'Too Big to Fail ' HBO film

HBO have made a film portraying the banking crisis of 2008.
Follow the link for a review of the film and then check you tube's trailers.
Media Life Magazine - 'Too Big to Fail,' a big story, well told
For background vocabulary check back to the posting on Nov 8th 2010.

Unit 9 Insurance What are captives?

 

Background reading for the exercise on page 93

From hamilton recruitment website:

The global insurance industry has seen a significant change in its role and competitive structure over the last two decades with international banks and financial service companies presenting competitive threats with their offering of new insurance products.
The Bermuda insurance market took the lead role on the global stage with an increasing presence through market expansion and acquisition and is second only to the City of London for insurance in the world. One of the key ways it has achieved this is through the development of the innovative concept of “captive” insurance companies.

Captives

A captive insurance company is defined as "a closely held insurance company whose insurance business is primarily supplied by and controlled by its owners, and in which the original insureds are the principal beneficiaries”. In layman's terms, a captive is an insurance company formed exclusively to insure (or reinsure) the insurance risks of its parent corporation. What is the point of a captive? Major Fortune 500 corporations (e.g. Coca Cola or Boeing) will set up a captive of their own in order to better control - and minimise - their own insurance bill (e.g. premium that would otherwise be paid out to a third-party insurance provider to cover workers' compensation claims for accidents in the work place). In this way, they hope to reduce costs from insurance claims (by adopting a rigorous vetting procedure on all claims) as well as gain access to the reinsurance market (better premium rates) and have the option to decide for themselves where to invest the premium dollars passed down to the captive entity (thereby possibly avoiding third-party investment management fees).
It is a huge financial market: Globally, captives generate $18 billion in annual premium. Their capital and surplus amount to $45 billion and they control investment assets of more than $100 billion. Captive insurance and reinsurance companies are an integral part of the alternative risk transfer market, which accounts for approximately 30% of global commercial premium. In all, some 4,000 captives serve their parents' risk financing needs around the world, and this number is growing steadily, in Bermuda and other leading offshore financial centres in the Caribbean such as Grand Cayman and the BVI.

One of the functions of a captive is to facilitate the efficient financing of risk within an organisation. Captive owners can be found in a wide range of sectors including multi-national corporations, associations, banks, municipalities, transportation companies, power producers, telecommunication companies, shipping companies, airlines and insurance companies.
A captive serves as a sophisticated in-house risk carrier. It can be used both as a weapon and a shield to control the upswings and downturns in the commercial market. A captive can bypass many of the problems and frictional costs inherent in the insurance industry. It can be an important co-ordination tool for risk managers. A captive forms part of the overall financial planning of a corporation or organisation, and through the captive, risk management issues are brought to the attention of executive management.
A captive can operate as a direct insurance company, issuing policies to subsidiaries in a group, or it may serve as a reinsurance company, assuming risks behind commercial insurers. Captives traditionally underwrite property & casualty risks, but to an increasing extent are also involved in life assurance and employee benefit schemes.
The commercial insurance industry can be slow in meeting new needs and embracing new concepts. For many captive owners, increased awareness of risk management problems has paid off in loss records that are substantially lower than industry average, especially those used to set commercial rates. Many corporations, groups and other organisations have formed their own insurance subsidiaries (i.e. captives), rather than being penalised by higher premiums based on the poor loss experience of other companies in their respective industries, and have gained many risk management and financial benefits.

Captive benefits

Underwriting profit
With a captive solution, the underwriting profit goes directly to the captive and thus flows back to the parent, not the commercial insurance carriers.
Improved cash flow and investment return
By controlling the captive's premium and loss reserves and investing premium funds in the stock market, substantial investment income can be earned by the captive. This income could be used to finance expansion of the business, as a reserve or savings, and as payment of debts. This income would otherwise go to commercial carriers.
Reduced overall cost of coverage
Premiums paid to the captive are no longer used to subsidise the commercial carriers' overheads and profits. This contributes to a lower premium. Also, premium rates in a captive are typically calculated according the the parent's own claims activity history and not set by industry-wide standards.
Access to the reinsurance market
A captive provides an entirely new avenue through which to obtain wholesale, lower premium quotes not offered by primary insurance carriers.
Unbundled support service
From the owner’s perspective, with a captive it is possible to pick and choose the optimum combination of claims settlement, policy issuance, reinsurance protection and loss control.
Access to otherwise unaffordable or unavailable coverage
A captive has the ability to provide tailor-made policies and coverage – a feature that is often difficult or impossible to obtain from the commercial market.
Co-ordination of global exposure
The use of a captive can be complementary to the centralisation and efficient control of a multi-national insurance program.

