This assignment is for Honors Economics, P1.
1) Find a credible source on the internet that connects to The Big Short or to your mutual fund. This source should drive your research project. Think of it as one of the sources that will be in your Works Cited Page.
3) After you read the source that you find, answer the following questions as a blog entry below:
- How does the text connect to your research project? (relevant)
- What evidence do you have that the text you found is credible? (credible)
- Create a clear, specific argument based on the text. (argument)
- Support the argument with thoughtful analysis, using cause/effect, compare/contrast, problem/solution, part/whole, or other methods of analysis. (analysis)
Keep in mind that everyone else will see what you write below, so please keep it professional. This post is due Thursday, 4/11, by 12:00am.
4) Come to class on Friday ready to discuss the reading and the text you found!
If you need support or have questions, my office hours are Monday and Wednesday from 3:15-4:15 in Room 229.
The mortgage crisis that occurred in 2008 all began with the rating agencies; or what Michael Lewis, in “The Big Short”, likes to call the “Engine of Doom”. Rating agencies went corrupt once their incentives became crooked. Rating agencies were being paid by investment banks; their customers. However, part of the rating agencies’ jobs was to rate the stocks they were receiving, but their ratings were not honest whatsoever. As investment banks found new ways to make money (through CDOs and Synthetic CDOs), rating agencies no longer looked to rating their stocks honestly. Their incentives shifted. The rating agencies needed their customers.
ReplyDeleteIn the beginning of the novel, Lewis states, “They were all being paid to be consensus,” (2). Here, he is speaking about the rating agencies. The investment banks were what fueled their paycheck. Without them, they would have no source of income. That is why when fraud began, and a potential Ponzi scheme began to develop, the rating agencies followed the rest of the “crooks” without any government regulation. Investors were buying what were supposed to be Triple-A rated tranches, but were really Triple-B rated tranches (the riskiest tranches). It was assumed, by the investors, that the bonds they were buying were safe because they trusted the ratings given out by the rating agencies. As the fraud continued and the market blew up into a crisis, everything trailed back to the rating agencies. THEY could’ve prevented the crisis, but didn’t. Individuals, such as Mike Burry in the book, wonder what rating agencies were even doing in the first place because it was clear that their job was not it. Burry states, “it makes me wonder what a ‘Wall Street analyst’ does all day,” (198).
The link I found pertains to the website of the National Community Reinvestment Coalition. This organization helped broadcast rating agencies as crooks and demanded for reform. When founded, in 1990, their goal was to increase capitol within their communities in correct and legal ways. This source is credible because their website contains many sections where online users can see their programs and issues, media centers, and resources. To give information that is not credible will not only jeopardize their organization, but it will also jeopardize all of their members which include community reinvestment organizations and community development corporations.
NCRC went after the rating agencies on April 8, 2007. Their complaint was specifically against Fitch, Moody’s, and Standard & Poors. These rating agencies were responsible for rating the bonds investors were buying honestly. They failed to do so correctly. It was “in an attempt to obtain relief for consumers and communities harmed by the agencies’ negligent and culpable behavior leading up to the downfall of the mortgage and credit markets”. The CEO of NCRC, John Taylor, is convinced that “The rating agencies knowingly issued false and inflated ratings for securities backed by problematic high-cost loans that have created a financial nightmare for millions of families across the country”. In Chapter 6, Lewis reveals that the rating agencies are to blame, so he would be in favor of NCRC’s cause. Their goal was to reform that rating agencies by conducting a thorough investigation which investigated all of the following: “1. They… committed a fraud on the market… 2. Their failure to consider mortgage fraud, decreasing underwriting standards and high-risk loan products… 3. They were unduly influenced by issuers”. Once their investigation was done, they would decide whether or not the rating agencies should get shut down, get their license suspended, or go on “probation”. Amongst all of these, their overall goal was to protect the people who were affected by the crisis. After all, once the market crashed, everyone got affected not just Wall Street. Lewis would agree that a reform would need to happen. NCRC’s complaint takes a giant step towards it. The fraud/Ponzi scheme should not have happened and the rating agencies had all the power to prevent it.
The article titled, “Report: Mortgages become slightly easier to get as standards ease” by E. Scott Reckard explains the changes that lending agencies are taking with their lending standards to improve the rate of obtaining mortgages. This article connects to The Big Short: Inside The Doomsday Machine by Michael Lewis and the topic of my research project on lending agencies as they both explain how previous declines in their lending standards had been a major cause of 2008’s financial crisis.
