The demise of fixed exchange rates initiated a rapid rise in the level of foreign exchange trading (forex). In the United States, forex leaped from $110.8 billion in 1970, 10.7 percent of U.S. Gross Domestic Product, to $5.449 trillion in 1980, 195.3 percent of U.S. GDP.
These figures are estimates, but in April 1977, the U.S. Federal Reserve Bank of New York undertook to measure the actual amount of forex in the United States, surveying forex trading at 44 large money center banks, which the Fed believed probably represented 98 percent of all forex in the United States at that time.
This April 1977 study found there was $4.8 billion in daily forex trading, or around $1.2 trillion a year. However, this study did not include all the trading in futures trading for various currencies. Currency futures were first created at the Chicago Mercantile Exchange (CME) in 1972, the year after fixed exchange rates were abandoned.
Financial turnover compared to gross domestic product
Other financial markets exhibited similarly explosive growth. Trading in U.S. equity (stock) markets grew from $136.0 billion or 13.1 percent of U.S. GDP in 1970, to $1.671 trillion or 28.8 percent of U.S. GDP in 1990. In 2000, trading in U.S. equity markets was $14.222 trillion, or 144.9 percent of GDP. Most of the growth in stock trading has been directly attributed to the introduction and spread of program trading.
Trading on the international derivatives exchanges slowed in the fourth quarter of 2006. Combined turnover of interest rate, currency and stock index derivatives fell by 7% to $431 trillion between October and December 2006.
Thus, derivatives trading – mostly futures contracts on interest rates, foreign currencies, Treasury bonds, etc had reached a level of $1,200 trillion, $1.2 quadrillion, a year.
By comparison, U.S. GDP in 2006 was $12.456 trillion.
While the housing and credit bubbles built, a series of factors caused the financial system to both expand and become increasingly fragile, a process called financialization.
Policymakers did not recognize the increasingly important role played by financial institutions such as investment banks and hedge funds, also known as the shadow banking system.
Some experts believe these institutions had become as important as commercial (depository) banks in providing credit to the U.S. economy, but they were not subject to the same regulations.
These institutions as well as certain regulated banks had also assumed significant debt burdens while providing the loans described above and did not have a financial cushion sufficient to absorb large loan defaults or MBS losses.
These losses impacted the ability of financial institutions to lend, slowing economic activity. Concerns regarding the stability of key financial institutions drove central banks to provide funds to encourage lending and restore faith in the commercial paper markets, which are integral to funding business operations. Governments also bailed out key financial institutions and implemented economic stimulus programs, assuming significant additional financial commitments.
By September 2008, average U.S. housing prices had declined by over 20% from their mid-2006 peak. As prices declined, borrowers with adjustable-rate mortgages could not refinance to avoid the higher payments associated with rising interest rates and began to default. During 2007, lenders began foreclosure proceedings on nearly 1.3 million properties, a 79% increase over 2006. This increased to 2.3 million in 2008, an 81% increase vs. 2007. By August 2008, 9.2% of all U.S. mortgages outstanding were either delinquent or in foreclosure. By September 2009, this had risen to 14.4%.
Financialization is a term sometimes used in discussions of financial capitalism which developed over several decades leading up to the 2007-2010 financial crisis, and in which financial leverage tended to override capital (equity) and financial markets tended to dominate over the traditional industrial economy.
Financialization is a term that describes an economic system or process that attempts to reduce all value that is exchanged (whether tangible, intangible, future or present promises, etc.) either into a financial instrument or a derivative of a financial instrument. The original intent of financialization is to be able to reduce any work-product or service to an exchangeable financial instrument, like currency, and thus make it easier for people to trade these financial instruments. Workers, through a financial instrument such as a Mortgage, could trade their promise of future work/wages for a home. Financialization of risk-sharing makes all Insurance possible, the financialization of the U.S. Government’s promises (Bonds) makes all deficit spending possible. Financialization also makes Economic_rent possible.
Foreign exchange trading
The demise of fixed exchange rates initiated a rapid rise in the level of foreign exchange trading (forex). In the United States, forex leaped from $110.8 billion in 1970, 10.7 percent of U.S. Gross Domestic Product, to $5.449 trillion in 1980, 195.3 percent of U.S. GDP. These figures are estimates, but in April 1977, the U.S. Federal Reserve Bank of New York undertook to measure the actual amount of forex in the United States, surveying forex trading at 44 large money center banks, which the Fed believed probably represented 98 percent of all forex in the United States at that time. This April 1977 study found there was $4.8 billion in daily forex trading, or around $1.2 trillion a year. However, this study did not include all the trading in futures trading for various currencies. Currency futures were first created at the Chicago Mercantile Exchange (CME) in 1972, the year after fixed exchange rates were abandoned. Financial turnover compared to gross domestic product
Other financial markets exhibited similarly explosive growth. Trading in U.S. equity (stock) markets grew from $136.0 billion or 13.1 percent of U.S. GDP in 1970, to $1.671 trillion or 28.8 percent of U.S. GDP in 1990. In 2000, trading in U.S. equity markets was $14.222 trillion, or 144.9 percent of GDP. Most of the growth in stock trading has been directly attributed to the introduction and spread of program trading.
According to the March 2007 Quarterly Report from the Bank for International Settlements (see page 24.):
Trading on the international derivatives exchanges slowed in the fourth quarter of 2006. Combined turnover of interest rate, currency and stock index derivatives fell by 7% to $431 trillion between October and December 2006.
Thus, derivatives trading – mostly futures contracts on interest rates, foreign currencies, Treasury bonds, etc had reached a level of $1,200 trillion, $1.2 quadrillion, a year.
By comparison, U.S. GDP in 2006 was $12.456 trillion.
Financial Instruments have hijacked all the monetary resources in the world - Derivatives, exotic financial products, futures, speculation, CDOs, MBS, commercial paper, devised and deceptive credit and credit derivatives, and Wall Street sapping the strength and resources to their own pockets
In the wake of the 2007-2010 financial crisis, a number of economists and others began to argue that Financial services had become too large a sector in the U.S. economy, with no real benefit from society accruing from the activities of increased financialization. Some, such as former IMF chief economist Simon Johnson even went so far as to argue that the increased power and influence of the financial services sector had fundamentally transformed the American polity, endangering representative democracy itself.
In February 2009, white-collar criminologist and former senior financial regulator William K. Black listed the ways in which the financial sector harms the real economy. Black wrote, “The financial sector functions as the sharp canines that the predator state uses to rend the nation. In addition to siphoning off capital for its own benefit, the finance sector misallocates the remaining capital in ways that harm the real economy in order to reward already-rich financial elites harming the nation.”
(from above wikipedia entry about financialization)
Hedge Funds –
Because the effect is to ‘hedge’ that part of the risk due to overall market movements, this became known as a hedge fund.
Estimates of industry size vary widely due to the lack of central statistics, the lack of a single definition of hedge funds and the rapid growth of the industry. As a general indicator of scale, the industry may have managed around $2.5 trillion at its peak in the summer of 2008. The credit crunch has caused assets under management (AUM) to fall sharply through a combination of trading losses and the withdrawal of assets from funds by investors. Recent estimates find that hedge funds have more than $2 trillion in AUM.
Most foreign exchange trading firms are market makers and so are many banks, although not in all currency markets. In foreign exchange (or FX) trading, where most deals are conducted over-the-counter and are, therefore, completely virtual, the market maker sells to and buys from its clients and is compensated by means of price differentials . . . etc.
In the United States, the New York Stock Exchange (NYSE) and American Stock Exchange (AMEX), among others, have Designated Market Makers, formerly known as “specialists”, who act as the official market maker for a given security. The market makers provide a required amount of liquidity to the security’s market, and take the other side of trades when there are short-term buy-and-sell-side imbalances in customer orders. This helps prevent excess volatility, and in return, the specialist is granted various informational and trade execution advantages.
Other U.S. exchanges, most prominently the NASDAQ Stock Exchange, employ several competing official market makers in a security. These market makers are required to maintain two-sided markets during exchange hours and are obligated to buy and sell at their displayed bids and offers. They typically do not receive the trading advantages a specialist does, but they do get some, such as the ability to naked short a stock, i.e., selling it without borrowing it. In most situations, only official market makers are permitted to engage in naked shorting.
There are over two thousand market makers in the USA and over a hundred in Canada.
On the London Stock Exchange (LSE) there are official market makers for many securities (but not for shares in the largest and most heavily traded companies, which instead use an automated system called TradElect). Some of the LSE’s member firms take on the obligation of always making a two-way price in each of the stocks in which they make markets. Their prices are the ones displayed on the Stock Exchange Automated Quotation system and it is they who generally deal with stockbrokers buying or selling stock on behalf of clients.
Proponents of the official market making system claim market makers add to the liquidity and depth of the market by taking a short or long position for a time, thus assuming some risk in return for the chance of a small profit. On the LSE one can always buy and sell stock: each stock always has at least two market makers and they are obliged to deal.
Unofficial market makers are free to operate on order driven markets or, indeed, on the LSE. They do not have the obligation to always be making a two-way price but they do not have the advantage that everyone must deal with them either.
How a market maker makes money
A market maker makes money by buying stock at a lower price than the price at which they sell it. Note that because a market maker can take short positions, purchase and sale may be either way round – a market maker may sell stock and then buy it back later at a lower price. Therefore a market maker can make money in both rising or falling markets, as long as they correctly predict which way a stock’s price will move.
Stock market makers also receive liquidity rebates from electronic communication networks for each share that is sold to or purchased from each posted bid or offer. Conversely, a trader who takes liquidity from a bid or offer posted on an ECN is charged a fee for removing that liquidity.
There are over two thousand market makers in the USA and over a hundred in Canada.
Unjust enrichment means when a person unfairly gets a benefit by chance, mistake or another’s misfortune for which the one enriched has not paid or worked and morally and ethically should not keep. A person who has been unjustly enriched at the expense of another must legally return the unfairly kept money or benefits. Unjust enrichment is an equitable doctrine applied in the absence of a contract and used to prevent one person from being unjustly enriched at another’s expense.
Five elements must be established to prove unjust enrichment:
A connection between the enrichment and the impoverishment;
Absence of a justification for the enrichment and impoverishment; and
Liability under the principle of unjust enrichment is wholly independent of liability for wrongdoing. Claims in unjust enrichment do not depend upon proof of any wrong. However, it is possible that on a single set of facts a claim based on unjust enrichment and a claim based on a wrong may both be available. A claim based on unjust enrichment always results in an obligation to make restitution. A claim based on a wrong always results in an obligation to make compensation, but may additionally result in an obligation to make restitution and on the other hand it will result in an obligation to make reimbursement which will allow the normal citizen to the courts for its wrongdoing which it never intended to do so.
In finance, a derivative is a financial contract with a value linked to the expected future price movements of the asset it is linked to – such as a share or a currency. There are many kinds of derivatives, with the most notable being swaps, futures, and options. However, since a derivative can be placed on any sort of security, the scope of all derivatives possible is near endless. Thus, the real definition of a derivative is an agreement between two parties that is contingent on a future outcome.
A common misconception is to refer to derivatives as assets. This is erroneous, since a derivative is incapable of having value of its own. However, some more commonplace derivatives, such as swaps, futures, and options, which have a theoretical face value that can be calculated using formulas, such as Black-Scholes, are frequently traded on open markets before their expiration date as if they were assets.
provide leverage or gearing, such that a small movement in the underlying value can cause a large difference in the value of the derivative
speculate and to make a profit if the value of the underlying asset moves the way they expect (e.g., moves in a given direction, stays in or out of a specified range, reaches a certain level)
hedge or mitigate risk in the underlying, by entering into a derivative contract whose value moves in the opposite direction to their underlying position and cancels part or all of it out
obtain exposure to underlying where it is not possible to trade in the underlying (e.g., weather derivatives)
create optionability where the value of the derivative is linked to a specific condition or event (e.g., the underlying reaching a specific price level)
Speculation and arbitrage
Derivatives can be used to acquire risk, rather than to insure or hedge against risk. Thus, some individuals and institutions will enter into a derivative contract to speculate on the value of the underlying asset, betting that the party seeking insurance will be wrong about the future value of the underlying asset. Speculators will want to be able to buy an asset in the future at a low price according to a derivative contract when the future market price is high, or to sell an asset in the future at a high price according to a derivative contract when the future market price is low.
Individuals and institutions may also look for arbitrage opportunities, as when the current buying price of an asset falls below the price specified in a futures contract to sell the asset.
Speculative trading in derivatives gained a great deal of notoriety in 1995 when Nick Leeson, a trader at Barings Bank, made poor and unauthorized investments in futures contracts. Through a combination of poor judgment, lack of oversight by the bank’s management and by regulators, and unfortunate events like the Kobe earthquake, Leeson incurred a $1.3 billion loss that bankrupted the centuries-old institution.
The use of derivatives can result in large losses because of the use of leverage, or borrowing. Derivatives allow investors to earn large returns from small movements in the underlying asset’s price. However, investors could lose large amounts if the price of the underlying moves against them significantly. There have been several instances of massive losses in derivative markets, such as:
The need to recapitalize insurer American International Group (AIG) with $85 billion of debt provided by the US federal government. An AIG subsidiary had lost more than $18 billion over the preceding three quarters on Credit Default Swaps (CDS) it had written. It was reported that the recapitalization was necessary because further losses were foreseeable over the next few quarters.
The bankruptcy of Orange County, CA in 1994, the largest municipal bankruptcy in U.S. history. On December 6, 1994, Orange County declared Chapter 9 bankruptcy, from which it emerged in June 1995. The county lost about $1.6 billion through derivatives trading. Orange County was neither bankrupt nor insolvent at the time; however, because of the strategy the county employed, it was unable to generate the cash flows needed to maintain services.
Large notional value
Derivatives typically have a large notional value. As such, there is the danger that their use could result in losses that the investor would be unable to compensate for. The possibility that this could lead to a chain reaction ensuing in an economic crisis, has been pointed out by famed investor Warren Buffett in Berkshire Hathaway‘s 2002 annual report. Buffett called them ‘financial weapons of mass destruction.’ The problem with derivatives is that they control an increasingly larger notional amount of assets and this may lead to distortions in the real capital and equities markets. Investors begin to look at the derivatives markets to make a decision to buy or sell securities and so what was originally meant to be a market to transfer risk now becomes a leading indicator. (See Berkshire Hathaway Annual Report for 2002)
Leverage of an economy’s debt
Derivatives massively leverage the debt in an economy, making it ever more difficult for the underlying real economy to service its debt obligations, thereby curtailing real economic activity, which can cause a recession or even depression. In the view of Marriner S. Eccles, U.S. Federal Reserve Chairman from November, 1934 to February, 1948, too high a level of debt was one of the primary causes of the 1920s-30s Great Depression.
Counting one dollar per second, it would take 32 million years to count to one Quadrillion. The numbers we are dealing with are absolutely astronomical and from the realms of super computing we have stepped into global economics. There is a sense of no sustainability and lack of longevity in the “Invisible One Quadrillion Dollar Equation” of the derivatives market especially with attendant Black Swan variables causing multiple implosions amongst financial institutions and counterparties.