 

Raising Finance: General Motors

From tutor2u:

General Motors (GM) – for decades the world’s biggest carmaker – have broken the record for the largest ever sale of shares, raising a whopping £12.6bn.  Their shares rose 7% to $35.99 in early trade in New York, having been priced at $33 by the company.  The sale marks what looks like an astonishing turnaround after the firm had to be rescued by American taxpayers in 2008.
More sales are planned for the near future which could push the record breaking deal even further.  President Obama must be very relieved – he has faced hostile criticism for allowing the firm to survive with a $50bn government bail-out.  But there’s still a long way to go if the taxpayers are to get all their money back.  It’s thought the government will have to sell its remaining stock at around $50 a share for several years to recoup its investment.  Now the US government has reduced its 61% stake in the company to around 33%.
But the bailout was never only about GM.  The rescue package was aimed at a firm that was, in effect, “too big to fail” (just like a big chunk of the UK banking sector).  Had it sunk, hundreds of thousands of jobs along the supply chain may have been lost.  At the moment a general revival does seem to be under way, at least in terms of the profitability and competitiveness of the companies involved.  But the cost has been huge: tens of thousands of workers were laid off, plants closed, familiar brands ditched and auto dealers told to look for other work.
Which car maker knocked GM off its top spot as the world’s number 1?  The answer of course was Toyota.  But Toyota’s dash for growth came with severe consequences with plummeting quality and a disastrous series of product recalls.

Origin of 'Go to the wall'

http://www.word-detective.com/2007/07/31/go-to-the-wall/
Fascinating stuff from the word detective.

Regulators failed to watch over Big Four during crisis, say Lords - 09 Nov 2010 - Accountancy Age

Regulators failed to watch over Big Four during crisis, say Lords - 09 Nov 2010 - Accountancy Age
This follows on from the listening summary task on page 84.
Check the vocab we have seen in unit 8.

Unit 8 Banking: Tier 1 capital

From CUP resources:  What is it? A bank’s assets can be categorised according to how risky they are. Tier 1 capital is considered the least risky, followed by less reliable capital in tier 2. A bank with high tier 1 capital is considered more stable (from a regulator’s perspective), better able to sustain future losses and less likely to collapse. Tier 1 capital includes equity capital (= money invested by shareholders, which the shareholders cannot withdraw at will) and disclosed reserves (= the bank’s own money). The bank itself has complete control over both equity capital and disclosed reserves, so there is no risk of unpleasant surprises. Why is it in the news? Governments around the world are currently attempting to reduce the riskiness of their banks, in order to avoid the need for future bailouts from public finances. This means banks will be expected to hold much more tier 1 capital than before. At the G20 meeting in Toronto, leaders pledged that “the quality of capital will be significantly improved to reinforce banks' ability to absorb losses”. The ratio of a bank’s core tier one capital to its risk-weighted assets, which is currently 2 per cent, is expected to double and could rise further.  In some countries, such as the UK, there will be a new banking levy, but Tier 1 capital will be exempt from the tax. Reading The BIS press release (last link below) spells out the requirements for capital to be included in Tier 1. Although it is a short press release, it contains large amounts of financial jargon. Discussion Why are governments so keen to improve the quality of banks’ capital? What is the best way to achieve this? Will the current measures work? What will be negative impact (on banks, on borrowers, etc.) when banks have to hold more safe capital? Where can I read about it? TEXT - Extracts from G20 Toronto Communiqué, Reuters, June 27th 2010. Chancellor’s tax may not reduce risk, Financial News, June 28th 2010. Will banks' medicine kill them (and us)?, BBC News, June 25th 2010. G20 backs drive for crackdown on banks, Financial Times, June 27th 2010. G20 summit: UK banks told to boost funds by £130bn, Telegraph, June 28th 2010.  Tier 1 capital, Wikipedia. Instruments eligible for inclusion in Tier 1 capital, Bank for International Settlements (BIS),

