The Role of Investment Banking in the 2008 Financial Crisis

(originally posted September 3, 2012)

An investment bank is generally a special type of financial institution that help companies access the capital markets such as stock market and bond market to raise money for expansion and other needs. If a company wanted to sell billions worth of bonds for project use, investment banks would help them find buyers for bonds and handle paper works. Today, investment banks also provide other financial activities such as offer broker-dealer and investment advisory services, and trading derivatives and commodities.

Investment banks play an important and active role in the economic development of a country. When investment banks act properly, they bring together investors and businesses to help channel the nation’s wealth into productive activities that create jobs and bring a possible growth in various sectors of economy. But that is when investment banks act properly. Looking back at the 2008 crisis, the senate found that the results of unregulated activities of the investment banks were the reasons for the collapse of economy. Investment banks turned bad mortgage loans into economy-wrecking financial instruments fuelled the downfall of market.

Internet Banking: Risks and Safety Measures

(originally posted July 25, 2012)

Beginning in the late 20^th century to the present day, technology has boomed to a whole new level. Take these images for example: from the old Nokia phone with an antenna, yellow backlight, hard to press keypads and the game Snake, we now have slick, talking iPhone 4S with a camera, video camera, games, stock and weather updates and many, many more. From bulky desktop computers, we now have portable tablets. From having to snail mail when wanting to communicate which could take days or weeks, you can now actually see your loved ones with just a simple click of a button on Skype or Facetime. But apart from technology improving our gadgets and ways of communication, it also improved and eased our financial transactions. Through E-banking, clients are now able to accomplish their bank transactions without having to go through the hassle of going to the bank and withdrawing the money to be used.

The Risks and Rewards of Using Brokerage Firms

“Too many people say to their brokers, I can’t deal with this. Take my money. Do what you want. That’s the worst attitude you can have.” Maria Bartiromo (American Television Journalist)

 

One of the good things brought about modernization and the advancement of technology is that they make life easier and more convenient for the people. From the modern transportations, the ever-evolving cellular phones to the development of new products in the financial markets, there surely is an endless list to all the benefits that people can reap from all these innovations.

Current Status of Different Brokerages in the Philippines

 

            Brokerage firms have increased and grown around the world. It is very essential in the world of finance and it has reached different countries including our country, the Philippines. But what is the current status of the brokerage in the Philippines? Is there any difference in other countries or is it just the same? Before all this, we should first discuss what a brokerage firm is. As stated in Investopedia.com, a brokerage firm, also called as simply brokerage, is a business whose main responsibility and purpose is to be an intermediary that puts buyers and sellers together in order to assist and facilitate a transaction. After the transaction has been successfully finished, these brokerage companies are compensated through commissions and fees. These groups of brokers who buy and sell your shares on the open market offer services, which are necessary to buy and sell in your name. It is important to look and work with brokerage firms with well-known names and good reputation. They should also have a solid foundation and experience to back them up. Every day, millions or even billions of transactions are done and traded. And this kind of exchange must be made with qualified and capable brokerage firms. This is to assure that solid investments are accomplished. Many brokerage firms compete for businesses, this with the increase of online brokerage firms. There has been a boom in online brokerage services due to the advancements in technology. This has given benefits like drop of trading fees, and many more. To have a highly skilled brokerage firm on your side can make a huge difference in the finances of one. This will maximize the benefits and minimize the hurdles that may prevent and stop one’s success. It is important to know the different brokerage firms in and outside your country, because this will help you get started in the right direction.

 

In the Philippines, a stockbroker is a person or a corporation authorized and licensed by the Securities and Exchange Commission (SEC) and the Philippine Stock Exchange (PSE) to trade securities. When buying and selling listed securities, the brokerage firm always acts as an agent between you, the buyers and sellers. His function is to execute the client’s order and to give advice when required. For the services rendered, the brokerage firm charges its clients a commission. When you buy stock, the brokerage firm adds the commission to the value of the shares bought. When you sell shares, the commission is deducted from the proceeds that you receive. The maximum fee is 1.5% of the gross value of the transaction plus 10% value added tax. This means that 10% is added to the brokerage commission to be paid with a maximum of 1.65%.