The single conceptual pitfall at the basis of the disorderly growth of the global derivatives market is the postulate of hedging and netting, which lies at the basis of each model and of the whole regulatory environment hyper structure. Perfect hedges and perfect netting require functioning markets. When one or more markets become dysfunctional, the whole deck of cards could collapse swiftly.
Three Historical Examples
1. The so-called rogue trader Nick Leeson who made a huge derivatives bet on the direction of the Japanese Nikkei index brought on the collapse of Barings Bank in 1995.
2. The collapse of Long Term Capital Management (LTCM), a hedge fund that had a former derivatives and bond dealer from Salomon Brothers and two Nobel Prize winners in Economics as principals, collapsed because of huge leveraged bets in currencies and bonds in 1998.
3. Finally, a lot of the problems of Enron in 2000 were brought on by leveraged derivatives and using derivatives to hide problems on the balance sheet.
(but this is the best part, my note – this article was from 2008)
Let us think about the invisible USD 1.144 quadrillion equation with black swan variables — ie, 1,144 trillion dollars in terms of outstanding derivatives, global Gross Domestic Product (GDP), real estate, world stock and bond markets coupled with unknown unknowns or “Black Swans”. What would be the relative positioning of USD 1.144 quadrillion for outstanding derivatives, ie, what is their scale:
1. The entire GDP of the US is about USD 14 trillion.
2. The entire US money supply is also about USD 15 trillion.
3. The GDP of the entire world is USD 50 trillion. USD 1,144 trillion is 22 times the GDP of the whole world.
4. The real estate of the entire world is valued at about USD 75 trillion.
5. The world stock and bond markets are valued at about USD 100 trillion.
6. The big banks alone own about USD 140 trillion in derivatives.
7. Bear Stearns had USD 13+ trillion in derivatives and went bankrupt in March. Freddie Mac, Fannie Mae, Lehman Brothers and AIG have all ‘collapsed’ because of complex securities and derivatives exposures in September.
8. The population of the whole planet is about 6 billion people. So the derivatives market alone represents about USD 190,000 per person on the planet.
Whilst outstanding derivatives are notional amounts until they are crystallised, actual exposure is measured by the net credit equivalent. This is normally a lower figure unless many variables plot a locus in the wrong direction simultaneously.
This could be because of catastrophic unpredictable events, ie, “Black Swans”, such as cascades of bankruptcies and nationalisations, when the net exposure can balloon and become considerably larger or indeed because some extremely dislocating geo-political or geo-physical events take place simultaneously.
Also, the notional value becomes real value when either counterparty to the OTC derivative goes bankrupt.
By Tom Foremski – October 16, 2008
The Size of Derivatives Bubble = $190K Per Person on Planet
By Tom Foremski – October 16, 2008
More must read financial analysis from DK Matai, Chairman of the ACTA Open.
The Invisible One Quadrillion Dollar Equation — Asymmetric Leverage and Systemic Risk
According to various distinguished sources including the Bank for International Settlements (BIS) in Basel, Switzerland — the central bankers’ bank — the amount of outstanding derivatives worldwide as of December 2007 crossed USD 1.144 Quadrillion, ie, USD 1,144 Trillion. The main categories of the USD 1.144 Quadrillion derivatives market were the following:
1. Listed credit derivatives stood at USD 548 trillion;
2. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:
a. Interest Rate Derivatives at about USD 393+ trillion;
b. Credit Default Swaps at about USD 58+ trillion;
c. Foreign Exchange Derivatives at about USD 56+ trillion;
d. Commodity Derivatives at about USD 9 trillion;
e. Equity Linked Derivatives at about USD 8.5 trillion; and
f. Unallocated Derivatives at about USD 71+ trillion.
Quadrillion? That is a number only super computing engineers and astronomers used to use, not economists and bankers.
As I watch the Greek economy treated with the same bond / pushing credit interest rates required of them / buying of credit default swaps so that when the bonds fail, the total amount will be paid out to third parties with no risk and unchallenged reward / credit ratings agencies downgrading their credit even as the interest payments alone are exaggerated beyond all measure / and seeing that identical “play” that was made on Fannie and Freddie driving it into the ground and on other countries around the world – driving their economies into the ground, as well –
I’m thinking . . .
and, thinking . . .
and, still considering that . . .
not one thing is going to change or be changed in all of it.
It wasn’t going to be changed five years ago, when the risk of total market collapses and the destruction of economies around the world were known to be a possibility.
It wasn’t going to be changed in 2006, when the evidence of what was before us was very, very clear and certainly known by anyone involved in the financial markets, banking, investments and academic economists.
It wasn’t going to be changed – not one iota, even in 2007 – not in 2008 and sure as hell, isn’t going to be changed now any more than it was going to be fixed, changed, regulated, repaired, or made into something right anytime before this day. In fact, there is no intention of it being changed even today.
I thought that it was because the evidence of the damage was not obvious, at the mark five years ago – except to people around the world trying to prevent it before the collapsing economies happened.
Those times are passed and the changes that were known to be ways that could prevent the collapse and ensuing crisis around the world – just would not be put in place by anybody in Washington or Wall Street or anywhere else that could’ve done it. They knew to put greater liquidity requirements on banks and insurance companies and etc., etc., etc.,
They knew the leveraging that was in play. One of many companies listed as a Fortune 500 company that would also apply to this, admitted to 96% of their operating capital being acquired by loans and re-financing loans to pay off loans simply to cover day-to-day operations. Not to be the only one to say so – but that is insane.
And there is not one thing in any of it that is going to be made any one bit different regardless … there, in all likelihood, is the same bullshit we will be living with twenty years from now as we watch all our children turn to the same gang violence as Chicago and Juarez for lack of any other economic opportunity in the US of A, throughout Europe and across most of the world.
– cricketdiane, 04-29-10
From Wikipedia, the free encyclopedia
In finance, a credit derivative is a securitizedderivative whose value is derived from the credit risk on an underlying bond, loan or any other financial asset. In this way, the credit risk is on an entity other than the counterparties to the transaction itself. This entity is known as the reference entity and may be a corporate, a sovereign or any other form of legal entity which has incurred debt. Credit derivatives are bilateral contracts between a buyer and seller under which the seller sells protection against the credit risk of the reference entity.
Stated in plain language, a credit derivative is a wager, and the reference entity is the thing being wagered on. Similar to placing a bet at the racetrack, where the person placing the bet does not own the horse or the track or have anything else to do with the race, the person buying the credit derivative doesn’t necessarily own the bond (the reference entity) that is the object of the wager.
He or she simply believes that there is a good chance that the bond or CDO in question will default (go to zero value).
Originally conceived as a kind of insurance policy for owners of bonds or CDO‘s, it evolved into a freestanding investment strategy.
The cost might be as low as 1% per year. If the buyer of the derivative believes the underlying bond will go bust within a year (usually an extremely unlikely event) the buyer stands to reap a 100 fold profit.
A small handful of investors anticipated the credit crunch of 2007/8 and made billions placing “bets” via this method.
The parties will select which credit events apply to a transaction and these usually consist of one or more of the following:
bankruptcy (the risk that the reference entity will become bankrupt)
failure to pay (the risk that the reference entity will default on one of its obligations such as a bond or loan)
obligation default (the risk that the reference entity will default on any of its obligations)
obligation acceleration (the risk that an obligation of the reference entity will be accelerated e.g. a bond will be declared immediately due and payable following a default)
repudiation/moratorium (the risk that the reference entity or a government will declare a moratorium over the reference entity’s obligations)
restructuring (the risk that obligations of the reference entity will be restructured)…
Maybe if everybody playing the credit derivatives on the Greece debt will finish making this money off it being in possible default, then just maybe they’ll stop dicking around and get some rescue package over to them before it all goes to hell.
Federal Lanham Act Remedies for False Advertising –
1. Historical Background –
Section 43(a) of the Lanham Act prohibits any false description or representation of goods. Although this section was originally construed narrowly, to reach only “passing off” and other behavior resembling trademark infringement, modern cases regard the statute as providing a federal remedy against false advertising.
2. Standing: Who May Invoke Section 43 –
A plaintiff seeking injunctive relief under § 43(a) must show a likelihood of economic injury due to the defendant’s conduct in order to be entitled to relief. If the plaintiff seeks damages, it must demonstrate an actual loss of sales (and / or loss of revenue, my note – actual money, but can include lost opportunity costs.)
3. What Constitutes a False Description or Representation –
Any falsehood with a tendency to mislead or deceive is actionable under section 43(a), provided it is material. The plaintiff need not prove that the defendant acted intentionally.
(from – “Capsule Summary”)
pp. 20 – 21, also pp. 148 – 150
Unfair Trade Practices & Intellectual Property,
author – Roger E. Schechter,
Black Letter Series, West Publishing Co., St. Paul, Minn.; 1986
Hmmmm . . . . – wonder if those laws still exist? After watching the Goldman Sachs hearings in the Senate committee yesterday, when investors are told that a thing is good investment securities, when they know it is not – isn’t that applied to laws like this? Or rather, aren’t laws like this applied to situations like that?
I found another section of this book which had this sentence – “Nonetheless, some courts will impose a duty to pay if the equities of the situation require it to prevent unjust enrichment.” – What constitutes “unjust enrichment”?
English unjust enrichment law is a developing area of law in unjust enrichment. Traditionally, work on unjust enrichment has been dealt with under the title …
en.wikipedia.org/wiki/English_unjust_enrichment_law – Cached – Similar
English unjust enrichment law is a developing area of law in unjust enrichment. Traditionally, work on unjust enrichment has been dealt with under the title of “restitution“. Restitution is a gain-based remedy, the opposite of compensation, as a loss-based remedy. But the event it responds to is the “unjust enrichment” of one person at the expense of another.
Hazell v. Hammersmith and Fulham LBC  2 AC 1. Banks paid councils a lump sum (for Islington, £2.5m). The councils then paid the banks back at the prevailing interest rate. Banks paid councils back a fixed interest rate (this is the swap part). The point was that councils were gambling on what interest rates would do. So if interest rates fell, the councils would win. As it happened, interest rates were going up and the banks were winning. Islington was due to pay £1,354,474, but after Hazell, it refused, and waited to see what the courts said. At first instance Hobhouse J said that because the contract for the swap scheme was void, the council had been unjustly enriched with the lump sum (£2.5m) and it should have to pay compound interest (lots) rather than simple interest (lots, but not so much). But luckily for local government, three law Lords held that Islington only needed to repay with simple interest. There was no jurisdiction for compound interest. They said this was because there was no ‘resulting trust’.
Westdeutsche Landesbank Girozentrale v Islington LBC  AC 669, the council had no authority to enter into a complex swap transaction with the German bank. So the House of Lords held that the council should repay the money they had been lent and a hitherto unknown ‘unjust’ factor was added to the list. Birks argued that the better explanation in all cases is an ‘absence of basis’ for the transfer of property. Searching through or adding to a list of open ended unjust factors simply concludes on grounds of what one wishes to prove, grounds that ‘would have to be constantly massaged to ensure that they dictated an answer as stable as is reached by the shorter ‘non basis’ route.’ (Birks (2005) 113)
The following eleven categories are examples of “unjust factor” (or what Peter Birks argued could be unified under one principle of a basis of a right being absent) which may ground a claim of restitution for unjust enrichment.
Unjust enrichment is a developed and coherent field in continental civil law systems. Continental lawyers say someone is unjustly enriched when there is no basis for their possession or title to some right or property. A more correct way of saying it is that someone has been “unjustifiedly enriched”. In German, the term is Ungerechtfertigte Bereicherung (§812 BGB) and in France the term is Enrichissement sans cause. English lawyers, however, have been accustomed to identify an “unjust factor”. The difference between “unjust factors” and “absence of basis” as a unifying principle has generated a lot of debate, particularly since Peter Birks changed his mind in his second edition of Unjust Enrichment (2005) in the Clarendon Law Series, and argued that the continentals had got it right.
The two leading theorists that have revived unjust enrichment were Lord Goff, who produced Goff and Jones on Restitution and Professor Peter Birks.
Black Letter Series, West Publishing Co., St. Paul, Minn.; 1986
(excerpt – )
To constitute “unfair” conduct, an advertisement or commercial practice must pose a risk of substantial, unmitigated, unavoidable consumer injury.
(further – )
These advertisements may be deceptive, however, if analyzed under the historic definition of that term. Under the classic test, an advertising claim is deceptive if it has any tendency to deceive a significant number of consumers.
(also found on pp. 225 – )
2. True. The original version of the statute [VIII. Federal Trade Commission Regulation of Unfair and Deceptive Practices] only dealt with “unfair methods of competittion.” The 1938 Wheeler-La Amendment added the “unfair and deceptive acts and practices” language.
(and on pp. 228)
4. True. Such statutes have been applied against defendants who were making casual sales of used goods.
(and therefore, why shouldn’t it be applied to investment firms, banks, hedge funds and others in the investment community who engaged in deceptive and misleading practices that would’ve been illegal in any other context, including as the laws and statutes are applied to regular Americans being involved in casual sales of goods that were unlikely to have created the huge ramifications that the Wall Street players caused, my note.)
Unjust enrichment is a legal term denoting a particular type of causative event in which one party is unjustly enriched at the expense of another, and an obligation to make restitution arises, regardless of liability for wrongdoing.
Liability under the principle of unjust enrichment is wholly independent of liability for wrongdoing. Claims in unjust enrichment do not depend upon proof of any wrong. However, it is possible that on a single set of facts a claim based on unjust enrichment and a claim based on a wrong may both be available. A claim based on unjust enrichment always results in an obligation to make restitution. A claim based on a wrong always results in an obligation to make compensation, but may additionally result in an obligation to make restitution and on the other hand it will result in an obligation to make reimbursement which will allow the normal citizen to the courts for its wrongdoing which it never intended to do so. For discussion of restitution for wrongs, see the page on restitution.
At common law, a claim based on unjust enrichment can be submitted to five stages of analysis. These can be summarized in the form of the following questions:
Was the defendant enriched?
Was the enrichment at the expense of the claimant?
There are two established approaches to this issue. Traditionally, common law systems such as those of England and the US have proceeded on the basis of what may be termed the ‘unjust factor’ approach. Traditionally, civil law systems such as those of France and Germany have proceeded on the basis of what may be termed the ‘absence of basis’ approach. More recently, many common law systems have showed signs of a possible move towards the ‘absence of basis’ approach (see for example the law of North Dakota in the section on the United States below). Both approaches will be discussed.
The ‘unjust factors’ approach requires the claimant to point to one of a number of factors recognized by the law as rendering the defendant’s enrichment unjust. English law clearly recognises at least the following unjust factors:
‘Absence of consideration’ is particularly controversial because the cases that support its existence as an unjust factor can also be used to support the view that English law has begun to favour the ‘absence of basis’ approach (see next paragraph).
The ‘absence of basis’ approach does not deal in individual unjust factors. Instead it seeks to identify enrichments with no legitimate explanatory basis. Imagine that A contracts with B that A will pay $150 up front for B to clean his house. A pays the money. B’s enrichment has a legitimate explanatory basis – he was paid under a valid contract. However, let us now change the example and assume that the contract was in fact void. This is discovered after A has paid the money but before B cleans the house. B’s enrichment no longer has a legitimate explanatory basis so B must repay the $150 to A.