ReplyDeleteThe Los Angeles Times is a daily newspaper company that has been able to maintain its status as a widely known newspaper company in the U.S. Founded in 1881, the company has provided news for millions of its readers; given its popularity, it would be unlikely for the company to print inaccurate information for their customers. The company would lose the reputation it had earned throughout the years, causing their business to be looked down upon as an unreliable source for news. Reckard who works for the “Money & Co.” section for the Los Angeles Times, focuses on following any news and updates concerning the U.S. economy. Given that he works in this section of the company, and that the newspaper is maintaining a good reputation, it would only be logical for the company to have Reckard working in the business section if he knew what he was talking about. Therefore, it can be said that Reckard also has to be educated in Business as to not ruin the company’s reputation.
Before the crisis, lending agencies aimed at originating and selling mortgages for investment banks, who in turn create mortgage bonds for homeowners. When lending agencies began to decrease their lending standards, problems arose. Reckard explains how lending agencies are attempting to correct these old motives. By decreasing “the average borrower credit score...from 749...to 745”, lending agencies allow individuals with lower credit scores and “less than 20% down payments” to obtain mortgages and mortgage insurance.However, it seems as if lending agencies are slowly returning to their old ways by decreasing their standards again. Lewis states that lending agencies, alongside investment banks, had “enabled the lending of trillions of dollars to ordinary Americans [and] how [they] had happily complied and told the lies they needed to tell to obtain the loans”, creating “[a problem so] cataclysmic...[with] big social and political consequences” (243).
Lending agencies had managed to do this through decreasing their lending standards in order to be able to produce mortgage bonds that investment banks could package into subprime mortgage bonds for lower-income homeowners. Without this process, lending agencies would have lost their ability to give out more mortgages for the investment banks to package into bonds, and decreasing the number of homeowners that would be able to take out a mortgage and decreasing the profits that the lending agencies would gain. This system that lending agencies had been using seems to be appearing once again, in their attempt to improve the ability for individuals to get mortgages. This could cause the consequences from before, and possibly another crash if the agencies don’t pay attention to the risks they are taking with these loans. Since it appears that lending agencies are heading towards this direction again, it would be wise for the government to step in and regulate their actions. These actions include floating interest rates, which usually increases (or decreases) the amount of interest that is originally placed on a mortgage, and teaser rates, which can go from a low interest rate to a high interest rate. Homeowners who don’t have enough money eventually default, allowing lending agencies to restart the process. This could be considered as ignorance since lending agencies are only aiming to benefit themselves, creating turmoil for everyone involved in the market and causing what could have been an avoidable crisis.
The article I found this week is called “Could the iPhone go Google-free?” by Kelli B. Grant. This article is about the possibility of Apple greatly reducing its dependence on Google as a main search engine and as a main app producer. The new search engine that would take Google’s place would be Yahoo and there are already many Apple apps that mimic the Google apps on the App Store, although sales prove that customers tend to prefer the Google apps. This article is something I found interesting because I have been investing on Apple in our class’ game and I just recently began investing Google as well. This particular article stuck out to me because I personally don’t think this would be a good decision for Apple to make and it might change my mind about whether or not I want to keep investing in Apple if they go through with this idea.
ReplyDeleteThe website where this article can be found is marketwatch.com, which is where our investing game is also located. Market Watch is indeed a credible source because stocks get updated all the time in order to provide users with the utmost accuracy. It is important that Market Watch keeps its information available and up to date at all times because even though I am only investing as part of a game, a lot of other people out there are making real life investments. Market Watch must be credible because people’s money is depending on the information that they provide. The author of this article is also reliable because she is also a columnist at another investing website called Smart Money. Kelli B. Grant’s investments are also shown on that website and they are all consistently successful, so I can trust that she knows how to work the market well and thus, knows what she is writing about.
This article has made me come to the decision that if Apple does proceed to reduce its reliance on Google in their phones, I will most likely stop investing in Apple in the class’ game. However, I don’t think that the possibility of this even happening is very likely. The price of a Yahoo stock right now is $24.25, while the price of a Google stock $789.84. It’s undeniable that Google brings in a lot more money than Yahoo does. If the workers at Apple are entrepreneurs motivated by the triple bottom line, then they would not choose to back away from Google. Among all search engines, Google is one of the most popular and most commonly used. Google is popular among all age groups and almost anyone that has access to internet will rely on Google whenever they need help on something. The truth is, even though this would be a great opportunity for Yahoo to step it up in the market, it would end up being an opportunity for Apple to go down in the market. This is not a company I would want to invest in if I can’t rely on them to make smart decisions with their products. At the end of the day, an investment is amount money and the risks you are willing and able to take. In this game, I’m able to take the risk and keep investing in Apple if they partner up with Yahoo, but it is not one I am willing to take because I believe Apple will not be as successful as it is with Google.
