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U.S. Senate Permanent Subcommittee on Investigations — Subcommittee finds Wall Street commodities actions add risk to economy, businesses, consumers

November 25, 2014 Comments off

Subcommittee finds Wall Street commodities actions add risk to economy, businesses, consumers
Source: U.S. Senate Permanent Subcommittee on Investigations

Wall Street banks have become heavily involved with physical commodities markets, increasing risks to financial stability, industry, consumers and markets, a two-year investigation by the Senate Permanent Subcommittee on Investigations has found.

The investigation’s findings, contained in a 396-page bipartisan report, add important new details to the public debate about the breakdown of the traditional barrier between commercial activities and banking. Included are previously unknown details about activities by Morgan Stanley, JPMorgan Chase and Goldman Sachs, including Goldman Sachs’ controversial management of warehouses storing most of the warranted aluminum in the United States. The new details raise new questions about whether such activities harm businesses and consumers and allow for possible manipulation of the markets.

See also:
Wall Street Bank Involvement With Physical Commodities (Day One)
Wall Street Bank Involvement With Physical Commodities (Day Two)

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Losing the Future: The Decline of U.S. Saving and Investment

November 21, 2014 Comments off

Losing the Future: The Decline of U.S. Saving and Investment
Source: Tax Foundation

Key Findings

  • Saving and investment are necessary for a society to adequately provide for its future.
  • Saving and investment have declined substantially as a percentage of GDP over the last 40 years, and have collapsed almost entirely since the financial crisis.
  • American private saving barely keeps pace with total government deficits. On the whole, the country saves very little.
  • American investment barely keeps pace with depreciation; U.S. private and public capital stock and infrastructure deteriorates almost as quickly as it can be repaired or replaced with new investment.
  • The U.S., overall, does not save enough money to fund all of the worthwhile domestic investments and relies substantially on foreign investors to make up the difference.
  • Tax reform could help the U.S. become a forward-looking economy that invests and saves at more prudent rates.

How the SEC Helps Speedy Traders

November 13, 2014 Comments off

How the SEC Helps Speedy Traders
Source: Social Science Research Network

We show that the Securities and Exchange Commission’s system for disseminating market-moving information in securities filings gives some investors an advantage over others. We describe two systems — the SEC’s file transfer protocol (FTP) server and public dissemination service (PDS) — that give certain investors access to securities filings before the general public. While contemporaneous work on this issue is limited to insider filings, we show that both the FTP and PDS gaps are pervasive across all types of filings, including Form 8-K, which includes market-moving information such as corporate earnings. We show that FTP access gives investors a mean (median) 85 (11)-second lead time, and PDS gives investors a mean (median) 77 (10)-second lead time, before the filing is available on the SEC’s website.

We also provide evidence suggesting that investors had the opportunity to take advantage of this lead time to earn trading profits. In particular, we show that traders could earn economically and statistically significant returns by trading on either the FTP or PDS gaps. Moreover, even investors who waited as long as ninety seconds to execute trades on the FTP or PDS gaps could earn meaningful returns using this strategy. We also identify abnormal trading volume in the moments after PDS subscribers receive SEC filings.

Finally, our direct access to both FTP and PDS also allow us to document the changes to those systems that the SEC implemented after the public revelation of this issue in October 2014. We show that the SEC imposed a significant delay on the PDS service after the existence of the informational advantage was revealed. We also, however, show that, as of November 2014, PDS subscribers still receive some 37% of filings before the general public. We argue that lawmakers should consider reforms that would help the SEC develop a centralized information-dissemination system that is better suited for the high-speed dynamics of modern markets.

How Does Government Borrowing Affect Corporate Financing and Investment?

November 12, 2014 Comments off

How Does Government Borrowing Affect Corporate Financing and Investment?
Source: Social Science Research Network

Using a novel dataset of accounting and market information that spans most publicly traded nonfinancial firms over the last century, we show that U.S. federal government debt issuance significantly affects corporate financial policies and balance sheets through its impact on investors’ portfolio allocations and the relative pricing of different assets. Government debt is strongly negatively correlated with corporate debt and investment, but strongly positively correlated with corporate liquidity. These relations are more pronounced in larger, less risky firms whose debt is a closer substitute for Treasuries. Indeed, we find a strong negative relation between the BAA-AAA yield spread and government debt, highlighting the greater sensitivity of more highly rated credit to variation in the supply of Treasuries. The channel through which this effect operates is investors’ portfolio decisions: domestic intermediaries actively substitute between lending to the federal government and the nonfinancial corporate sector. The relations between government debt and corporate policies, as well as the substitution between government and corporate debt by intermediaries, are stronger after 1970 when foreign demand increased competition for Treasury securities. In concert, our results suggest that large, financially healthy corporations act as liquidity providers by supplying relatively safe securities to investors when alternatives are in short supply, and that this financial strategy influences firms’ capital structures and investment policies.

The Risks of China’s Internet Companies on U.S. Stock Exchanges

October 31, 2014 Comments off

The Risks of China’s Internet Companies on U.S. Stock Exchanges
Source: U.S.-China Economic and Security Review Commission

In May 2014, Alibaba, China’s leading e-commerce website, filed for a U.S.-based initial public offering (IPO) in what is expected to be one of the largest in U.S. history. The highly anticipated IPO will be just one in a recent wave of Chinese Internet companies launching IPOs in the United States. The trend has raised some misgivings among U.S. regulators about the corporate structures of these companies. To bypass Chinese government restrictions on foreign investment in the Internet sector, Chinese Internet companies use a complex and highly risky mechanism known as a Variable Interest Entity (VIE). An addendum was added to this paper on September 12, 2014.

Climatescope 2014

October 30, 2014 Comments off

Climatescope 2014
Source: Bloomberg New Energy Finance, Inter-American Development Bank Group, U.K. Government Department for International Development, U.S. Agency for International Development

The Climatescope is a unique country-by-country assessment, interactive report and index that evaluates the investment climate for climate-related investment worldwide.

It profiles 55 countries worldwide and evaluates their ability to attract capital for low-carbon energy sources while building a greener economy.

The Climatescope is a snapshot of where clean energy policy and finance stand today, and a guide to where clean energy can go tomorrow.

This marks the third year of the Climatescope project. In 2012 and 2013, the Climatescope focused exclusively on Latin America and the Caribbean. The first edition was developed by the Multilateral Investment Fund of the Inter-American Development Bank Group in partnership with Bloomberg New Energy Finance.

In 2014, the UK Department for International Development and the US Agency for International Development have joined as supporters and advisors. The project has been expanded to include 55 countries, states, and provinces in sub-Saharan Africa and Asia. Bloomberg New Energy Finance serves as research partner and author of the report.

Measuring Managerial Skill in the Mutual Fund Industry

October 23, 2014 Comments off

Measuring Managerial Skill in the Mutual Fund Industry
Source: Stanford Graduate School of Business

Using the dollar-value a mutual fund manager adds as the measure of skill, we find that not only does skill exist (the average mutual fund manager adds about $2 million per year), but this skill is persistent, as far out as 10 years. We further document that investors recognize this skill and reward it by investing more capital with skilled managers. Higher skilled managers are paid more and there is a strong positive correlation between current managerial compensation and future performance.

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