New Info Blog

The current financial crisis

The public have a common understanding that the subprime mortgage crisis has leaded to a far more serious consequence, so called ‘the financial crisis’ recently. To be exact, It has been going on for seven months. But how will that be happened? This is the question. The subprime load crisis is relatively simple to understand. People bought homes they couldn’t afford, and now they are falling behind on their home loans. This has caused the loss of related financial institutions.

However, the amount of loss is not the major cause of the financial crisis. US government has already announced to take over Fannie Mae, Freddie Mac and AIG, and have injected the capital over that amount into the market. Besides, the majority of homeowners are still doing just fine. The conventional mortgage market is still healthy. So, how is it that a mess concentrated in one part of the mortgage business: the subprime loans, has frozen up the whole credit markets in United States? How would that crisis caused such a big impact to the stock market, causing the collapse of Bear Sterns, Lehman brothers, etc, and left the economy on the brink of the worst recession in a generation and forced the Federal Reserve to take its boldest action since the Depression in 1923?
 
In order to have a big picture of this incident, I think this could be explained in this way. First of all, behind the whole financial crisis, there are actually 3 major components: the subprime mortgage, Leverage (or gearing), and the Credit Default Swap(CDS). We have mentioned about subprime mortgage before. So, what is leverage? In the finance industry, leverage is a common way to use in such a way to magnify the outcome of the investments. This can be done by various financial instruments such as options, futures, margin or borrowed capital, to increase the potential return of an investment. 
 
At present, many investment banks use leverage to operate more then 20 times of their capital. For example, if bank A have an asset of 5 billion, then 30 times of leverage means that bank A can operate 150 billions of money, in which most are borrowed. It is obvious, if there is 5% of profit in the investment, then bank A has a profit of 7.5 billion. However, on the other hand, if there is 5% loss in the investment, then bank A loss all it’s 5 billion of asset, and still owe the lender 2.5 billion.
 
The third component is CDS. What is CDS? As explained above, the operation of leverage is very risky. So some bankers think of a way to take insurance on these leverage. This insurance is called CDS. It is a specific kind of agreement which allows the transfer of third party credit risk from one party to the other. One party in the swap is a lender and faces credit risk from a third party, and the counterparty in the credit default swap agrees to insure this risk in exchange of regular periodic payments. For example, Peter borrows $100 from John. John wants to get insurance on this $100 debt in case Peter was unable to return the money. The John goes to Jane and asked for Jane to insurance that debt. Jane agrees to do so if John is willing to pay her an insurance fee of $5 per year. That is exactly the most simplified scenario of CDS.
 
Now, apply that in the world of banks. Recall the example of ‘bank A’. Bank A operates a leverage of 30 times. To reduce the risk, it goes to bank B and asked for bank B to do CDS insurance. After analysis the market data, bank B knows that the breach of contract case is less than 1%. Therefore, bank B is willing to take that insurance to earn the insurance fee. However, this is not the end of the story. Although bank B agree to accept the insurance, it can not have the insurance fee immediately. At the same time, some other banks such as bank C, bank D, etc. are interested to these CDS contracts. So bank B is willing to re-sell them to other banks to have the cash immediately. This is the scenario. The CDS contracts being sell and re-sell continuously among different financial sectors. In the mean time,
the market value of the CDS has reached 62 trillion.
 
However, you may see that, all the banks A, B, C, etc are making money. So, where is the money comes from?  The money comes from the revenue generated by the subprime mortgage business. So why the honey moon period can continue in the previous few years? It is because the real estate prices keep rising in the previous few years. In that period, home owners and buy and re-sell the real estates easily, who can earn good money at the same time. It just likes snowball or bubble. The market keeps rocking until 2006. When the downturns came, the prices of the real estates dropped. People who are lack of financial ability was unable to pay the high interests of those subprime loans. In that case, the subprime mortgage market started collapsing, which in turn affecting the CDS market. Banks and financial institutions who are involved in those products is unavoidably being affected. In fact, nearly all I-banks and most of the commercial banks are involved in this storm, or more appropriates, the tsunami. 

George C. (http://www.finance-database.com)

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In my opinion, the second biggest challenge that you face in your online forex, stock commodity or futures trading is distraction.

