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Bailout: What you Must know

Bailout: What you Must know

What is a Bailout?
• In the field of economics, a bailout refers to the act of loaning or injecting capital into an entity, such as a company, an individual or a country, which is in danger of failing. The bailout is a calculated financial maneuver that increases a failing entity’s liquidity profile; the maneuver is undertaken in an attempt to free the struggling entity from insolvency, bankruptcy, total liquidation or ruin. 
• In addition to injecting a dying organization or market with cash, a bailout can also be administered for sheer profit; an example of such a maneuver occurs when a predatory investor resurrects a faltering company by buying its assets or shares at an enormous discount (this occurred when JP Morgan purchased Bear Sterns in 2008). 
• Other reasons for a bailout include: for social improvement or to prevent greater socioeconomic failures. An example of the latter situation can be elucidated by examining the relationship between the United States Federal Government and private transportation companies such as airliners: it is the policy of the US government to protect the biggest transportation companies (petrol companies, airliners etc.) from total failure through the issuance of severely discounted loans and subsidies. 
• Companies, such as airliners or enormous investment banks, are deemed “too big to fail”, because their services and assets under management are considered, by the United States Federal Government, to be constant universal necessities in maintaining the health, welfare and security of the nation. 
Principal Themes of a Bailout:
• Throughout the 20th and 21st centuries, certain principles have emerged that are seemingly consistent with bailouts:
o To initiate a bailout a central bank will typically provide a loan in order to help the system cope with liquidity issues.
o In a number of bailouts, the underlying government has let insolvent institutions (those with insufficient funds to pay-off short-term finances and massive debts) fail in a systematic way. An example of such a maneuver can be found with Lehman Brothers during the financial crisis in 2008. 
o A bailout requires that all struggling organizations make their financial situation 100% transparent. Understanding the true financial position of struggling enterprises or nation’s ensures that the extent of losses and quality of assets are known by the underlying government.
o Those banks deemed healthy enough to survive, in a collapsing market, require a recapitalization, which requires the underlying government to inject funds to the institution, in exchange for preferred stock (receives a cash dividend over time). This cash infusion enables the bank to lend money to other banks or investors.
o The government should take ownership, either through equity or stock, in a struggling company to the extent taxpayer assistance is provided. The government should become the owner so it can later obtain funds by issuing new shares of common stock to the public. 
o In most bailout situations, the interest rate will be slashed to stimulate the economy by enticing individuals to borrow. 
Arguments against a Bailout:
• A bailout signals lower business standards for enormous corporations by incentivizing risky activities; big corporations have a safety net regardless of what they do
• A bailout promotes centralized bureaucracy by enabling government bodies to choose the specific terms of a bailout
• The action instills a corporatist style of government where a failing business can use the government’s power to extract money from taxpaying citizens 
• When capital is injected into a dying corporation, the money supply will invariably rise, sparking inflation.

Understanding Bond Ratings

Understanding Bond RatingsWhat are Bond Ratings?

Bond ratings are grades that are given to bonds to indicate the instrument’s credit quality, meaning their ability to fulfill their obligation to the underlying investor. Bond ratings are given to all types of bands and are supplied by independent rating services such as Moody’s and Fitch and Standard & Poor’s. These companies provide grades to all classes and forms of bonds based on the instrument’s strength and its ability to pay the attached principal and interest in accordance with the maturity schedule.

Bond ratings are analogous to credit ratings for individuals; those bonds that possess a higher rating are valued at a higher rate and viewed as safe investments when compared to bonds with lower ratings.

Credit Rating Agencies:

Credit rating agencies must be registered and labeled as such with the Securities and Exchange Commission. When they are registered, they are labeled as “Nationally Recognized Statistical Rating Organizations.” This status enables these agencies to evaluate the worthiness of bonds and attach their evaluations with an affirmed credit rating. 

According to the Credit Rating Agency Reform Act, a Nationally Recognized Statistical Rating Organization may be registered with respect to up to five distinct classes of credit ratings: 1.0 brokers, dealers and financial institutions; 2.) insurance companies; 4.) issuers of asset-backed securities; 3.) corporate issuers; and 5) issuers of municipal securities, government securities, or securities that are issued by a foreign government.

