Over the past couple of decades a large number of corporate failures have led to an increase in the intensity and demand for regulation within global markets. Regulators were brought in to try and reassure the public and improve public opinion of firms and increase consumer confidence.
The most recent scandal, manipulation of the Libor rate by leading banks, has called into question whether there is enough regulation within the financial market. The Libor rate is used as a benchmark interest rate for a range of financial deals and represents the price that a bank is willing to pay another for a currency.
This scandal occurred during the height of the financial crisis in 2008 and has, along with a number of other altercations, caused deep public distrust in the banking industry.
There are two models of regulation; national self or statutory regulation; and self-legitimation. The first of these models suggests that regulation follows a cyclical pattern by loosening regulation during periods when the economy is strong and regulations increase when a crisis occurs. As the Libor rate was manipulated as a result of the financial crisis in 2008 it could be said that the call for reform that followed the discovery of the scandal falls into this model of regulation.
The self-legitimation model suggests that at times of public distrust and lack of confidence in the market, companies will take whatever action required of them to improve their public image. This in itself acts as regulation without the force of the law.
The role of regulators, however, can be diluted by the impact of Government. For example, in the Libor case, the Government was accused of not doing enough to regulate the banking industry by not giving the Regulator the power they require to do their job effectively. The proposal was that regulators should be able to force a split between retail and investment banking operations of a bank if reforms were not taken up. The Government failed to provide the legal powers to regulators to do this because of fears of handing too much power to regulators. They also feared that it would make the Banks less competitive which would further threaten a recovering economy. As such it makes it more of an empty threat.
The theory of Regulatory capture is likely to play a role in future, as it has done in the past with cases such as Enron in the early 2000's. It suggests the idea that regulators can become too intertwined with the targets of their regulation. There is a fear that the regulations that that these targets are required to adhere to become a list of topics that require a "box-ticking" attitude. This theory may be a simple explanation for why the Government is unwilling to give the regulators in the Libor case too much power. In the future, this power may be a way to manipulate and control the activities and operations of banks and as such may damage the industry.
It would appear that regulation is self-defeating as it seems that corporations will suffer the new regulation put on them subsequent to a scandal or failure but then find a way to circumvent that same regulation before they themselves become the centre of a scandal. They may get away with it for a while but eventually more regulation will kick in a the process will start again.
Friday, 22 March 2013
Sunday, 17 March 2013
Recovery since Credit Crunch 2008
The banking crisis that started in 2007, which saw the collapse and takeover of many of the World's largest banks, for example, Lehman Brothers and Bear Stearns, led to the credit crunch of 2008. The consequences included; rising cost of bank lending, and bond and equity finance; depressed house and share prices; reduced consumer confidence and spending; and negative impact on UK exports.
Prior to the crisis, the majority of developed countries were experiencing one of the longest periods of time with low interest rates. This encouraged borrowing and spending and discouraged saving leading to a housing market boom in the UK and the US. This also led to "predatory lending" to sub-prime borrowers who should have been more doubtful borrowers because of their diminished ability to repay.
The banks became greedy and soon found new ways to sell credit such as derivatives and Collateralised Debt Obligations (CDO's). These subsequently failed.
Rescue plans were produced by Governments all over the world; the US tried to secure a $700bn bailout fund but was denied in a vote by Congress; part-nationalisation of RBS, Lloyd's TSB and HBOS and £50bn from the Treasury with an additional £200bn from the Bank of England for a rescue plan in the UK; also in the UK, a bank debt guarantee of £250bn; and Switzerland sets up a $60bn "toxic debt fund". £119bn alone went to Northern Rock in the UK.
The UK is now on its way to recovery, but there is still quite a way to go as consumer confidence and spending is still low and interest rates are still not at ideal levels. The economy has not been kick-started again yet.
This leads onto the Funding for Lending scheme started by the Bank of England and the UK treasury to encourage UK banks to start lending to companies and households. Set up in 2012 it has recently been evaluated to measure its success so far and whether or not it has helped the economy out of the recession. The scheme has £60bn available to banks for lending purposes. It is a way to provide cheap finance to those who need it to restart the economy.
