Financial Markets - Week 6 - Lessons 14, 15 & 16

Chapter 6.14 - Goldman Sachs - What happened to Goldman Sachs after 2008?

Goldman Sachs went from being the most prestigious Investment Bank in the world under the leadership of John Whitehead to one of the more distrusted Firms in recent years. The company received a $10 billion investment from the United States Department of the Treasury as part of the Troubled Asset Relief Program due to its involvement in the Subprime Mortgage Crisis.

Chapter 6.14 - IPOs - Describe the Impresario Hypothesis.

Impresario Hypothesis - Pricing things below market generates excitement, creates diversification of purchaser base, and gives buyers the perception that they may be able to flip the purchase for more than they initially paid.

Chapter 6.15 - Brokers and Dealers - What does an Investment Bank do?

Investment banks help with corporate finance needs, such as raising funds or capital. Companies and governments hire investment bankers to facilitate complicated financial transactions, including debt issuance such as a bond offering, new securities underwriting, mergers and acquisitions, and initial public offerings (IPOs)

Chapter 6.14 - Goldman Sachs - What was John Whitehead's sentiment about respect?

John Whitehead offered the guideline that 'The respect of one man is worth more than acquaintance with 100'

Chapter 6.16 - Government Debt - What is a more common practice than default?

More common than default is that the governments inflate the currency to pay debts. In the case of default, there is typically a restructuring, as opposed to repudiation.

Chapter 6.14 - Ratings Agencies - Describe Ratings Shopping. How have things changed since 2008?

New regulations have required that ratings agencies clean up their act following the 2008 crisis. The speaker recalls the scene in the Big Short in which the Manager of the Ratings Agency admits that they provide Triple A ratings without much investigation because they would otherwise lose the business. This is referred to as Ratings Shopping.

Chapter 6.16 - Government Debt - What did Mao and Lenin both do immediately upon attaining power?

One of the first things that Lenin's Bolsheviks and Mao's Communists did upon taking power was to repudiate the debts incurred by the regimes they'd overthrown.

Chapter 6.16 - Government Social Insurance - How are Progressive Taxes a Risk Management Device?

Progressive Taxes are a risk management device, because if your income falls very low, your taxes go down. This includes negative taxes for some lower income households.

Chapter 6.16 - Government Debt - What is repudiation and what is often used as the justification?

Repudiation of debt occurs when a Government stops servicing its debt and declares that it will no longer make payments. Justification is often that old regimes ran up debt irresponsibly and future generations shouldn't be on the hook to pay the bill. This occurred in Russia in 1918.

Chapter 6.16 - Government Social Insurance - What are some common examples of Social Insurance?

Some examples of Social (Governmental) Insurance are Public Education, Social Security, Medicare/Medicaid, and Negative Taxes.

Chapter 6.14 - The Prudent Person - Describe the Prudent Man Rule in ERISA.

The 'Prudent Man Rule' in the Employment Retirees Income Security Act (ERISA) states that fiduciaries must use care, skill, prudence, and diligence of a prudent man acting in a like capacity.

Chapter 6.16 - Government Social Insurance - What was the AFCD, what were the criticisms, and what took its place in 1996?

The AFDC (Aid to Families with Dependent Children) was abolished in 1996 due to a perceived accelerating moral hazard during the Clinton Administration. It was perceived that we were developing a class of people who've lived their lives with AFDC and no plans to work. This later evolved into SNAP (Supplemental Nutrition Assistance Program).

Chapter 6.14 - Glass Steagall - What was the Glass Steagall Act of 1933?

The Glass Steagall Act of 1933 created the FDIC. It also required the separation of Commercial Bank, Investment Bank, and Insurance Company into different independent businesses. This is why JP Morgan and Morgan Stanley are now separate enterprises.

Chapter 6.16 - Government Involvement in Corporations - In what way is America more capitalist than China?

The United States is the least likely among developed nations to own shares of Corporations. China, on the other hand, owns and controls significant portions of its Corporations.

Chapter 6.16 - Government Social Insurance - Describe what happened after the first income tax was implemented during the Civil War.

The first income tax was a failure. In 1872, following the Civil War, it was estimated that only 10% of eligible taxpayers actually paid their taxes. This was described as 'incapacity of the lower officers and dishonesty of the higher ones.' Without information systems and the fact that transactions were conducted in cash, Fraud was too simple. The Tax was rescinded in 1872.

Chapter 6.15 - Payment for Order Flow - What is a limit order?

A limit order is an offer to buy a stock below a specific dollar value or an offer to sell above a specific dollar value.

Chapter 6.15 - Brokers and Dealers - Distinguish between a broker and a dealer

A 'broker' connects buyer and seller in exchange for a commission. A 'dealer' acts for himself and receives the markup on sale.

Chapter 6.14 - The Underwriting Process - What is a bought deal?

A bought deal is when an underwriter agrees to buy newly issued securities at a set price and will resell them in hopes of making a profit. A best effort deal is an attempt to sell the securities, with the understanding that the deal collapses if the underwriter cannot sell them.

Chapter 6.16 - Government Involvement in Corporations - Distinguish between Chapter 7 and 11 Bankruptcy

Chapter 7 Bankruptcy is complete liquidation of assets. Chapter 11 Bankruptcy is re-structuring of the Company and its debts.

Chapter 6.15 - Brokers and Dealers - What is Churning?

Churning' is when a broker executes excessive trades in order to earn commission from funds held in your account.

Chapter 6.14 - Mutual Funds and ETFs - Distinguish ETFs from Mutual Funds

ETFs tend to be more liquid and have lower management fees than a Mutual Fund. You can't time the market during the day with a Mutual Fund. All redemptions and purchases into a Mutual Fund happen at 4 pm.

Chapter 6.16 - Government Social Insurance - What does the speaker note as a common problem of young governments?

The speaker notes that young governments deal with excessive fraud. It slowly decreases as regulations catch up and systems progress. America was much more corrupt in the late 19th century than it is today.

Chapter 6.14 - The Underwriting Process - How can Underwriters stabilize the price of an issuance? What are the criticisms of doing so?

Underwriters are legally allowed to purchase shares and 'stabilize' prices in the market until the entire issue is sold. This has been criticized as market manipulation, but the SEC has ruled otherwise.

Chapter 6.16 - Government Debt - Is there an observable trend in Sovereign Debt?

Waves of Sovereign Default around the world are not uncommon.

Chapter 6.14 - The Underwriting Process - Describe when syndicates are necessary in Investment Banking.

When an offering is too large for a single investment bank, syndicates are formed from many investment banks, each carrying inventory risk that they won't be able to earn sufficient underwriting spread from reselling securities (or worse, will suffer a loss on sale).

Chapter 6.16 - Government Social Insurance - In what way was Workers' Compensation a breakthrough?

Workers Compensation was a breakthrough because it required Employers to purchase the insurance and encouraged them to keep their workplaces safe to avoid rising rates associated with accident prone workplaces.