Sunday, June 13, 2010
Wednesday, June 9, 2010
Tuesday, June 8, 2010
FINRA
The news in the past few weeks has been saturated with the FINRA (Financial Industry Regulatory Authority)
Today, I want to talk a little about what's going on with these three things, and what are your thoughts on these subjects.
Background on the sub prime mortgage crisis: there's a lot that could be explained here but I'll give you the short version. Basically, rating agencies, such as Moody's, were giving AAA ratings on mortgages that banks then sold. However, the very people buying these ratings (investment banks) were paying the rating agencies which leads many people to believe the conflict of interest are party to blame of the crisis. I Anyways, the banks cut up and packaged these gold rated mortgage backed securities into complex, nonsensical packages that no one could understand, and eventually sold them to investors through various mediums including mutual funds. Well, home buyers bought these mortgages left and right, paying a small down payment, owing almost the entire value of the mortgage on the house. The worse part is these people had bad credit ratings hence "sub prime" mortgage. Eventually, the buyers defaulted on their loans and banks had to seize the property. As more and more of this happened, the value of these mortgages fell and these home buyers were left with a larger debt on their mortgage than the mortgage was worth. Then they stopped paying their mortgage, defaulted on the lean, and furthered the downward spiral. Banks were foreclosing and seizing these properties but each seize takes about 8 months to complete from start to finish and often the people had already left the houses, leaving it prone to vandalism. This causes the value of the properties to decrease significantly and banks to receive as little as 40 cents on the dollar at foreclosure actions. The rest took a life of its own. As people began to lose more and more money, fear and speculation drove the market into crisis.
FINRA: On May 20, 2010, the Senate passed the Financial Regulatory Reform Bill by a vote of 59-39. (http://banking.senate.gov/public/_files/FinancialReformSummary231510FINAL.pdf) The legislature has 3 main parts, regulators would receive more authority to monitor mortgages and securities, reduce debt they take on and increase capital reserves and finally, worst comes to worse, the government can seize failing banks and sell it back piece, by piece. Hello big brother, you're getting mighty large...
Another interesting topic regarding this is the Glass Steagall Act of 1933. I'd explain it but this post is getting long enough as it is. So google the Act before giving an opinion. My concern is that they enacted the act after the Great Depression but then the Graham-Leach-Billey Act of 1999 completely repealed it. So the smart people of 1933 found that it was important to separate the investment banks from the depository banks but then the smart people of 1999 found that among other things it promoted deflation and repealed it. Now the "smart" people of 2010 are thinking about reenacting it or some version of it? There are huge problems either way, why are we just switching back and forth. Destroying the U.S. economy isn't a fashion trend that comes back every into fashion every 20 years.
The bill now proceeds to House-Senate conference where the Senate version and the House version are reconciled. It could be ready for President Obama's signature as early as July 4, 2010! If passed this would be the most sweeping overhaul of the financial sector since the Great Depressio
What do you think about this new bill?
The next segment will be on BP. What the future of BP is and whether you should invest in it. BTW BP closed at a 52 week low today of 34.68 even though the DJIA and the S&P both went up.
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