This week’s reading is titled, “Why Apple’s Stock Is Down” written by Matthew Zeitlin. Throughout this source, Zeitlin explains why the price of Apple’s stock has declined for the past few months and its continuing to decline. Zeitlin writes, “Since late October, the company’s price has dropped some 18 percent... and the drop appears to be purely the result of Apple-specific issue... Technology companies have done pretty well, while Apple’s stock has been sucking air”. Here, it is evident that other technologies have been rising while Apple, which is a very big prestigious company in the technology industry has been falling. This is relevant to my research project, because I’ve just recently invested in Apple Inc. (AAPL) at $435.69. If Apple’s stock price continues to decrease, then the company’s value might decrease, I would have losses instead of gains and other competitors such as, Samsung and Google will have more value and power in this industry.
ReplyDeleteThe text I found it’s credible because it’s posted by The Daily Beast. In 2011, The Daily Beast became the online home of Newsweek magazine, which has served as the world’s preeminent conversation starter since its founding in 1933. This Newsweek magazine, has attract over 18 million visitors a month and the magazine has reached millions of more people through its tablet and international editions. Moreover the author, Matthew Zeitlin is a business reporter that gained his bachelor’s degree in English Language and Literature/ Letters at Northwestern University and he was an intern at The New Republic, a liberal American magazine that comments on politics.
If Apple does not create any new innovations and/or fixes those specific issues that are causing a decline in their stock price, then the value of the company will decrease and competitors will take the advantage to dominate the technology industry and overpower Apple. In the article, Zeitlin writes, “It seems that Apple’s competitors have finally figured out a way to, well, compete in areas that the company dominated. Apple’s share of global tablet sales has fallen from about two thirds to half; meanwhile, Google’s Android operating system has about 75 percent of new sales in the smartphone market”. Here, it is evident that other companies have created new technologies similar to Apple’s but somehow have attracted more customers than what Apple did. By this, Apple is losing tons of customers and competitors have been gaining them. This has an effect of Apple’s revenue because they are not making as much money compared to before. Competitors are advancing and improving their technologies. Furthermore, Zeitlin also states, “Samsung’s Galaxy line of smartphones, a direct and cheaper competitor to the iPhone, just crossed 100 million units shipped. It has become the most dominant smartphone manufacturer by market share...”. This shows that other companies have been trying their best to take Apple’s customers by making more efficient and cheaper technologies. By making the prices cheaper of these smartphones, the more people that will be willing and able to afford it and they would be able to get the same service as Apple.
“S&P Lawsuit: U.S. Accuses Ratings Agency Of Fraud In Lead Up To Financial Crisis” discusses how the the Obama administration accused Standard & Poor's of refusing to warn investors that the housing market was collapsing in 2006, and it connects to my research project of “The Big Short,” which addresses the many aspects of what led to the downfall of our economy.
ReplyDeleteThis text is credible because it is from the Huffington Post. A reliable and nationally recognized news source, mostly providing information in politics and business. The authors are Daniel Wagner and Christina Rexrode. Daniel Wagner is CEO of Country Risk Solutions and was previously Senior Vice President of Country Risk at GE Energy Financial Services, where he was part of a team investing billions of dollars annually into global energy projects. Christina Rexrode is currently a business reporter at Associated Press. She has worked as a banking reporter at The Charlotte Observer and as a business reporter at The St. Petersburg Times. These two writers have a clear past and present knowledge on the topic of business and finance, and are sure to provide the Huffington Post on credible information on the fraud the rating agency has committed.
The article talks about the fraud that Standard and Poor’s committed on rating investments, “According to the lawsuit, S&P gave high marks to the investments because it wanted to earn more business from the banks that issued them.” The government gets involved to punish the agency, demanding a $5 billion penalty. This is similar to one of the possible roles that the government may have in preventing a macroeconomic crisis in the future; creating legislation to punish fraud. This government role, however, is not the best way to take care of the situation, this will simply “deal” with the problem after damage is down, nothing will be solved. Instead, the government should create a “new transparency and disclosure requirements for banks on all investments opportunities.” This way, information will not be hidden from the public, which are the investors; they’ll know what they’re investing in or buying. If investment information is more public, then the process of investing will be safer due to the fact that is visible by everyone, hence, less chance of fraud. On the contrary, creating new transparency and disclosure requirements may have its costs. Since government involvement would increase, more jobs will be created and those hired will be paid with tax payer’s money. But despite that, the rationale for creating new transparency and disclosure requirements for banks on all investments opportunities is more wise in preventing any future financial crisis.