Notice that in the example just given, exactly the same conclusion would be reached using the ‘unjust factors’ approach. Under that approach, A would not be able to point to an unjust factor provided that the contract was valid, but could point to the unjust factor of total failure of consideration once we assume that it was void. In the vast majority of cases, a properly developed ‘unjust factors’ approach and a properly developed ‘absence of basis’ approach will reach the same result.
 What remedies are available to the claimant?
It is necessary to distinguish personal remedies from proprietary remedies. A personal remedy asserts that the defendant must pay the claimant a sum of money. By contrast, a proprietary remedy asserts that some property in the defendant’s possession belongs to the claimant, either at common law or in equity. There are several arguable examples in the English case law of the courts giving a proprietary remedy in an unjust enrichment claim. However, some commentators maintain that, in English law, unjust enrichment only ever triggers a personal remedy.
There are several reasons why it may be important for the claimant to seek a proprietary rather than a personal remedy. The most obvious is that showing that one is entitled to a proprietary interest in some property means that one need not compete with the defendant’s unsecured creditors in the event of his insolvency. It is also generally accepted, although with little justification, that a claimant who is entitled to a personal remedy only will be restricted to simple interest, while a claimant who is entitled to a proprietary remedy can get compound interest. The availability or non-availability of a proprietary remedy may also have consequences for limitation periods and for the conflict of laws.
English law gives effect to restitutionary proprietary interests (assuming that it does at all) through a number of devices. One of these devices will be discussed and another two will be mentioned briefly.
It doesn’t matter if you are a “market maker” or not, such as Goldman Sachs and about 2000 others are – they still can’t store explosives under their desks because they must abide by the laws which apply to that just as we all do, and they still can’t engage in failing to meet OSHA standards for a work place, nor can they be exempted from the regulations, statutes and laws governing the rest of us and the business laws that generally apply to everything.
I know yesterday during the hearings, the term “market maker” was used as a declaration of why “we get to get away with doing it this way, by law – because we qualify as a market maker.” That doesn’t mean everything else in the law and in international law doesn’t apply to them. It does not exclude their businesses, their business participation, their business practices and decisions, their business processes and their marketing practices from the laws governing everything else.
An Icelandic 1000-krónur note. The value of the Icelandic króna declined significantly during 2008.
Economic growth in Iceland, Denmark, Norway and Sweden from 2000 to 2007. Iceland is in red.
The 2008–2010 Icelandic financial crisis is a major ongoing economic crisis in Iceland that involves the collapse of all three of the country’s major banks following their difficulties in refinancing their short-term debt and a run on deposits in the United Kingdom. Relative to the size of its economy, Iceland’s banking collapse is the largest suffered by any country in economic history.
In late September 2008, it was announced that the Glitnir bank would be nationalised. The following week, control of Landsbanki and Glitnir was handed over to receivers appointed by the Financial Supervisory Authority (FME). Soon after that, the same organisation placed Iceland’s largest bank, Kaupthing, into receivership as well. Commenting on the need for emergency measures, Prime MinisterGeir Haarde said on 6 October, “There [was] a very real danger … that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could have been national bankruptcy.” He also stated that the actions taken by the government had ensured that the Icelandic state would not actually go bankrupt. At the end of the second quarter 2008, Iceland’s external debt was 9.553 trillion Icelandic krónur (€50 billion), more than 80% of which was held by the banking sector. This value compares with Iceland’s 2007 gross domestic product of 1.293 trillion krónur (€8.5 billion). The assets of the three banks taken under the control of the FME totaled 14.437 trillion krónur at the end of the second quarter 2008.
The financial crisis has had serious consequences for the Icelandic economy. The national currency has fallen sharply in value, foreign currency transactions were virtually suspended for weeks, and the market capitalisation of the Icelandic stock exchange has dropped by more than 90%. As a result of the crisis, Iceland is currently undergoing a severe economic recession; the nation’s gross domestic product decreased by 5.5% in real terms in the first six months of 2009. The full cost of the crisis cannot yet be determined, but already it exceeds 75% of the country’s 2007 GDP. Outside Iceland, more than half a million depositors (far more than the entire population of Iceland) found their bank accounts frozen amid a diplomatic argument over deposit insurance. German bank BayernLB faces losses of up to €1.5 billion, and has had to seek help from the German federal government. The government of the Isle of Man will pay out half of its reserves, equivalent to 7.5% of the island’s GDP, in deposit insurance.
( . . . )
On 24 October, it emerged that Norway’s semi-public export credit agencyEksportfinans had made a complaint to Norwegian police concerning the alleged embezzlement of 415 million Norwegian kroner (€47 million) by Glitnir since 2006. The Icelandic bank had acted as an agent for Eksportfinans, administering loans to several companies: however Eksportfinans alleges that, when the loans were paid off early by borrowers, Glitnir kept the cash and merely continued with the regular payments to Eksportfinans, effectively taking an unauthorized loan itself.
OMX Iceland 15 closing prices during the five trading weeks from September 29, 2008 to October 31, 2008
Trading in shares of six financial companies on the OMXNordic Iceland Exchange was suspended on 6 October by order of the FME. On Thursday 9 October, all trading on the exchange was frozen for two days by the government “in an attempt to prevent further panic spreading throughout the country’s financial markets”. The decision was made to do so due to “unusual market conditions”, with share prices having fallen 30% since the start of the month. The closure was extended through Monday 13 October due to continuing “unusual market conditions”.
The market reopened on 14 October with the main index, the OMX Iceland 15, at 678.4, which corresponds to a plunge of about 77% compared with 3,004.6 before the closure. This reflects the fact that the value of the three big banks, which form 73.2% of the value of the OMX Iceland 15, had been set to zero. The values of other equities varied from +8% to –15%. Trading in shares of Exista, SPRON and Straumur-Burðarás (13.66% of the OMX Iceland 15) remains suspended. After a week of very thin trading, the OMX Iceland 15 closed on 17 October at 643.1, down 93% in króna terms and 96% in euro terms from its historic high of 9016 (18 July 2007).
Trading in the shares of two financial services companies, Straumur–Burðarás and Exista, resumed on 9 December: together the companies account for 12.04% of the OMX Iceland 15. The values of the shares in both companies dropped sharply, and the index closed at 394.88, down by 40.17% on the day. Trading in shares in SPRON and Kaupthing remains suspended, at prices of ISK 1.90 and ISK 694.00 respectively.
Ratings of Icelandic sovereign debt
(long-term foreign currency)
The four credit rating agencies which monitor Iceland’s sovereign debt all lowered their ratings during the crisis, and their outlook for future ratings changes is negative. The Icelandic government had a relatively healthy balance, with sovereign debt of 28.3% of GDP and a budget surplus of 5.5% of GDP (2007). Debt is now 90 percent of GDP with a budget deficit.
In addition, the value of foreign currency bonds which mature in the remainder of 2008 is only $600 million, and foreign currency debt service in 2009 is only $215 million, well within the government’s ability to pay. However the agencies believe that the government will have to issue more foreign currency bonds, both to cover losses as the banks’ overseas operations are liquidated and also to stimulate demand in the domestic economy as Iceland goes into recession.
On 24 October, the IMF tentatively agreed to loan €1.58 billion. However the loan had still not been approved by the Executive Board of the IMF on 13 November. Apparently, UK and the Netherlands had halted IMF’s aid to Iceland as the Icesave dispute had not been resolved. Due to the delay Iceland found itself caught in a classic catch-22 situation, loans from other countries could not be formally secured until the IMF program had been approved. The Icelandic government spoke of a $500M (€376M) gap in the funding plans. Dutch finance ministerWouter Bos stated that the Netherlands would oppose the loan unless agreement was reached over deposit insurance for Landsbanki customers in the Netherlands.
The IMF-led package of $4.6bn was finally agreed on 19 November, with the IMF loaning $2.1bn and another $2.5bn of loans and currency swaps from Norway, Sweden, Finland and Denmark. In addition, Poland has offered to lend $200M and the Faroe Islands have offered 300M Danish kroner ($50M, about 3% of Faroese GDP). The Icelandic government also reported that Russia has offered $300M. The next day, Germany, the Netherlands and the United Kingdom announced a joint loan of $6.3bn (€5bn), related to the deposit insurance dispute.
In 2001, banks were deregulated in Iceland. This set the stage for banks to upload debts when foreign companies were accumulated. The crisis unfolded when banks became unable to refinance their debts. It is estimated that the three major banks hold foreign debt in excess of €50 billion, or about €160,000 per Icelandic resident, compared with Iceland’s gross domestic product of €8.5 billion. As early as March 2008, the cost of private deposit insurance for deposits in Landsbanki and Kaupthing was already far higher (6–8½% of the sum deposited) than for other European banks. The króna, which was ranked by The Economist in early 2007 as the most overvalued currency in the world (based on the Big Mac Index), has further suffered from the effects of carry trading.
Coming from a small domestic market, Iceland’s banks have financed their expansion with loans on the interbank lending market and, more recently, by deposits from outside Iceland (which are also a form of external debt). Households also took on a large amount of debt, equivalent to 213% of disposable income, which led to inflation. This inflation was exacerbated by the practice of the Central Bank of Iceland issuing liquidity loans to banks on the basis of newly-issued, uncovered bonds — effectively, printing money on demand.
In response to the rise in prices — 14% in the twelve months to September 2008, compared with a target of 2.5% — the Central Bank of Iceland has held interest rates high (15.5%). Such high interest rates, compared with 5.5% in the United Kingdom or 4% in the eurozone for example, have encouraged overseas investors to hold deposits in Icelandic krónur, leading to monetary inflation: the Icelandic money supply (M3) grew 56.5% in the twelve months to September 2008, compared with 5.0% GDP growth. The situation was effectively an economic bubble, with investors overestimating the true value of the króna.
As with many banks around the world, the Icelandic banks found it increasingly difficult or impossible to roll over their loans in the interbank market, their creditors insisting on repayment while no other banks were willing to make fresh loans. In such a situation, a bank would normally have to ask for a loan from the central bank as the lender of last resort. However, in Iceland the banks were so much larger than the national economy that the Central Bank of Iceland and the Icelandic government could not guarantee the repayment of the banks’ debts, leading to the collapse of the banks. The official reserves of the Central Bank of Iceland stood at 374.8 billion krónur at the end of September 2008, compared with 350.3 billion krónur of short-term international debt in the Icelandic banking sector, and at least £6.5 billion (1,250 billion krónur) of retail deposits in the UK.
The Icesave logo, advertising it as “part of Landsbanki, Reykjavik, Iceland”
The situation was made worse by the fact that Icesave was operating as a branch of Landsbanki, rather than as a legally independent subsidiary. As such, it was completely dependent on the Central Bank of Iceland for emergency loans of liquidity, and could not turn to the Bank of England for help. The UK Financial Services Authority (FSA) was aware of the risk, and was considering imposing special liquidity requirements on Icelandic deposit-taking banks in the weeks before the crisis. However the plan—which was never implemented—would have forced the Icelandic banks to cut interest rates or stop taking new deposits, and might even have sparked the sort of bank run it was designed to prevent. The Guernsey authorities were also planning on bringing in restrictions on foreign banks operating as branches and on transfers of funds between Guernsey subsidiaries and parent banks (“parental upstreaming”). Landsbanki operated in Guernsey through a legally independent subsidiary.
The existence of a bank run on Landsbanki accounts in the UK in the period up to 7 October seems confirmed by a statement from the bank on 10 October, which said “Landsbanki Íslands hf. transferred substantial funds to its UK branch during this time to fulfil its Icesave commitments.” The transfer of funds from Landsbanki Guernsey to Heritable Bank, a Landsbanki subsidiary in the UK, also suggests a bank run in the UK. A transfer of “substantial funds” from Iceland to the UK would have been a significant downward push on the value of the króna, even before the effects of any speculation.
The current economic climate in the country has affected many Icelandic businesses and citizens. With the creation of Nýi Landsbanki, the new organisation which replaces the old Landsbanki, around 300 employees will lose their jobs due to a radical restructuring of the organisation which is intended to minimise the bank’s international operations. Similar job losses are expected at Glitnir and Kaupthing The job losses can be compared with the 2,136 registered unemployed and 495 advertised vacancies in Iceland at the end of August 2008.
Other companies have also been affected. For example, the private Sterling Airlines declared bankruptcy on 29 October 2008. The national airline Icelandair has noticed a significant slump in domestic demand for flights. However, the airline states that year-on-year international demand is up from last year. Guðjón Arngrímsson, a spokesman for the airline, said “we’re getting decent traffic from other markets… we are trying to let the weak [króna] help us.” He has also stated that it is impossible to predict whether the company will be profitable this year.Morgunblaðið, an Icelandic newspaper, is cutting some jobs and merging parts of its operations with the media corporation 365. The newspaper 24 stundir has ceased publication due to the crisis, resulting in the loss of 20 jobs.
Importers are particularly hard hit, with the government restricting foreign currency to essential products such as food, medicines and oil. The €400 million loan from the central banks of Denmark and Norway is sufficient to pay for a month’s imports, although on 15 October there was still a “temporary delay” which affected “all payments to and from the country”.
The assets of Icelandic pension funds are, according to one expert, expected to shrink by 15–25%. The Icelandic Pension Funds Association has announced that benefits will in all likelihood have to be cut in 2009. Iceland’s GDP is expected by economists to shrink by as much as 10% as a result of the crisis, putting Iceland by some measures in an economic depression.Inflation may climb as high as 75% by the end of the year.
Unemployment had more than tripled by late November 2008, with over 7000 registered jobseekers (about 4% of the workforce) compared to just 2136 at the end of August 2008. As 80% of household debt is indexed and another 13% denominated in foreign currencies, debt repayment is going to be more costly. Since October 2008, 14% of the workforce have experienced reductions in pay, and around 7% have had their working hours reduced. According to the president of the Icelandic Federation of Labour (ASÍ), Gylfi Arnbjörnsson, these figures are lower than expected. 85% of those currently registered as unemployed in Iceland stated that they lost their job in October, after the economic collapse.
Over £840 million in cash from more than 100 UK local authorities was invested in Icelandic banks. Representatives from each council are meeting to try to persuade the Treasury to secure the money in the same way that customers’ money in Icesave was fully guaranteed. Of all the local authorities, Kent County Council has the most money invested in Icelandic banks, currently £50 million.Transport for London, the organisation that operates and coordinates transport services within London, also has a large investment at £40 million. Local authorities were working under government advice to invest their money across many national and international banks as a way of spreading risk. Other UK organisations said to have invested heavily include police services and fire authorities, and even the Audit Commission. It is hoped that about one-third of the deposited money will be available fairly rapidly, corresponding to the liquid assets of the UK subsidiaries: liquidation of other assets, such as loans and offices, will take longer.
In an emergency sitting of Tynwald on 9 October, the Isle of Man government raised compensation from 75% of the first £15,000 per depositor to 100% of £50,000 per depositor. The Chief Minister of the Isle of Man, Tony Brown, confirmed that Kaupthing had guaranteed the operations and liabilities of its Manx subsidiary in September 2007, and that the Manx government was pressing Iceland to honour this guarantee. Depositors with Landsbanki on Guernsey found themselves without any depositor protection.