 

The Securities and Exchange Commission of the Philippines is the regulator of the forex business in the Asian nation. As a developing economy, Philippines cannot be said to be a major hub for forex brokerage, and the local community is being serviced by U.S. based firms which are regulated under the rigorous oversight that any domestic American broker is subject to. Activities in the Philippines, however, are under the regulatory coverage of the SEC of the Philippines, which is itself modelled on the American system.

 

While in real estate brokerage, selling real estate in the Philippines is a lucrative career if you know how to find the right market to tap into. Over the years, Filipinos working abroad have been the top buyers of condominiums and houses and lots. A real estatebroker is a person who acts as an intermediary between sellers and buyers of real estate and attempts to find sellers who wish to sell and buyers who wish to buy.

In the Philippines, people have started investing in real estate like never before. In every part of Metro Manila condominiums are being constructed especially in those business districts. Even in the provinces, subdivisions are rising since people realized that is much practical to buy house and have it financed. The real estate industry is increasing dramatically and it is a good business since we have a young population.

 

Customs has been quite a niggling issue in the country. You hear people complaining about how it’s hard to get shipments past customs, how the delays costs them even more money, or how people at times end up paying more for customs fees than for the purchased package. But most people don’t really understand the details in the process that lead to holdups. Perhaps it would be better if we retrace our steps and go back a bit.

How do we define customs brokerage in the Philippines? These are companies who are given license to assist parties in shipping goods in and out of the country by helping them process the documents and fees needed for the goods. In order to do this, they have to have extensive knowledge of the customs law and regulations, know how to classify the goods and identify the corresponding tariffs, among many other things. The licensing bodies in the Philippines are the Professional Regulation Commission and the Bureau of Customs, a branch of the Department of Finance.

 

The broker profits by intermediating between two (or more) parties. Using a biform game, we examine whether such a position can confer a competitive advantage, as well as whether any such advantage could persist if actors formed relations strategically. Our analysis reveals that, if one considers exogenous the relations between actors, brokers can enjoy an advantage but only if (1) they do not face substitutes either for the connections they offer or the value they can create, (2) they intermediate more than two parties, and (3) interdependence does not lock them into a particular pattern of exchange. If, on the other hand, one allows actors to form relations on the basis of their expectations of the future value of those relations, then profitable positions of intermediation only arise under strict assumptions of unilateral action. We discuss the implications of our analysis for firm strategy and empirical research. Well, brokerage is a lucrative business in the Philippines since everything goes positive in this country. It has been performing great. The Philippines Stock Exchange is in its all-time high records. Tall buildings are rising because people are now investing more in real estate. Brokerage is a way of meeting the minds of people.

           

Source:

–       http://www.investopedia.com

–       http://www.business.com/finance/us-brokerage-firms/

–       Brokers and Competitive Advantage

Michael D. Ryall and Olav Sorenson

Management Science

Vol. 53, No. 4, Strategic Dynamics (Apr., 2007) (pp. 566-583)

Page Count: 18

–       http://www.ehow.com/how_5035840_become-real-estate-agent-philippines.html#ixzz25U3nk91j

–       http://fglinc.tripod.com/knowinvest.htm

–       http://www.forextraders.com/forex-broker-philippines.html

 

 

Written by: Descanzo, Jiou

Tayag, Adrian

Tubig, CJ

Conflicts of Interest in Investment Banking

An investment bank is a special type of financial firm that deals with assisting different companies or institutions enter the capital market for the purpose of raising funds for future expansion or other needs. Though they usually appear as an aid for issuance of securities, investment banks at the present do not only focus their activities at a one point. Aside from the service they offer to assist in the issuance of securities, they also have started adding other services like retail operations, providing brokerage services to individual investors, and proprietary or principal operations, either in trading or merchant banking. Each kind of service entity has its own nature and goals. Thus, if all these services are put into one bank, it is possible to create conflicts that could question the main essence of the financial institution. This paper would tackle how the different services and activities exercised in an investment bank could possibly result to numerous conflicts of interest.

Brokerage Law and Practices

In every firm, there are rules and regulations. These are set to have order in the firm and the community. Brokers also have these regulations and conduct of business.