Credit Rating Tiers:

Bond Rating    Standard & Poor’s    Moody’s
Highest Quality Bonds    AAA    Aaa
High Quality Bonds    AA    Aa
Upper Medium Quality Bonds    A    A
Medium Quality Bonds    BBB    Baa
Somewhat Speculative Bonds    BB    Ba
Low Grade, Speculative Bonds    B    B
Low Grade, Possibility of Default    CCC    Caa
Low Grade, Partial Recovery Possible    CC    Ca
Default, Recovery Unlikely    C    C

The above graph demonstrates the rating system incorporated by the two dominant rating agencies in the United States. The grades are given based on the bond’s credit worthiness and the expected ability of the bond to be repaid in full plus the attached interest payments. Bond ratings are the measure of the quality and security of the underlying bond and are primarily based on the underlying financial condition of the issuer.

In a more specific sense, bond ratings incorporate an evaluation from one of the recognized rating services to indicate the likelihood that a debt issuer will be able to meet the scheduled interest and principal repayments to the investor. Typically, those bonds that are graded as ‘D’ bonds are the lowest quality bonds and are already in default.

What Are Fixed Rate Bonds

What Are Fixed Rate Bonds

 

What is a Fixed-Rate Bond?
A fixed-rate bond is a type of debt instrument that pays a fixed coupon or interest rate throughout its course of maturity. Dissimilar to a floating rate note, a fixed rate bond is a long term, fixed-income security that carries a predetermined interest rate.

Due to its fixed nature, the fixed-rate bond is not susceptible to fluctuations in interest rates, and is therefore viewed as a security that does not possess a significant amount of interest rate risk. That being said, the fixed-rate bond, although a conservative investment, is highly susceptible to a loss in value due to inflation. The fixed-rate bond’s long maturity schedule and predetermined coupon rate offers an investor a solidified return, while leaving the individual exposed to a rise in the consumer price index and overall decrease in their purchasing power.

The coupon rate attached to the fixed-rate bond is payable at specified dates before the bond reaches maturity; the coupon rate and the fixed-payments are delivered periodically to the investor at a percentage rate of the bond’s face value. Due to a fixed-rate bond’s lengthy maturity date, these payments are typically small and as stated before are not tied into interest rates.

Any fixed-income instrument that contains a long maturity schedule (such as a treasury bond) will increase the holder’s risk of inflation. Over time the purchasing power of a dollar decreases as the general prices for goods rises. Because the holder of the bond is locked into a fixed rate, there is no adjustment made for inflation or interest rates, leaving the holder stuck with a weakened payment. For example, a dollar was worth more 20 years ago, meaning those who have held a fixed-rate bond for 20 years are experiencing diminished returns (in regards to purchasing power) when compared to what they were receiving during the infancy of their investment.

Dissimilar to a fixed-rate bond, a floating rate note is a type of bond that contains a variable coupon that is equal to a money market reference rate, or a federal funds rate plus a specified spread. Although the spread remains constant, the majority of floating rate notes contains quarterly coupons that pay-out interest every 3 months with variable percentage returns. At the beginning of each coupon period, the rate is calculated by adding the spread with the reference rate. This structure differs from the fixed-bond rate which locks in a coupon rate and delivers it to the holder over semi-annually over a course of multiple years.

 

All You Need to Know About Government Bonds

All You Need to Know About Government BondsWhat are Government Bonds?

A bond is a form of investment in which an investor (either an individual or a business entity) loans a lump-sum, for a certain amount of time, at a set interest rate, to a government body or a business.

Government bonds are types of bonds issued by a national government, which are denominated in that country’s specific currency. Those bonds that are not issued in the underlying government’s currency are typically referred to as sovereign bonds.

When an individual investor or corporation invests in a government bond they are in essence, providing a loan to the issuing government body. The issuing agency takes the lump sum from the investor and uses towards the funding of public services or other expenditures. In turn, the investor is awarded a coupon, which will provide the investor with the full return of their investment plus added interest payments. As a result, the party that invests in the government bonds will obtain a fixed return on their investment that is tied into inflation and interest rates.

Government bonds are viewed as ultra-conservative investments. All government bonds are marketed and issued as risk-free financial instruments, because the governing body will typically guarantee the fulfillment of the loan obligation. Additionally, the government can also raise taxes to redeem the bond at maturity, which adds into the risk-free nature of the bond.

