violated Section 12(a)(2) of the Securities Act of 1933. Plaintiff alleges that the Offering Circular and other offering materials for the $6 billion preferred stock offering, failed to warn investors about Freddie Mac's fatal exposure to mortgage-related losses, poor underwriting standards and risk management procedures, and the negative impact of those failings on the adequacy of Freddie Mac's capital. Defendants were underwriters of the Series Z Preferred initial public offering. They sold the shares to the public in a firm commitment underwriting at $25 per share less than a year ago. The shares now trade at $2 per share.
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outstanding claims against the biggest six Auditors under fire !
BDO Seidman last August a jury ordered BDO Seiman to pay $521m in damages for its negligence in a Portuguese bank audit, almost as much as the firm s estimated revenue for that year. KPMG A US Justice Department report concluded that KPMG either helped perpetrate the fraud at New Century or deliberately ignored it. Class action lawsuits are also pending. KPMG also faces a lawsuit by Fannie Mae, which is trying to reclaim more than $2 billion from its old auditors. KPMG already paid $400 million to settle the SEC s case against it related to Fannie Mae. Ernst and Young will likely face lawsuits related to the bankruptcy of its audit client, Lehman Brothers. PwC lawsuits are likely for its audit of what was once the world s largest insurance company, AIG. Deloitte- Washington Mutual fund Madoff scandal- Friehling & Horowitz Auditing firm has not peer review more than 15 years !!!.
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Emergency Economic Stabilization
plan was expected to be announced for the Treasury to buy equity stakes in 9 American Banks, and potentially thousands of smaller banks, using the first $250 billion dollars allotted to the program. The banks receiving money would include Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. (including Merrill Lynch), Citigroup Inc., Wells Fargo & Co., Bank of New York Mellon and State Street Corp.
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Action Plan !!
The law which created the fund gives the Treasury $250 billion immediately, then requires the President to certify that an additional $100 billion in funds are needed, and finally $350 billion are subject to Congressional approval
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What will the housing bill do? (1)
Provisions of the housing bill that President Bush signed into law on Wednesday, July 30, 2008: Gives the Federal Housing Administration $300 billion in new lending authority and relaxes standards to provide affordable, fixed-rate mortgages to an estimated 400,000 debt-ridden homeowners. Any losses will be covered by an affordable housing fund financed by Fannie Mae and Freddie Mac, the government-sponsored companies that finance mortgages. Allows the Treasury Department temporary authority to lend money to Fannie and Freddie or buy their stock to avert a collapse of one or both of the mortgage giants. The authority expires on Dec. 31, 2009.
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What will the housing bill do? (2)
Creates a new regulator and tighten controls on Fannie and Freddie, including power for the regulator to approve pay packages for company executives. Creates a new affordable housing fund drawn from their profits. Permanently raises the limit on the loans they may buy to $625,000 in the highest-cost areas. Allows them to buy loans 15 percent higher than the median home price in certain cities. Provides $3.9 billion in grants to the hardest-hit communities for buying and fixing up foreclosed property
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Potential effects The maximum cost of a $700 billion bailout would be $2,295 estimated cost per American (based on an estimate of 305 million Americans), or $4,635 per working American (based on an estimate of 151 million in the work force). It should be noted however, that it makes little sense to merely divide the number 700 billion by the number of Americans or even by the number of American families, as the debt would not be paid in this fashion even if it were all entirely used and squandered. America pays the interest on its debt, and many Americans do not make a significant contribution to this payment or to taxes in general. The bulk of this money would be spent to purchase mortgage backed securities, ultimately backed by American homeowners, which possibly could be sold later at a profit, by the government. Economist Michael Hudson predicts that the bailout would cause hyperinflation and dollar collapse. However, there is no persuasive evidence of prices rising and the U.S. Dollar. has actually risen to higher levels than before the plan's announcement Indeed, during the week before and after the EESA was agreed, investment bank UBS was continually flatly rejecting that bailouts such as these were inflationary, emphasizing instead that they were antideflationary, not inflationary. The 2008 federal budget submitted by the president is $2,900 billion, meaning a $700 billion bailout would constitute a 24% increase to $3,600 billion, which would in fact far exceed the $3,100 billion 2009 budget. The total government commitment and proposed commitments so far in its current and proposed bailouts is reportedly $1 trillion compared to the $14 Dayarayan Auditing & Financial trillion United States economy. 63
Services Firm
I didn t want to have to do that !
