The Finance Crisis and Bailout
November 6, 2008
Rotman Experts Discuss: “What Went Wrong? Why? What Lessons Can Be Learned”
The U.S. sub-prime mortgage crash in 2007 has now snowballed into the current ongoing credit crunch and ensuing world financial crisis which has engulfed the global markets and news media. Even with a $700 billion bail-out plan from the U.S. federal government, stock prices have not recovered as evidenced by all the major indices continuing on a downward trend. Investors are panicking, banks are approaching insolvency, and Main Street businesses are steadily feeling the pressure of tightening credit terms.
On October 8, 2008 four leading thinkers from the Rotman School of Management, University of Toronto spoke about the current financial crisis and what went wrong. Ramy Elitzur (Edward Kernaghan Professor of Financial Analysis and Associate Professor of Accounting), John Hull (Maple Financial Group Chair in Derivatives and Risk Management and Professor of Finance), Eric Kirzner (John H. Watson Chair in Value Investing and Professor of Finance) and Peter Dungan (Adjunct Associate Professor of Business Economics) spent one hour primarily discussing the sub-prime mortgage crisis and the over-leveraging of related asset-backed securities (ABS) and collaterized debt obligations (CDO).
So exactly what went wrong? A number of factors contributed to what developed into a perfect economic storm. When banks extended ‘teaser’ mortgages, containing favourable terms, to individuals who otherwise could not afford a home, these new homeowners found it increasingly difficult to meet their debt obligations when interest rates increased. In addition to this, the oversaturation of housing in the United States prompted residential prices to plummet. Finally, the miscalculation of mortgage default rates coupled with inappropriate use of unregulated credit swaps resulted in a shortfall of capital holdings by banks to cover the risk exposure generated. These factors rapidly overwhelmed markets and natural correcting mechanisms were not able to react fast enough. Misrepresented risk levels in ABS and CDO caused by multiple levels of securitization added to the toxicity in the wider market as interbank lending and trade became negatively affected.
From an economic standpoint, Professor Dungan emphasized that the real economy (i.e. not just focusing on the financial economy) is in a classic overbuild scenario in the housing and automotive sectors specifically. Professor Dungan also highlighted that those high inventory levels will work themselves out over time, with the market re-pricing this inventory (albeit painfully for the average consumer). In addition, the US Federal Reserve and the Bank of Canada are reacting strongly to the crisis (as indeed are world central banks) taking clear steps to enable recovery, including introducing the widest coordinated interest rate cuts (1) ever to help steady markets and supply lower cost capital. Professor Dungan forecasts negative real economic growth in North America for the next few quarters, before moving toward recovery. Yet he also issued the warning that if short term lending continues to be contained (or tightens further) then we will have a serious macroeconomic issue to contend with.
There is still a great deal of uncertainty and volatility in the market worldwide, and by all accounts this volatility will continue as average consumers and investors react to present conditions. While the effects of this crisis will continue to be felt, it is important to take steps to protect your business and mitigate systemic and market risk as much as possible. At C&Co we can help to provide assurance through the reduction of asymmetric information, performance of due diligence, and review of your capital requirements. In addition, our financial modeling services can perform specific tailored sensitivity analyses to help with your strategic planning during these turbulent times.
Contact us today for a free private consultation.
Singapore #1 for Business
October 7, 2008
Singapore once again tops the list of best countries for start-ups as reported by the World Bank in their annual “Doing Business” report. Canada maintains its rank in the top 10 at number 8, however comes second worldwide for the starting a business category. To read the CNN article summary of the top 20 countries, click here. To see a detailed list of categories and the rankings of all 181 countries included in the study, click here.
When looking to move your firm abroad its important to recognize that there are many factors to consider when making your decision. While your individual list of factors may vary from those within this study, the important point is that you conduct due diligence to make sure that you have all of the correct and appropriate information. At C&Co we can help make this process easier, and we have the expertise to give you valuable independent advice that will reduce your operational and market risk.
Contact us today to arrange a confidential meeting.
Greenwashing Awareness Rises
July 29, 2008
Canadians have been inundated with claims of environmentally friendly products and ‘eco’ everything, each brand shouting more vociferously than the next. However this constant hue and cry (not to mention over use of every shade of the color green) is starting to take its toll. A recent report by the Gandalf Group indicates that most consumers have had enough, and don’t take these green claims credibly.
For most businesses, particularly small to medium size firms that are doing all they can to build a positive brand image, these research findings sound a cautionary note. Most companies are driven by the need to differentiate their product and service offerings, and just a short time ago capitalizing on new customer awareness of the environment seemed a perfect way to do so. However the tide has now turned, and companies must take extra steps to burnish their eco-credentials.
Here are few handy suggestions:
Court the blogosphere. Everyone knows that word-of-mouth marketing is the most powerful form of advertising, but what is less known is how the right mention in the right place online can make all of the difference in terms of consumer’s perceptions. Many blogs have assumed the role of ‘trusted advisor’ for consumers (treehugger anyone?), so a nod of approval can go a long way to driving web traffic and sales.
Communicate the features. Branding is about perception, so if consumers are unaware of the eco-attributes of your offering, then you’ll be lost amongst the fray. Avoid making generic claims and offer specific support for your eco-friendly features, allowing the consumer to delve into the minutia if they so choose.
Improve your product. When your product and service offerings match your brand promise, then your claims ring true for the consumer. Ultimately consumers make up there mind through experience and interaction with your product and service. If you are able to satisfy their particular need, then you are already well on your way.
If you are struggling to differentiate your brand, or simply are looking for help with getting your organization to behave in a more social responsible manner to help the bottom line; then contact us. We’re here to help.
EBay’s Growth Taper’s Off
July 17, 2008
Internet auction site EBay has been buffeted by the increasingly challenging economic conditions within the US. As consumers have reduced discretionary spending in reaction to greatly increased inflation, EBay has had an overall reduction in sales growth.
Read the complete story here
US Government to Support Mortgage Industry
July 14, 2008
BBC news offers a look into the US Government’s plans to support the ailing mortgage industry through an expansion of access to credit, in addition to other measures.
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