Types of Government Bonds

U.S Treasury Issues: These types of Government Bonds are the safest among all of the government-issued securities. As a result of the conservative nature, U.S. Treasury issues possess very low fixed rates, meaning the interest attached to the bond is extremely low. That being said, the income obtained from interest payments are tax free. These types of bonds include treasury bills (possess a 10 year maturity schedule starting from $1,000 to $1,000,000). The United States government no longer issues Treasury bonds; however, individuals can purchase these bonds in secondary markets.
 
Treasury notes possess a maturity schedule from 2 to 10 years and are valued at $1,000. These types of Government Bonds are awarded based on two bids: a competitive bid and a noncompetitive bid. 
Treasury Inflation Protected Securities, also known as TIPS, are bonds sold at $1000 with a 5, 10, or 20-year maturity schedule. The principle attached to TIPS is adjusted twice per year to cancel out the effect of inflation on the return. Following the cancellation of inflation, a fixed rate of capital interest is calculated on the return. Treasury bills are cash management tools with maturity tenure of 2 to 26 weeks.
Agency Bonds: Agency bonds refer to bonds issued by agencies of the federal government. For example, the Government National Mortgage Association (also known as Ginnie Mae), the Federal National Mortgage Association (Fannie Mae), the Federal Home Mortgage Corporation (Freddie Mae), and the Student Loan Marketing Association (Sallie Mae) are all financial institutions of the Federal Government who issue bonds or loans to the general population.

What Are High Yield Bonds

What Are High Yield BondsWhat High Yield Bonds?

All types of bonds are issued by various organizations or government bodies to raise capital for various purposes, such as funding for public service or paying-off expenditures. All bonds possess variables that determine the expected return that an investor will obtain from the purchase of their bond. Individuals make money from bonds by securing interest payments and the reimbursement of their investment when the bond matures.

In most instances, a bond that is backed by a government agency or a reputable company will yield a small return than a bond from a riskier issuer, because the repayment of the investment is either guaranteed or nearly guaranteed.

A high-yield bond is a speculative investment that possesses a low grade from a bond rating agency. Typically these bonds, which are referred to as junk bonds, are rated below investment grade at the time of purchase. As a result of the greater risk (meaning the increased likelihood that the bond will default) the purchaser of the bond will obtain a higher yield.

As a result, for the obtainment of a higher yield the individual is more susceptible to losing his investment; those issuers that are regarded as speculative possess a poor-financial model which increases the risk of default—meaning the obligation to pay the investor back is not fulfilled. To make such bonds attractive to potential investors these speculative issuers must attach a higher-yield (a higher percentage of return) to the purchasing party.

Risks Associated with High-Yield Bonds:

The holder of a high-yield bond is subject to credit risk, inflationary risk, currency risk, duration risk, interest rate risk, the repayment of principal risk, streaming income risk, liquidity risk, maturity risk, market risk, taxation adjustment risk, reinvestment risk, and political risk.

The interest rate risk attached to a high-yield bond refers to the assumed risk of the market value of the bond changing as a result of fluctuating interest levels or risk premiums. The credit risk attached to high-yield bonds refers to expected loss upon a default of the scheduled payments or the expected loss if the speculative issuer files for bankruptcy. The liquidity risk attached to a high-yield bond refers to the speculative issuer’s lack of cash, which subsequently leads to an inability to make payments on time.

Why are High-Yield Bonds used?

High-yield bonds are typically re-packaged into collateralized debt obligations; this repackaging of debt effectively raises the credit rating above the rating of the original high-yield. The increased rating enables the CDO to meet the minimum rating requirements of institutional investors and pension funds despite the high risk assumed.

High-yield bonds are often packaged into complicated derivatives as a form of toxic debt to represent a huge potential for return for a small investment.