Henry Paulson U.S. Treasury Secretary There is much more volatility and uncertainty in the market. We will see a big change in trading habits over the next few years," Economic Hit Man
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Manager on side shareholders inside
Remarkably, Mr. Viniar was able to do all of the above, and for that he earned $58.5 million in total compensation in 2007, including a $22.6 million bonus and $21.1 million in stock. All told, his pay was at least 21/2 times richer than that of any other CFO on Wall Street . Mr. Viniar's comp was also more than 23 times the average $2.5 million raked in by the finance chiefs on FW's list of 1,000 CFOs at publicly traded companies.
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Who were main Planner !!
The original proposal was three pages, as submitted to the United States House of Representatives .The purpose of the plan was to purchase bad assets, reduce uncertainty regarding the worth of the remaining assets, and restore confidence in the credit markets. The text of the proposed law was expanded to 110 pages
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What is Socialism for the rich and capitalism for the poor
Socialism for the rich and capitalism for the poor is a classical political-economic argument, formulated around 1970, stating that in the advanced capitalist societies, what actually happens is that the state gives much more resources to help the rich than the poor. The argument has different formulations, one of the most common is, the capitalist political economy toward big corporations is "privatizing profits and socializing losses."
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New Ways of Making Money
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What Are Derivatives?
A derivative is a financial contract whose value is linked to the price of an underlying commodity, asset, rate, index or the occurrence or magnitude of an event. The term derivative refers to how the price of these contracts is derived from the price the underlying item. It was like riding a tiger, not knowing how to get off without being eaten !?
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Warren Buffett
Chairman s Letter to shares holders of Berkshire Hathaway
Financial instruments are time bombs and "financial weapons of mass destruction their buyers and sellers, but the whole economic system. Large amounts of risk have become concentrated in the hands of relatively few derivatives dealers ... which can trigger serious systemic problems . During the past 37 years, the company has delivered an average annual return of 22.6%. Since 1965 the company's book value has gone up by 194,936%. BBC News-Tuesday, 4 March, 2003
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Some Figures and Statistics
Global equity capital $51.2 trillion (Wikipedia: Reuters March 2007) $165 trillion "total traded securities" (Economist, 19/01/2008) Global physical trade Daily ForEx trade volume $3.2 Trillion (BIS 2007) Total Derivatives Nominal $516 trillion (BIS 2007) Total Derivatives Value $11.1 trillion (BIS 2007) Total Swaps Nominal $408 trillion, 79% of all derivatives % Interest Rate Swaps 75 (BIS 2007)
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Free market ideology comes down to socialism for the rich, capitalism for everybody else.
Market watch reminds us that the U.S. gross domestic product (GDP) is about $15 trillion. The GDP of all nations combined is approximately $50 trillion. The total value of all the real estate in the world is estimated at $75 trillion and the total value of all the world's stocks and bonds is about $100 trillion. But there's a $500 trillion market in derivatives! (Source: By Gonsalves, AlterNet. Posted September 22, 2008. Sean)
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What problems do they currently face?
Over the past year, mortgages have defaulted at a faster rate, and companies have had to take billions of dollars in losses. Fannie and Freddie are required by their government regulator to have a financial cushion - cash or securities to fall back on. With losses rising, that cushion has been dwindling. That has forced them to raise new money during a time where it has been expensive and difficult to do so. Most of the mortgages Fannie and Freddie insure or own are traditional, prime mortgages that are among the safest in the market. The pair backed very few of the exotic sub prime mortgages that have caused the most problems over the past year.