The article I found this week is titled “Microsoft, H-P, Intel fall; Facebook, Netflix Up” Dan Gallagher and Benjamin Pimentel. This article talks about the fall of Microsoft after a rise they had just yesterday due to disappointing sales. These low sales are due to the lack of demand for Microsoft’s Windows 8 that hit the market in the fall. Quite simply there are plenty of operating systems that perform on par or above windows 8’s performance standards so for this reason the demand for their operating system was down. I found this interesting because I had invested in the company yesterday morning when they were cheap around 24.54 per stock after looking at their sales in the past few months I sold when they got up to 32.01. After looking at how they crashed back down to 28.94 I knew I had made the right decision.
ReplyDeleteThis article came from MarketWatch conveniently where our investment game is being hosted. MarketWatch as the name would imply watches and reports on the market. Over the years MarketWatch had become an incredibly credible resource for investors and generally people who are just interested in the market. All stocks and information are constantly updated to keep up with the stock market thus attracting many members to its website. Many people depend on MarketWatch’s updates so publishing something untrue or inaccurate would harm its reputation and make them lose members and losing members means losing money. What makes MarketWatch have to be accurate is that investor’s money is on the line so they must be sure to make their information accurate. It gives the users any and all information they would want and it does not withhold any information which is how good investments are made.
. Microsoft is in a incredibly competitive market having to compete against companies like Apple or Amazon for their tablets and this article has made me realize maybe Microsoft is not as safe of a investment as I originally thought. Microsoft’s stock is currently at 28.94 while others are a lot higher on the cost margin. Microsoft’s competitors such as Apple’s stock is currently 437.37 and Amazon’s stock is at 270.30. The difference is quite clear so it’s very clear that Microsoft does not make as much money as its competitors which shows that their new operating system does not offer enough to reel in new customers. “Microsoft bore the brunt of the fallout, as the disappointing PC sales indicated weak demand for its Windows 8 operating system” showing that the demand for operating systems really is down which is why its sales suffered such a loss and is valued less in the market. The solution to Microsoft’s problem is not clear so for now I would suggest Microsoft to focus its efforts on other projects such as their video gaming market until the demand for new computers or new operating systems increases. For now Microsoft cannot compete with Apple or Amazon so I would not invest with Microsoft because their stocks are too unstable and fluctuate too much. Apple is quickly becoming a very popular brand and Amazon is a great up and coming business with potential to grow more. So I think it might take awhile for Microsoft to make a comeback or start to compete effectively with its competitors.
http://theweek.com/article/index/239242/will-apple-stock-ever-reach-700-again
ReplyDeleteThe article “Will Apple Stock Ever Reach $700 again?” by Harold Maass is one that focuses on how Apple’s history has changed from having high share prices to having a drastic decrease on Thursday, January 17, 2013. Also the article focuses on solutions that can help Apple’s shares get back to $700. This text relates to my investment portfolio because the idea of price change is one that affects my decision on trading and sharing a company. If the company has an increase in it’s price change throughout it’s years of business then I will want to invest in that company because their price change history is probably going to keep increasing.
The text I found is credible because it was published in The Week. The Week is a weekly magazine in Canada and the United Kingdom. Furthermore, the article was published on The Week’s daily website which was launched in September 2007. The Week wouldn’t publish any false information because the information published on the magazine is shared internationally, both to the United Kingdom and Canada. Therefore, in order to be categorized as a excellent news source, The Week provides the audience with accurate information that helps the public be more informed about what is happening all around the world.
The technological advancement today in society leads to big competition between big companies like Apple and other smartphone companies. Apple’s stock was trading at $700 but then had a dramatic decrease of 12 percent which led to the Apple stock trading at $450. Before the downfall, Apple’s “profits were of $13.1 billion and record sales of (47.8 million) and iPads (22.9 million)(but) it’s stock dove by as much as 12 percent early Thursday”(Maass). One cause to this problem is competition. Samsung and other rival smartphones and tablets were gaining which then led to less customers for Apple. This also explains the price change in Apple’s history. Price change is the difference in the cost of an asset or security from one period to another.One solution that can be done in order to increase the company’s price change is “Apple may dip into its $137 billion cash lake to boost its share price by paying fatter dividends or buying back more stock”(Maass). Paying dividends will benefit Apple because the dividends can provide certainty about the company’s financial well-being. Therefore, paying some of it’s dividend can lead to Apple’s stock increasing to how it was a year ago.