While this is a great idea in theory, there is a chance that the opportunity for cheap finance will not be taken up because there is no demand for it.
As of March 4th, 39 banks had taken part in the scheme, withdrawing £14bn worth of loans. However, the net borrowing figure fell by £2.4bn in the last quarter of 2012 suggesting that the loans are taking a while to have an effect due to the time taken to approve loans.
While the idea here is a good one surely the treasury could be using the money on a more productive scheme? The funds are available until December 2012 but by the end of 2013 they should have a better idea of the success of the scheme so far. It is quite a small way of improving consumer confidence and increasing spending. I believe that they should find a better way to motivate banks to provide cheaper loans/mortgages to the public and to businesses. An incentive scheme could be argued for that would reward banks who give mortgages at a certain level. All it requires is one or two banks to start and the rest will fall in line.
Prior to the crisis, the majority of developed countries were experiencing one of the longest periods of time with low interest rates. This encouraged borrowing and spending and discouraged saving leading to a housing market boom in the UK and the US. This also led to "predatory lending" to sub-prime borrowers who should have been more doubtful borrowers because of their diminished ability to repay.
The banks became greedy and soon found new ways to sell credit such as derivatives and Collateralised Debt Obligations (CDO's). These subsequently failed.
Rescue plans were produced by Governments all over the world; the US tried to secure a $700bn bailout fund but was denied in a vote by Congress; part-nationalisation of RBS, Lloyd's TSB and HBOS and £50bn from the Treasury with an additional £200bn from the Bank of England for a rescue plan in the UK; also in the UK, a bank debt guarantee of £250bn; and Switzerland sets up a $60bn "toxic debt fund". £119bn alone went to Northern Rock in the UK.
The UK is now on its way to recovery, but there is still quite a way to go as consumer confidence and spending is still low and interest rates are still not at ideal levels. The economy has not been kick-started again yet.
This leads onto the Funding for Lending scheme started by the Bank of England and the UK treasury to encourage UK banks to start lending to companies and households. Set up in 2012 it has recently been evaluated to measure its success so far and whether or not it has helped the economy out of the recession. The scheme has £60bn available to banks for lending purposes. It is a way to provide cheap finance to those who need it to restart the economy.
While this is a great idea in theory, there is a chance that the opportunity for cheap finance will not be taken up because there is no demand for it.
As of March 4th, 39 banks had taken part in the scheme, withdrawing £14bn worth of loans. However, the net borrowing figure fell by £2.4bn in the last quarter of 2012 suggesting that the loans are taking a while to have an effect due to the time taken to approve loans.
While the idea here is a good one surely the treasury could be using the money on a more productive scheme? The funds are available until December 2012 but by the end of 2013 they should have a better idea of the success of the scheme so far. It is quite a small way of improving consumer confidence and increasing spending. I believe that they should find a better way to motivate banks to provide cheaper loans/mortgages to the public and to businesses. An incentive scheme could be argued for that would reward banks who give mortgages at a certain level. All it requires is one or two banks to start and the rest will fall in line.
Sunday, 10 March 2013
Mergers and Acquisitions
It is believed that 2013 will bring around a come back in merger and acquisition activity in world markets. In the last month alone there have been three major deals announced worth $75 billion. First there was the purchase of Heinz by Warren Buffett's Berkshire Hathaway and 3G Capital (private equity firm) for $28 billion. Second, was management buyout of Dell by its original founder for $24 billion and finally, Liberty Global acquired Virgin Media for $23 billion.
There has also been a significant merger in the last month or so of 2 major US airlines (US Airways and American Airlines) which has been greatly anticipated. Recent economic and market conditions have led companies to behave far more cautiously as the risk on major deals like these has been greatly increased. There hasn't been this level of activity since the early 2000's and it may be a taste of things to come as the market is kick-started into more headline grabbing deals such as the ones already mentioned.