On 11 October, an agreement was reached between the Icelandic and Dutch governments on the savings of about 120,000 Dutch citizens. The Icelandic government will cover the first €20,887 on savings accounts of Dutch citizens held by Landsbanki subsidiary Icesave, using money lent by the Dutch government. The total value of Icesave deposits in the Netherlands is €1.7 billion. At the same time, Iceland and Britain reached an agreement on the general contours of a solution: Icesave deposits in the UK total £4 billion (€5 billion) in 300,000 accounts. The figure of €20,887 is the amount covered by the Icelandic Depositors’ and Investors’ Guarantee Fund (DIGF; Tryggingarsjóður in Icelandic): however, the DIGF had equity of only 8.3 billion krónur at the end of 2007, €90 million at the exchange rates of the time and far from sufficient to cover the Dutch and British claims.
The cost of deposit insurance in the UK is not completely clear as of November 2008. The Financial Services Compensation Scheme (FSCS) paid around £3 billion to transfer deposits from Heritable Bank and Kaupthing Singer & Friedlander to ING Direct, while the UK Treasury paid an additional £600 million to guarantee retail deposits that were higher than the FSCS limit. The Treasury also paid out £800 million to guarantee Icesave deposits that were higher than the limit. A loan of £2.2 billion to the Icelandic government is expected to cover the claims against the Icelandic DIGF relating to Icesave, while the exposure of the UK FSCS is expected to be £1–2 billion.
The crisis also prompted the Ministry of Foreign Affairs to reduce its foreign aid to developing nations, from 0.31% to 0.27% of GNP. The effect of the aid cut was greatly amplified by the falling value of the krona, leading the Icelandic International Development Agency (ICEIDA) to see its budget fall from $22 million to $13 million. Since Iceland’s foreign aid is targeted in sectors for which the country has particular expertise (e.g. fisheries, geothermal power), the cutbacks will have a substantial impact in countries which receive Icelandic aid – most noticeably in Sri Lanka, where ICEIDA is pulling out altogether.
On February 27, 2009, the Wall Street Journal reported that Iceland’s new government is trying to raise $25 million by selling its ambassadorial residences in Washington, New York, London and Oslo.
On August 28, 2009, Iceland’s parliament voted 34-15 (with 14 abstentions) to approve a bill (commonly referred to as the Icesave bill) to repay the United Kingdom and the Netherlands more than $5 billion lost in Icelandic deposit accounts. Initially opposed in June, the bill was passed after amendments were added which set a ceiling on the repayment based on the country’s Gross Domestic Product. Opponents of the bill argued that Icelanders, already reeling from the crisis, should not have to pay for mistakes made by private banks under the watch of other governments. However, the government argued that if the bill failed to pass, the UK and the Netherlands might retaliate by blocking a planned aid package for Iceland from the International Monetary Fund (IMF). Under the deal, up to 4% of Iceland’s Gross Domestic Product (GDP) will be paid to the UK, in sterling terms, from 2017-2023 while the Netherlands will receive up to 2% of Iceland’s GDP, in euro terms, for the same period. Talks between Icelandic, Dutch and UK ministers in January of 2010 dubbed as “Icesave” did not result in any specific actions being agreed upon. 
In April 2009, Iceland’s state prosecutor hired Eva Joly, the Norwegian-French investigator who led Europe’s biggest ever fraud investigations into bribery and corruption at oil group Elf Aquitaine, as special consultant to a 20-member ”economic crime team” to “investigate suspicions of criminal actions in the period preceding the collapse of the Icelandic banks” which may involve several Iceland’s business and banking leaders. Joly stated that the investigation will require a minimum of 2–3 years to build up enough evidence to secure prosecutions.
In an interview Joly stated that:
“Finding proof will start at home in Iceland, but my instinct is that it will spread. If there are things relevant to the UK we will get in touch with the Serious Fraud Office. If there are things relevant to Germany we will get in touch with their authorities. In Iceland, there is more than enough for a starting point for the investigation, given all the talk about market manipulation and unusual loans. If these are proved they are embezzlement and fraud. The priority is tracing any flow of assets from the banks and getting them back.”
The investigation is expected to focus on a number of questionable financial practices engaged in by Icelandic banks:
Almost half of all the loans made by Icelandic banks were to holdings companies, many of which are connected to those same Icelandic banks.
Money was allegedly lent by the banks to their employees and associates so they could buy shares in those same banks while simply using those same shares as collateral for the loans. Borrowers were then allowed to defer paying interest on the loan until the end of the period, when the whole amount plus interest accrued was due. These same loans were then allegedly written off days before the banks collapsed.
Kaupthing allowed a Qatari investor to purchase 5% of its shares. It was later revealled that the Qatari investor “bought” the stake using a loan from Kaupthing itself and a holding company associated with one of its employees (i.e. the bank was, in effect, buying its own shares).
Scrutiny of Icelandic business leaders
Since the crisis began, many of Iceland’s business leaders, who had previously been considered financial gurus who greatly developed Iceland’s economy, are now under intense public scrutiny for their roles in causing the financial crisis:
Reportedly, all of those under scrutiny are now rarely seen in public and some have apparently left the country. They are also reportedly the subjects of an ongoing investigation to determine if any of their business practices warrant criminal prosecution.
Statements from former politicians
Former Prime Minister Davíð Oddsson has claimed that Iceland needs to investigate “unusual and unconventional loans” given by the banks to senior politicians during the years before the crisis.
Björn Bjarnson, the former Minister for Justice and Ecclesiastical Affairs, has started a blog detailing the problems with the business sector and the efforts to cover them up. This was cited as an example of how politicians and businessmen, who traditionally held a tight grip over the Icelandic media, have lost this control and that dozens of similar blogs have been created. Björn stated that:
“I have written a lot about problems in the business sector over the last 14 years, and I can only compare some parts of it to Enron. Here companies have been playing a game, using the media and publishing to make themselves look good. We only hope that the foreign media will soon begin to understand what has been going on.”
Some of the 6000 protesters in front of the Alþingishús, seat of the Icelandic parliament, on 15 November 2008.
Parts of the Icelandic public have arranged protests against the Central Bank, the Parliament and the government’s alleged lack of responsibility before and after the crisis, attracting between 3000 and 6000 people (1–2% of Iceland’s population) on Saturdays.
And a little about the Freedom of Information Act and financial firms –
§ 38:249 (US Code)
K. Eighth Exemption: Reports by Financial Institutions
1. In General
§ 38:249 (US Code) Introduction
5 USCS § 552(b) (8) provides an exemption from FOIA disclosure for matters that are contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions.
Accordingly, a number of federal offices and agencies, including the Treasury Department, the Comptroller of the Currency, the Federal Reserve System, and the Pension Benefit Guaranty Corporation have promulgated regulations affirmatively applying Exemption 8 to relevant information in their possession.
Some regulations, however, such as those of the Federal Deposit Insurance Corporation, may contain provisions for the discretionary release of reports that are otherwise exempt.
As stated in the legislative history of the FOIA, Exemption 8 is designed to insure the security and integrity of financial institutions, since the sensitive details collected by government agencies which regulate financial institutions could cause great harm if they were to be indiscriminately disclosed. A major concern is that the disclosure of such reports containing frank evaluations of investigated banks might undermine public confidence in the soundness of such institutions and cause unwarranted runs on banks.
A secondary purpose behind the enactment of Exemption 8 is to safeguard the relationship between the banks and the supervising agencies. There was concern that if bank examinations are freely made available to the public and to the banks’ competitors, the banks will be less likely to give the agencies their full co-operation – (which they don’t do now, my note).
The courts have indicated that Exemption 8, like the other FOIA exemptions, must be narrowly construed, but this does not mean that the plain meaning of the language of the exemption can be overlooked.
Practice pointer: Although reports prepared by bank regulatory bodies are beyond the scope of FOIA disclosure, such reports might nevertheless be subject to discovery in the course of litigation.
Exemption 8 does not create independently any evidentiary privilege, its effect being only to permit the withholding of such information from the public generally.
If, however, the federal banking agency forbids the bank to disclose a report of an examination without agency approval, discovery of examination reports must be sought from the agency and not from the bank as part of pretrial discovery in litigation involving the bank. (or financial investment, financial brokerage, stock market records, or investment “auction” facility, my note).
(from pp. 256 – 257, 15 Fed Proc, L Ed; )
§ 38:250. What “financial institutions” are governed by
The term “financial institution” has been interpreted to include banks and other related institutions.
Thus, two sets of federal regulations, those of the Comptroller of the Currency and the Federal Reserve System, indicate that the exemption is applicable to reports relating to the affairs of any bank or affiliate thereof, bank holding company or subsidiary, broker, finance company, or any person engaged, or proposing to engage, in the business of banking, extending credit, or managing or controlling banks.
It has been held that examination reports of federal savings institutions are also exempt from disclosure. Although some fears have been expressed that if Exemption 8 is construed literally, the records relating to a closed bank will be perpetually sealed, it has been held that such records come within the scope of Exemption 8, at least where the bank has only recently been closed and where the records have not yet been turned over to GSA.
One question is whether national securities exchanges are considered to be “financial institutions” within the meaning of Exemption 8.
In one case, a Securities and Exchange Commission staff study on an off-board trading problem raised by a rule of the New York Stock Exchange, as well as of the transcripts made and documents received by the SEC in the course of its investigation, were held not? to be exempted from FOIA disclosure by reason of Exemption 8.
But it has been held that an SEC report regarding an inspection of one of the lesser stock exchanges is exempt as pertaining to a financial institution.
(and from pp. 259, 15 Fed Proc, L Ed)
§ 38:252 Other exempt information
Other types of information that have been held to be exempted from disclosure under 5 USCS § 38:252 (b) (8) include reports of the Comptroller of the Currency concerning the policies of a national bank, reports of FDIC examiners, and reports of the Federal Home Loan Bank Board concerning the financial conditions of savings associations.
Information concerning disciplinary proceedings involving specific stock exchange members, since it is of value to SEC supervision of the stock exchange, is protected by Exemption 8.
Freedom of Information
Federal Procedure, Lawyers Edition; 1990
§ 38:249 (US Code)
§ 38:250 (US Code)
§ 38:252 (US Code)
Volume 15, § 38:1 – 38:600
So much for the concept of transparency. It seems that is simply a term to be used in public displays of political arena working and not an application used in fact, in process, nor in financial services processes.
Conflict of Laws –
Entry, pp. 1085, Vol. 4, Encyclopedia Britannica, 1978
The law of conflict of laws has to do with the resolution of problems that result from the fact that there exists in the world a multiplicity of different sets of courts and different systems of private laws; that is, law dealing with relations between persons. As the earth is presently organized, its surface is divided among nations that are independent of each other and that have no world government above them. Each of these nations maintains its own set of courts in complete independence of every other nation, and each nation has its own set of laws, written or unwritten.
The Law of Conflict of Laws: Function and Sources –
While in such countries as France, Sweden, Peru, or Japan, one single system of law obtains for the whole country, diversity exists in many others, especially nations organized upon a federal pattern, such as the United States, Canada, and, to a minor degree, West Germany, Switzerland, Mexico, or Soviet Union [today, Eastern European nations and Russia]. ( . . . )
Even in countries whose political structure is of the unitary rather than the federal pattern, differences can be found. In the United Kingdom, for example, considerable difference exist between the laws of England, Scotland, the Isle of Man, the Channel Islands, and Northern Ireland. (I’m not sure the extent to which that is true today, my note).
Diversity of laws exists frequently between a country and its colonies. (etc.)
Diversity of laws develops where a country is divided. (etc.)
Diversities of law within one country may also exist on an ethnic or religious basis. (etc.)
Because of the spread of Western civilization over the entire planet, the laws of modern nations, at least insofar as they are concerned with relations between private individuals, present a considerable measure of uniformity. (to some extent, my note).
They are sufficiently different, however, to make it important to know to what situations one ought to apply the law of one country, state, region, or group rather than that of another, especially when dealings are carried on between persons of different law units.
This question of determining which of the world’s numerous laws is the proper one to apply in a particular situation is in itself a legal question.
Those rules of law by which such questions of choice of law are determined constitute a major part of that field of the law that is known as private international law or the law of conflict of laws.
Other parts of this field of the law are concerned with the problem of jurisdiction — that is, the problem of determining in what cases the courts of a particular country or state are, or are not, to go into action — and, furthermore, with the problem of stating what weight, if any, is to be given in one country or province to the judgments and other decisions of the courts or other agencies of other countries or provinces.
In countries adhering to the French legal tradition it is customary to regard as parts of private international law also those rules that deal with nationality and with the legal position of aliens and nonresidents.
In accordance with usage in countries of the English legal tradition, however, the present article will be limited to jurisdiction, foreign judgments, and choice of law.
The name private international law, which is generally used in countries of European-continental tradition, and occasionally also in England, seems to indicate that it is a part of international law — that is, that system of law that is superior to all sovereign states and that, at least in theory, is uniform throughout the world.
This view was commonly held for many centuries, and when the name private international law was coined in the 19th century it was meant to signify that the supranational body of international law consisted of two parts, public and private international law.
While the former would determine the proper conduct of sovereign nations toward each other in both peace and war, the latter would, in a uniform way, tell all nations in what cases their courts ought or ought not to take jurisdiction, under what conditions foreign judgments were to be enforced or otherwise recognized, and in what cases the laws of one nation were to be applied rather than those of another.
pp. 1087, Vol. 4 (same entry – Conflict of Laws)
In the United States, the Constitution provides that “full faith and credit shall be given in each state to the public acts, records and judicial proceedings of every other state.”
Under this clause, the states, and by statute, the territories, are obliged mutually to enforce their money judgments and to recognize the res judicata and law-changing effects of their judicial acts, provided the state by which the judgment was rendered was acting within the scope of its jurisdiction as defined by the Supreme Court of the United States.
The only other defenses that might be raised are grave irregularity of the proceedings in which the judgment was obtained and, in certain cases, lack of finality.
In countries that follow the general principles of the common law, a foreign judgment usually is willingly enforced and otherwise recognized unless (1) the country by which it was rendered lacked jurisdiction according to the notions prevailing in the place where recognition is sought, or (2) the proceedings in which the judgment was obtained were tainted with fraud or were otherwise grossly unfair, or (3) the recognition or enforcement of the foreign judgment would seriously interfere with an important public policy of the country or state where recognition or enforcement is sought.
In addition to these requirements, most civil-law countries (except, of course, those few in which foreign judgments as such are not enforced at all) also demand that reciprocity with the country whose judgment is sought be recognized. (. . . )
Nowhere will a foreign judgment be enforced or recognized unless the country by which it was rendered had jurisdiction to do so under the notions obtaining where recognition is sought. These limits are sometimes wider, however, than those that a country will concede to others for the exercise of their jurisdictions.
pp. 1088, Vol 4
The greatest difficulties have arisen in the field of contract. Many courts and writ have held that problems of the law of contract are generally to be decided under the law of the place where the contract was made.
Under a refinement of this theory (1978, my note), problems concerning performance are to be decided under the law of the place where the contract was to be performed.