“Japanese Automakers Recall 3.4 Million Vehicles Over Air Bags“ This article is talking about the recent recall that the Japanese automaker Toyota made on 1.73 million vehicles because defected air bags. Toyota recently had a large 7 million auto recall just last October. This article can alarm Toyota customer and lead to a decrease in revenue and purchase of automobiles of this band because there afraid of other defects with the automobiles. That could have a negative impact on stockholders. This article was published on the New York Times, a very large and well known news organization that would lose its valuable customer if it were to publish false information. The article was also in the business section of the New York Times that is dedicated to the manner of business and finance. The author of this article also used references form the actual press re-less that Toyota made. The value stock of Toyota is at an all high for the last 6 months that could potentially fall and then rise to make a profit. “Toyota will exchange the faulty inflators for new ones”(Mr. Sakai) Since Toyota is paying for exchanging the airbags themselves it would be a burden and would take a cut from the profits of the company. This would worry investors if the companies value starts going down and sell their stock holdings, that would also drive prices down. That could be a good investment once prices are low so that I could resell them when they go up again. This would be good but it would take time because the reaction of the public to this announcement is still not very known. What is best to do is look at what happened with the company back in October when it had the other recall and from there it could be a platform to periodic what are the possible outcomes with the stock. In the data presented on marketwatch.com we can observed that the recall did not affect the procession of Toyota stock. Therefore they may not be as effected by this recall. The company is also replacing the defective airbags that has its positives because many new car buyers see this act of loyalty to the customer and would increase individuals possibly to to buy a car from the automaker. Toyota stock has constantly increased and the company has a high value in the market that means it would stay strong of it go a small blow to it. Therefore I should wait to see if the Toyota stock falls and then invest in it because it would not last long since its keeps going up.
ReplyDeleteThe article I found this week was titled, “Mutual Funds: What You Need to Know” by Tara Siegel Bernard which explains essential information about purchasing funds, highlighting diversity as an important aspect of one's portfolio. This article goes on to speak about the major things an individual must know when purchasing a fund from things like costs to where to purchase them. This article is relevant to my research project because it involves creating a mutual fund that has an objective and a diverse mix of equities. As stated by Bernard,”...you need to build a diversified portfolio, whether it’s for your child’s college fund or retirement savings.” This describes college or retirement as an objective for a fund, and highlights diversity within the fund which is required in the assignment.
ReplyDeleteThis article is credible because it comes from the New York Times which is an American daily newspaper that has been published since the year 1851. It is the third largest newspaper in the United States and is part of The New York Times Company which is the publisher of 18 other newspapers. The New York times would not publicate false information because it could impact their profits negatively. Furthermore this article was written by Bernard who is a personal finance reporter for The New York Times. Previously she was part of the banking and credit card industry, this makes her very knowledgeable in the field of personal finance and a good candidate to give others advice about what exactly one should know before purchasing funds.
The current performance of a fund cannot be an exact indicator of how it will do in the future because as stated in “Mutual Funds: What You Need to Know”, “Often, this year’s star funds are next year’s worst performers.” In fact this is proven on market watch where a student may be the investor who is making the most profit or having the least losses but later falls to the bottom of the list because of a stock which has unexpectedly fallen. An example different from this is the JPMorgan Chase & Company (JPM) stock which had an amount of indexes in the month of June that were very low and currently has ones that are currently increasing. In spite of a fund's performance in the past it can indeed be opposite of what is expected.
This week’s article is called “Amazon: Great company, WAY overvalued stock” Paul R. La Monica. The Article describes how amazon’s market price is too high for its fundamentals and it explains why that is a problem comparing it with some of its competitors like, Wal-Mart and Target. This connects to the investing project because, I invested in this stock and bought a share and would like to know if I should get badly affected by it.
ReplyDeleteThis article is credible because it came from CNN a cable news channel founded and still running since 1980. It was one of the first channels to have 24 hour news coverage and it is known for its famous slogan “The worldwide leader in News”. The author of this article is a writer for the CNN Money portion of the online news channel with his daily column called “The Buzz”. Which focuses on the big market and macroeconomic news of the day, he also edits several of the site's market and economic features and is a regular contributor to the site's daily video reports. This makes the article and site more credible because Paul R. La Monica has background with the market and the economy.