LAW FOR BROKERS

 License. In order for a broker to engage in business, he or she is generally required to acquire a license and pay a fee. Brokers who conduct business without a license can be fined by state licensing authorities. In some states it is illegal for any person other than a licensed broker to be paid for services concerning real estate transactions. Brokers also have license tax. In the context of law, any individual who regularly works as a middleperson or negotiates business transaction for the benefits of others is considered a broker. It has been held by a federal court that a statute requiring brokers to obtain a license was only applicable to those people regularly employed as brokers. An individual only casually involved in brokerage through the arrangement of only a few sales would not be considered to be engaged in the business of brokerage.

Revocation of License The state’s concerns regarding brokers extend beyond initial licensing to the establishment of conditions for the maintenance of a license. The state may provide for the revocation or suspension of brokers’ licenses for reasonable grounds.

The power to revoke a license may be vested in a specially designated commission that exists primarily to hear complaints about the fraudulent practices of brokers. Such proceedings are ordinarily informal, and technical court rules generally are not observed.

During a hearing, the commission is presented with evidence relating to the broker’s conduct and must consider whether such conduct warrants denial of the privilege to engage freely in business.

Grounds for revocation of a license are generally based upon Fraud, dishonesty, incompetence, or bad faith in dealing with the public. A real estate broker’s license may be revoked or suspended because of Misrepresentation used to affect a purchase or sale. Generally, the conduct of a broker in negotiating a real estate transaction on behalf of his or her principal is subject to strict fraud and deceit standards, equal to those imposed on his or her principal. It has been held by some courts that the failure of a broker to disclose material facts within his or her knowledge will create liability. Within the meaning of fraud is the pretense of knowledge on the part of the broker while executing a real estate transaction where no knowledge actually exists—for example, while selling a house a broker states that there are no concealed defects in the house, although he or she does not actually know if such defects exist.

A real estate broker’s license may be suspended or revoked if duties are performed unlawfully. In addition, a broker’s license can be revoked or suspended if a broker is guilty of racial discrimination in the selling and leasing of property.

Stockbrokers may be liable for various unethical activities, such as churning, which is the unnecessary trading of stocks to gain additional commissions. A Consumer Protection organization, the Securities Investor Protection Corporation (SIPC), has been established by Congress to aid customers of securities concerns that go out of business.

Bonds State regulations usually require that brokers, especially those engaged in the real estate business, deliver a bond to insure faithful performance of their duties. The liability of the surety guaranteeing such a bond extends only to transactions that arise during the normal course of the broker’s business and that are intended to be included in the bond.

Commissions A broker is ordinarily compensated for services by the payment of a commission, based upon a portion of the value of the property in a particular transaction.

Generally, a commission is earned when negotiations between a buyer and seller are completed, and an agreement is reached. It is customary for a broker to deduct and reserve the amount of commission from funds obtained by him or her for a client. The ordinary basis for the calculation of a percentage commission is the total sale price of whatever is sold.

In order for a broker to be entitled to a commission, a sale must be completed for which the broker has been employed.

The broker’s right to a commission is not dependent upon the finalization of the transaction unless otherwise agreed upon by the broker and by his or her client.

The compensation of a broker is based upon procurement of a client who is willing and able to purchase. The specific terms of the transaction must be satisfactory to the broker’s client.

Of paramount importance is the prospective buyer’s ability to provide the required funds at the suitable time. A broker who has properly performed his or her duties should not be denied a commission due to a failure by the parties to consummate the deal.

In the absence of any agreement to be employed by a client, a broker is not to be compensated for voluntary services. Similarly, compensation is not due a broker when a sale is made by an owner after the broker-client relationship has been terminated. A common type of termination is the expiration of a real estate listing. This rule against the payment of a commission is absolute—regardless of whether or not the sale is made to an individual whom the broker initially produced—provided the broker was given ample opportunity to complete the transaction and failed to do so. Once a broker has earned his or her commission, a client may not terminate the relationship and complete the transaction himself or herself in order to avoid paying the broker.

Any fraudulent misrepresentations or evidence of bad faith on the part of the broker will defeat his or her right to a commission. Mere Negligence in the execution of duties, in the absence of bad faith, does not automatically defeat a broker’s right to compensation.

