Assessed blog 3 Barclay- Banking scandal

Assessed blog 3 Barclays- The manipulation of LIBOR rate in banking sector

          Welcome back to my blog! Last week, l was talking about the sub-prime mortgage crisis and the fall down of RBS by misleading of Fred Goodwin and other chief executives. L have found that the environment in banking area is quite complex and it is driven by many factors both inside the corporate culture and outside the economic tendency. It is quite fascinated me to get further research in UK bank area. Just after 5 years of financial crisis by the trigger of leman brothers, in 2012, another biggest banking scandal in UK has appeared.

Biggest banking scandal

          “Dude, l owe you big time! Come over one day after work and l am opening a bottle of Bollinger.” Said by an external trader to a Barclay trader. Beginning in 2012, an international investigation into the London Interbank Offered Rate, or Libor, revealed a widespread plot by multiple banks—notably Deutsche Bank, Barclays, UBS, Rabobank, and the Royal Bank of Scotland—to manipulate these interest rates for profit starting as far back as 2003.Barclays and banks from others countries are founded to manipulate LIBOR for making profits and lie to the public.

    

What is Libor? Why does it matter?

      At first, l do not quite understand what Libor is. Based what l learn, l thought it was just a rate which relate the loans bank making to each other. When l do some further studies, l find that it is not the easy things what l think. By contrast, it is the most important base rate. Many banks worldwide use Libor as a base rate for setting interest rates on consumer and corporate loans. Indeed, hundreds of trillions of dollars in securities and loans are linked to libor, including government and corporate debt, as well as auto, student, and home loans, including over half of the United States’ flexible-rate mortgages. It is said about 300 trillion pounds contract and loans are related to this number.

How dose such important rate being manipulated?

      So far, l cannot help to wonder why such important rate can be manipulated. Is there any regulators to supervise it? Nobody to become suspicious when such important rate changed? When l googling some news, l realized that it is possible to manipulate Libor in this particular situation. Firstly, l did like to talk about the formation of Libor rate, to calculate the Libor rate, a representative panel of global banks submit an estimate of their borrowing costs to the Thomson Reuters data collection service each morning at 11:00 a.m. The calculation agent throws out the highest and lowest 25 percent of submissions and then averages the remaining rates to determine Libor. This calculation method give Barclays and other banks a chance to get in, they were came under investigation by a handful of regulatory authorities—including those of the United States, Canada, Japan, Switzerland, and the UK—for colluding to manipulate the Libor rate beginning in 2003. Secondly, the specific economic environment in UK banking area have weaken the supervise power and tempt the bank to interfere Libor rate, as we know,2012 is just after 5 years of financial crisis caused by sub-prime mortgage market. People in UK have already loss a lot confidence in banking area, for banking area, l believe the most essential thing is to let people believe you, if they not, you can hard lend your loans and make your profits. Subsequently, in order to give public confidence and make people believe them, banks are try to make some estimate or fake figures to make their company look health and better, so in my opinion, some banks are not aim directly to rig the Libor rate, maybe they just want their company to look health to public for attract customers. Thirdly, l have found that although the change of Libor rate is a very tiny number, it indeed have big influence to the banks, which l mean such a tiny change is hard to grasp by the regulator. There is an example l find on the finance website which can identity that point. If we see the calculation we can find that the Barclays traders actually affected the rate by only one basis point, they would have made more than $2 million payment based on the notional amount is 80 billion by this tiny change of Libor rate.  

The highest penalties and consequence caused by Libor scandal

      Regulators in the United States, the UK, and the European Union have fined banks more than $9 billion for rigging Libor, which underpins over $300 trillion worth of loans worldwide. Since 2015, authorities in both the UK and the United

States have brought criminal charges against individual traders and brokers for their role in manipulating rates, though the success of these prosecutions has been mixed. The scandal has sparked calls for deeper reform of the entire Libor rate-setting system, as well as harsher penalties for offending individuals and institutions, but so far change remains piecemeal.

Barclays was the first bank to take a penalty, coughing up 290million pound for manipulation. Several others have been hit with fines since, including Deutsche Bank, UBS and Rabobank. No offense, to be frank, l think it is very ridiculous that the government has helped to bail out the UK banks industry in financial crisis during 2007 and 2008, and now they are let down by what they have saved before.

  On conclusion, l think the UK government should have a completely reform in the banking industry, also the external traders and brokers. More efficient legislation and skillful regulator should be built and trained. More important, government and related organization should not always appear when the things has happened, they need to act early, like to publish some mesurament to help public raise confident in bank, maybe that will prevent the Libor scandal happen. But l know economic is always the complex thing, banks should always obey the rules to earn a long living.      