Amazon is a very popular site and a lot of people like to buy things from there, but according to Paul R. La Monica the amount its worth in the market is too much for what it really is worth. The company’s P/E is also too high which can affect the company in the future because, if Amazon does not get enough sells and gets beat by its competitors then those ratios for the company won’t be accurate anymore making it look bad. According to Paul R. La Monica …” Amazon's PEG comes out to [be] about 3.1… [When really] Using Amazon's current market value of $113 billion and sales forecasts of $80.5 billion for 2013, Amazon's price-to-sales ratio is 1.4.[Which comes out be] in between Target and Wal-Marts trade at PEGs of 1.1 and 1.7” Meaning the company’s records showed estimates that are too high to what the company is shown to actually make. This connects to the big short when investment banks were writing false information down believing that what they wrote was actually what they would make. As Paul R. La Monica states…”I'd be more willing to accept the premise that Amazon should trade at a sky-high valuation if it was using its technological advantages to generate exorbitant profit margins. But it's not” This is not healthy for the company or for the market because it is false information being published which is not the best idea considering the fact that the country just came out of a financial crises in 2008 which is recent. This makes me wonder how my investment in this company will turn out because, this even happened in 2010 and it has been a while from then and so that means anything can happen. I know Amazon is very popular but so are its competitors and at any moment there can be a crash for that company and that makes me scared. Next steps for me when I plan to invest would be to search up more information on the stock to make sure incidents like these haven’t happened before.
The article I found this week is called, “SEC’s Day of Reckoning on Transparency: Dodd-Frank Section 1504 on Disclosure of Natural Resource Revenues” by Daniel Kaufmann. Kaufmann discusses the new regulations that SEC is putting in place so that there is more transparency in the market. In other words, they are working to make information more public. He goes on to explain both the benefits and costs of increasing transparency. This article highlights one of the solutions to preventing another stock market crash which is explained in The Big Short by Michael Lewis. At the basis of the financial crisis was the access to information that the investment banks either kept purposely secret or were ignorant to. Therefore, if information was made more public, we help to prevent any chance of another crash.
ReplyDeleteDaniel Kaufmann, the author of this article, is a nonresident senior fellow in the Global Economy and Development program whose areas of expertise include public sector and regulatory reform, development, governance and anti-corruption. Additionally, he is now president of the Revenue Watch Institute. All in all, Kaufmann has a history which proves that he has a lot of knowledge of the finance world. In other words, he would not dare tarnish his reputation because that would make everything he worked for be for naught. Likewise, the Brookings Institution, which published the article, would not want to risk its reputation either. In fact, its mission statement states that they "provide innovative and practical recommendations that...foster the economic and social welfare...and secure a more open, safe, prosperous, and cooperative international system.” In order to keep true to its mission statement, Brookings needs to make sure that they are a reliable source of information to all. Therefore, since Kaufmann and Brookings both have good reputations that they cannot afford to tarnish, this article is credible.
Before the financial crisis in 2008, the subprime mortgage bond market was very popular, yet, most investors didn’t even understand what they were betting on. One of the main problems was that investment banks did not provide enough information to their investors. For instance, people like Howie Hubler, mentioned in The Big Short, were allowed to make many high risks bets. Yet, he didn’t completely understand the market which cost Morgan Stanley $9 billion in the end. Government needs to step in and create new transparency and disclosure requirements for investment banks on all investment opportunities to prevent drastic money losses. It isn’t right when, “The shareholders who financed the risk taking had no real understanding of what the risk takers were doing, and, as the risk taking grew ever more complex, their understanding diminishes” (258). People such as Howie Hubler blindly investing loads of money because they think they are making good investments when really, they don’t understand the full picture. More information provided to investors would increase the amount of understanding in the market. For, “if the SEC [Securities and Exchange Commission] issues strong and effective transparency rules and leaves little room for disclosure avoidance, then accountability to investors would be enhanced” (Kauffmann). In other words, increasing transparency would increase the amount of investments and as a result, the market increases, improving the economy. With the economy in a stable state then there would be no fear for a market crash. Furthermore, “Growing evidence suggests that the benefits of transparency [includes] gains for countries in terms of investments, macro-economic (fiscal) stability....and control of corruption” (Kaufmann). In essence, increasing transparency in the market would prevent another financial crisis because it touches on the majority of issues which had caused the first one. It would be a huge mistake to allow people in the market to continue to work on blind faith where instead they could have more access to the information they need to make wiser and better investments.