But where is a contract made when it was concluded by the exchange of letters between Tokyo and Paris, or San Francisco and Chicago? Where is the contract of sale to be performed when the seller has to obtain the goods in New Orleans and ship them from New York to Amsterdam, and the buyer, a business firm in Oslo, has to pay the price at a bank in London?
furthermore, what intrinsic connection with the parties’ relationship does the place of contracting have at all, if, as frequently happens, the contract was made at a place at which quite accidentally the parties’ minds met. Should German law really be applied to a contract concluded by a Dane and an Italian while they were flying over Germany in an airplane?
The view most widely followed by the courts of both civil-law and common-law countries is that problems concerning an alleged contract are to be decided in accordance with that law which the parties expressly agreed to be applicable, or which is recognizably that law upon the basis of which the parties negotiated and made their contract.
Theoretical objections to this practical view still carry some weight, especially in the United States. Where no particular law can be discovered as the one upon the basis of which the parties transacted their business, detailed differentiations must be made depending on the kind of contract in question (sale, insurance, transportation, contract for services, suretyship, etc.) and on the particular problem to be decided.
Although the field of contract is the most important for international and interstate trade, it is the one beset with the most uncertainties as to choice of law. Fortunately, the substantive laws do not widely differ from one another, and business has learned to avoid many of the difficulties through resorting to arbitration and appropriate drafting. Through skillful draftsmanship the experienced international lawyer can prevent many of the difficulties that can so easily arise under private international law.
(out of the order offered in the text – but important here)
The notion that the courts of a country should ever have to decide problems under foreign law rather than invariably deciding all problems coming before them under the law of their own country is by no means self-evident.
It has its rationale mainly in the thought that it would be unjust to teh parties concerned if a problem were decided under a law that they did not know might cover their situation when they began the transaction that led to the subsequent litigation. (but does not apply to false advertising, misrepresentation, fraud and other illusory, illegal, fraudulent, corrupt, unfair, unscrupulous or criminal business practices, my note, because even at a very basic level, those engaging in it know by its nature to be wrong and likely to fail the merits of any legal test of acceptable practices. – cricketdiane)
(further, on pp. 1088, Vol 4 – Conflict of Laws)
The necessity to apply the law of a foreign country or province, however, constitutes an inconvenience to the court and the parties. Although judges are familiar with the law of their own country, they cannot be expected to be familiar with the laws of the whole world. (but they can read at least as good as I can, my note.) Foreign law must therefore be especially pleaded and proved, often at considerable inconvenience and expense.
European and American scholars of the late 19th centuries attempted to reduce the whole field of choice of law to a few principles that could be expressed in a small number of highly generalized maxims.
Their results, however, proved impractical. Since the problems of choice of law are almost as manifold as those of substantive private law, these efforts turned out to constitute oversimplifications.
Mid-20th-century writers and courts regard it as their task to elaborate patiently those detailed rules of narrow application that are necessary to do justice to the infinite variety of actual life.
Some U.S. scholars also stress the interests of states to implement their policies over divergent policies of other states. The results of the manifold efforts can be found in the works listed in the bibliography. Here no more can be done that state some overall approaches, which must not be regarded as rules of immediate applicability. (their note, not mine.)
(also out of order from the text – )
In their general approach to the problem of jurisdiction, the common-law countries still proceed from the long-obsolete notion that no civil suit could be commenced in any way other than by the defendant’s arrest by the sheriff. Consequently, an action can still be brought in any place in which the defendant is personally served with process, (or in which they own property or have conducted business, my note), even though he may be there only for a few minutes to change airplanes.
In modern times it has come to be widely held, however, that personal service upon the defendant is no longer an indispensable requirement of jurisdiction and that an individual may be sued in the country or state of his residence, even if the summons is not personally pressed upon him. a corporation can always be sued in the country or state in which it has been incorporated.
(and, also out of order – but very interesting – )
As another example, the courts of New York regard themselves as an “inconvenient forum” for suits between nonresidents concerning a tort committed outside New York.
With few exceptions, Anglo-U.S. courts will not try controversies concerning title to, or trespass upon, land situation outside the state. (my note, but this changes when it involves money, securities, exchange of securities, fraud, fraudulent business practices, currency manipulation or currency forms as the property in question.)
(etc. – lots more good information here, but I need to lookup something else.)
Encyclopedia Britannica, 1978
pp. 1085 – 1088; Vol. 4, “Conflict of Laws”
Essentials of Business Law, Second Edition –
1984, 1986, West Publishing Company, St. Paul, Minn.
authors – Smith, Mann, Roberts
pp. 700 – 701, 702 – Part Nine, Regulation of Business
Figure 39 – 3 Restraints of Trade
Restraint – Standard
Price fixing … Per se illegal
Market allocations … Horizontal: per se illegal
Vertical: rule of reason
Group boycotts … per se illegal
Tying arrangements … per se illegal (* if seller has power in tying product or a not insubstantial amount of interstate commerce is affected in the tied product.)
However, in the text –
Economic analysis indicates that a monopolist will use its power to limit production and increase prices. Therefore, a monopolistic market will produce fewer goods at a higher price than a competitive market. Addressing the problem of monopolization, Section 2 of the Sherman Act prohibits monopolies, attempts to monopolize, and conspiracies to monopolize.
Thus Section 2 prohibits both agreements among businesses and, unlike Section 1, unilateral conduct by one firm.
Although the language of Section 2 appears to prohibit all monopolies, the courts have not interpreted it in that manner. Rather, they have required that in addition to the mere possession of market power there also must be either the unfair attainment of the monopoly power or the abusive use of that power once attained.
It is extremely rare to find an unregulated industry with only one firm, so the issue of monopoly power involves defining what degree of market dominance constitutes monopoly power. Monopoly power is the ability to control prices or to exclude competitors from the marketplace. The courts have grappled with this question of monopoly power and have developed a number of approaches, but the most common test is market share.
A market share greater than 75 percent generally indicates monopoly power, while a share less than 50 percent does not. (but what constitutes the actual market base is subjectively determined, my note). A 50 to 75 percent share is inconclusive (1986).
Market share is the fractional share possessed by a firm of the total relevant product and geographic markets, but defining the relevant markets is often a difficult and subjective project for the courts.
The relevant product market, as demonstrated in the case which follows (at the bottom of pages 701 – 702), includes products that are substitutable for the firm’s product on the basis of price, quality, and adaptability for other purposes. For example, although brick and wood siding are both used in buildings as exteriors it is not likely that they would be considered as part of the same product market. On the other hand, Coca Cola and Seven-Up are both soft drinks and would be considered part of the same product market.
The relevant geographic market is the territory in which the firm sells its products or services. This may be at the local, regional, or national level. (or in the cases we have today – in the international arenas, my note.)
For instance, the relevant geographic market for the manufacture and sale of aluminum might be national, whereas that of a taxi company would be local. The scope of the relevant geographic market will depend on such factors as transportation costs, the type of product or services, and the location of competitors and customers.
If sufficient monopoly power has been proved, it must then be shown that the firm has engaged in unfair conduct. The courts have not yet agreed on what constitutes unfair conduct (that is not true even when it was written and certainly not now – my note).
One judicial approach is that a firm possessing monopoly power has the burden of proving that it acquired such power passively or that it had the power “thrust” upon it. An alternative view is that monopoly power, when combined with conduct designed to exclude competitors, violates Section 1. a third approach requires monopoly power plus some type of predatory practice, such as pricing below marginal costs (among others, my note.)
(from – )
Essentials of Business Law, Second Edition –
1984, 1986, West Publishing Company, St. Paul, Minn.
authors – Smith, Mann, Roberts
pp. 700 – 701, 702 – Part Nine, Regulation of Business
excerpt from “Operations Management, Strategy and Analysis” by Krajewski, Ritzman: 1993, Addison-Wesley Publishing Co.
(pp. 296 – 299: also pp. 300 about diseconomies of scale, found below first reference passages and Managerial Practice 8. 1 “The Agony of Too Much – And Too Little – Capacity”)
Capacity is the maximum rate of output for a facility. The facility can be a work station or an entire organization. The operations manager must provide the capacity to meet current and future demand or suffer the consequences of missed opportunities.
Capacity plans are made at two levels. Long-term capacity plans, which we describe in this chapter, deal with investments in new facilities and equipment. These plans look at least two years into the future, but construction lead times alone can force much longer time horizons.
Currently, U.S. investment in new plant and equipment is $550 billion annually (1986). Service industries account for more than 64 percent of the total. Such sizable investments require top-management participation and approval because they are not easily reversed.
Short-term capacity plans, which we discuss in later chapters, are constrained by long-term plans. Short-term plans focus on work-force size, overtime budgets, inventories, (short-term capital plays, etc., my note), and the like, rather than on capital investment decision.
Capacity planning is central to the long-term success of an organization. Too much capacity can be as agonizing as too little, as Managerial Practice 8. 1 demonstrates. When choosing a capacity strategy, managers have to consider questions such as, should we have one large facility or several small ones? Should we expand capacity before the demand is there or wait until demand is more certain? A systematic approach is needed to answer these and similar question and to develop a capacity strategy appropriate for each situation.
Capacity planning requires a knowledge of current capacity and its utilization. A statistic often used to indicate the degree to which equipment, space, or labor (or throughput of product, my note) is currently being utilized is the average utilization rate, calculated as follows:
Average Utilization Rate = Average Output Rate divided by Capacity
and expressed as a percentage. The average output rate and the capacity must be measured in the same terms, that is, time, customers, units, or even dollars.
Output Measures – are the usual choice of product-focused firms. Nissan Motor Company confidently states its capacity to be 450,000 vehicles per year at its Tennessee plant. Capacity is well understood as an output rate because customization is low.
For multiple products, however, the capacity measure must recognize the product mix. For example, ( . . . )
Input Measures – are the usual choice of process-focused firms. For example, managers of a job shop think of capacity as machine hours or number of machines. Just as product mix can complicate output capacity measures, so also can demand complicate input measures.
Demand, which invariably is expressed as an output rate, must be converted to an input measure. Only after making the conversion can a manager compare demand requirements and capacity on an equivalent basis.
(pp. 297 – Managerial Practice 8. 1)
The Agony of Too Much and Too Little Capacity
Too Much Capacity –
The commercial real estate market in most major U.S. cities is sick, (1993) caused in part by the recession in the early 1990s. At the same time many tenants, especially those in the financial industry, are undergoing restructurings expected to cut demand for office space for years to come.
The vacancy rate of office space is 26 percent in Miami, Oklahoma City, Phoenix, and Dallas alike; it is 20 percent nationwide. Values have declined as much as 30 percent in some markets, and the capacity glut hurts everyone. For example, the CenTrust Tower in Miami, a 47-tower building built by a failed thrift for $165 million, was recently sold for only $38 million.
To make matters worse, the real estate industry is suffering from a virus becoming known as the “rollover risk.” Tenants from well-planned and pricey buildings are being lured to cheaper, empty buildings.
With the exception of the credit squeeze, rollover risk may be the single greatest obstacle to the recovery of the real estate market.
“There isn’t a tenant in Washington who pays the rent who isn’t getting two calls a week from brokers asking the tenant to break the lease and move into cheap space elsewhere,” says a banking consultant in Washington, D.C. “The entire market is being cannibalized.”
Too Little Capacity –
In the late 1980s the world’s airlines re-equipped their fleets and vied to buy a record number of commercial passenger jets. Orders for Boeing, Airbus, and McDonnell Douglas surged to more than 2600 planes.
Douglas alone had a backlog of some $18 billion in firm orders for its MD-80 and new MD-11 widebody. That’s enough to keep its plant fully utilized for more than three years.
Despite the number of orders, Douglas’ commercial aircraft division announced a startling loss, Airbus had yet to make money, and even the mighty Boeing fought to improve subpar margins.
The large number of orders caused many problems. For one, Douglas’ suppliers in the metal forging industry were unable to keep pace with sales. Another problem was with its own work force: In two years, Douglas’ work force doubled, but training periods were abbreviated and the new hires were much less productive than seasoned employees.
Plant managers tried to keep on schedule by pushing planes along the assembly process, even if all the work at one particular station had not been completed.
Work was also subcontracted to other plants, including a sister plant that makes combat planes and a leased plant owned by the U.S. Air Force.
Because of the capacity shortage, costs skyrocketed and profits plummeted. By the start of the 1990s, the capacity pressure was relieved because American had cut back on the hypergrowth strategy that had set the pace for the entire airline industry in the 1980s.
Sources: “Office Buildings, Under Pressure Already, Face Threat to Their Leases,” Wall Street Journal, September 27, 1991; and “Planemakers Have It So Good, It’s Bad,” Business Week, May 8, 1989.
(from pp. 297, Operations Management, Strategy and Analysis, 1993)
Diseconomies of Scale –
New Rules Breed Wasteful Mergers – Law in the News pp. 705, Part Nine – Regulation of Business, Essentials of Business Law, Second Ed., 1986
New Rules Breed Wasteful Mergers by Herman Schwartz
Public policy is always fertile ground for irony. Today, for example, the economic landscape is strewn with merger fiascos, but current antitrust policy toward these combinations is increasingly lenient. “economic efficiency” is now the “only goal” of merger policy, according to a former Justice Department official.
As a result, the merger wave of the 1980s surges ahead, reachinng a new peak last week with the Allied Corporation’s $5 billion plaanned union with the Signal Companies, the largest industrial merger ever (outside the oil industry).
This preoccupation with economic efficiency ignores Congressional intent and judicial precedent. The legislative history of the antitrust laws contains almost no mention of efficiency, production or price. Rather, there is an insistent Jeffersonian concern for the small entrepreneur – for social, not economic reasons.
Thus, the Supreme Court has always ruled that efficiencies cannot save an otherwise illegal merger.
Steel mergers were supposed to “rationalize” a sick industry. But LTV, for example, is having so much trouble digesting Republic that, even though LTV’s own steel sales rose substantially in the first quarter of 1985, it lost $156 million and operated less efficiently than the other top steelmakers; before the merger LTV had been among the most efficient.
Elsewhere, the once-voracious ITT will spin off 12 industrial technology acquisitions in its third major asset sale in eight months, with more to follow. G.E. has shed Utah International, after a loss of perhaps $3 billion.
Du Pont’s acquisition of Conoco was described by one market analyst as “dead weight pulling Du Pont down all the time.” And the history of railroad mergers like that of Penn Central (permitted in the name of “efficiency”) is dismal: in 1979, Forbes magazine concluded that 14 out of 17 rail mergers were unsuccessful.
At least some of these deals would have been blocked by an antitrust policy more consistent with Congressional intent and established law. ( . . . )
One merger consultant estimated that 70 percent fail.
(out of order in the content of the article – )
Nevertheless, when the Administration (1985 article, my note), took office, William F. Baxter, then the Assistant Attorney General in charge of anti-trust, promptly redrew Federal guidelines to ease restrictions on mergers between competitors. The guidelines further legitimized virtually any “vertical” merger — between customer and suppliers — or between companies in neither a directly competitive nor supply relationship.
Soon, deals — such as the proposed Allied-Signal merger — were proposed “that never would have been . . . before the Reagan Administration took office,” as one businessman put it. (etc. Last June, the Antitrust Division further softened the guidelines.
Experience shows that the supposed benefits of a merger are often illusory.