This was due in part to the failure and scandals of some huge companies such as Enron that severely reduced confidence in the markets for mergers and acquisitions and created a great deal of mistrust the world over.
In the US, the recent survival after the fiscal cliff that was looking likely unless serious steps were taken to reduce the deficit and rescue the economy, has made more executives bolder to make large scale deals.
With the economic crisis many companies were seeking to survive rather than pursue growth objectives in what was a very trying period for all global companies. Focus has been more on the core business activities within a business and most companies have far less spare cash lying around than usual, effectively reducing the incentives for any M & A activity further.
Mergers and acquisitions of the size mentioned above also lead to issues involving all stakeholders, not just the shareholders. First of all, the employees of the firm being taken over will be put at risk of losing their jobs, particularly senior management members. The employees who are working closer to the frontline of the business are more likely to be kept on as they have an intimate knowledge of the work required on a day to day basis. In many cases firms are taken over because they have been weakened by poor management and made more susceptible to take overs. If this is the case then top managers are more likely to be fired and replaced by personnel that have been approved by the incoming firm. In the Heinz case Unite, representing the workers at Heinz, has already called for a meeting with the new owners to discuss the consequences of the take over on the current employees. It is likely that many top managers will lose their jobs.
A lot of the other stakeholders relationships with the company may change depending on the management approach and strategy of the firm taking over. For suppliers it may depend on whether the company is working within the same industry as the target company or not, as they may wish to change suppliers to someone who they already have a strong working relationship with. With customers the bidding firm may use different distribution channels in use.
The US airlines merger will create the biggest airline in the world and while this will have been at the fore in the minds of the those organizing the merger, they will also have seen the opportunities for vertical integration and creating synergies between the two companies and hopefully getting the chance to compare and share their respective strategic capabilities. This merger in particular will create a very large amount of market power and dominance in the US air travel industry.
There has also been a significant merger in the last month or so of 2 major US airlines (US Airways and American Airlines) which has been greatly anticipated. Recent economic and market conditions have led companies to behave far more cautiously as the risk on major deals like these has been greatly increased. There hasn't been this level of activity since the early 2000's and it may be a taste of things to come as the market is kick-started into more headline grabbing deals such as the ones already mentioned.
This was due in part to the failure and scandals of some huge companies such as Enron that severely reduced confidence in the markets for mergers and acquisitions and created a great deal of mistrust the world over.
In the US, the recent survival after the fiscal cliff that was looking likely unless serious steps were taken to reduce the deficit and rescue the economy, has made more executives bolder to make large scale deals.
With the economic crisis many companies were seeking to survive rather than pursue growth objectives in what was a very trying period for all global companies. Focus has been more on the core business activities within a business and most companies have far less spare cash lying around than usual, effectively reducing the incentives for any M & A activity further.
Mergers and acquisitions of the size mentioned above also lead to issues involving all stakeholders, not just the shareholders. First of all, the employees of the firm being taken over will be put at risk of losing their jobs, particularly senior management members. The employees who are working closer to the frontline of the business are more likely to be kept on as they have an intimate knowledge of the work required on a day to day basis. In many cases firms are taken over because they have been weakened by poor management and made more susceptible to take overs. If this is the case then top managers are more likely to be fired and replaced by personnel that have been approved by the incoming firm. In the Heinz case Unite, representing the workers at Heinz, has already called for a meeting with the new owners to discuss the consequences of the take over on the current employees. It is likely that many top managers will lose their jobs.
A lot of the other stakeholders relationships with the company may change depending on the management approach and strategy of the firm taking over. For suppliers it may depend on whether the company is working within the same industry as the target company or not, as they may wish to change suppliers to someone who they already have a strong working relationship with. With customers the bidding firm may use different distribution channels in use.
The US airlines merger will create the biggest airline in the world and while this will have been at the fore in the minds of the those organizing the merger, they will also have seen the opportunities for vertical integration and creating synergies between the two companies and hopefully getting the chance to compare and share their respective strategic capabilities. This merger in particular will create a very large amount of market power and dominance in the US air travel industry.