Assessed blog 2-RBS:inside the bank that run out of money

Assessed blog 2 RBS:inside the bank that run out of money

  In October 2008, RBS(The Royal Bank Of Scotland) has published a announcement which has suffered a

loss of nearly 24 billion pounds.That information has completely ruined its reputation and threat the position of Scotland as one of the financial center all over the world.   

    Loss 24 billion pounds in less than 1 year!!How can that happen?Especially one of the most famous bank in the world.The video really surprised me.When l finished watching and to do some research on my own,l can divide the RBS’s failure in 2008 into three main reasons.First,the sub-prime mortgage crisis.Second,the acquisition of Dutch Bank ABN AMRO.Third,the individualism and arrogant of top leaders.

    The first and most important thing l want to talk about is the corporate cultural inside RBS,cause i think the basic reason led to such great loss is the arrogant and individualism of top leaders inside this company.Although the financial crisis and acquisition is also crucially important,it is can be avoided before they do completely due delligence.The case has made me think about the trail blog l wrote about Digby Jones,he has said that if you want to be success,you must go deep research into the market where you want to step in,to know what attract your customer most. As the same,such a big acquisition with out previous investigation and evaluation is a deal that beyond our imagination. The reason why they not doing that is the overconfidence and individualism of the Fred Goodwin’s manage performance.One thing impressed me most is the interview with the pre-colleague of Fred Goodwin,he said Goodwin is a person which possess high knowledge but usually use his knowledge to bully people around him, a little acerbic.What l want to say is that maybe the tough management style did bring RBS excellent efficiency,but the negative aspect is that no one want to express their opinions and suggestions.l always wonder that did nobody give some oppositions to Goodwin in every morning meeting about the Dutch Bank acquisition in RBS?But when l go deep in this corporate culture,l know the meeting maybe is just a “personal show” of Fred Goodwin himself.

   

The second reason is about the financial crisis which we also called the sub-prime mortgage crisis.Actually,there was some apparently indication has appeared since some mortgage institution in America met  problems,then the situation has extended to Europe.Many citizens has used their house as mortgages to bank,then bank sell this to another bank for gaining profit follow this circulation.But with the housing price down and interest rate goes up,the house was not worth than their previous value,individual cannot offer such big loans to bank.The financial crisis began,in October 2008,by the trigger of Lehman Brothers downfall.The stock market in America collapse,bottoming at 7062.

(The Dow Jones index of America)

      

   Then followed the third reason which is RBS decide another acquisition of Dutch Bank ABN AMRO.Such a company in banking area,prepare to takeover a large size and badly operate company during this tense situation(sub-prime mortgage crisis appear)without due dilligence?l wonder why there is no one notice the change of the sub-prime mortgage market.Maybe is their greedy and over-confidence has blinded eyes,undoubtedly,Fred Goodwin’s decision early is brilliant(Natwest,credit card,second-hand car,Citizens)but this time was different because the unpredictable of the market situation.All Fred Goodwin think about is to expand their company size and with his previous successful experience and tough leadership through the company,he can’t get advisable suggestions.Let’s look back at this acquisition,first,Barclay has offered a price of 66 billion pounds to ABN AMRO,soon after,led by RBS including Fortis Bank and Banco Santander made an even big offer of 72billion pounds,RBS wins the battle.But the 72 billion pounds include 50 billion was made up of cash by selling shares in RBS.It makes me think about what we have learnt in our first week,generally,the cost of capital usually is more important than debt finance,to collect such big cash by selling shares have damaged the value of shareholders,to be frank,l think it was the reason why there is no shareholders want to help Goodwin when RBS finally went nearly collapsed.He didn’t appreciate the value of his shareholders,all he think about is to make his company bigger,by afford large premium to ABN AMRO without any due dilligence.Unfortunately,with the financial crisis,Dutch bank ABN AMRO was found about hundreds of millions pounds were related to sub-prime mortgage investment.The RBS finally has suffered about 24 billion pounds.The share price of RBS has plummeted.           

  To sum up,l believe that the sub-prime mortgage market and acquisition on ABN AMRO was just the trigger of this whole thing .The main problem is the over-control of the Fred Goodwin and other top leaders in RBS,they are individualism and arrogant led the failure of RBS.l have learned that if the company want to survive ,it is better to both know your competitor and yourself,always do fully previous research before coming to any decisions in right time.And the most important,cultivate a harmony and open corporate culture for living long.  