( . . . ) Today, Mobil is trying to spin off Montgomery Ward, after pouring over $600 million into it, and is taking a $500 million charge against earnings. Exxon has written off a $1.3 billion investment in Reliance Electric. . . . And Arco’s divestiture of its refining and retailing operations shows that vertical integration may yield not efficiencies, but trouble.
pp. 705, Essentials of Business Law, 2nd Ed.
inset article from New York Times Company, 1985
Managerial Considerations in Job Design and Work Measurement pp. 279 – 281, Operations Management, Strategy and Analysis
Compensation Plans –
Compensation plans based on work measurement typically involve incentive schemes. Those used most often are piece rate and individual incentive plans.
Piece Rate Plans – piece rate is a compensation plan based on the number of units processed during a day or week. (my note – that is whether it is stocks, bonds, investment “deals”, seams in a pair of blue jeans or what management must specify as a “fair day’s work.” – that last part came from the text.)
Individual Incentive Plants – sometimes, incentive plans are used to motivate workers. Such plans reward output that exceeds a predetermined base level. (etc.)
Quality and Compensation Plans – the purpose of incentive pay is to encourage high levels of output from employees. However, a high rate of output may be achieved at the expense of quality. What is the advantage to a company if a worker produces at 115 percent of standard but has a 20 percent defective rate?
In Chapter 3, when we discussed total quality control, we argued that quality at the source is critical for achieving world-class quality performance. Incentive plans that do not recognize and reward quality may not motivate the worker to produce high-quality goods.\
Two basic approaches are used to recognize quality in incentive pans. The first is the autocratic approach, which docks the worker’s pay for defective production or requires the worker to repair all defects at a lower rate of pay.
The second is the motivational approach, which is based on the concept of extra pay for extra effort. (etc.)
Many variants (including game theory popular in the last twenty-five years whereby the extreme levels of compensation, rewards, perks and bonuses of the executives are used as a motivating carrot for all mid-level performs who would be enticed to think they could have that eventually too, my note) of the motivational approach of including quality in work measurement are used in practice. the important point is that quality should be clearly recognized when compensation plans are being developed.
(Apparently, there also needs to be a standard set for what represents “quality” especially in the financial investment industries – because not every deal qualifies as “the deal” nor should it be, as exemplified by yesterday’s Senate hearings with the mid-level management / decision makers of the Wall Street investment firm, Goldman Sachs, – 04-27-10, Senate investigations committee.)
It has resulted in the collapse of large financial institutions, the bailout of banks by national governments and downturns in stock markets around the world. In many areas, the housing market has also suffered, resulting in numerous evictions, foreclosures and prolonged vacancies.
It contributed to the failure of key businesses, declines in consumer wealth estimated in the trillions of U.S. dollars, substantial financial commitments incurred by governments, and a significant decline in economic activity.
Many causes have been proposed, with varying weight assigned by experts. Both market-based and regulatory solutions have been implemented or are under consideration, while significant risks remain for the world economy over the 2010–2011 periods.
And on pages 300 – 301 of the same book – Operations Management, Strategy and Analysis, 1993 -in the section titled “Economies of Scale”
there is also – Diseconomies of Scale
. . . Historically, many organizations have subscribed to the concept of economies of scale. The concept seems simple: Increasing a facility’s size (or scale) decreases the average unit cost.
But in reality, it’s not at all simple. At some point a facility (or business, corporation, bank or conglomerate, my note) becomes so large that diseconomies of scale set in. Excessive size can bring complexity, loss of focus, and inefficiencies, which raise the average unity cost. (etc.)
muckety map - good example of diseconomies of scale - AIG / Goldman Sachs / Wall Street bailouts
(Figure 8.1 found on page 300 of the book below – not really applicable)
Figure 8.1 also shows a second dimension to the concept. Not only is there an optimal size for a facility but also an optimal operating level for a facility of a given size. Economies and diseconomies of scale are represented not just between cost curves but also within each one.
As the output rate approaches a facility’s best operating level, economies of scale are realized. Beyond that level, diseconomies set in.
pp. 300 – 301, Operations Management, Strategy and Analysis
My Note – I had another chart or two about these general concepts and some online information that I found awhile back, however – by the time I find it in my computer – it could be awhile. Therefore, I’m going to take a break, start a new blog entry and check online for the ones I was trying to find, which would have to be easier.
Share in GDP of U.S. financial sector since 1860 - must not include derivatives - Leonard N. Stern School of Business at New York University - Thomas Philippon, The future of the financial industry
Derivatives were suggested to be over $600 Trillion dollars – I don’t think that is included in the GDP . . .
(of anywhere, now that I think about it, my note) – cricketdiane
For the first half of this year, GDP growth averaged 2 percent at an annual rate, above the 1.6 percent pace posted over the second half of 2006. We expect GDP growth in the second half of the year to slow from the pace of the second quarter but to outpace growth in the first half as a whole.
Declining residential building activity subtracted significantly from GDP growth in the second quarter and there remain considerable uncertainties in the outlook for the homebuilding sector. While housing starts in the second quarter were about the same as in the first quarter of the year, permits for residential construction declined about 6 percent in the second quarter; together, these indicators suggest that there could be some further decline in activity ahead. Sales of new single-family homes were up slightly compared to the first quarter, while sales of existing homes were down nearly 8 percent. The overhang of both new and existing homes for sale remains substantial, and private analysts expect that declining housing activity will reduce overall GDP growth through the rest of the year, though to a more modest degree than in previous quarters. Developments in the sub-prime mortgage market remain a concern for many families, but do not appear to pose a significant macroeconomic risk.
Real personal consumption expenditures rose 1.3 percent at an annual rate in the second quarter, well below the first quarter’s 3.7 percent pace. Rising gasoline and food prices combined with uncertainties related to the weak housing market likely contributed to the second-quarter slowdown. The fundamentals underpinning consumer spending remain sound: Household balance sheets are healthy, with net worth reaching a new high in the first quarter of 2007 (and still elevated even with recent equity market reversals), and real disposable income is up 3.2 percent over the past four quarters. Rising incomes and the healthy job market should support consumption going forward and serve to offset the downward impetus from softening housing values.
July 30, 2007 – Assistant Secretary for Economic Policy Phillip Swagel Statement for the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association
My Note –
Read my post just before this one because the testimony given by Ben Bernanke twice in 2008 (January and Spring) as well as the US Treasury document mentioned are repeating the same words as this document which came from July 2007.
Working Group on Financial Markets
From Wikipedia, the free encyclopedia
The Working Group on Financial Markets (also, President’s Working Group on Financial Markets, the Working Group, and colloquially the Plunge Protection Team) was created by Executive Order 12631, signed on March 18, 1988 by United States President Ronald Reagan.
The Group was established explicitly in response to events in the financial markets surrounding October 19, 1987 (“Black Monday”) to give recommendations for legislative and private sector solutions for “enhancing the integrity, efficiency, orderliness, and competitiveness of [United States] financial markets and maintaining investor confidence”.
As established by Executive Order 12631, the Working Group consists of:
* The Secretary of the Treasury, or his designee (as Chairman of the Working Group);
* The Chairman of the Board of Governors of the Federal Reserve System, or his designee;
* The Chairman of the Securities and Exchange Commission, or his designee; and
* The Chairman of the Commodity Futures Trading Commission, or her designee.
(Read this – they were told to resolve this mess that created the Bear Stearns, Lehman Brothers, Merrill Lynch economic foundation impacts at this meeting in 2000 with the Presidents’ Financial Working Group and then that information was continuously covered and insistence made about changes that needed to be put in place “or else” – and what the “or else” would be. – But they did nothing.)
Working Group on Highly Leveraged Institutions (HLIs)
5 April 2000
3. The key issues arising from the LTCM episode are twofold. First, how best to address the systemic risks arising from the accumulation of high levels of leverage in financial markets. Second, how to reduce the potential market and economic impact of the sudden and disorderly collapse of an unregulated HLI. In the market conditions of late 1998, the disorderly liquidation of a hedge fund as large and as leveraged as LTCM could also have imposed substantial direct losses on its counterparties. Significant
secondary losses could have been imposed on other firms, through the rapid liquidation and closing out of LTCM’s positions and the collateral supporting its funding. The potential widespread disruption in financial markets and possible collapse of some major firms would have posed grave dangers to the stability of the financial system and the health of the global economy.
The Report stresses the importance of leverage, particularly in the context of large players with complex market and credit exposures.
Although leverage itself is neither strictly synonymous with risk nor straightforward to define, high leverage – and its interaction with other elements of risk – can nevertheless produce significant concerns from the perspective of the financial system as a whole.
4. The market dynamics issues relating to HLI activities in small and medium-sized open economies are: the potential for large and concentrated positions seriously to amplify market pressures, and the risk that market integrity may be compromised by aggressive trading practices. The Working Group examined the experiences of six economies in whose markets HLIs were active during 1998.
(pp. 1 – summary points)
6. The Working Group also considered, but did not recommend, a further range of
potential policy options including an international credit register specifically directed at
HLIs and direct regulation of currently unregulated HLIs. However, it notes that
reconsideration of these proposals may be appropriate in the future. While it is difficult
to be precise about the circumstances that might lead to this, the failure to carry through
properly the recommended measures within this Report is likely to prompt such a
7. In many of the above areas, considerable work has already been done, or is under way, by private and public sector organisations. In particular, the reports of the Basel Committee’s Working Group on HLIs2, the US President’s Working Group (PWG)3, the International Swaps and Derivatives Association (ISDA) 1999 Collateral Review4, the CRMPG5, the IOSCO Hedge Fund Task Force6 and a group of five large hedge fund managers7 (together with a separate report by Tiger LLC) contain useful analysis and recommendations on issues relating to HLIs.
8. Taking forward the full range of these initiatives, and in particular ensuring that the changes required to strengthen market discipline are sustained, will require considerable effort. It is critical that these measures are carried forward with high priority by all the agents identified in this Report. This work becomes more pressing given the pace of financial market development, the degree of financial market inter-relationships and the
complexity inherent in many new products.
2 Banks Interactions with Highly Leveraged Institutions and the accompanying Sound Practices for Banks Interactions
with Highly Leveraged Institutions (both January 1999). See also the follow up report on the Implementation of the Committee’s Sound Practice Guidelines relating to Banks’ Interactions with Highly Leveraged Institutions (January 2000).
3 Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management (April 1999).
4 ISDA 1999 Collateral Review.
5 Improving Counterparty Risk Management Practices (June 1999).
6 Hedge Funds and Other Highly Leveraged Institutions (November 1999).
7 Sound Practices for Hedge Fund Managers (February 2000).
(from the Financial Stability Forum – which the Presidents’ Working Financial Group participated with over all of the years during the Republican administrations – 2000 onward, especially – )
Ongoing and Recent Work Relevant to Sound Financial Systems
12 March 2009
A series of status reports, collated by the FSF Secretariat, on recent and ongoing work relevant to strengthening financial systems by various international financial institutions, groupings and committees. This document is published twice yearly in March/April and September/October. The document is accompanied by a cover note which highlights and summarises those initiatives started during the previous six months, out of the initiatives in the document.
The document also includes an overview table of major ongoing international regulatory initiatives, including information on their schedules for public consultation and target dates for finalisation.
This overview table is intended to provide a snapshot of key regulatory initiatives in the implementation, public consultation and development phases, along with an indication of their timing where applicable.
It is intended to assist national authorities, firms and other stakeholders in keeping abreast of and better preparing for major regulatory initiatives as they are taken forward. Initiatives are included in this table, drawing on the advice of the principal international institutions, groupings and committees. The table captures only summary information on major initiatives, and is concerned largely with the timing of implementation.
Thus readers are encouraged to refer to the document on Ongoing and Recent Work relevant to Sound Financial Systems for further insight on the background and objectives of these and other initiatives of the principal international institutions, groupings and committees. Readers should also be aware that decisions regarding implementation are in most cases left to national discretion, and thus the timing of implementation may vary across jurisdictions.
Lastly, the authoritative sources on dates are the committees and bodies responsible for the initiatives. The timing of initiatives indicated in the table is based on information as of 6 March 2009, and the relevant bodies should be consulted directly for more recent developments.
Financial conditions have improved, as unprecedented policy intervention has reduced the risk of systemic collapse and expectations of economic recovery have risen. Nonetheless, vulnerabilities remain and complacency must be avoided. The financial sector continues to be dependent on significant public support, resulting in an unparalleled transfer of risk from the private to the public sector. At the same time, however, work will need to begin on exit strategies from the various financial, monetary, and fiscal support policies in order to address market uncertainty. Medium-term policies need to ensure that steps taken to normalize policies and markets are consistent with establishing a lasting framework of sound financial regulation, sustainable fiscal balances, and the maintenance of price stability.
Overview of Developments
The risks to the global financial system have moderated from the extreme levels identified in the April 2009 Global Financial Stability Report (GFSR). Unprecedented policy actions undertaken by central banks and governments worldwide have succeeded in stabilizing the financial condition of banks, reducing funding pressures and counterparty risk concerns, and supporting aggregate demand.
These interventions have reduced the tail risk of another systemic failure similar to the collapse of Lehman Brothers. Bank debt and interbank markets have resumed functioning, albeit with massive public sector support. Concerns regarding liquidity and counterparty risks in the banking sector have declined, as evidenced by the narrowing of LIBOR-overnight index and credit default swap spreads (Figure 1).
However, overall financial conditions remain tight. Growth in bank credit to the private sector continues to slow in mature economies, securitization markets outside those supported by the public sector remain impaired, and lower-quality borrowers have little access to capital market funding. Furthermore, the public sector interventions that have underpinned the reduction in private sector risks have resulted in a concomitant increase in public sector risks and a mounting burden on fiscal sustainability.
Severe recession risks have eased in response to concerted fiscal and monetary policy stimulus measures (as discussed in the July 2009 World Economic Outlook Update). This has helped spur some return of risk appetite and a decline in volatilities, with investors moving into risk assets from safe havens. Although perceived credit risk has diminished, as evidenced by narrower spreads and lower projected default rates, it remains high.
Risks in emerging markets have also lessened, reflecting the recovery of commodity prices and the resumption of portfolio inflows and rising asset prices (Figure 2). TThese improvements have not been evenly distributed, and cross-border banking flows to emerging markets remain weak. Risks in emerging Europe have also been reduced, but strains remain and vulnerabilities flagged in the April 2009 GFSR persist.
The April 2009 GFSR highlighted three main areas of risk: (i) that weaknesses in advanced-economy banking sectors could act as a greater drag on credit growth and economic recovery; (ii) that emerging markets remain vulnerable to a slowing or cessation of capital inflows; and (iii) that yields on sovereign debt may rise significantly and private borrowers may be crowded out if the burden on public sector balance sheets is not managed in a credible way. While progress has been made in these areas, concerns remain./p>
Bank balance sheets need to be restored to health
The risk of a widespread banking crisis has eased and prospective writedowns on securities are likely to be somewhat lower, as a result of the recovery in mark-to-market valuations, but bank capitalization still remains a concern as further writedowns on loans are expected. Confidence in the U.S. banking system has been bolstered by better-than-expected earnings results, a successful stress-testing exercise, the commitment by the U.S. government to stand behind the 19 largest banks, and a series of bank capital-raisings. However, loss ratios are expected to continue to rise for loans.