PRACTICES FOR BROKERS

Brokers want to earn commissions and sometimes they are under intense pressure. Sometimes what brings in most money for them is not always what is best for investors or what they really want. There is this temptation to sell excessively risky products because they are more lucrative than the low-risk alternatives. According to Investopedia, here are some “simple rules for brokers”

Eight Simple Rules for Brokers

When in Doubt, Spell It Out
If it even occurs to you that an investor may need or want to know something, tell them. Never succumb to the urge to keep quiet, even when you know this may cost you the deal.

Do unto Others
Put yourself in the position of the investor. If you would prefer not to be handled in a certain way, don’t do it to someone else. Above all, avoid self-deception. The best test is to ask yourself whether you would want your mother, brother, best friend or indeed yourself to have these investments.

Avoid One-Size-Fits-All Approaches
Everyone has different needs, preferences and circumstances. They therefore need a portfolio that truly caters to them. The correspondence you send out should also be tailored to each client. Nothing is more useless to a client than a standardized quarterly letter containing general information that he or she could get from the newspaper or any website. Most clients will switch off and not even read them. What customers need is customized information about their own portfolio, how its doing and why, what changes you plan, etc.

Ask the Client -Don’t Expect Them to Ask You!
A client won’t ask for clarification if he or she doesn’t realize it’s needed in the first place. Make absolutely sure that the client knows what he or she is getting. They do not need to know every intricate detail, but they certainly need to know, at minimum, how risky the product is in relation to the probable returns. There should be no surprises in store for the unwary and trusting investor.

Be Specific About the State of the Market
You should discuss the market with your client in general and with respect to the specific asset classes. This does not mean attempting to time the market, but the investor ought to know whether the market has been booming for years and is regarded as possibly overpriced, or whether the converse prevails. In the same vein, if people are saying that commercial property may well have peaked, tell that to the client. There is nothing wrong with stating that “opinions are divided and it could go either way”. But there is something wrong with keeping quiet about potential disadvantages and risks in order to push through the sale.

Be Open About Monitoring and Control
A client should know how often you will monitor the investments and what this really means. For instance, will you call the client if there is news in the media that things may go be going sour for a particular asset? This also applies to positive new opportunities that can pop up. If all you plan to do is take a look at the asset allocation once a year, that may be OK, but the client needs to know that he or she cannot expect more from you.

Show the Client Visually How Things Work
The classic multi-color pie chart with asset class combinations for high, low and medium risk is a great way to demonstrate the very essence of the investment process. Likewise, “pyramids of risk” which show how one moves from a low-risk basis of cash, upward through bonds to equity funds and so on, should always be the starting point of the advisory process.

Explain Brochures
Simply handing your client a pamphlet is not enough. There is a good chance they will not be understood and they may not even get read. Go through the main points with clients, so you can be sure they really understand the main elements of the investment and what the text means. The man in the street does not know the meaning of such phrases as “optimizing portfolio risk,” “sector allocation,” “overweighting mid caps” and dozens of others. Similarly, ordinary investors are generally unaware of the meaning and implications of long-term versus short-term investments, or the difference between investment styles like value and growth. There is an optimal (and minimum!) level of communication and understanding that is essential for good brokering practice.

By: Camille Sy & Christine Dolina

Problems of Investment Banking

An investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client’s agent in the issuance of securities. An investment bank may also assist companies involved in mergers and acquisitions, and provide ancillary services such as market making, trading of derivatives, fixed income instruments, foreign exchange, commodities, and equity securities (Wikipedia 2012). Laurence Knight, a business reporter, said that Investment banks carry out two very different, and sometimes conflicting, functions in the financial markets. Traditional “investment banking” refers to financial advisory work. For example, a big corporation might ask for the bank’s help if it wants to borrow money in the bond markets, or float itself on the stock market, or buy up another company. In this capacity, the investment bank acts as an impartial adviser, like a solicitor or an accountant, using its expertise to help its client in return for a fee. But investment banks also do something else quite different. They deal directly in financial markets for their own account. An investment bank’s “markets” division makes money by buying financial assets from one client, and then selling them to another, often with a hefty mark-up.