Scholarship

Scholarship

Scholarships are varied with a number of different awards that can be conditional or merit based.  Schools may help to facilitate scholarship awards, but often the student has to take initiative and seek out potential scholarships themselves.
What are types of scholarships?
Merit – merit is the most conventional for of scholarships and will take into account the student’s achievements and abilities.  The criteria used will usually depend on the nature of the scholarship.  Athletic scholarships generally award athletic achievements and ability only.  Academic merit scholarships will factor a number of items such as the student’s grades, test performance, and community involvement.
Need– need based scholarships are generally determined by formula and are assigned to students that would have difficulty paying for college even with the assistance of loans.  Some need based scholarships will account for merit if the student is particularly high performing but otherwise unable to pay for college.
Field of Study – scholarships may be offered to students in high demand fields.  These awards are usually conditional on the student remaining in that field of study.  The student may be obligated to serve a specific area or meet other commitments after graduating from college with this type of scholarship.
Recruiting – some colleges may offer exceptional applicants substantial scholarships to incentivize them to study at their institution.  This is closely related to merit scholarships only that these scholarships come from institutions only.
Workplace – some workplaces will offer the children of employees, nominal merit based scholarships to continue studying at a post-secondary institution.
Race, gender, religion – some organizations will offer minority and other special interest students scholarships with some of their qualifications generally tied to an aspect of their identity.  As with all scholarships, there is usually an element of merit attached to these scholarships and they are usually earned rather than disbursed feely.
Military – most branches of the military will pay in full for former and active service members to pursue a post-secondary education to either further their career in the military or adjust to civilian life.
What are grants?
Grants are scholarships in that they do not need to be repaid and the most is usually spent at the discretion of the student.  The most notable grant is the Federal Pell Grant, which will provide $5,550 to undergraduate students that meet certain requirements.  There are additional grants for exceptional economic need and the children of service members that have died in Iraq and Afghanistan.
Where do I look for a scholarship?
A high school guidance counselor or college financial aid office is the best place to being a search for scholarships.  These individuals will receive information on scholarships and pass that information on to students.  These offices will also help the student determine the affordability of their study program and suggest loans and other arrangements if scholarships are not readily available.
Parents can check with organizations and workplaces they belong to.  Unions and chambers of commerce will usually grant nominal scholarships to the children of members or outstanding students.
Foundations and charities also exist to provide scholarships for a broad range of qualified students.  These scholarships will involve merit, need, student identity and field of study scholarships.
The PSAT/NMSQT test, administered in the junior year of high school is used to screen students for the National Merit Scholarship.  This will provide the student with some federal scholarships for college study.
You may use internet search engines but be aware that the potential of fraud from less than reputable sources is very high.  It is usually best to apply to established scholarships or through education institutions that have vetted the scholarship offer.  No scholarship should ask for an application fee or for information such as social security number and bank information.
What are the typical terms of a scholarship?
Although many scholarships are paid in a lump sum to the student, many others carry terms and conditions.  For instance, many scholarships are paid annually or per semester giving the student, some compensation for every semester they remain in school.  These arrangements will usually mandate that the student continue to meet a minimum threshold of academic performance, tied to GPA.  Other athletic scholarships may mandate that the student continue to play on the athletic team.  Other conditional scholarships may have terms dependent on community service, organization membership, standards of conduct, or full time employment.
What are indicators of scholarship scams?
There exist a number of scam offers that prey on needy students.  You should generally view scholarships that solicit you and your information critically, as it will be odd for them to seek you out without being referred or having the student express the initial interest.  Very often, these so called scholarship offers are actually deceptive loans so reading the terms and conditions of every agreement will be necessary when dealing with scholarship offers.  Even legitimate awards may come with bond conditions and other terms.

What are alternatives to scholarships?
Low interest loans are available to students that demonstrate need.  For instance, the Federal Perkins loan, paid through the student’s school, provides a fixed interest rate of 5% and allows for interest to be deferred until the student graduates.  These favorable terms are limited as this loan is intended for students with significant financial needs.  Any student that wants to apply for a Perkins loan must submit their FAFSA early for consideration and demonstrate financial need.  There are other federal loans available and most will have fixed interests rates, due to recent reforms on federal student lending.
Loan consolidation is available for those with existing student debt.  Most loan consolidation programs will end all other loans and have the debtor take out a newer, large loan that combines the other debts.  The consolidation provider benefits by collecting interest on this loan.  Federal loan consolidation fixes interest rates at 8.25% and lets the student pick a repayment term.  This prevents the amount of interest from increasing beyond a controllable rate for the student.

