Bank stress test has been completed. The results are withheld until earning season is over. The aggregated result may be released. This indicates that at an aggregate level, the stress test results reveal weakness vs. strength.
What if weakness is revealed?
It could force capital infusion. Where will the capital infusion come from? It could come through Public-Private-Investment-Program (PPIP) since the others have been exhausted.
What if strength is revealed?
Then, the banks can focus on serving customers instead of worrying about raising capital.
Wednesday, April 8, 2009
Tuesday, April 7, 2009
Liquidity vs, Credit Crisis
Liquidity - ability to turn an asset to cash.
Credit - Ability to borrow.
Liquidity Crisis - Inability to sell assets; such as, loan portfolio, asset backed security and CDO.
Credit Crisis - Consumer and business unable to borrow.
Credit - Ability to borrow.
Liquidity Crisis - Inability to sell assets; such as, loan portfolio, asset backed security and CDO.
Credit Crisis - Consumer and business unable to borrow.
Saturday, April 4, 2009
Thursday, March 26, 2009
Impact of Market Downturn on Hedgefund and Mutual Fund Industry
Both the industries have witnessed massive redemption. Their portfolios have shrunk due to the sudden fall in equities. Due to these, the overall portfolio sizes have shrunk. The industry will endure the following 5 changes.
1. Increase Fee Structure - Fees will rise to spread the cost to fewer investors.
2. Increased Consolidation - Industry will consolidate. Weak players will disappear. Weak Funds will disappear. strong funds and companies will strengthen.
3. Increase capital outflow and retail investment in stocks and bonds - With equities at decades low, retail investors are venturing into the stock and bond market in greater number.
4. Increased Regulation - Hedge fund industry has enjoyed relaxed regulation. That will be a luxury going forward. They will need to maintain higher capital to absorb risk. They will have to be more transparent with their methods. They will also be subject to more regulatory oversight.
5. Increased flight to ETF - ETFs are more tax efficient and regulated. Investors will fly to ETF to avoid the cost structure of mutual fund and hedge fund.
1. Increase Fee Structure - Fees will rise to spread the cost to fewer investors.
2. Increased Consolidation - Industry will consolidate. Weak players will disappear. Weak Funds will disappear. strong funds and companies will strengthen.
3. Increase capital outflow and retail investment in stocks and bonds - With equities at decades low, retail investors are venturing into the stock and bond market in greater number.
4. Increased Regulation - Hedge fund industry has enjoyed relaxed regulation. That will be a luxury going forward. They will need to maintain higher capital to absorb risk. They will have to be more transparent with their methods. They will also be subject to more regulatory oversight.
5. Increased flight to ETF - ETFs are more tax efficient and regulated. Investors will fly to ETF to avoid the cost structure of mutual fund and hedge fund.
Fed Bond Buyback
Last week when Fed Chairman announced US treasury buyback, bond yield fell and soon after mortgage rates fell as well. Then, market digested the news. The next day the market sold off. When Secretary Geither announced the details of public-private approach to purchasing toxic assets, market reacted positively. Then, Treasury tried to buy bonds. It received lukewarm response. Then, it received massive response.
Overall, the investors are expressing confidence. Market seem to reinforce that. A week is too early to declare victory. But, given the rout in the stock market and the recent improvement, FED effects seem to be working in the right direction.
Overall, the investors are expressing confidence. Market seem to reinforce that. A week is too early to declare victory. But, given the rout in the stock market and the recent improvement, FED effects seem to be working in the right direction.
Tuesday, March 24, 2009
Call for new global reserve currency is premature
US Dollar is the currency in which many countries hold their foreign reserves. Due to the FED decision to purchase treasury bonds and due to recent the fiscal deficit, trading partners; especially, China is wary of US Treasury Bonds (also of US $).
Oil trades in US $. Exports trade in US $. US $ is free float. Ruble is volatile. Chinese Yuan is float within a narrow band. Many countries have tied their currencies to US $ due to its history and stability.
Current US fiscal deficit and rise/fall of US $ is a short-term phenomenon. US is blessed with the bounty of nature, innovation, free market and entrepreneurship to overcome the deficit and balance budget.
Let's analyze Euro. Euro has gained in strength since its inception (was equivalent to $0.84 and ended above $1.50 last year), has lost strength after the global economic crisis. UK has thus far remained outside of Euro. Euro is a global currency in a limited scale (within the Euro zone). Has this alleviated the problems of the member countries? No.
A new global currency is not something the world needs. World needs to rid itself of the toxic assets and get back to the path of growth. That is what is truly needed.
Oil trades in US $. Exports trade in US $. US $ is free float. Ruble is volatile. Chinese Yuan is float within a narrow band. Many countries have tied their currencies to US $ due to its history and stability.
Current US fiscal deficit and rise/fall of US $ is a short-term phenomenon. US is blessed with the bounty of nature, innovation, free market and entrepreneurship to overcome the deficit and balance budget.
Let's analyze Euro. Euro has gained in strength since its inception (was equivalent to $0.84 and ended above $1.50 last year), has lost strength after the global economic crisis. UK has thus far remained outside of Euro. Euro is a global currency in a limited scale (within the Euro zone). Has this alleviated the problems of the member countries? No.
A new global currency is not something the world needs. World needs to rid itself of the toxic assets and get back to the path of growth. That is what is truly needed.
Removal of toxic assets from bank balance sheets
Treasury's model is public private model. This will help to establish a realistic market price for the illiquid assets. Fed is on the hook for 85% of investment while the private investor is on the hook for 15%. It is better than FED being on the hook for 100% of investment as in the case of the insurance giant.
Market has reacted to this positively. Several institutions have expressed interest in this.
By removing troubled assets from banks balance sheets, banks will start lending more freely.
This approach is promising. Off course, time will tell the outcome.
Market has reacted to this positively. Several institutions have expressed interest in this.
By removing troubled assets from banks balance sheets, banks will start lending more freely.
This approach is promising. Off course, time will tell the outcome.
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