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Some recent cases of market manipulation using derivatives:
Avista Energy, electricity, in 1998. Enron, electricity, 1998. Enron, etal, electricity and gas, 2000 and 2001. Arcadia, crude oil, in 2001. Salomon Brothers, U.S. Treasury securities, 1991. Individual traders, U.S. Treasury securities, 1992. Fenchurch, U.S. Treasury securities, 1993. Ferruzzi, soybeans, 1989. Sumitomo, copper, 1995 through 1996.
Source: Backgrounder Derivatives By :Randall Dodd http://www2.gsb.columbia.edu/ipd/j_derivatives.html
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A mortgage-backed security (MBS) is an assetbacked security whose cash flows are backed by the principal and interest payments of a set of mortgage loans. Payments are typically made monthly over the lifetime of the underlying loans. However not all securities backed by mortgages are considered mortgage-backed security (MBS). Housing Bonds (Mortgage Revenue Bonds) are backed by the mortgages which they fund, but aren't classified as mortgage-backed security (MBS).
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The secondary mortgage market is the market for the sale of securities or bonds collateralized by the value of mortgage loans. The mortgage lender, commercial banks, or specialized firm will group together many loans and sell grouped loans as securities called collateralized mortgage obligations (CMOs). The risk of the individual loans is reduced by that aggregation process. citation needed] These securities are collateralized debt obligations (CDOs). The CDOs are sometimes further grouped in other CDOs. Mortgage delinquencies, clarify] defaults, and decreased real estate values can make these CDOs difficult to evaluate. This happened to BNP Paribas in August, 2007, causing the central banks to intervene with liquidity.
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The bond market (also known as the debt, credit, or fixed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds. As of 2006, the size of the international bond market is an estimated $45 trillion, of which the size of the outstanding U.S. bond market debt was $25.2 trillion. Nearly all of the $923 billion average daily trading volume (as of early 2007) in the U.S. bond market takes place between broker-dealers and large institutions in a decentralized, overthe-counter (OTC) market. However, a small number of bonds, primarily corporate, are listed on exchanges. References to the "bond market" usually refer to the government bond market, because of its size, liquidity, lack of credit risk and, therefore, sensitivity to interestrates. Because of the inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve.
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Bond market volatility For market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevant; principal and interest are received according to a pre-determined schedule. But participants who buy and sell bonds before maturity are exposed to many risks, most importantly changes in interest rates. When interest rates increase, the value of existing bonds fall, since new issues pay a higher yield. Likewise, when interest rates decrease, the value of existing bonds rise, since new issues pay a lower yield. This is the fundamental concept of bond market volatility: changes in bond prices are inverse to changes in interest rates. Fluctuating interest rates are part of a country's monetary policy and bond market volatility is a response to expected monetary policy and economic changes. Economists' views of economic indicators versus actual released data contribute to market volatility. A tight consensus is generally reflected in bond prices and there is little price movement in the market after the release of "in-line" data. If the economic release differs from the consensus view the market usually undergoes rapid price movement as participants interpret the data. Uncertainty (as measured by a wide consensus) generally brings more volatility before and after an economic release. Economic releases vary in importance and impact depending on where the economy is in the business cycle.
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Bond investments Investment companies allow individual investors the ability to participate in the bond markets through bond funds, closed-end funds and unitinvestment trusts. In 2006 total bond fund net inflows increased 97% from $30.8 billion in 2005 to $60.8 billion in 2006. Exchange-traded funds (ETFs) are another alternative to trading or investing directly in a bond issue. These securities allow individual investors the ability to overcome large initial and incremental trading sizes.
