Living Wills

The most interesting news of the week in the financial world that will affect several large British banks it’s the draw up of a “Living will” by the end of the year. This will help them to outline the procedures to be dismantled more easily in any future financial crisis.

The economist article is the most complex of the ones I read, I have to say that even looking up some words it´s not easy to understand technical references that are not familiar to usual readers. What I like the most about the article it’s that they actually propose a solution for future liquidity crisis and the death of huge banks. The ringed fences it´s a decent solution so “If banks were run as federations of self-contained units, it would be easier to swoop in and save some parts while allowing others to die” (Art.1). But this is an idea that most of the banks don´t like because of the legal problems and how having different subsidiaries can affect to the reputation of a mayor bank entity. This separatism could also affect the lending viability making it harder for trading operations.

The Times is a well structured article, I like it because of how easily they explain the problem and the resolution of the organisms, which will change the financial system. In one side it’s the FSA “The regulator has strongly backed the idea of living wills in contrast with the Bank of England (The other side), which has called for banks to be split up so that they are not too big to fail.” (Art.2)

It´s interesting how the Bank of England “has called for banks to be split up so that they are not too big to fail.”(Art.2) I didn´t think that they could ever say something like that, a country that PRESUME of being the most liberal system in the world when in fact the creator of economic liberalism shouldn’t disturb into the banks rules by restricting them. A better way in my point of view will be the FSA approach about how the Banks:


• Should be required to produce recovery and resolution plans
• Banks which are deemed to be so big that they have an impact on the entire financial system must be forced to hold more capital.
• The need for more capital to support riskier parts of their business, such as proprietary trading.



It also mentions the problem about the bonuses in the investment banks, about that, the FSA said “The priority use of high investment bank profits must be to enhance capital levels rather than to support excessive bonus payments"

The Bloomberg news it´s as usual, short and concise, they give you a brief idea of the proposal that the FSA asked for the largest banks in the UK and they use the FSA words to explain the new regulation “Banks will have to hold more capital against trading books and derivatives will be cleared through a central clearinghouse, the FSA proposed.” (Art.3)

Art.1 http://www.economist.com/businessfinance/displaystory.cfm?story_id=14558456
Art.2 http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6885273.ece
Art.3 http://www.bloomberg.com/apps/news?pid=20601102&sid=aSocSdoWp8p0

*FSA: The Financial Services Authority (FSA) is an independent non-governmental body an independent body that regulates the financial services industry in the UK.

The Tom Sawyer Effect

In this new entry I will try to criticize an effect that happens all the time in media and communications. It´s known as the Tom Sawyer effect and it is always present in the press and in the financial announcement.

What happens?
The stock market’s reaction to the publication of results of companies is often surprising. Good results sometimes lead to a downward reaction on the stock market and vice versa because it was different than expected. The human response to a given, as are the results, is based on the information provided previously. Such behavior is known as "Tom Sawyer effect" this was studied in a Working Paper of the Federal Reserve Bank of Boston and entitled "Tom Sawyer and the Construction of Value. (Art.1)

I will try to explain this with the announcement of results from JP Morgan in the past week. In the article from the Guardian (Art.2) the headlines tells you everything “JP Morgan smashes expectations with $3.6bn profit” the title captures the attention of readers but when you read the whole article, it is well structured and it shows that the reporter does a good job explaining the reason for such benefits.

The New York Times (Art.3) is where the story unfolds more through the use of relevant people in the financial world, giving more objectivity to the story using more formal language and the headline is less flamboyant “JPMorgan Chase Reports Strong Profit of $3.6 Billion”

For the Independent article (Art.4) it is interesting how they see the profits of JP Morgan as an incentive for the Dow Jones to pass over the 10.000 after 12 months. It also seems that investment banking profits could be saving US financial firms from weaknesses elsewhere. In this article, we see more objectivity, because instead of focusing only on JP Morgan it also talks about the financial system, competitors like Goldman Sachs and “one of the main reasons that Wall Street is once again expected to pay boomtime-style bonuses at the end of this year.”