Now, I say the second biggest challenge, because the first challenge is to know what the heck you are doing in the first place! Frankly, if you don’t know that- and most beginner and many intermediate level traders really don’t- then you’re going to need all the distractions you can get to keep you away from the markets so that you don’t keep losing your money!

However, assuming that you do know what you are doing in the markets and have a sound plan, then the next major challenge that you face is distraction. It goes back to what we have discussed about the need for mental focus. However, the issue of distraction is wider ranging. When we spoke about focus, we were talking about the need to focus within all the vast variety of choices available to you in the trading world.

With distractions, the issue is much wider and potentially worse still. Here, we are talking about literally everything that can distract you from your online trading. If you are a private trader working from your home, this can be an endless list; the postman, your cat, the need to get some bills paid,the shopping,the fact that it’s a sunny day and you’d rather be outside,surfing the internet, checking your email, the telephone, odd jobs around the house, and so on. If you are in this position, I am sure you can add to the list.

Even if you are an investment bank trader, there are still plenty of distractions. Some of the above- email and the internet for example still apply- and there are others. Chatter from your colleagues, meaningless bullshit meetings that you must attend and are not allowed to get out of, the endless stream of media “information” and more.

At least for the institutional trader, it is understood that trading is a business. It is literally his/her job. There is daily accountability involved and it cannot therefore be mistaken for a hobby and treated as one. However, for the person working at home, this is a much easier mistake to fall into, especially at the very start, when you may not have decided upon your trading routine.

Speaking personally, I have to say that distraction is something that I have a big problem battling against, since I do operate from home. The problem is that if your mind is not totally focused upon what you are doing in the financial markets, and getting the process right, the margin for error quietly widens and things can start to go wrong.

The key point to come back to is that trading has to be a business, if it is intended to be your primary source of income for yourself and your family. If that is the case, then it is imperative that you treat it with the seriousness that it deserves. That means that even though you may be working for yourself at home, you need to impose some business disciplines that you would find in a standard office environment.

If at all possible, you should establish for yourself a separate room for your online trading. Wherever possible, you need to give very serious thought to closing the door to family and pets in order to concentrate on what you are doing. (Now, I know that this is hard because my two cats basically have total access to me, and I can’t see that changing. But as the saying goes: do what I say, not what I do!)

Let’s not forget that neither your friends, your pets, nor your family would have access to you if you were working at an office job somewhere, would they? Hence, closing the door closes out an enormous source of distraction.

Use effective time management principles to deal with other distractions. In other words, schedule other things that need to be done appropriately so that they do not interfere with your trading. Maybe you need to fix upon a time when you check and deal with your email once in the day, or at most twice, but you certainly do not keep looking at it every five minutes or so.

Do you know what constantly checking your email all the time is like?

It’s like going to your front door every few minutes to see if there is anyone there! Did you ever think of it like that? Well, if you would never do that, why check your email every 5 minutes?!

What’s the big deal? Well, it takes time away from you focusing upon your business, which is trading, not email checking or chatting idly. When you break your focus, then it takes a certain period of time to restore it. If this keeps happening the whole time, your mind is working hard just to stand still, i.e. to keep getting back to where it left off last time.

That is why it is so vital to get this under control. If not, it is not the trading that is exhausting you, so much as the sheer amount of clutter that you have allowed to invade your own brain. They say that failing to plan is planning to fail. Hence, starting today, sit down and plan out what you can do to minimize the distractions during your trading day. Consider the email challenge. Consider too scheduling certain activities together, e.g. make all of your outgoing calls at the same time, when you go out to the shops, make sure that you get that post office visit done too. Try to handle pieces of paper that come onto your desk once, and don’t keep coming back to them over and over again.

This is all about organizing you, and you are unique. Hence, it is impossible for me or anyone else to give you a list. You have to come up with it yourself, and then go to work to reduce the distraction to your trading. I’ve given you a broad hint in what we have been discussing, but it is ultimately down to you.

Remember, your online trading is a business, not a hobby. It will ultimately, if it is not already, be your primary source of income and that upon which your family depends. Hence, you owe it both to yourself and to them to get serious and to get professional, no matter whether you trade from home or on the proprietary trading desk of the biggest firm on Wall Street.