Unit 8 Banking: Bailout

What is it? Literally, it means trying to save a sinking boat by throwing bucketfuls of water over the side. ‘Baile’ was an old English word meaning ‘bucket’. In business, it means rescuing a failing company, and is typically used when the government provides money to a strategically important company to avoid a messy collapse. There is also a noun, a bailout (or a bail-out), to refer to this attempted rescue. Why is the term in the news? The US government  recently bailed out AIG, a huge insurance company. The bailout was considered necessary because the collapse of AIG would have had severe consequences for the US and global economy. This bailout in 2008, came only a week after the US bailed out Fannie Mae and Freddie Mac, two mortgage lenders considered to be at the heart of the US real estate market. The issue of bailing out struggling companies raises all sorts of interesting questions connected with the limits of the free market and the degree to which government intervention is necessary or desirable. Governments are in the undesirable position of being criticised if they bail a company out (i.e. for wasting taxpayers’ money and rewarding bad management) and criticised if they stand back (i.e. for allowing key firms to collapse and wreck people’s lives and businesses). Which companies have been bailed out in your country and around the world? What are the short-term advantages and disadvantages of bailing out struggling companies? Think about the bailed-out companies, the government, the taxpayer, the companies’ customers, the companies’ competitors, other countries’ governments, etc. What about the long-term advantages and disadvantages? Do you think governments should bail out more struggling companies? Adapted from CUP resources

Tourism Industry Battered By Exchange Rate High Colón Hits Hotels / Business & Real Estate / Costa Rica Newspaper, The Tico Times

This article has lots of references to the exchange rate mechanism that operates in Costa Rica.
See if you can identify any metaphors in the article
Tourism Industry Battered By Exchange Rate High Colón Hits Hotels / Business & Real Estate / Costa Rica Newspaper, The Tico Times

Unit 8 Banking Unit 10 Bankruptcy: Banks

Adapted from the CUP website

Too big to fail

What is it? This is a concept supporting the idea that certain businesses are so important to a country and its economy that it would be disastrous if they went bankrupt. The term has been often applied to the largest banks found in countries as they are considered key players in a healthy financial system. When a government has decided that an institution is too big to fail, it also means that it plans to step in and save it if it seems to be moving towards bankruptcy. Opponents to this idea, however, feel that it is counterproductive to keep large businesses alive if they cannot survive on their own. Why is it in the news? This concept has become increasingly important since the beginning of the financial crisis in 2008. As governments began to use taxpayers’ money to bail out large banks, the entire concept of allowing companies to become too big to fail has been an issue of contention in the news. Experts on both sides of the fence have written countless articles and blogs on the problem. During the Basel III meetings in Switzerland about new international banking regulations, the issue of capital requirements for such banks has been raised and there have been discussions in the UK about breaking up the large banks to separate the retail sections from investment banking. Discussion Let's discuss these questions in class What do you think about the concept of “too-big-to-fail? What are the positive and negative aspects of this concept? Why do taxpayers have to pay for large banks which fail?  Shouldn’t they have enough funds to keep this from happening? What is the danger of allowing banks to be created with such far-reaching influence on the financial system? What suggestions would you have for governments facing this problem? Where can I read about it? Basel Capital Rules Alone Won't Fix Too-Big-To-Fail Lenders, Sants says, Bloomberg, October 4th 2010. Swiss medicine could be painful for UK banks, BBC, October 5th 2010. Banks go on the defence as banking commission gears up, Guardian, September 23rd 2010.