In Europe, universal banks have also benefited from better earnings and capital increases, but loss rates are expected to rise. The Committee of European Banking Supervisors is conducting a coordinated stress test exercise on a system-wide basis which should help to reestablish market confidence in the banking system.
But, on both sides of the Atlantic, it is proving difficult to effectively implement measures that fully address the problem of impaired assets on banks’ balance sheets, leaving banks vulnerable to a further deterioration in the quality of these assets if the global downturn is deeper, and more prolonged, than projected.
Corporate bond markets have reopened, but bank credit growth is still slowing
Corporate bond markets are functioning more normally, a critical development for countries, notably the United States, that rely more heavily on nonbank market financing. Corporate credit and asset-backed spreads have tightened significantly and issuance has risen, as firms seek alternatives to scarce bank credit.
High-yield issuance has also increased recently, but is still restricted to higher quality credit, and spreads remain historically wide.
However, bank lending remains restricted, despite unconventional policies aimed at reviving credit to end users. Overall bank credit growth continues to diminish, as deleveraging pressures persist (Figure 3). Securitization markets continue to be impaired, except for those directly supported by government programs or central bank facilities (Figure 4).
Emerging market sentiment has strengthened, but markets remain vulnerable to capital outflows
Emerging market assets have benefited from the recovery of commodity prices and improved growth prospects, especially in Asia. The return of risk appetite has also led to a resumption of portfolio inflows from investors. Emerging market equities have rebounded 30 to 60 percent since end-February, matching or outpacing mature market equities. EMBI Global sovereign spreads have more than halved since their peak in October. Despite these positive developments, the overall outlook for emerging markets remains vulnerable to lower than expected global growth and to constrained international bank lending.
As highlighted in the April 2009 GFSR, banks are contracting their cross-border positions at a faster rate than their domestic balance sheets, although there is evidence that parent banks have maintained funding levels to their emerging market subsidiaries (Figure 5).
Consequently, cross-border deleveraging is leading to an unwinding of the rapid financial globalization that occurred over the past 10 years. This trend will likely continue, placing additional pressure on those banking systems that are heavily reliant on cross-border funding. Emerging Europe and the Commonwealth of Independent States are particularly vulnerable to contractions in cross-border funding and have not benefited as much from the market rebound seen elsewhere.
Concerns mounting regarding sovereign debt markets
Globally, sovereign yield curves have steepened considerably, as conventional monetary policy easing has anchored short-term rates, while the longer end of the curve has risen sharply, reflecting in part improved recovery prospects and reduced risks of deflation. Nevertheless, concerns about the ability of markets to absorb the supply of new government bonds may also be contributing to the rise in yields (Figure 6). With public debt levels expected to rise significantly in many mature market economies, increased focus on fiscal sustainability may have been reflected in sovereign credit default swap spreads remaining well above their pre-crisis levels.
The risks ahead
The April 2009 GFSR raised immediate policy challenges regarding the intensifying threats to systemic stability and a worsening credit crunch, emphasizing the need for a range of financial policies to mitigate downside risks. Since then, ongoing unprecedented policy actions have reduced the likelihood of major failures, an important step toward restoring confidence.
Complacency must be avoided.. There is a risk that the recent improvements in the financial sphere could lead to complacency. Continued policy efforts are needed to stave off the chance that some of the recent gains could yet be reversed. Although the financial system has stepped back from a period of extreme uncertainty, there remains a high level of uncertainty consistent with significant dysfunction in some financial markets. Confidence is still fragile, and tail risks could reemerge. The improvement in financial markets is in large part due to far-reaching public sector support. Thus, the lasting regeneration of the wide range of markets necessary for efficient financial intermediation is far from assured.
More work is needed to fix banks and markets. Concerning banks, this implies in some cases implementing measures already taken, and, in others, adopting new measures.
In spite of recent capital raisings by banks, there is a need to ensure adequate capital levels going forward as default rates increase, and to promote restructuring where needed. Moreover, actions continue to be needed to help banks deal effectively with troubled assets. Only then will they be in a position to support the real economy going forward. Parallel to this, finding ways to reopen the securitization market by placing it on a sounder footing will be of particular importance, as it serves as a significant conduit of credit provision.
Deleveraging and tail risks. If the remaining problems with mature economy banks are not effectively addressed, then the deleveraging process required to restore their health will be more severe than otherwise necessary, acting as a greater drag on the economic recovery.
Indeed, fixing the banks remains a prerequisite for a sustained recovery. Because much of the improvement in financial conditions is due to the robust rally in risk assets since March, there is a risk of a significant market setback if financial markets get too much ahead of the pace of economic recovery. Indeed, tail risks could reemerge if a major correction in asset prices were again to undermine confidence in financial institutions.
Further measures are still needed to restore confidence in the banking sector and to facilitate lending. Many countries have taken an active role in assessing their banking systems by performing stress tests, which, if accompanied by credible measures to address any shortfalls in capital, can be an effective tool in rebuilding bank balance sheet strength.
The U.S. experience and recent European initiatives to organize coordinated stress tests are a welcome step forward. More generally, viable banks with capital shortfalls should be required to submit action plans to raise their capital ratios. If carrying out such plans over the near-term is not feasible, banks viewed as viable should receive temporary capital injections from the government with appropriate conditions.
In some cases, such capital injections may need to be followed by restructuring, including the possible sale or liquidation of parts of the bank. Banks deemed to be nonviable should be resolved as promptly as practicable. Determined and suitably transparent implementation of such policies would be helpful in restoring confidence in the banking sector.
Sovereign debt markets may be at risk of destabilization if the burden of public debt financing is viewed as unsustainable. Emerging markets remain vulnerable to spillovers from mature economies that may result in a more general slowing or cessation of capital inflows. Corporate borrowers in emerging markets are particularly susceptible because of their high rollover requirements and limited access to alternative sources of finance. As well, localized problems in some individual emerging markets could have wider repercussions if not addressed effectively.
Globally consistent exit strategies.. Even though the time has not yet come to start withdrawing all the various forms of official support that have been extended in response to the crisis, it is important that carefully considered and coordinated exit strategies are put in place.
Communication of such strategies can be of great value in reducing market uncertainty. The broad objectives that should guide the formulation of exit policies are price stability, a sound financial system based on market principles, and fiscal sustainability. Within countries, exits should be coordinated across monetary, financial, and fiscal policies.
Central banks should have a range of effective instruments at their disposal for withdrawing liquidity in a timely fashion in order to avoid market disruption. Cleansing central bank balance sheets of quasi-fiscal interventions through transfers to fiscal authorities may also be needed to ensure central bank financial independence.
As confidence resumes, policy options for the withdrawal of extraordinary public support include natural run-off as the market rebounds and the orderly withdrawal of liquidity and funding measures.
A crucial consideration throughout the exit is maintaining consistency of policies across countries to minimize the opportunities for regulatory arbitrage and adverse financial flows. There will likely be political pressures both to delay and accelerate the exit from various crisis policies, which will have to be resisted for the above reasons.
At this critical stage in emerging from the crisis, policymakers need to safeguard the gains made thus far. The unprecedented scope of the crisis itself and the measures taken to contain it, will require a comparable policy response. Throughout this process, timing and modality will be crucial. Reliance on market mechanisms wherever possible will best ensure an outcome consistent with the exit objectives of price stability, a sound financial system, and fiscal sustainability.
East Asian economies, Singapore and Hong Kong SAR, rank in the top two positions in the Enabling Trade Index, followed by Switzerland, Denmark and Sweden, according to The Global Enabling Trade Report 2009 released today by the World Economic Forum. Canada, Norway, Finland, Austria and the Netherlands complete the top ten list. The report measures and analyses institutions, policies and services that enable trade in national economies around the world, highlighting for policy-makers a country’s strengths and the challenges to be addressed.
from Davos Summit – World Economic Forum and summer sessions 2009
Network of Global Agenda Councils
The World Economic Forum is forming Global Agenda Councils on the foremost topics in the global arena. For each of these topics, the Forum will convene the most innovative and relevant leaders to capture the best knowledge on each key issue and integrate it into global collaboration and decision-making processes.
Global Agenda Councils represent transformational innovation in global governance, creating multistakeholder groups composed of the most innovative and influential minds for the purpose of advancing knowledge as well as collaboratively developing solutions for the most crucial issues on the global agenda.
Global Agenda Councils will challenge prevailing assumptions, monitor trends, map interrelationships and address knowledge gaps. Equally important, Global Agenda Councils will also propose solutions, devise strategies and evaluate the effectiveness of actions using measurable benchmarks.
In a global environment marked by short-term orientation and silo-thinking, Global Agenda Councils will foster interdisciplinary and long-range thinking to address the prevailing challenges on the global agenda.
The formation of Global Agenda Councils marks a major milestone in the Forum’s evolution towards becoming the “integrator, manager and disseminator of the best knowledge available in the world.” These Councils build upon a unique strength of the Forum: its extraordinary ability to convene the very best of the world’s thought leaders. The Global Agenda Councils will also leverage the world’s greatest minds to develop a better understanding of the leading issues of the day and how they will shape the future.
The U.S. has the world’s largest prison population with one in every 31 adults in the corrections system, which includes jail, prison, probation and supervision. States spent a record $51.7 billion on corrections in fiscal 2008.
[from – ]
FACTBOX: U.S. states in balancing act on budgets
Fri Jun 26, 2009 10:51am EDT
NEW YORK (Reuters) – U.S. states are resorting to some unusual measures to balance budgets as the economic recession decimates their revenue.
Forty-six U.S. states face fiscal 2010 budget deficits totaling at least $130 billion, according to the Center on Budget and Policy Priorities. During the current fiscal year, 42 states were hit with mid-year shortfalls of a combined $60 billion, according to the Washington think-tank.
United Nations Conference on the World Financial and Economic Crisis and Its Impact on Development – June 24 – 26, 2009
The United Nations is convening a three-day summit of world leaders from 24 to 26 June 2009 at its New York Headquarters to assess the worst global economic downturn since the Great Depression. The aim is to identify emergency and long-term responses to mitigate the impact of the crisis, especially on vulnerable populations, and initiate a needed dialogue on the transformation of the international financial architecture, taking into account the needs and concerns of all Member States.
The United Nations summit of world leaders in June was mandated at the Follow-up International Conference on Financing for Development, held in December 2008 in Doha, Qatar. Member States requested the General Assembly President Miguel d’Escoto Brockmann to organize the meeting “at the highest level”.
Draft outcome document of the Conference on the World Financial and Economic Crisis and its Impact on Development
We, Heads of State and Government and High Representatives, met in New
York from 24 to 26 June 2009 for the United Nations Conference on the WorldFinancial and Economic Crisis and Its Impact on Development.
1. The world is confronted with the worst financial and economic crisis since the Great Depression. The evolving crisis, which began within the world’s major financial centres, has spread throughout the global economy, causing severe social, political and economic impacts. We are deeply concerned with its adverse impact on development.
This crisis is negatively affecting all countries, particularly developing countries, and threatening the livelihoods, well-being and development opportunities of millions of people. The crisis has not only highlighted longstanding systemic fragilities and imbalances, but has also led to an intensification of efforts to reform and strengthen the international financial system and architecture.
Our challenge is to ensure that actions and responses to the crisis are commensurate with its scale, depth and urgency, adequately financed, promptly implemented and
appropriately coordinated internationally.
2. We reaffirm the purposes of the United Nations, as set forth in its Charter,
including “to achieve international cooperation in solving international problems of an economic, social, cultural, or humanitarian character” and “to be a centre for harmonizing the actions of nations in the attainment of these common ends”. The principles of the Charter are particularly relevant in addressing the current challenges.
The United Nations, on the basis of its universal membership and legitimacy, is well positioned to participate in various reform processes aimed at improving and strengthening the effective functioning of the international financial system and architecture.
This United Nations Conference is part of our collective effort towards recovery. It builds on and contributes to what already is being undertaken by diverse actors and in various forums, and is intended to support, inform and provide political impetus to future actions. This Conference also highlights the importance of the role of the United Nations in international economic issues.
A stock fund or equity fund is a fund that invests in equities more commonly known as stocks. Stock funds are contrasted with bond funds and money funds.
Fund assets are typically mainly in stock, with some amount of cash, which is generally quite small, as opposed to bonds, notes, or other securities. This may be a mutual fund or exchange-traded fund.
The objective of an equity fund is long-term growth through capital gains, although historically dividends have also been an important source of total return. Specific equity funds may focus on a certain sector of the market or may be geared toward a certain level of risk.
Stock funds can be distinguished by several properties. Funds may have a specific style, for example, value or growth. Funds may invest in solely the securities from one country, or from many countries. Funds may focus on some size of company, that is, small-cap, large-cap, et cetera.
Funds which involve some component of stock picking are said to be actively managed, whereas index funds try as well as possible to mirror specific stock market indices. Contents
* 1 Fund types
o 1.1 Index fund
o 1.2 Growth fund
o 1.3 Value fund
o 1.4 Sector fund
* 2 Income fund
* 3 Balanced fund
* 4 Asset allocation fund
* 5 Fund of funds
* 6 Hedge funds
* 7 See also
Fund types –
Index funds invest in securities to mirror a market index, such as the S&P 500. An index fund buys and sells securities in a manner that mirrors the composition of the selected index.
The fund’s performance tracks the underlying index’s performance. Turnover of securities in an index fund’s portfolio is minimal. As a result, an index fund generally has lower management costs than other types of funds.
A growth fund invests in the stocks of companies that are growing rapidly. Growth companies tend to reinvest all or most of their profits for research and development rather than pay dividends. Growth funds are focused on generating capital gains rather than income.
This is a fund that invests in “value” stocks. Companies rated as value stocks usually are older, established businesses that pay dividends.
A fund that invests in one area of industry is called a sector fund. Most sector funds have a minimum of 25% of their assets invested in its specialty. These funds offer high appreciation potential, but may also pose higher risks to the investor. Examples include gold funds (gold mining stock), technology funds, and utility funds.
An equity income fund stresses current income over growth. The funds objective may be accomplished by investing in the stocks of companies with long histories of dividend payments, such as utility stocks, blue-chip stocks, and preferred stocks.
Option income funds invest in securities on which options may by written and earn premium income from writing options. They may also earn capital gains from trading options at a profit. These funds seek to increase total return by adding income generated by the options to appreciation on the securities held in the portfolio.
Balanced Funds invest in stocks for appreciation and bonds for income. The goal is to provide a regular income payment to the fund holder, while increasing its principal.
Asset allocation fund
These funds split investments between growth stocks, income stocks/bonds, and money market instruments or cash for stability. Fund advisers switch the percentage of holdings in each asset category according to the performance of that group. Example: A fund may have 60% invested in stocks, 20% in bonds, and 20% in cash or money market. If the stock market is expected to do well, that could switch to 80% stocks, and 10% each in both bond and cash investments. Conversely, if the stock market is expected to perform poorly, the fund would decrease its stock holdings.
Fund of funds
“Fund of funds” implies that the assets of a fund are other funds. The other funds may be stock funds, in which case the original fund can be called “fund of stock funds”. See fund of funds.
“Hedge fund” is a legal structure. Hedge funds often trade stocks, but may trade or invest in anything else depending on the fund. See hedge fund.