It is banks’ capital markets whizz-kids who were behind the last decade’s boom in “derivatives” – complex contracts that allow clients to speculate on financial markets. For example, the investment bank may know a pension fund in London who wants to buy Russian mortgage debt, while its Moscow office may know a local home loans company. The bank may offer to buy the Russian client’s loans, and then sell them on to the London client through a derivative contract, but at a much higher price. The profits on these kinds of transactions were enormous during the boom years – and have become enormous again during the recovery. These transactions are supposed to be risk-free for the investment banks – it is the buyer who should end up with all the risk. But as the demise of Lehman Brothers and others demonstrated, the business can contain many hidden risks that only come to light during a financial crisis.

Unlike their colleagues in the advisory division, the salespeople and traders of the markets division do not have any obligation to take their supposedly sophisticated clients’ interests into account. This creates a well-known conflict of interest – the risk that the bank’s traders may abuse confidential “inside” information given by clients to the investment bank’s advisory people. For this reason, all investment banks are required by law to have a “Chinese Wall” that prevents information passing from the advisory division to the markets division. However, the financial crisis revealed a new source of controversy – the US financial watchdog found investment-banking supreme Goldman Sachs had misled clients into buying dud investments. The case has led to calls by some US politicians for new rules that will ban traders at investment banks from exploiting their clients’ gullibility.

Strictly speaking, what investment banks do not do is “traditional” banking – taking deposits from ordinary folk and making loans to local companies. But that has not stopped most investment banks teaming up with a big retail bank. Warburgs, Salomon Brothers, JP Morgan, Merrill Lynch, Bear Stearns are all big investment banks that have been bought up by High Street banks. Deutsche Bank and Barclays grew their own investment banks from scratch. Only Goldman Sachs and Morgan Stanley remain as pure investment banks. By teaming up in “universal” banks like this, the investment banks can put all those retail deposits to much more profitable use. But since the crisis, there have been calls on both sides of the Atlantic to split these banks up again. In the US, former central banker Paul Volcker argued successfully that the government should ban these universal banks from their more risky activities that gambled depositors’ money on global markets. In the UK, the independent banking committee has been tasked among other things to look at the complete split-up called for by Liberal Democrat Vince Cable. But some query the logic of the move. Lehman Brothers was a pure investment bank, not a universal bank, but that did not stop its collapse from nearly sinking the entire financial system.

The level of profits and pay earned by investment banks far exceeds that of most other industries. Many wonder why. Hard work and talent play a part. Bankers – particularly juniors working in corporate finance – are famous for working 12-plus hours a day, including weekends. Bankers will argue that the high pay reflects the importance of their work. By channeling money from those who have it spare, to those who can put it to good use, Wall Street and the City help drive the investment that underpins economic growth. But some may ask why, if investment banks make so much, other banks do not enter the market and undercut their profits. Part of the answer is that very few firms have the necessary global reach. To make money, an investment bank must be able to match all kinds of investors and borrowers from all parts of the world. The most profitable transactions usually come when a bank spots an opportunity to match buyers and sellers that nobody else has seen. But others argue that much of the investment banks’ reported profit is not real. Because bankers are paid such big bonuses, they seek clever ways to report higher profits while concealing the true risks from their own management or shareholders. And some may also ask whether a business that makes money through the creation of ever more debts has already reached the limit of its social usefulness (BBC News Business 2010).

Discussing the nature of investment banking is not enough. The people must be more knowledgeable about the risk they would take if they engage in investment banking. Thus, the paper will talk about some challenges that investment banking goes through. Because of the innovation being yearned for, investment banking emerged. This process is still recently developed that is why adjustments are still in progress. Investment banks still need to focus on the following: demographic challenges, emerging market’s growth, technology commoditization, ultimate value to investors, re-evaluation of capital, resource constraints, the inability to predict risk, debt finance, and complexity.