Unit 8 Banking: Financial Inclusion

This website has a lot of information on Financial inclusion.
I look forward to your comments in class.
 You could  also  look at their glossary.
 http://www.centerforfinancialinclusion.org/Document.Doc?id=778

Unit 7Fraud / Unit 8 Banking

Following on from Unit 7 and related to Unit 8 is a very relevant topic: alleged Bank fraud
Read the article on the BBC website.
Vocab-related exercises are

from the CUP website: Subprime mortgage

What is it? A subprime mortgage is a loan granted to people who have poor credit histories and low credit ratings. For these reasons they do not meet the requirements for a conventional mortgage. As these loans are seen as risky by the lending institutions, they charge higher rates of interest than the normal prime rate, a rate of interest which banks establish for their most credit-worthy customers.  One of the most common forms of this type of loan is the adjustable rate mortgage (ARM). This begins with a fixed interest rate which is then adjusted to the current interest rate in the market plus a margin. At the beginning borrowers are able to keep up with their payments, but when the interest rates increase, their monthly payment also increase causing many to default on their loans. Why is it in the news? From 2004 to 2006 these mortgages were very popular as they enabled those with poor credit histories to take out loans and buy property. At the time interest rates were low and lenders were searching for a way to increase their profits. With these loans they were able to charge much higher interest than on a  conventional loan. However, these loans posed a higher risk to the lenders, so they were packaged into mortgage-backed securities and sold to investors. When the payments no longer could be made, many investors discovered that the securities they had bought were worthless and this eventually led to the world-wide financial meltdown. Reading Do you  understand the concept of a mortgage? It is a loan in which the property being bought with it becomes the security for the loan. This means that if the borrower cannot keep up with the payments, he or she can lose the property. Think about the possible topics which could come up in an article about subprime mortgages. Read the BBC article listed below. Vocabulary work In the articles listed below, the word 'mortgage' is often used in combination with other words. Read the articles and find the collocations or phrases with the word mortgage. It is used both as a noun and adjective. Discussion points Let's discuss these questions in class. What do you think of the idea of offering housing loans to people who normally don’t qualify for them? Does this have advantages and disadvantages? Do you think that the housing bubble was created artificially? Why or why not? Where do you think the blame lies, with borrowers who borrowed beyond their means or banks who lent money to high-risk customers? Are you in favour or more regulation in the banking industry or do you think it interferes with free trade and a healthy economy?  Give reasons and examples for your opinion. Where can you read about it? Case study: Florida father battles to save his home. BBC, October 15th 2010. Bank of America Sued by Chicago Home Loan Bank over Subprime Mortgages, Bloomberg, October 15th 2010. From Bad to Worse? A Foreclosure Crisis Primer, AOL News, October 15th 2010.

Unit 6 Corporate Accountability: A Summary of the Sarbanes-Oxley Act

The simplest summary I could find. See if you can find  similar keywords in the extract  on Page 63 and make a note of them so you are able to use them effectively in a one minute oral summary on this topic.
http://www.legalzoom.com/business-law/corporate-law/corporate-accountability-summary

Enron, Arthur Andersen, Worldcom, and Tyco. When corporate names become synonymous with scandal and greed, public confidence wavers. The Sarbanes-Oxley Act was signed into law on July 30, 2002 in response to corporate scandals.

Sarbanes-Oxley has been called by many the most far-reaching U.S. securities legislation in years. Now, all companies required to file periodic reports with the Securities and Exchange Commission (SEC) have new duties for reporting and corporate obligation. Non-compliance comes with significant penalties.
Within this article, we'll take a closer look at six main areas of the Act:
 (1.) the oversight board
(2.) increased auditor independence
 (3.) greater financial disclosures
 (4.) conflict of interest disclosures for analysts
(5.) corporate and criminal fraud accountability and
(6.) sharpened responsibilities for attorneys.