The article, “What Should Be Done about the Credit Rating Agencies?” by Edward I. Altman, Sabri Oncu, Anjolein Schmeits, and Lawrence J. White discusses the role rating agencies had in the demise of the U.S. financial market in 2008, and possible future solutions the U.S. Securities and Exchange Commission (SEC) can implement to avoid more crises. This article relates to my potential thesis for The Big Short essay because I am considering writing about rating agencies. My thesis will focus on how the fraudulent ratings of the agencies had greatly influenced the crash of the market with the release of false information to the public. With government intervention, a similar mistake can be avoided if the SEC chooses methods of regulation such as the modes of income and incentives for rating agencies.
ReplyDeleteThis article is credible because the New York University Stern School of Business published it. NYU Stern has been ranked globally in the top 15 business schools by leading business and education publications. Because NYU Stern is nationally accredited, it would avoid publishing false information that would potentially tarnish its prestige. Also, all of the authors of this article are current professors of finance at NYU Stern. These authors also have Ph.Ds. in either Finance or Economics and a Masters Degree in areas of Economics or Finance. Because these authors are professors at an eminent school and have acquired degrees in these areas, they have extensive knowledge and research on the U.S. economy’s current status and potential.
In order to avoid another financial crisis, there should be less of a bias in the bond ratings. With government intervention, the government can subsidize rating agencies to not only improve the quality of the ratings, but to decrease dependence these rating agencies have towards their customers, the investment banks. As of the 2000s, rating agencies have depended on their customers to provide support their salaries; if a rating agency had few customers, the workers at the agency would earn a small amount of money. With the desire of better salaries, raters wanted to keep customers through any means, including publishing fraudulent ratings. According to the article, “There were fewer issuers [customers], each with large amounts of business for a rater…and the bonds were more complex, so that errors would be harder to spot.” In other words, rating agencies falsely rated these securities knowing that because the new bonds were becoming increasingly complicated, no one would really notice their mistake. Although the rating agencies’ decisions to publish these ratings helped their customers sell their securities, the rating agencies were basically coercing investors into buying bonds that would do terrible instead of the advertised success, resulting in the loss of billions of dollars in the market. With government intervention, the proposed funding will sever the economic reliance rating agencies have towards their customers. Rating agencies will be less susceptible to bribes of investment banks, as the government will now be subsidizing salaries for the raters. In addition, the government can adopt a “grading” system where raters who are accurately rating securities receive a bonus. This incentivizes raters to do better jobs and influences other individuals to become involved in the rating agency business, attracting raters of higher caliber. Finally, the article suggests a new method of randomization, “When an issuer requests a rating, the clearinghouse [in the SEC] could randomly assign a rating firm from among the qualified group...” Basically, by randomly assigning investment banks to a rating agency, bias is diminished because the customer can no longer look for the agency that gives them the better rating; these ratings will be honest and true, as allegiances between customers and rating agencies will be weakened. Although these suggestions may be costly for taxpayers, it is the best way to not only improve rating standards, but also minimize the potential of corruption in the market.
The article I read this week was called “Credit rating agencies may soon have to follow tougher norms” by Shaji Vikraman and Mayur Shetty. This article relates to my research paper because in my case I am targeting the rating agencies as the problem in the subprime mortgage bond market. Based on The Big Short it is clear to me that rating agencies need to be fixed and in order for that to happen the government needs to become involved by having government regulation and making information public to decrease fraud. In addition, it is also clear to me that rating agencies had customers before to whom they were dishonest especially when rating the bonds incorrectly but if rating agencies have their information become public then people are more aware of the inconsistencies that occur before there is another financial crisis in the future.
ReplyDeleteThe article that I found this week comes from The Economic Times. This newspaper is credible and relevant towards the issue of rating agencies because this newspaper focuses solely on the financial market, stocks, investments, loans, business, and banks which rating agencies are closely associated with as according to Michael Lewis. This article is also credible because The Economic Times has been publishing articles since 1961 and unlike other news sources it is not biased towards what is occurring in the market. Instead, this article educates readers about the market and teaches them that there will always be a downfall in any area that isn’t being regulated. In terms of rating agencies, The Economic Times just like Lewis would argue and agree that if ratings aren’t done correctly then the market will be hurt especially affecting clients and values in bonds.