Widely reported, most developed economies are struggling to come to terms with seismic demographic challenges. To varying degrees, these are set to transform the way people live and work. Life cycle savings and ageing populations point to the need to save in developed economies, making asset management an increasingly vital source of revenue growth for investment banks (Accenture 2011). Economies experiencing rapid growth, combined with little well established competition, offer exciting opportunities for investment banks. But the risks, and operational challenges, of expansion into these new geographies are still being potentially underestimated (Accenture 2011). Technology has repeatedly demonstrated its ability to commodities banking offerings – particularly in non-relationship based, low value added areas. With commoditization increasingly dominating ‘flow’ businesses, clear-sighted strategic decision-making is vital. Banks must either make the substantial investments in straight through processing capabilities needed to achieve economies of scale, or concentrate on areas such as advisory, that cannot be commoditized (Accenture 2011). Investment banks have to concentrate on services and offerings where they deliver value to their clients, not just margins to them. This makes it essential for banks to develop deep, real-time insights into the risk/reward balance of their products and services (Accenture 2011). Savings deposits may be the most desired form of capital, undemanding and sticky, but those attributes also make it rare and likely to become rarer. Investors have many more choices on where to place their capital and the amount placed in savings has been one of the slowest growing of all areas for over a decade. With this in mind, investment banks need to re-evaluate capital’s importance in any service of product and charge accordingly (Accenture 2011). Mounting resource constraints point to gradually rising input costs becoming a universal backdrop to all business and banking activity. With oil approaching peak output, and basic commodity costs responding to wide demands of emerging markets, a reordering of economic priorities looks to be the likely result. Sustainability is now on the agenda (as a serious business issue) across all business sectors and investment banks must overcome their institutional cynicism and follow suit, as well as capitalize on the opportunities presented (Accenture 2011). Based on further research, another fundamental problem that has been exposed is the inability to correctly predict risk. This is the risk of default amongst vast swathes of mortgage owners. This led to money being lent in the form of mortgages to people that could not repay, because the mortgages themselves were pooled together and sold as assets by investment banks. Of course, it turned out that many of these assets were worthless. One more challenge is leverage, also known as debt finance. Investment banks and hedge funds were borrowing and risking increasing amounts of money without a proper appreciation of the risk involved. The more money borrowed, the worse the consequences and investment goes sour. Governments are also falling foul of the debt trap. Increased levels of borrowing are causing financial instability and concern over our ability to repay. The increased cost of servicing this debt in the form of interest is also damaging the ability of the productive private sector to create wealth and prosperity (UK DebtBombshell 2010). An additional problem is complexity. Investment bankers created complex financial instruments, known as derivatives, to hedge their investment risks. Unfortunately the scale of this means that global financial institutions have become deeply interlinked. Therefore, when there is a problem in one area of the banking system, it quickly threatens all other areas.

All these challenges do not apply to every investment banks, but then, most of the problems are surely experienced by them. The start of an innovation or a change is really demanding and strenuous, but identifying entities’ problems or challenges, indeed, help in its own advancement and growth.

Christine Elisha Dolina  ●  Camille Tommei Sy

The Thing About Brokerages

Brokerage firms have been in the service of investors since their conception in the earlier days. From the traditional brokerage firms of the olden day to the now increasingly popular discount brokerages, brokerages have served one important purpose to investors worldwide – the connection of buyers and sellers. Like any financial intermediary, they serve as middlemen in financial transaction; more particularly speaking, in the process of buying and selling of financial securities between two parties. For investors who aren’t well-versed in the market, traditional brokerages could be of great assistance, providing information, doing research and managing the investor’s financial portfolio for a relatively reasonable fee since these things are considerably crucial when making investments. They also serve as advisors, doing consultancy work for investors of different types while considering into factor the investor’s current financial situation and retirement plans.  These services vary, however, with respect to the type of brokerage the firm is and to the place in which the firm is based in.

Regulations in Philippine Investment Banking

    The government plays a vital role in investment banking in the Philippines, one of its role is regulation. Regulation means some laws promulgated by the government which creates limits, constraints actions of an individual or entity. Like any other banking system, investment banks are heavily regulated under the fact that they have large corporate or government clients which means that they transact in large denominations.

Capital Management in Investment Banking

The banking sector is divided into two major divisions: investment banking and commercial banking. It is necessary to differentiate the two because most people are familiar only of commercial banks Commercial banks manage deposit accounts, such as checking and savings accounts, for individuals and businesses. They provide loans to the public using the money held on deposit. On the other hand, investment banks facilitate the buying and selling of stocks, bonds and other investments, as well as helping companies to go public with initial public offerings (IPO). While commercial banks are highly regulated by a number of authorities, investment banks are only lightly controlled allowing them much more leeway in their strategic decision-making. Investment banks have a higher risk tolerance due to their business model and the relative weakness of government regulation in the industry.