Oversight Board:The Public Company Accounting Oversight Board was created to oversee the audit of public companies. This board sets standards and rules for audit reports. All accounting firms that audit public companies must register with the Oversight Board. It also inspects, investigates, and enforces compliance from these registered firms.
Auditor Independence: Auditors now have a list of non-audit services they can't perform during an audit. The Act also imposes a one-year waiting period for audit firm employees who leave an accounting firm to become an executive for a former client. In addition, the former firm must wait one year before performing any audit services for the new employer.
Greater Financial Disclosures: Transactions and relationships that are off-balance sheet but that may affect financial status now must be disclosed. Personal loans from a corporation to its executives are now largely prohibited. Annual reports must include a report stating the management is responsible for the internal control structure and procedures for financial reporting.

Sarbanes-Oxley has been called by many the most far-reaching U.S. securities legislation in years.

Conflict of Interest Disclosures for Analysts: Conflict of interest disclosures now need to be made by research analysts who make public appearances or offer research reports. These disclosures need to contain certain information about the company that is the subject of the appearance or report. The analyst has to report whether he or she holds any securities in the company or received corporate compensation. Brokers and dealers have to disclose if the public company is a client.
Corporate and Criminal Fraud Accountability:Altering, destroying, concealing or falsifying records or documents with the intent to influence a federal investigation or bankruptcy case is subject to fines and up to 20 years imprisonment. New audit workpapers must be retained for five years. Any person who knowingly defrauds shareholders of publicly traded companies is subject to fines or imprisonment.
Attorneys' Responsibilities: There are now minimum standards of professional conduct for attorneys representing public companies before the SEC. These include a rule requiring an attorney to report securities violations to the CEO.
Securities laws like Sarbanes-Oxley are complicated and confusing. But failing to follow the Act's new restrictions and procedures can result in severe penalties. For a copy of the Act and for more information on the SEC, go to http://www.sec.gov/

Ad Astra article and language analysis

 Here is a link to an article in Tico Times which mentions Aldesa. The business articles are always interesting to read.

http://www.ticotimes.net/Business-Real-Estate/Rocket-Company-Launches-Stock-Offering_Friday-October-01-2010

Note down useful phrases regarding stock options.
Look at how  the journalist sets the tone of the article- note the use of metaphors such as : boost,fuels,propel,radar to reinforce the rocket concept.
Find the prepositions that collate with: according,possibility,committed.relying,aim,arrive,embark.
Try to write a personal statement for each word and preposition to reinforce the collocation.

To prepare for Unit 6 Ethics

Tutor2U have excellent background notes on Ethics.
You might like to read the notes so that you feel familiar with the basic vocabulary and key concepts.

http://tutor2u.net/business/strategy/business-ethics-introduction.html

You can also follow the links to their blog on Finance and Accounting.

Financial metaphors from CUP

Green shoots

What is it? Green shoots are the first signs of spring: the shoots of baby flowers, crops and other plants pushing up through the snow or the bare earth after the winter. The term has long been used as a metaphor for the first signs of economic recovery after an extended period of economic difficulty such as a recession. Why is it in the news? In the current economic crisis, journalists (along with everyone else) are looking for the beginning of the end, and have seized on good news stories (such as a rise in house sales or an increase in reported business confidence) as signs that recovery is on its way. A graph in The Economist (Recovery position, see below) shows a dramatic increase in the number of mentions of ‘green shoots’ in news stories in April 2009. Similarly, a search on Google News (http://news.google.co.uk/) will reveal numerous news articles containing the expression. However, another article in The Economist (A Glimmer of Hope, see below) points out the danger of being optimistic too early. Apart from the obvious danger of being disappointed later, optimism may lead to complacency, so business leaders and politicians may be tempted to avoid taking painful but necessary steps. Discussion: Is the global financial crisis coming to an end? What ‘green shoots of recovery’ are you aware of? What are the dangers of early optimism? Is optimism itself good for the economy? Language analysis: The image of ‘green shoots’ relies on the conceptual metaphors of RECESSION = WINTER and BUSINESS = A FARM. Get students to think of more metaphors within these conceptual metaphors (e.g. a bleak outlook, an economic thaw, the chill / dark days of recession, the freeze in the banking system; to nurture an economy, to sow seeds of growth, to reap the benefits of an investment, a cash cow). They could then try to find more such metaphors in the articles they read or they could invent their own. Where can I read about it? Bank of England reluctant to confirm green shoots, Independent, 23rd April 2009. Green shoots will take some nurturing, Times, 23rd April 2009.

