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USA: Back on the World’s Leading Positions in Financial World

A small number of people could have expected such a rapid recovery of the United States financial system and the return of its banks to the world’s leading positions. According to information from the New York Stock Exchange, on July 12, 2013, Wells Fargo Bank (estimated market value of $ 236 billion) surpassed, according to the market capitalization criterion, leading the Industrial and Commercial Bank of China (ISBC) to become the world leader. In addition, other financial institutions from the United States, such as Bank of America, Goldman Sachs, AIG and others, record fantastic results. It is particularly interesting that these banks only a few years ago were part of the government’s aid program and received a huge amount of funds (Wells Fargo 25 billion, Bank of America 45 billion, Goldman Sachs 10 billion and AIG 40 billion dollars).

In the past period, the stock indices indubitably spoke in favor of the thesis that the financial crisis in the United States has, in fact, been overcome. The shares of the aforementioned companies made steady growth and reached record levels for a period of five years, that is, from the beginning of the crisis. Given that this is a low base that compares today’s value of shares of these companies, it should be cautious when making conclusions about the final outbreak of the crisis. In addition, it should also be noted that most of these banks have survived because a huge amount of liquid assets has been pumped up through the Trouble Asset Relief Program (TARP) program to enable their smooth functioning. Out of the initial $ 750 billion, as originally planned, a $ 450-billion-dollar program has been put into the financial system through various programs. This move by the government came to the justified disapproval of taxpayers whose money was used to cover the losses of financial institutions incurred as a result of gambling operations in the mortgage and market derivatives.

Financial derivatives or as Voren Buffett calls them “Weapons of Massive Financial Destruction” were a real attraction in the pre-crisis period. One of the main reasons for this is the complete lack of regulation. The debate on the regulation of this market was initiated in 1998 when an independent commission for the control of the derivatives market noticed the first irregularities and wrote a detailed report to Congress. However, the main apologists for the liberal market, the then director of the Fed, Alan Grinspen and the Secretary of the Ministry of Finance, Robert Rubin, managed to lobby Congress in setting a moratorium on the introduction of regulations to the Dodd-Frank Wall Street Reform and Consumer Protection Act.
In order to overcome the consequences of the crisis more quickly and painlessly, but also eliminate the possibility of re-emergence, the aforementioned TARP stabilization program had to be accompanied by a new, tougher and better regulation of the financial market. As early as July 21, 2010, President Barack Obama signed a proposal sent by Chris Doda and Barney Frank, thereby giving legal force to the new regulations. The main motive, as it is said, is to provide financial stability through improving the accountability and transparency of the financial system. as well as to break off with “too big to fail” practice. By achieving this objective, taxpayers, and on the other hand, investors and other participants in the financial market, would be protected from the irrational behavior of financial institutions. The new regulation consisted of sixteen points, each of which individually processes a certain financial sector and controls the work of supervisory authorities. Dodd-Frank Akt has come across various criticisms in the process of adoption and entry into force. Interestingly, criticism is often diametrically opposed, from being too strict and impractical to those that are loose and that it does not bring about any major change in the system. In addition, the proposal for the return of the Glas-Stigl Act, introduced in 1933 after the Great Depression, can be heard more and more often, which would completely separate the affairs of commercial and investment banks. The main purpose is to limit commercial banks ‘commercial activities to less risky transactions, making citizens’ deposits more secure. Given that this is the worst recession since the thirties of the last century, such proposals are completely justified because extreme situations require radical systemic and institutional changes.

An extremely important link in the chain that contributed to the collapse of the US financial system was the rating of the agency. This conclusion can only come intuitively, but every dilemma is eliminated by getting acquainted with the procedure for ranking securities. Namely, prior to the ranking of a certain HOV, the financial company issuing a rating refers to the agency with a request for giving it a monetary compensation. Since it is in the interest of the issuer to keep the paper as well as possible because it’s market value will be higher, it can indirectly exert pressure on the rating agency to achieve this. It is very easy to conclude that as a product of this relationship on the basis of the issuer-rating agency, we get a huge number of high-quality securities with low risk and high yield.

That this is an extremely important problem and a significant factor of the emergence of the crisis can be concluded from the views of members of the Financial Crisis Inquiry Commission (FCIC). The unanimous conclusion of the commission is that the rating agency disastrously performed its basic task, timely and accurate informing the investor about the quality of certain HOVs. As the main critic of the commission, the unrealistically high ranking of financial derivatives emitted in 2007 based on mortgage loans, which since the beginning of 2006 showed significant instability. In addition, the entire chapter of the aforementioned regulations (Dod-Frenk Act) deals exclusively with rating agencies. Protecting investors through more stringent and quicker control of their business is one of the pillars on which the prevention of the emergence of a new crisis is based. Within the same point, the Investor Protection Bureau was established to monitor market developments and control the quality of HOVs that are the subject of trading.