According to Shaji Vikraman and Mayur Shetty, rating agencies in India are being highly observed by the government so that fraud isn’t committed since this a problem that is occurring not only in India but all across the world. Based on this article and Lewis I agree and with government providing financial incentives towards rating agencies there will be benefits that outweigh the costs. For example, instead of having upset taxpayers, people who take out loans will not have an eternal debt especially if the rates are fixed rather than floating. Therefore, in this case people will be able to trust that the financiers at the rating agencies are doing their job correctly. Furthermore, another benefit is that with government regulation, the workers must have a financial background and have worked in other rating companies before as that can help them understand inaccuracies in the ratings and keep security. According to the article, with government regulation “it will make it more efficient for all” and by it the authors refer the attention that financiers receive. However, the government must be prepared to give enough bonuses so that work can be done better than in the past when it wasn’t which led the economy to crash. As a result, if more information is provided by the government about rating agencies and the government incentivizes workers to protect client activity then rating corruption can be prevented in the future.
The article “Massachusetts Fines Deutsche Bank $17.5 Million Over CDO Conflict of Interest” highlights how Deutsche Bank has been fined by Massachusetts’ state government due to the fact that the bank deceived clients and investors in creating and marketing $10 billion worth of collateralized debt obligations (CDOs). Similarly to The Big Short, written by Michael Lewis, both the article and the book highlight how CDOs were made and sold given false information from rating agencies and potentially influenced fraud amongst investment banks.
ReplyDelete“Massachusetts Fines Deutsche Bank $17.5 Million Over CDO Conflict of Interest” is credible because it was published by the Fox Business Network, this is an American cable network that discusses the financial and business news, which helps the credibility of the article because it demonstrates how dedicated Fox Business Network is about their economic webpage. Because the service is available to nearly 58 million Americans, any potential false information could jeopardize the entire network for credibility, being an incentive for the online and cable network to publish credible sources.
In The Big Short, Michael Lewis addresses how rating agencies did not meet the standards in order to rate the CDOs that investment banks were distributing to third party sellers. The article agrees on the argument that in order to prevent the fraud that led to the market crash in 2008, government should intervene by using economic fees as incentives to motivate employees to supervise their CDOs more often. The article states, “Massachusetts Secretary of the Commonwealth William Galvin said Deutsche Bank Securities Inc. failed to supervise its employees who ‘knew but failed to disclose’ such conflicts concerning the collateralized debt obligation, known as a CDO.” The bank was fined because it deceived clients about the $10 billion dollar CDO it represents how history is repeating itself as investment banks became unaware of what they were selling. If fees are enforced on investment banks for not correctly supervising their CDOs, having a fee increases awareness for them to improve the quality of the CDO, avoiding the government fee. Investment banks ripped off their clients leading the market crashed because of the unawareness of the magnitude how these CDOs would fail. Because these investments banks had no idea what they were selling “Within a year, rating agencies downgraded Carina to junk status ‘which resulted in catastrophic losses to investors,’ the regulators said.” Because the biggest concern was the economical loss that investors faced when Deutsche Bank sold these “fake” CDOs, it attracts the idea that government should intervene more by monitoring the actions investment banks do, overall reducing the catastrophic event that the American economy faced in 2008 as a long term positive effect.
Source: http://www.foxbusiness.com/news/2013/03/13/massachusetts-fines-deutsche-bank-175-million-over-cdo-conflict-interest/
The text I found this week is called “Steve Eisman's Next Big Short: For-Profit Colleges” by Andy Kroll and it’s published on Mother Jones. As we’ve learned, Eisman is known for being the sole investor who shorted the subprime mortgage industry. Recently in 2010, he found a new target which were of course, for-profit colleges. This text connects to The Big Short because of the fact that the cycle is repeating itself once again. It all begins with one person and then ends with a market crash. When Eisman first began stating the truth and making bets, individuals thought he was crazy and wrong. They thought that it was impossible but as time went by, they noticed he was correct, but they refused to admit it. The story is seriously repeating itself with these private colleges.
ReplyDeleteThe evidence that I have that the text I found is credible is that it is published on Mother Jones - an American magazine that features breaking news, investigations and politics. Also, Andy Kroll’s specialty is Economics. He has been really good at it for various years, even so that his work was published in the Wall Street Journal as well as Mother Jones. Lastly, Mother Jones overall is a credible source because it has been around for many years (since 1976) and it will lose credibility if false information was published.
Just as the stock market crash could have been avoided, this for-profit college situation could be avoided too. With government regulation and intervention, not only could it have decreased but perhaps prevented entirely too. "Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry. I was wrong," Eisman said. "The for-profit education industry has proven equal to the task." Private colleges are creating their own engine of doom. As the years go on and the student loans increase, the market including private colleges is going to end up ceasing. This being because just like with the lending agencies who let anyone borrow money - even those who everyone knew would never pay back; the same is occurring with colleges. Anyone can take out student loans, but not everyone will pay back. Eventually, too many loans would be taken out and the market would have to include more public schools and less private.