Hedge accounting and risk management

http://www.accountancyage.com/accountancyage/analysis/2270257/hedge-accounting-hedging-bets

Read and note useful vocabulary that is used to describe risk management by banks

Wall Street never sleeps!

For more  on hedge funds and movies
 Follow this link:
http://www.efinancialnews.com/story/2010-09-30/gross-warns-hedge-fund-and-pension-scheme-reforms-will-shrivel?mod=sectionheadlines-home-AM

Check useful phrases to describe the activities of hedge funds to the vocab handout from the last class.

The heated debate continues on international standards

Check the meaning of the phrases that are underlined

ICAEW: US standards proposal complicates convergence

Institute takes a pop at the US standards setter's proposal for fair value accounting

Written by Kevin Reed

Accountancy Age, 28 Sep 2010

A proposal by the US accounting standards setter to use fair value for all assets will increases complexity and complicate the strategy to converge with international rules, claims the ICAEW.

Dr Nigel Sleigh-Johnson, head of the ICAEW’s Financial Reporting Faculty, said that FASB's strict model for measuring financial instruments will make statements harder to read and information more difficult to understand for investors.

"Simplification of the standards for financial instruments accounting is a key priority, and is an objective endorsed by the G20 governments. The FASB’s proposals are surely pulling in the wrong direction," said Sleigh-Johnson.

The IASB's model contains 'mixed measurement': which results in financial instruments being stated at either amortised cost or fair value in the primary financial statements (with fair values for all financial instruments disclosed in the notes).

The ICAEW has been the most vocal accounting institute on the convergence debate. In February the ICAEW said the US Securities and Exchange Commission had failed to provide certainty on US plans to adopt international standards.

Further reading:

It's time for the US to show some leadership on convergence: ICAEW

Read more: http://www.accountancyage.com/accountancyage/news/2270588/icaew-standards-proposal#ixzz10wROIi5q
Accountancy Age - Finance, business and accountancy news, features and resources.

AAA rating

From CUP resources:

What is it?

AAA is the top bond credit rating awarded by independent rating agencies such as Standard & Poor’s (S&P), Fitch and Moody’s, to assess the creditworthiness of a corporation’s debt issues. In simple terms, a corporation with a good rating, such as AAA, is considered extremely safe for lenders to invest their money in. Lenders are reassured by such ratings that a borrower will be "good for the money" and will not default on the debt. When a rating agency downgrades a corporation’s rating, it can trigger severe problems for the corporation (e.g. lenders may demand repayment or higher interest rates, it may be harder and more expensive to borrow money from other lenders, share prices may fall, etc.), which can lead to further downgrades. This type of chain reaction has played an important part in the current financial crisis.

Why is it in the news?

Countries also issue bonds to borrow money, so they too have credit ratings. S&P has recently revised its outlook of the UK’s credit risk from stable to negative, and warned its rating may be downgraded from AAA to AA. This is still extremely high (the lowest rating is D: see Wikipedia article below), but the downgrade is likely to damage confidence. There is also speculation that the US government may also lose its AAA rating, as a result of the huge amounts of money it has used to bail out banks and stimulate the economy.

Discussion:

• How do you think credit ratings are calculated?
• What are the dangers of relying on credit ratings? (e.g. A corporation with a good rating may be able to borrow much more heavily than others, so may actually be more vulnerable to major economic changes. The problems with AIG stemmed partly from overconfidence in its AAA rating).
• Think of some countries you know well. What do you think are their credit ratings? (NB See Standard and Poor's website for a complete list).
• Given that rating agencies have so much power to boost or damage a corporation or country, is it right that it is left to independent companies?

Where can I read more about it?

• Bond credit rating, Wikipedia.

Speaking skills

Here is a link to the BBC business English skills
http://www.bbc.co.uk/worldservice/learningenglish/general/talkaboutenglish/2009/02/090211_tae_bltg.shtml