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Bond market Bond · Debenture · Fixed income Types of bonds by issuer Agency bond · Corporate bond (Senior debt, Subordinated debt) · Distressed debt · Emerging market debt · Government bond· Municipal bond· Sovereign bond Types of bonds by payout Accrual bond · Auction rate security · Callable bond · Commercial paper · Convertible bond · Exchangeable bond · Fixed rate bond · Floating rate note · Highyield debt · Inflation-indexed bond · Inverse floating rate note · Perpetual bond · Puttable bond · Reverse convertible · Zerocoupon bond Securitized Products Asset-backed security · Collateralized debt obligation · Collateralized mortgage obligation · Commercial mortgage-backed security · Mortgage-backed security
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Derivatives Bond option · Credit derivative · Credit default swap · CLN Pricing Accrued interest · Bond valuation · Clean price · Coupon · Day count convention · Dirty price · Maturity · Par value Yield analysis Nominal yield · Current yield · Yield to maturity · Yield curve · Bond duration · Bond convexity · TED spread Credit and spread analysis Credit analysis · Credit risk · Credit spread· Yield spread· Z-spread · Option adjusted spread Interest rate models Short rate models · Rendleman-Bartter · Vasicek · Ho-Lee · Hull-White · Cox-IngersollRoss · Chen · Heath-Jarrow-Morton · Black-Derman-Toy · Brace-Gatarek-Musiela Organizations Commercial Mortgage Securities Association (CMSA) International Capital Market Association (ICMA) (Securities Industry and Financial Markets Association (SIFMA)
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All CDS positions (CDS = credit default swaps) have to be cleared and processed. Their sum has been estimated about 1400 to 1600 billion USD. (The total market size is 62000 billion USD). The total of mortgage based securities (e.g. mortgage backed securities) that have been issued from Freddie Mac and Fannie Mae counts for 5500 billion USD. This is nearly 50 % of the US market, which counts for 12000 billion USD. The US government is ready to invest 200 billion USD in preferred shares. The sum of all public spending was 2700 billion USD in 2007. The month the US government will spend 5 billion USD for bond issues of Freddie and Fannie. Two month ago the Congressional Budget Office estimated the financial burden resulting to rescue Freddie Mac and Fannie Mae. The forecast was 25 billion USD. Indeed the cost of this rescue measure will account for 300 billion USD (outcome of a new forecast). This amount would nearly twice the number in terms of US net raising of credit in 2007. (Source:http://www.eddielogic.com/)
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Storm in Accounting profession (1)
FASB Adopts Guidance to Ease Crisis
"fair value" accounting where there is no market for a security. Fair value accounting, also known as "markto-market" accounting, requires banks to value their mortgage-related assets at current market prices. Devastated by the write-downs they have taken on mortgage assets since the collapse of the housing market, banks - with the backing of congressional Republicans - have been pushing hard for the Securities and Exchange Commission to suspend the requirement
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Storm in Accounting profession (2)
But critical says That suspending the fair value rule would muddy the validity of financial statements and encourage exactly the kind of dodgy accounting that defined the Enron era of corporate scandals earlier in the decade.
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Storm in Accounting profession (3)
Recent professional guidance, such as SAS 99, Consideration of Fraud in a Financial Statement Audit, and Public Company Accounting Oversight Board (PCAOB) Auditing Standard 2, has brought more attention to the auditor's responsibility to uncover the warning signs of fraud, but there is still some ambiguity about where the auditor's responsibility ends and the fraud examiner's begins.
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Storm in Accounting profession (4)
New accounting Standard (FASB) Under the change, when an active market for a security doesn't exist, companies will be allowed to use their managers' estimates of value, taking into account expected future cash flows and risk discount rates.
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Storm in Accounting profession (5)
Noteworthy language in the relief regarding market transparency, oversight and audit, and mark-to-market (MTM) FAS157 treatment: Section 114. Market Transparency. 48-hour Reporting Requirement: The Secretary is required, within 2 business days of exercising authority...
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The FRC Guidance on Audit Committees (formerly known as the Smith Guidance) was first published in 2003 and updated in 2005. It is intended to assist company boards when implementing the sections of the Combined Code on Corporate Governance dealing with audit committees and to assist directors serving on audit committees in carrying out their role.