Sunday, 3 March 2013
Foreign Direct Investment
Foreign Direct Investment (FDI) is "the purchase of physical assets or a significant amount of the ownership (stock) of a company in another country to gain a measure of management control". For some companies, this will be done by building factories abroad so as to reduce costs where the labour or land prices may be cheaper. Alternatively, companies can seek to merge or acquire pre-existing companies within the country they wish to invest in, so as to gain a entry into the foreign market there and save themselves from setting up their own brand there which can be very time consuming.
Currently, Manchester Airports Group (MAG) is preparing a $2 billion bid for Chicago Midway Airport in the US, in an attempt to expand their portfolio abroad. At this point there is little further information on the bid, however, we can speculate that MAG is looking to find a way into the American market and look to make the first airport in America privatized.
MAG will be able to use its technical know-how in the application as a means to secure their bid as their experience in the industry is very strong.
In the last 5 years or so FDI has taken a step backwards because of the financial crisis and companies being less willing to spend their money abroad when there is an increased risk for unpredictable returns.
In the example mentioned above, MAG is attempted to buy into an already well established market rather that into a developing country where it may find it difficult to create a competitive advantage due to the fact that all the other players in the market are not newcomers to the industry as well and if anything have a better understanding of the market they are already in.
This acquisition could however, provide a strong synergy between the existing airports owned by MAG in the UK with the new Chicago airport. It may be in a better position to bring more business between the UK and the US.
It is unlikely to bring any major benefits to the US as most of the staff will retain their positions and it will just be a change of ownership that will occur. It is clear that the acquisition is only being attempted to increase their share of the market and, hopefully for shareholders, their share value. There is a clear asset available that is already set up and only looking for new ownership meaning that the transition for MAG would not be a difficult one.
FDI has often been considered a way to avoid transportation costs when importing or exporting but the nature of the company means that this is not their main aim. MAG will see this as a opportunity to escape the UK where all the airports are already privatized and are trying to get a head start in a new market. However, sometimes this can backfire as they are the first company to experience how the new market works and there is always some risk in that. Any slightly late-comers will get a chance to study the approach of the leader into the new market and adjust their potential plan for joining in the industry as well.
Currently, Manchester Airports Group (MAG) is preparing a $2 billion bid for Chicago Midway Airport in the US, in an attempt to expand their portfolio abroad. At this point there is little further information on the bid, however, we can speculate that MAG is looking to find a way into the American market and look to make the first airport in America privatized.
MAG will be able to use its technical know-how in the application as a means to secure their bid as their experience in the industry is very strong.
In the last 5 years or so FDI has taken a step backwards because of the financial crisis and companies being less willing to spend their money abroad when there is an increased risk for unpredictable returns.
In the example mentioned above, MAG is attempted to buy into an already well established market rather that into a developing country where it may find it difficult to create a competitive advantage due to the fact that all the other players in the market are not newcomers to the industry as well and if anything have a better understanding of the market they are already in.
This acquisition could however, provide a strong synergy between the existing airports owned by MAG in the UK with the new Chicago airport. It may be in a better position to bring more business between the UK and the US.
It is unlikely to bring any major benefits to the US as most of the staff will retain their positions and it will just be a change of ownership that will occur. It is clear that the acquisition is only being attempted to increase their share of the market and, hopefully for shareholders, their share value. There is a clear asset available that is already set up and only looking for new ownership meaning that the transition for MAG would not be a difficult one.
FDI has often been considered a way to avoid transportation costs when importing or exporting but the nature of the company means that this is not their main aim. MAG will see this as a opportunity to escape the UK where all the airports are already privatized and are trying to get a head start in a new market. However, sometimes this can backfire as they are the first company to experience how the new market works and there is always some risk in that. Any slightly late-comers will get a chance to study the approach of the leader into the new market and adjust their potential plan for joining in the industry as well.
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