Securities and Exchange Commission stitches bleeding scars in market, in a rush

The financial market has been bleeding badly since last summer when the sub-prime led credit crisis struck the investment banking sector, bringing the fifth investment bank Bear Stearns to demise. Among mounting worries that big-name banks are going to post more massive write-downs, the SEC finally comes to the front, playing hero.

 

SEC gets on the move

SEC required all the remaining investment bank behemoths to reveal more company figures in addition to the regular disclosure of company liquidities. SEC raises the threshold for information reveal, forcing all banks to report their borrowing situation, to see if the company’s business relies too much on leverage.

 

Cash is the king

Since the market is in bearish mood at the moment, investors are more concerned than ever before with the capital adequacy, equity and assets of the companies. The current situation looks worrisome. The four big banks all build up their business and growth on heavy borrowings. Lehman Brothers has two-thirds of its debt based on short-term borrowing, which is extremely volatile when the overall credit in the market is strained.

 

Bear Stearns woes 

The sudden topple of Bear Stearns early this year is till haunting the market and investors; the company was the first casualty in Wall Street to be fatally hit by the sudden clamp of liquidity. Since then the SEC have been watching closely on the situation, in case that more banks will follow the trend.

 

‘It is never too late’, as the old saying goes. The rigorous standards set up by SEC are considered a market stabilizer. It might be painful in the beginning, but the banks will find themselves the ultimate beneficiaries of the move, because their future returns will be based on a more solid and safer cash-backed foundation.

CITIgroup customers mourn over worse-than-expected loss in funds

Two hedge funds affiliated to CITIgoup.Inc send their investors in real panic by reporting more than 75% loss in the value of the funds. The two funds involved branded their products as less-risky fixed income ones. However, the two funds, namely Falcon and ASTA/MAT channelled most of their cash into municipal bonds, mortgage-backed securities and other debt instruments, which bear the highest risk.

 

CITI funds fiasco 

Some of the funds’ customers are filing court suits against CITIgroup for fraud. To counteract, CITIgroup executives offer the affected fund investors $250 million as exit compensation, and the precondition to get this money is to drop all legal charges against the company. So far, the investor’s reactions to the offer are still not available.

 

CITI’s case does not come alone since the credit-crunch-led shockwave swept across the world. Banks are anxiously dealing with the situation while huge write-downs are reported from one to another. Last week, one of China’s first QDII (qualified domestic institutional investor) funds of Minsheng Bank was forced to dismantle its portfolio because the fund lost more than half of its capital. Investors of the fund also tried to bring the bank and fund managers to court but ended up in vain, because the fund had informed its investors of the potential risks when the fund was open to retail market.

 

Over confindence kills

There is one similarity for all these failed funds: they are so aggressive that they bet all the money on high-risk securities or derivatives. When they entered the market and built up portfolios, the sentiment of the market was high, however, suddenly the wind changes, huge exodus of capital appeared instantly after the horrible picture of sub-prime mortgage was unveiled last summer.

 

Hide the truth 

Besides overconfidence, low portfolio diversity also resulted in the huge loss of the funds. What’s worse was that the fund managers did not reveal the real picture to their customers, who were initially told that the funds won’t touch any risky sectors. Customers are now told that their money was gone and the situation is irreversible because the gross prospect for the whole economy is still perceived as bleak. What can they do except for accepting the sad truth?

Headcount cut show in financial industry starts

Today two obtrusive numbers come onto headlines of many financial publications: the Royal Bank of Scotland is going to layoff 7,000 its staff, and UPS will put that figure to 8,000. The horrible scene of job loss in financial market now begins to full-fledge. The big names in the industry will be hit the hardest first.

 

More than 40,000 job loss in City

Cut in RBS accounts for one fourth of the bank’s total 28,000 employees, as a formal consultation for position redundancies is already undergoing in the bank. In the beginning of the year, JP Morgan’s London arm expected that there would be as many as 40,000 job cuts for 2008 alone. Many market insiders were mocking at the JP Morgan’s estimate to be over-pessimistic, however, as more and more banks are revealing huge write-downs in their book, the job cut plans are also gaining momentum from bank to bank, people are beginning to paint more gloomy pictures.

 

Business schools reap the windfalls  

Interestingly, many business schools are now busy with putting up commercials and ads in newspaper and websites, in order to attract those who are laid off from financial sector to business schools for MBA or EMBA study. FT revealed in its February business supplement that MBA application cycle actually counters the economic cycle, in other words, the worse of the economy looks like the more people are going to apply for seats in the business schools.

 

MBA VS Recession 

The applicants are hoping that by spending generally two years in business schools, they can fend off the sluggish period of market and economy, and then enter the job market again when the economy pick up pace again. 2008 will be an excellent year to test if this assumption is true or false.