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A new edition of the guidance was issued in October 2008. A limited number of changes have been made to implement some of the recommendations of the Market Participants Group (MPG), which was established to provide advice to the Financial Reporting Council on market-led actions to mitigate the risk that could arise in the event of one of more of the Big Four audit firms leaving the market. The Group s final report, containing 15 recommendations to enhance the efficiency of the UK audit market, was published in October 2007
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Helpless standards
The amendments arise as a consequence of the amendments to IAS 39 and IFRS 7 published by the International Accounting Standards Board (IASB) on 13 October 2008. The amendments issued by the IASB address the desire expressed in a number of quarters, including EU leaders and finance ministers, to reduce the differences between IFRS and US Generally Accepted Accounting Principles. In moving to issue the amendments, the ASB like the IASB has not followed its normal due process, given the need to take urgent action to address the rare circumstances of the current credit crisis. The ASB wants to ensure that entities applying FRS 26 and FRS 29 have the same ability to be able to make reclassifications as those applying IFRS. Entities may use the reclassification amendments, if they so wish, from 1 July 2008.
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In September 2008, the IASB and FASB issued a progress report and a timetable for completion for the projects initially discussed in their 2002 Memorandum of Understanding. Both Boards are clearly working hard to bring the standards more in line with one another. In addition, the SEC recently removed the reconciliation requirement for foreign issuers to reconcile their financial statements from IFRS to U.S. GAAP; and certain U.S. companies may file their financial statements under IFRS starting for years ending December 15, 2009. In addition, the SEC has recently issued a release with a proposed roadmap for the potential mandatory adoption of IFRS in the U.S. With the fast pace of the convergence project, understanding the differences between IFRS and U.S. GAAP is becoming more important for businesses of all sizes. This course outlines the major differences between IFRS and U.S. GAAP. Objectives: Recognize the significant differences and similarities between U.S. GAAP and IFRS Analyze financial statements prepared in accordance with IFRS Standardize reporting in an international environment
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ACCA's written evidence to the Committee contains eight recommendations to help frame the final report from the Committee: There is a need to separate the activities of retail (i.e. taking deposits and making loans) from all other forms of banking. We welcome the Government's moves to ring-fence depositor accounts, as this is key. ACCA recommends that remuneration design needs to be carefully thought through with a clear eye to any unintended consequences as far as humanly possible. Remuneration design should be linked to cash flow and clear performance measure, rather than profitability and less well-defined measures of performance. Banks are already heavily regulated, but the regulations are not supervised very effectively. ACCA recommends that existing regulation for banking institutions is more effectively supervised. Ethical behavior and professionalism has to be at the heart of any solution. There is a role for regulators, credit rating agencies, institutional investors and analysts in understanding and better explaining to the wider world what the banks are doing. This has implications for the training of these professions and the effectiveness of their communications. There is a continuing need for convergence to international reporting standards. The principles outlined in the OFR should be considered, and organizations should think about how these can be injected into their reporting. ACCA is doing this and the principles are proving useful.
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Into account market capitalization Chinese and European companies have gained more importance. Opposite to this development the importance of North American companies as well as Japanese Companies declined. Among the top 100 most valuable companies firms from China were able to more than double their market value (+123 per cent). American companies had to face a decline of 10 per cent. Within the list of top 100 world s largest companies three countries head the list: United States, UK, and China. This list represents an example of the increasing importance of emerging markets (countries), in particular China. (Note: Another example for the importance of emerging market countries were recent measures by sovereign wealth funds. Of course, it cannot be for granted that the enormous market capitalization of Chinese companies will be stable for the future. But it illustrates very well that the importance of US companies have been declined. In addition the weak USD, the sub prime crisis and the weak economic development did influence the position of US companies in that list. Due to the stronger EURO companies from Europe were able to achieve a better position. But see for yourself in the following to tables. Table A contains the world s largest companies in terms of their turnover; table B contains the world s most valuable companies in terms of market capitalization.
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Sources
http://www.cbsnews.com/elements/2008/07/ 16/in_depth_business/whoswho4265160.sht ml American Banker- October 15. 2008, where were auditors Fannie Mae report spotlight, Accounting errors. Bloomberg.com. Feb. 24, 2006
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