Department of Administrative Services
Department Financial Summary
Risk Management $137,428,923
My Note –
So last year, the state of Georgia spent over $137 million dollars on risk management? No wonder there is a budget crisis.
Department of Banking and Finance
Department Financial Summary
Financial Institution Supervision
Provide for safe and sound operation of Georgia state-chartered financial institutions, and to protect the interests of the depositors, creditors, and shareholders of those institutions.
Transfer funds from the Chartering, Licensing and Applications / Non-Mortgage Entities program to the Financial Institution Supervision program to properly budget funds for projected expenses. Restore operational funding for VOIP phone system for field offices.
Total Change $623,279
Protect customers from unfair, deceptive, or fraudulent residential mortgage lending practices and enforceapplicable laws and regulations.
Provide for safe and sound operation of Georgia state-chartered financial institutions, and to protect the interests
of the depositors, creditors, and shareholders of those institutions.
Total Change $12,316
Administration – (for department of banking and finance)
State General Funds $1,876,614 $173,210 $2,049,824
Total Funds $1,876,614 $173,210 $2,049,824
Department of Corrections
Program Budget Financial Summary
State General Funds $82,167,745 $1,069,332 $83,237,077
My Note –
every person pays fee for probation supervision monthly which covers the costs of that probation and every county and city, state and federal system is paying for this through using the tax money and fees levied against each petty offense as well.
From the FY 2009 Budget – (Georgia Governor’s Recommendations)
Post-secondary studies are critical to preparing Georgians to compete in the challenging economic climate of this century. The FY 2009 budget includes $115 million to provide funding for enrollment growth in the university system. It also provides $237 million in bonds for continued expansion and enhancement of facilities at institutions around the state: $70 million for the School of Dentistry at the Medical College of Georgia, $33 million for an Engineering Technology Center at Southern Polytechnic State University, and $30 million for major repairs and renovations system-wide. For those students who choose a technical school career path, the FY 2009 budget includes $93 million in bonds to construct new facilities at technical colleges statewide.
Education, Department of $10,806,643.46 $8,172,469.64
Community Health, Department of $8,671,964.53 $69,344,281.39
*My Note –
So therefore, by cutting services and charging more, cutting programs and refusing to fill vacancies mandated to provide services – these surpluses reflect diverting funds to programs that the Republican administration in Georgia determine to suit themselves. That could be part of the problem . . .
And, considering the amount of money that our taxes are paying out for every last part of the University system, from buildings and land to teachers’ salaries, administration costs, overhead and operating costs – why does any one have to pay again just to attend? That is obscene considering the tuitions and fees being charged.
Every dorm has been built with tax money, every piece of equipment for labs and sports and every administrative computer, xerox machine, telephone and security service, among other things have been purchased and paid for with tax moneys from the state, county, cities and federal budgets.
Those “public moneys” are our paid taxes, service fees, and every other excuse to take money that each citizen has earned.
Is there something wrong with their math skills or is it just another American racket of greed and profiteering?
– cricketdiane, 06-27-09
$114,715,169 is recommended to recognize a 3.36
percent increase in credit hours, bringing the total
number of hours generated to 6,843,691. The credit
hours were generated by a student body of 266,444
students engaged in post-secondary education
activities. Both numbers represent an all-time high for
the University System of Georgia (USG).
$6,500,000 in additional funding for Georgia
Gwinnett College (GGC) to assist with start up and
accreditation requirements is recommended as part
of the USG budget – GGC is the first new college in
the University System since 1970. The first freshman
class of 852 students started in the fall of 2007.
$14,464,286 to provide the first year of funding for
the Board of Regents’ Retiree Health Benefit Fund to
assist in meeting the Regents’ OPEB liability.
$1,000,000 to increase funding for books and
materials for public libraries in addition to $125,431 to
increase the public library state grants formula based
on an increase in state population.
$216,905,000 in bonds recommended for University
System of Georgia (USG) capital outlay projects,
specifically targeting Georgia’s priority educational
needs including a School of Dentistry at Medical
College of Georgia, a nursing and health building at
Gordon College, a new preparatory school at Georgia
Military College, an Engineering Technology Center at
Southern Polytechnic State University, and a teacher
education building at Macon State College.
$35,000,000 in cash and $30,000,000 in general
obligation bonds for major rehabilitation and
renovation on USG’s 35 campuses, representing an
investment in the nearly 75 million square feet of real
property operated and maintained by the University
$700,000 for the Agricultural Experiment Station and
$300,000 for the Cooperative Extension Service
to provide for ongoing maintenance and operating
needs across the state.
$800,000 to complete infrastructure improvements at
the UGA-Griffin campus.
$7,161,000 to expand Medical College of Georgia
course offerings to regional campuses throughout
Georgia to encourage an increase in medical school
enrollment. $159,000 to add 13 residency slots at
teaching hospitals as part of an effort to increase
the number of physicians practicing in underserved
portions of the state. Currently, Georgia ranks 35th in
the nation in physicians per capita.
TECHNICAL AND ADULT EDUCATION
$93,150,000 in bonds for new construction projects
and equipment for the technical college system
For durn near $10 million dollars, I could find them a damn parking place. That is obscene while there are programs being cut all over the state and metro Atlanta counties which help people and communities through this difficult economic time. It is obvious that the decision-makers value concrete more than people and their own convenience over using tax money to do other things that improve the opportunities for the citizens of Georgia.
Economic vitality in rural Georgia is the singular goal of the OneGeorgia Authority – and we have the tools to help make it happen. From land acquisition, infrastructure development, airport enhancements and broadband creation to machinery purchases, business relocation assistance and entrepreneur support, OneGeorgia provides grants and loans for these economic development activities to qualified applicants.
Our task at the OneGeorgia Authority is to serve as a financial partner and catalyst in helping our rural communities maintain excellent quality of life advantages while also creating sustainable and diversified economies. Local governments, local-government authorities, joint or multi-county development authorities, lending institutions and airport authorities are qualified applicants. Learn if your geographic area is eligible. Learn more about our programs.
Governor Perdue Announces OneGeorgia Awards
Governor Perdue Announces $16.2 million in OneGeorgia Awards
Wednesday, June 24, 2009
BRUNSWICK, GA –Governor Sonny Perdue and members of the OneGeorgia …
Southeast Georgia RDA– building expansion
May 20, 2009
On June 1, 2007, OneGeorgia awarded an Equity loan of $488,541 to the Southeast Georgia Regional Development Authority to support the expansion of the Michigan Blueberry Growers processing facility in Alma. The Equity loan was used for building construction of a pre-cooler building, dry storage room and office space. The expansion will provide much needed cooling space to support the continued growth of blueberries in Georgia. In 1983, a member-owned blueberry marketing cooperative, founde…
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Map of awards in Georgia, does not include metro Atlanta, Savannah and areas next to the state line with SC and NC
Grant & Loan Awards: Bartow County
Equity funds to assist with the construction of 30 T-hangars at the Level III Cartersville-Bartow Regional Airport. Currently the Airport houses 120 private aircraft permanently based at the airport, spread among 60 T-hangars, 50 tie-downs and corporate hangars. There are currently no vacancies for T-hangar space and a waiting list of 100. The new hangars will add economic development capacity, meet an airport need, generate new taxes and encourage tourism. The Airport is ranked by the DOT as number one in the nine airports within Region One and 7th highest in economic activity compared with all 94 general aviation airports in Georgia. Shaw Industries and Anheuser-Busch use the Airport regularly to fly executives in and out for meetings. Georgia Power bases its aerial patrols and resource management there. Phoenix Air Group, a worldwide airline services company and fixed based operator at the Airport, will handle the rental of the hangars. The Company provides many services including electronic warfare training to militaries; air charter, fuel, and advanced flight school services.
About 37.3 million Americans were living in poverty in 2007, or about 12.5 percent of the population, according to the government, which defines poverty as an annual income of $21,203 or less for a family of four.
UNEMPLOYMENT FUELING POVERTY
The worst financial crisis since the Great Depression of the 1930s, ignited by the collapse of the U.S. housing market, has sent the U.S. economy into a downward spiral.
Government data shows the unemployment rate jumped to 7.2 percent in December, the highest in nearly 16 years, as companies cut jobs to cope with a shrinking economy.
“My guess is poverty is going to go up from around 12.5 percent now by about half percentage point to 13 percent,” said Rebecca Blank, a senior fellow at the Brookings Institution in Washington. “The main driving factor is rising unemployment.”
It certainly was quick for the stock market bunch to get government money available and easy accelerated paths to start their own businesses using our money –
Why can’t that be done for the rest of our economy and throughout the rest of the country? Why do they get money to start their own businesses and government help to mentor it, get through the regulations and be given an easy path of accessibility but the rest of us are either shut out of the business system or hindered from even starting by excessive fees and regulations?
Help laid-off Wall Streeters start new firms: mayor
Thu Jan 15, 2009 9:08pm EST
NEW YORK (Reuters) – New York City will help laid-off Wall Streeters switch industries by training them for new jobs and will work with foundations to set up boot camps for entrepreneurs, Mayor Michael Bloomberg said on Thursday.
Bloomberg, in his eighth State of the City address, pinned the city’s future on hanging onto the bankers and brokers whom critics fault for driving Wall Street to the brink.
Along with $30 million of federal incentives for new financial firms, keeping these individuals will ensure the city stays a financial capital and shares in Wall Street’s eventual revival.
* What if corporations have been converting assets into investment portfolios? Then they are now in the business of managing those portfolios rather than in the running of the business they are in.
* Statistics are a strange animal. Unlike foxbusiness reported a couple months ago, when statistics show a percentage of homes in foreclosure or default, it does not in any way imply that the greater percentage are being paid on time.
If 5% of the homes are in default, that does not mean that 95% are not. Especially as over 4 million homes have already been foreclosed in the past five years. Obviously, 95% are part of a total that excludes all the homes that have already been foreclosed.
It fails to accomplish the task of statistics, which is to provide an accurate overview of the magnitude of the problem.
* There is a chart that shows a huge number of homes whose mortgages will be resetting over the first six months of 2009. The number of jobs lost, layoffs and business closings that have created our substantial unemployment will have rippling effects through our economy that have not been tallied yet. Neither of these facets in the economy have been accurately projected by the “experts” as seen on the news and likely those advising our government leaders.
October 16, 2007
The Honorable Barney Frank Chairman Committee on Financial Services House of Representatives
The Honorable Spencer Bachus Ranking Member Committee on Financial Services House of Representatives
Subject: Information on Recent Default and Foreclosure Trends for Home Mortgages and Associated Economic and Market Developments
Substantial growth in the mortgage market in recent years has helped many Americans become homeowners. However, as of the latest quarterly data available, June 2007, more than 1 million mortgages were in default or foreclosure, an increase of 50 percent compared with June 2005.1 Defaults and foreclosures on home mortgages can impose significant costs on borrowers, lenders, mortgage investors, and neighborhoods. Additionally, recent increases in defaults and foreclosures have contributed to concern and increased volatility in certain U.S. and global financial markets. These developments have raised questions about the extent and causes of problems in the mortgage market.
People without jobs and those whose hours have been cut at their existing jobs do not spend money in the same way as those fully employed.
Although living with limited or no income is far more expensive than living with a substantial income, the variety of choices for spending money also changes. For instance, more is spent on food and less on clothing. The choices change and with limited means, it is far more difficult to get good deals on what is purchased.
In a larger sense, this means that mall stores will see a drop in sales and there will not likely be repurchase power for homes over quite some time. Restaurants will no longer have as extensive a customer base nor as regular a repeat business. Frequency of customer use in many businesses will be lost. And, new customers won’t be available either.
People don’t paint houses they don’t own unless that is their business to provide. They don’t remodel or put upgraded flooring or appliances in houses that have been lost. They’re not going to buy new bedding or window treatments for the guest room when they now live with relatives or in the homeless shelter.
All of which begs the question – what happens when everyone is selling and no one is buying? Will businesses continue to go to their conventions, rent hotel rooms, buy airfare for employees and attend seminars? Will those industries suffer, too?
Will businesses continue to buy advertising to promote themselves to an audience who can no longer buy their products and services? Will the printing, advertising and promotions businesses still continue without the customer base available for their services?
Or, does it matter, because businesses have become investment portfolio managers rather than retailers, manufacturers, service providers or whatever? How long will that hold out when they are losing the money that is coming in the door from the customer base they used to enjoy?
It certainly answers the question about what CEOs are paid to do. Apparently, they are the hedge fund managers of the companies’ portfolios of investments, stocks, bonds and credit default swaps. Those aren’t profits derived from their initial and primary business foundation. Ultimately, this puts no footing under their business whatsoever and undermines the very substance of their original business model.
So, as it turns out, the US government could have given a million dollars each to every man, woman and child, legal citizen or not, living in the US and solved the problems we face. Everyone could have paid off their mortgages, bought new cars, bought new clothes, appliances and goodies, paid for college educations, started new businesses and had money to live on for awhile.
It would’ve cost less than what they’ve done and solved nearly all the problems in our economy. And, for what they’ve spent now doing it their way and the way their favorite lobbyists for the bankers and chamber of commerce have insisted, every aspect of economic blight, weakness and disruption still exists. It hasn’t even made a dent in it of any significance and in fact, may very well contribute to a continuation and deepening of these economic difficulties.
Who taught these people in Washington to think? Are they capable of generating real solutions in that environment at all? Who let the bankers loan money they didn’t have in the first place? Who let corporations become hedge fund managers instead of pursuing better business practices for their primary products and services in the marketplace?
Who decided to bailout their friends with our money on a blank check instead of eradicating bad and nearly criminal business methods that are causing the problems? And, then who was it that turned around and blamed us for their ineptitude, lack of action to resolve these issues and unwillingness to serve the greater good?
There seems to be a certain inbreeding of thought and perception among the business leaders, financiers and politicians in our country. Are they capable of knowing the difference between using the real facts to direct decisions and falling prey to perception management which alters the facts to suit some particular outcome? Are they in a position to even discern the difference?
It is no longer a matter of what is left or right, conservative or liberal, business or non-business – when the tangible assets of our country are being converted to rubble and ruin. It isn’t a choice of who is capable of swaying the public opinion when the public is living with the outcome in every real sense and losing the opportunities of today and their future is constrained.
And, how could anyone believe that a $500 a year reduction on our federal tax bill make up for the tax increases that every state, county and local government is currently adding? Why don’t they just leave the tax codes alone and give the states the money they need?
By the time every fee is raised, every sort of tax is increased in every city, county, state and every other federal tax is hiked – none of us will have any money to spend anyway. Well over 50% of every income is already going to the government now. If it isn’t taxed one way, it is taxed another. There is a steady increase even today, of every tax and fee charged by the government and these were already inflated and exorbitant in many cases as it was.
I guarantee – it won’t be our children’s children that pay for this mess and the pathetic excuse for the “solutions” they’ve called bailouts and buying of bad debt by our government. It will be each of us and our children in the coming days, weeks, months and years that will be paying for it.
Our communities don’t exist to serve the needs of the community any more – they stand desolate and increasingly, in disrepair – their tax base has been destroyed – the very fibers of the communities have been decimated. How will taking $500 off our taxes two years from now fix any of that?
– cricketdiane, Cricket House Studios, Cricket Diane C Phillips, 01-05-09
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