Chrysler Refuses to Initiate Jeep Recall

Chrysler Refuses to Initiate Jeep Recall

 
In a rare refusal of the United States government, the Chrysler Group is rebuffing a National Highway Traffic Safety Administration request to recall 2.7 million sport utility vehicles. 
 
The federal agency claims that the gas tank design utilized in 1993 to 2004 Jeep Grand Cherokees and Jeep Libertys from 2002 to 2007 is dangerous. 
 
The refusal marks the first time since 1996 that a vehicle maker has fully challenged a recall from the federal agency. That former case also involved Chrysler and a seat belt system used on nearly 100,000 vehicles. During that refusal, Chrysler was an independent company and won a federal court decision on the dispute two years later. 
Now controlled by the Italian automaker Fiat, Chrysler said it has been working with the government regarding concerns over the vehicles in the present dispute. Chrysler claims that the design of the fuel tank is a common design used in a number of other vehicles. The vehicle maker also claims the fatal accidents pinpointed in the investigation were almost all high-speed wrecks in which a different design would have made no difference. 
 
Since it initiated the recall process in 1966, the National Highway Traffic Safety Administration said it has been involved in over 17,000 separate recalls involving roughly 500 million vehicles. The agency’s investigation regarding Chrysler began at the request of the Center for Vehicle Safety, a public interest group based out of Washington. The group claims there were more than 201 fire crashes with 285 fatalities involving the Grand Cherokee, and 36 crashes resulting in 53 deaths involving the Liberty models. 
 
Chrysler claims these figures to be overstated, and disputes the number of deaths caused by fires. “The only way to prevent more deaths from fires is for the National Highway Traffic Safety Administration to order a safety recall and require Chrysler to design a suitable remedy,” said Clarence Ditlow, the Center for Auto Safety’s executive. 
While neither side has provided an estimated cost of a recall, the Center for Auto Safety has estimated that it would cost Chrysler no more than $300 million to install new parts to the fuel tank to properly address the problem.  
 
 
Source: National Highway Traffic Safety Administration

Former Credit Union COO Ordered to Pay $72.5M

Former Credit Union COO Ordered to Pay $72.5M


On November 26, 2012, the US Attorney’s Office for the Northern District of Ohio reported that Anthony Raguz was sentenced to 14 years in prison and ordered to pay $72.5 million.  Raguz was the former chief operating officer of the St. Paul Croatian Federal Credit Union, and the he is responsible for what the U.S. Attorney’s Office calls “one of the largest credit union failures in American history.”


Investigations found that Raguz issued over 1,000 fraudulent loans worth more than $70 million to over 300 account holders.  The loans were issued to account holders in St. Paul from 2000 to April 2010, and Raguz received more than $1 million and other kickbacks for issuing the fraudulent loans.  A large percentage of the account holders had little or no assets, income, and/or employment history.  The loans were repaid with new loans to false nominees (“Auto Truck Company” for example).  


He pleaded to six counts of bank fraud, money laundering, and bank bribery in 2011.  Because of his crimes, the St. Paul Croatian Federal Credit Union was forced into liquidation in April 2010, and the National Credit Union Share Insurance Fund suffered a $170 million loss.  The money laundering charges are connected to Raguz drawing checks worth $371,800 from his St. Paul account to The Vanguard Group.


Steven M. Dettelbach, the U.S. Attorney for the Northern District of Ohio, stated: “Leaders of financial institutions such as this must be held accountable for their actions.  As COO, Mr. Raguz’s corrupt actions cause enormous hardship for innocent depositors, and Mr. Raguz will spend more than a decade in prison for those actions.”  


Stephen D. Anthony, the Special Agent in Charge of Cleveland’s FBI Field Office, stated: “The St. Paul Federal Credit Union collapse resulted in one of the largest credit union failures ever investigated in U.S. history.  This complex, large-scale investigation transcended international borders and will continue until all those involved are brought to justice.”


Source: Federal Bureau of Investigation

SEC Warns Investors Regarding Binary Options and Charges Cyprus Company

SEC Warns Investors Regarding Binary Options and Charges Cyprus Company

The Securities and Exchange Commission cautioned investors about the dangers of participating in binary options and has charged a Cyprus-based business with selling them illegally to investors in the United States.