Discover FREE expert Trading videos, podcasts and articles packed with secret strategies to super-charge your Trading and rocket your profits. Dr. Asoka Selvarajah also offers you his critical FREE report, “The 7 Deadly Mistakes Of Online Trading”. Visit http://www.OnlineTradingRebel.Com right now!

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The Foreign Currency markets (Forex or FX) were deregulated in 1997 and no longer the private domain of the banks, insurance companies and other large financial institutions. Private investors quickly discovered what the large trading companies knew for a long time. Which was, it is much easier to invest in currencies for a profit than invest in stocks for a profit. In every currency transaction there is one winner and one loser. The winner simply needs to make more than the commissions (Pip’s) charged them by the brokerage firm they are using. When purchasing a stock, the seller of that stock could be selling that stock at a loss, and the person they bought it from could have sold it at a loss and the person before that could of sold it at a loss and so on and so on.

One of my biggest pet peeves when watching the business broadcast on television is when an investment banker from one of the stock brokerage firms come on and says,” investing in the stock market over the last 100 years has been proven to produce the largest capital gain when compared to any other form of investment.” At that time I wish I was a TV host so bad, because I want to ask the lying banker, “exactly which companies would you have bought 100 years ago that are still in business today?” Can’t you just hear them when you ask that, I am sure they would then mention some more fabrications like this, “well there aren’t too many, but if you sold this company after 2 years and then bought this other company and held it for 5 years and then sold it and bought XYZ firm and held it for 8 years, just a bunch of useless trash talking.” That’s my opinion anyway.

In essence, purchasing currency is a lot more like gambling on two sports teams than it is similar to purchasing stocks. When gambling on sports teams there are two participates and one wins and one loses. The winner pays the commission (Vic) to the bookmaker. There are quite a few differences between gambling and investing in currencies though.

First, the quantity and quality of information the currency has at their disposal when attempting to decide on when to buy and when to sell is vastly superior to gambling on sports teams. In fact, if you follow a few simple principles and don’t get greedy this information can be used to virtually guarantee profits. The next difference is the upside potential verses the downside loss in trading currencies. When gambling a gambler will normally invest in a one on one situation, in other words they invest one dollar to make one dollar. The currency investor on the other hand can limit their losses to what of percentage of their upside gain they believe is possible. If a gambler is correct 50% of the time they are still losing money. If a currency trader is correct 50% of the time they are traveling around the world on their own yacht trading with their wireless internet connection visiting every exotic know location. That is quite a substantial difference.

There are quite a few more reasons that investing in currencies is the best form of trading, but I am only going to mention one. If you manage your money correctly and have a low tolerance for risk then you only need to be correct somewhere around 20% of the time to break even. Even a blind monkey can do that. Really if you just throw darts at a chart you are going to be right 20% of the time. Since most of the people reading this will be new to the currency markets I highly suggest you acquire a quality education before attempting to trade. Yeah, it is not too tough, if I can do it, surly anybody can. But, I got my education before starting.

William R. Alheim, Jr., CPA, MA – We have researched 100’s of Courses and only listed our TOP 10 COURSES the rest we threw out so you don’t have too. You can also visit http://www.tradingforexreviews.com/ to learn more about Forex Brokerage Firms, Software Systems and Educational Courses. Good Luck! I look forward to seeing you on the trading floor making money!

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Indeed, it goes without saying that taxes government does, well, it does not do well. Every major bubble burst in our economy always occurs due to inept government intervention, bad regulatory policy, bad tax policy incentives and/or lobbyist favors for one company over another. The list of mistakes made by politicians and our government are just too numerous to mention.

Presently, we are in a bit of hurt due to the subprime lending calamity, which sunk the overheated housing market. Now we hear politicians telling us that we can bail out our economy by investing in alternative energies, green technologies and environmental innovations. Interesting indeed, sure it makes sense leverage such technologies, the only problem is when government gets involved and pushes too hard. Next, they will start unbalancing the free-market playing field and diverting monies to these sectors.

As soon as they do entrepreneurs, corporations, vulture capitalists, investment banks and the like will start lining up to get some of this money flow. Since, the money flow will be so prevalent there will be no reason to go and create a new start-up that is actually viable, might ever earn a profit or even or even offer a reasonable ROI on energy savings for the buyers of the products or services. You see folks this is EXACTLY how the government tax bubbles in the marketplace, rather than letting the free-market do what it does best.