Assessed Blog 1 Stock market efficiency - Vanke

Assessed Blog 1

Stock market efficiency - Vanke

In this week lecture,l have learned about the stock market efficiency.The efficient markets hypothesis,popularly known as the Random Walk theory which indicated that the stock price reflect the value of the firm,and none investor can gain excess profit from it,this hypothesis play a key role among investors and financial managers.

   According to Fama(1970),the stock market has been divided

into three parts according to the level of efficiency which are weak,semi-strong,and strong efficiency.To some extent,the level of different efficiency has raised the awareness of investors from gaining extra profit through the market.

In this Blog,l would like to use a case of china’s largest property developer to explain what learn from the stock market efficiency.

     The company called Vanke which is the largest chinese property developer.It has become the leading real estate company in china since it get into the house market in 1988.It is a large sized company which possess about 210 million square meters contractual property in china.The case was started from another chinese company called Baoneng Insurance,a private enterprise which has kicked off the fight by adding the share of Vanke to take up about 24% stakes , exceed the state-owned conglomerate China Resources as Vanke’s largest shareholder in December 18^th 2015 (Financial times,2016)Meanwhile,the share price of Vanke has experienced a unbelievable increased from 13.81¥ per share to 24.43¥ per share which was 2 times as the start of this month. It is not surprised if we link this performance with the efficient market hypothesis,the share price increased dramatically because it has made quick reaction follow the information of Baoneng’s investment strategy,some investors think that this information has demonstrated that Vanke is a brilliant real estate company which attract many investors,it has bring the positive emotion to Vanke’s investor.

(The share price of Vanke between 2015 and 2017)

     However, Baoneng Insurance company is extremely complex company,the money in this company is mainly gained from a kind of insurance called“universal insurance”which is a new insurance combined with the life insurance and short-term investment.That is to say,the money which Baoneng used to add its stakes possess high risk.Due to this reason,the top management team in Vanke unwilling to let Baoneng takeover the company as their largest stakeholders.Except for Vanke ,Baoneng Insurance company has also adding stakes in 8 different company in China, the chair of Vanke describe Baoneng as a “barbarian”.  

     Subsequently.Vanke has published a share-swap deal with shenzhen metro as a response to prevent Baoneng’s takeover.But the drama is,because of the driver of money,the second largest shareholder China’s resources and Vanke’s shareholders have rejected the proposed from Vanke top management team, raising questions over whether the state-owned conglomerate would vote with Baoneng rather than management.

     After that,the chair of Vanke has another negotiation with the second largest property developer in china called Evergrande,joined the battle in August.And eventually nominate the board number by increasing its stakes.On the other hand,the insurance regulator has published some limitations to limit the high-risk and return products which means Baoneng has been supervised by regulator in fund speculation area.

      Now with the China’s resources leave the game and sold the stake for 5.4＄billion to shenzhen metro,and the announcement of China Evergrande for not steeping further in control Vanke’s stake ,Vanke has won this 1 year battle.

     However,some retail investors has suffer a great loss of this battle.let’s look back to the Vanke’s stock market.After three days significant increase from 16^th December to 18^th December,Vnake’s top management team has announced a delist due to the official reason of recapitalize.But may be the true factor is to consider a measurement to fend off the Baoneng’s invasion.However,because of the successive rise of stock price,many retail investors have put their money in Vanke’s share,expect to gain a lot from this battle.But to their unexpected is the company has delist just after 3 days.

     After delist,Vanke’s share price has already reached the peak at 24.43¥ per share.But many experts have stated that Vanke’s share price was overestimated because of the affection of the Baoneng’s purchasing plan.Meanwhile,at this time,Shanghai composite index suffer from a huge loss,bottoming out from 3635.77 to 2737.77 during the period in January 2016.It seems that there is a significant plummet waiting for Vanke’s resumption.  

(The index of Shanghai composite index)

      After that,Vanke has been delist for totally 6 month until the announcement of resumption in 4^th July 2017.And the share price during that time experienced the significant increase .Many retail investor was suffered a great loss.

(The share price of Vanke after resumption)

      From this case, l have learnt that the stock market is completely random and no one can predicted it.Investors can not predict before the information has published and cannot get abnormal profit.What’s more,l believe that maybe Vanke was overestimated at that time,but it will not last for a long time.Because as we can see from this battle,the core concept is that Vanke is a really brilliant real estate company so that many other company want to get advantage from it,the well-structure and performance company like Vanke will eventually earn high performance in the stock market ,which l mean today is Baoneng,may be the other day is another company want to invest in it.So the best way for investors to this kind of company maybe is to hold it for a longtime, if the market is efficient.

                                                                                                                

                                                                                                             2/11/2017