Binary options are securities whose payout is dependent on whether the underlying asset rises or declines in value. In this type of all or nothing payout structure, investors are betting on a stock price’s fluctuations: under this format, the investor will either receive a pre-determined amount of money if the asset rises in value, or no money if the asset price declines. 

The agency alleges that Banc de Binary has been selling and offering binary options to investors across the United States without first registering the securities as mandated under U.S. securities laws. The company solicited domestic customers by advertising through spam e-mails, YouTube videos, and other Internet-based advertising forms. Representatives with the company also communicated with investors directly by e-mail, phone, and instant messenger chats. The company also acted as a broker when offering and selling these types of securities, but failed to register with the SEC as a broker as mandated under U.S. law. 

The Commodity Futures Trading Commission issued a joint Investor Alert to caution investors about deceitful promotional schemes involving binary options trading platforms and binary options. The majority of the binary options market operates via Internet trading platforms that are not complying with U.S. regulatory requirements and may be engaging in illicit activity. 

According to the complaint against Banc de Binary filed in federal court, the company began offering and selling binary options to U.S. investors in 2010. The company induced investors to create accounts with the bank, deposit money into said accounts, and then purchase binary options whose underlying assets including stock indices and stock. The company’s solicitation of U.S. investors has been successful and attracted customers with modest means. For instance, one investor had a monthly income of $300, and another customer was encouraged to deposit additional funds into his trading account even after he informed the company’s representative that he was unemployed with less than $1,000 in his account. 

The investor alert was jointly issued by the Office Investor Education and Advocacy and the Office of Consumer Outreach. The alert discusses in detail the potential risks of investing in binary options, and warns potential investors that they may not have the full protections of the federal commodities and securities laws if they purchase binary options that are not subject to the oversight of U.S. regulators. 

 

Everything to know about Variable Annuities

Everything to know about Variable Annuities

What is an Annuity?


• An annuity is a financial instrument that provides fixed payments over a specified period of time. An annuity provides a distribution of finances, earned on an investment in a fixed schedule; the payments are allocated to the holder of the annuity in quarterly, monthly, biannually or annually installments.
• An annuity is typically used as part of a retirement plan; the instrument is a fixed-income investment that ensures stable income once the holder stops working. The most common form of an annuity is a pension fund; while the retiree was working, the individual paid a portion of his or her salary into a pension fund, which is invested. Once the holder retires, the return on the investment takes the form of an annuity and is disbursed periodically to the individual.
Types of Annuities:
• In general, there are four different types of annuities: traditional, equity-indexed, fixed and variable. Each style of annuity will fluctuate in regards to the delivery of payment, the financing options and the investment style. 
What is a Variable Annuity?
• A variable annuity is a formal contract between you and an insurance company; under this contract, the insurance provider agrees to distribute periodic payments to you, beginning on a specific date in the future. A variable annuity plan is purchased through the insurance company after you have provided an agent with a lump sum or series of payments.
 
• The primary difference between a variable annuity and a fixed annuity is the manner and amount in which payments are distributed to you. As the name suggests, the variable annuity does not possess fixed payments; the amount of funds delivered will fluctuate based on the time period that you select for receiving payments and the performance of the underlying funds. 
• A variable annuity offers a holder a number of investment options; the value of your annuity plan will depend on the performance of the investment options you choose. The investment options in a variable annuity plan are typically mutual funds, which in turn, will invest in stocks, bonds, money market funds or a combination of the three. 
• A variable annuity will allow you to receive periodic payments for the rest of your life; typically the variable annuity is enacted once you retire. 
• A variable annuity is also attached with a death benefit, meaning if you die before the insurer has begun making payments, your beneficiary will be granted a specific amount of the annuity. 
How is an Annuity Purchased?
• = The majority of holders work with firms to set up an annuity plan. The holder can either invest in installments or purchase an annuity with a lump sum of cash. Dissimilar to life insurance products, an annuity plan does not require a physical examination and is only used to provide funds for the individual while he or she is alive. When the annuity is affirmed, the holder signs a contract to outline the specific terms of the policy, including the length of time that it covers and whether or not the payments will be fixed. 
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