The free-markets deliver everything tax mistakes buy, sell or trade and they do it with efficiency. Why, because there is a profit motive to do so. If the government creates free-give-aways or offers tax incentives for one company over another, or one method or product over another; they favored method will become inefficient, that’s just a given.

Politicians need to stop steering investment dollars into green industries, rather the consumer should be allowed to choose which makes the most sense for them, this way the most efficient products and services will be the ones which help us into energy independence. Dear Citizen, the green tech sector is the next Bubble, it should be obvious. If you are enjoying things like the telecoms crash, DotCom bust, or the real estate and banking crisis fine, but if you are getting tired of this nonsense, why not look outside and observe what is really going on here?

There is no reason to keep repeating these ‘boom and bust cycles’ and sector rotations in our economy, no reason at all. Think on this.

“Lance Winslow” – Lance Winslow’s Bio. If you have innovative thoughts and unique perspectives, come think with Lance; http://www.WorldThinkTank.net/.

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Everybody who even perfunctory follows the news must have heard about the string of terrible financial developments in the United States. More and more investment and banking companies are going bankrupt or are being threatened by spreading credit crisis. This is a spillover effect from excessive lending practices during a prolonged housing bull market, which came to an end as a “bursting bubble” over a year ago.

Now more and more companies find themselves in possession of securities tied directly to mortgages issued during that time. With more and more houses going into foreclosures and loosing value, an increasing number financial instruments are rapidly becoming non performing, or outright worthless. Companies holding them are experiencing losses going into billions of dollars. Some of them are becoming insolvent.

Such was the case with Washington Mutual, which was seized by federal authorities and sold at a bargain price to JP Morgan Chase. Washington Mutual set a sad record, becoming the biggest bank to ever fail in USA. But not the only one lately. So far the crisis has claimed 12 banks, investment banks and even insurance companies, like the industry giant American Insurance Group.

To date US Treasury managed to avoid real disaster by stepping and taking over failing institutions or facilitating financing to keep them alive, by lending money to other companies for purchase of weakened rivals. Intervention has cost Treasury hundreds of billions of dollars, including $25 billion to bailout Bear Sterns, $100 billions each for Fannie Mae and Freddie Mac, $85 billion for AIG. This list goes on and on.

Now FED is asking congress for additional $700 billions in order to bail out entire financial industry, by establishing a market for mortgage backed securities. Federal authorities would purchase instrument from most at risk firms. That would set some kind of pricing guidelines for all other such securities, making it possible for all holders of such notes to start trading in them again, potentially lowering risk of owning them.

Nobody really knows if this is going to be enough, but the price of such action will be staggering. With the money already spent and the funds requested, the total bill will surely top $1 trillion dollar by a wide margin. This would signal new wave of borrowing by Treasury, which would last for years and push the total debt level into record and uncharted level.

Dollar lost value while all this was unfolding, and is likely to continue slide until congress works out details of this massive funds infusion. After that it will take some time to see if the steps FED is taking are having desired effect. US dollar will probably stay under pressure during this time. One might expect this to continue through the reminder of 2008.

In order to finance rising level of debt, we can expect to see interest rates rise on USD, which would make Treasury paper more attractive. Combined with economic slow down in the rest of the world, this might prove very bullish for dollar going into 2009. This will only be the case if the interest increases are done in a slow, measured pace and not due to some market panic. This particular scenario is compatible with very long term dollar charts.

We should be watching with interest what comes out of the chambers of congress. Once the funding is granted, it will be up to the financial authorities to prove it is money well spent. If it works even half as well as promised, we should see steady appreciation of Dollar in 2009 and perhaps a little longer.

Mike P. Kulej is a Chief Forex Strategist for Spectrum Forex LLC. He specializes in mechanical trading systems as explained on http://www.spectrumforex.com. Spectrum Forex LLC offers numerous services to individual traders. He also publishes trading blog http://www.fxmadness.com. With questions and comments e-mail him at kulej@spectrumforex.com

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The second quarter was a tumultuous one forLehman Brothers and Wachovia Corp., two of the country’s leading financial institutions.