So… the Tom Sawyer effect can be seen in the price of the JP Morgan shares and the increase of the Dow Jones over the 10.000 the day of the announcement of results.




The conclusion is convincing. The assessment we make of the same information varies depending on the expectations that they previously had. Our reactions are different than we expected


Art.1 http://www.bos.frb.org/economic/wp/wp2005/wp0510.pdf
Art.2 http://www.guardian.co.uk/business/2009/oct/14/jp-morgan-beats-profit-forecast
Art.3 http://www.nytimes.com/2009/10/15/business/15bank.html?bl
Art.4 http://www.independent.co.uk/news/business/news/jpmorgan-results-help-dow-power-past-10000-1802782.html

Commutalist :The Communist-Capitalist

The reasons why I think the Chinese empire will rule the world ousting American hegemony. The whole world has already accepted that China is emerging as one of the next world´s power. After 60 years with the communist in the power the last week celebration was “an extravaganza showing off a rapidly growing arsenal of sophisticated made-in-China weaponry. It was also intended to show the Communist Party’s own strength at a time of global economic crisis” The Economist said in (Art.1).

But this hegemony not only affects the military field, in the economic context is clear that China is no longer an underdog power “Today, a socialist China geared to modernization, the world and the future has stood rock-firm in the east of the world,” Mr. Hu said in a brief speech (Art. 2).

Right now China is projected to overtake Japan soon and have the second largest economy in the world. (Art.3) As it is show in the IMF graph, China´s GDP evolution over the past three decades has been spectacular.

One of the key to this tremendous growth has been its currency; the Yuan is today a possible successor to the dollar´s hegemony. According to recent reports, China is trying to internationalize its currency with a series of maneuvers to ensure that the Yuan will become the main currency in the world. Some analysts believe that in 2012 $2 trillion of trade flows can be resolved by the “Redback”. An example of this appears in the Times article “China is using a $50 billion bond deal with the International Monetary Fund (IMF) to expand the global reach and influence of its currency in what analysts say could be a potentially huge development in Beijing’s campaign to internationalize the “redback” (Art.4).

But the problem to the Yuan’s development is that Chinese government policy restricts the Yuan from trading freely and being fully convertible. But this step must be taken with caution because, as Alan Greenspan said in a letter to the US Senate “…step to allow a currency to float freely, could cause an outflow of deposits from Chinese banks, destabilizing the system and would present a risk to the global economic outlook," he warned.

To finish this new entry in Financial Raindrops, there are a number of difficult structural problems in the Chinese economy that will need to be dealt with in order for growth to be sustainable and for China to achieve its potential. Starting by reforms in the banking and state companies system will have to be combined with measures to tackle unemployment or poverty that still remains widespread.

China also needs to decrease its exposure to dollar assets by shifting their reserves from long-term to shorter term in U.S. Bonds. That will give them more flexibility and be more dependent on themselves. As we can see in the table below, China is the United States’ largest creditor by far.

But what really impresses me is the growth that China has experienced over the last decade. It was unthinkable that a Communist government could achieve and maintain power for 60 years supported by an almost dictatorial-government control, a large population with the lowest labor in the world and an army to prove their greatness.

Sources:

(Art.1) http://www.economist.com/opinion/displaystory.cfm?story_id=14569466

(Art.2) http://www.nytimes.com/2009/10/02/world/asia/02china.html?_r=1

(Art.3) http://www.nytimes.com/2009/10/02/business/economy/02yen.html

(Art.4) http://business.timesonline.co.uk/tol/business/economics/article6822804.ece

www.businessweek.com/globalbiz/content/may2009/gb20090522_665312.htm

www.nuwireinvestor.com/articles/what-happens-if-the-yuan-replaces-the-dollar-as-the-53636.aspx

www.washingtonpost.com/wpdyn/content/article/2009/03/13/AR2009031300703.html?hpid=topnews

and daily press.