Continuing a recent pattern of financial services firms bidding farewell to their chief executive officers, Wachovia’s board asked longtime CEO, G. Kennedy Thompson, to retire. At press time, Lehman Brothers’ CEO, Richard S. Fuld, Jr., had avoided the same fate. But president and chief operating officer, Joseph Gregory, and chief financial officer Erin Callan were suddenly reassigned after disappointing second-quarter results and writedowns that totaled $11 billion.

Ian Lowitt succeeded Callan as CFO, while Herbert McDade III, took over Gregory’s slot. Callan was reassigned to a senior executive role within Lehman’s investment banking division. Gregory’s new role was unclear.

The reassignments came on the heels of news that Lehman expected to see a $2.8 billion loss in the second-quarter and that it planned to raise $6 billion through common and mandatory convertible preferred stock issuances.

Just days before she was reassigned, Callan said during Lehman’s conference call about its earnings, that the capital the firm expects to raise is not being held against particular asset exposures on the company’s balance sheet. The efforts to raise capital are “so we can get back to running our business on a day-to-day basis and stop the distractions and discussions we have related to our balance sheet,” Callan said during the call.

Meanwhile, Wachovia’s board asked Thompson to retire after the bank endured a string of disappointing results. One analyst from Robert W. Baird & Co. said he expects more bad news from Wachovia. “While not completely surprised by the announcement, Thompson’s departure was sudden in our opinion,” wrote David A. George, an equity analyst at Baird. “We wouldn’t be surprised to see more bad news (credit, capital markets, dividend) out of [Wachovia] over the coming weeks.” George maintains a neutral stance on Wachovia, saying that although the company’s share price had underperformed in the first few days of June, he believed the risk/reward ratio was not attractive enough to warrant a stock purchase.

Unlike Wachovia’s Thompson, Lehman’s chairman, Fuld, didn’t appear to have come under any pressure to resign or retire as of press time. In fact, Fuld and Lehman still enjoyed the confidence of at least two high-profile banking analysts. “We are buyers of the stock on the assumption that CEO Dick Fuld will steady the Lehman ship, and with greater stability, the stock will appreciate,” wrote Mike Mayo, an analyst at Deutsche Bank in early June.

Merrill Lynch analyst Guy Moszkowski said the early June price correction in Lehman’s stock had been overdone, and that concerns about the bank’s share price suffering further from a Bear Stearns-style funding challenge were unfounded. Lehman’s shares “have meaningfully undershot fair value in the last few days, on speculation and concerns that are not justified, in our opinion, given access to the [Federal Reserve's] primary dealer facility and ample liquidity,” wrote Moszkowski.

Those persistent rumblings about liquidity put Lehman in need of some analyst praise. Rumors of a possible sale were rampant, along with accounts that the company had approached several South Korean investors, including the Korean Development Bank and Woori Financial Group.

Those concerns were not totally unsubstantiated. Credit-default swaps had widened from 140 basis points in early May to about 260 basis points a month later. In addition, Standard & Poor’s had downgraded Lehman’s long-term rating to A, from A+, in keeping with a review of the global securities industry.

Before Lehman’s early announcement, Deutsche Bank’s Mayo predicted that Lehman would take action by raising about $4 billion in capital, citing a desire on the part of the company’s management to stay in control of its destiny and focus more of its efforts on offensive, rather than defensive, tactics. Still, Deutsche Bank lowered its share-price target estimate to $49, from $52, saying that it expects hedging losses at Lehman, as well as dilution should the firm issue additional equity.

In addition, before Lehman’s earnings were announced, Merrill’s Moszkowski reversed his second-quarter projection, from a profit of 6 cents per share to a loss of 74 cents per share. He blamed possible mark-to-market asset values that could drop by around $1 billion, ineffective hedges and general market weakness in May.

In early June, rumors circulated that both Lehman and Wachovia would be acquired by other firms. In Wachovia’s case, such a deal is unlikely, said Baird’s George. For one thing, he said, the list of likely buyers is limited to JPMorgan Chase & Co., which is already busy digesting Bear Stearns, and San Francisco-based Wells Fargo & Co. Neither company is likely to get much of a premium out of a Wachovia purchase, given all of its ongoing challenges.

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