Money Games Information

The recent meltdown has focused attention on the US Federal Reserve. The Federal Reserve has had a key role in reviving the economy and getting it back on track during the recession. Its policies have affected the United States and the globe, primarily because of the high degree of integration among major global economies.

Photo: federal-reserve.org

The Federal Reserve was established in 1913 and its role was to foster the development of a stable and responsive economy for the country. Over the years, the Federal Reserve has also taken up responsibilities like framing the country’s fiscal policies and aiding banks. The Reserve’s cardinal function is to regulate the flow of money in the economy. The Federal Reserve is responsible for ensuring that the economy has adequate liquidity. This in turn also influences other macroeconomic factors like employment, economic growth rates and market demand and supply.

A growing economy represents the best opportunities for both the industry and the markets. The Federal Reserve has the responsibility to maintain employment rates in times of recession and ensure that the economy is stable. The Federal Reserve has to monitor the economy and control areas like inflation and interest rates for banks. This represents an indirect control over the forex market through financial institutions. The global interbank forex markets are thus affected by the Federal policies. The Federal Bank stepped in to correct the situation when the banking system collapsed recently. The Reserve flushed in billions of dollars in to beaten down banks in order to rescue those on the verge of bankruptcy or collapse. This also ensured that there was enough credit available in the domestic and forex markets to continue trading.

Stable interest rates are a prime concern for an economy like the United States. Being a credit oriented society, an increase in interest rates can even freeze the economy, if appropriate steps are not taken. Unpredictability also results from fluctuations in lending rates. The Federal Reserve controls the rates at which banks can lend money and this has an impact on the forex markets. The higher the rates, the lesser the demand for credit. This causes a weakening of the currency in the global forex markets. The Federal Reserve steps in to monitor and control the fluctuations and ensure that the consumer’s interests are protected.

The Federal Reserve also has to ensure that the United States has a stable currency. The dollar’s stability ensures that the economy continues to function well. The policies issued by the Reserve have ensured that the dollar remained strong even when the banking sector collapsed and the country went into recession. This in turn has helped strengthen recovery from negative economic indicators. The forex has thus seen  other currencies weakening but a relatively stable dollar. These fiscal policies in combination with other measures has helped ensure recovery of the economy. The 700 billion dollar bailout was an unpopular but immensely helpful measure taken by the Federal Reserve. The move had not found favor among Congresspersons but it was still passed due to the dogged determination of the Federal Reserve. The bailout has a favorable impact on the financial sector. Forex markets witnessed a strong dollar against most currencies and increased investor confidence in the Dollar.

Visit skipcube.com to see the impact of economic news on forex. Also, discuss fundamentals at the forex forum 

A free offshore bank account is a wonderful enticement to get people to consider offshore banking. Many people have the mistaken assumption that offshore banking or internet banking is an unsafe or disadvantageous investment option. This thinking is flawed; however, when you look at the issues in detail.

For example, one concern of Internet banking in the past has been over the use of passwords and the security of information. This is a very serious issue that all investors should be concerned about. However, the reality is most offshore banks take great lengths to keep their customers’ information secure and private. Since security and privacy are one of the main appeals of offshore banking, it is not surprising that these banks establish intricate web security procedures and far more. In addition, the average investor can help alleviate their own security concerns by taking steps to safeguard their own banking information. These can be as simple as making correspondence to the bank with encrypted email, not keeping written records, and deleting password cookies from your computer. The combination of these practices translates into much safer banking practices than you will find domestically.

One reason people turn to offshore bank accounts is the fear of overregulation in their own domestic financial markets. Overregulation can make it harder to make money in their own domestic country making offshore investing a more viable option. Offshore investing grants its customer more monetary liquidity and the opportunity to invest in far more global or foreign investments.

Also there are several groups of people who can benefit from having a free offshore bank account. These could include individuals that have offshore properties, those who want to minimize inheritance taxes, those who are merely interested in wealth building or management, those who want more investment opportunities or better ones, and even those who are concerned about asset protection. The result is that you can see that many different types of people can benefit from offshore investing. If an enticement like a free offshore bank account is needed to get them to start investing; then, this is good news for everyone. The offshore banking institutions get investing dollars and the investors get a slew of advantages they would not otherwise receive at home.

With all this said, this does not negate the importance of doing your due diligence when reviewing offshore banks. Just because an offer is for free, does not mean it is the best deal for you. For this reason, we recommend you use a third party to help you setup your account. These financial advisors can be very helpful in finding the right banks for you. Even if it does cost you a few extra dollars to find the best bank for your investing needs, we strongly believe it is worth it. However, many investors have found the free offshore bank account to be just what they were looking for. In addition, recognize that you can always change offshore banks later if you feel a better option comes along.

For more information and tips on Free Offshore Banking, try visiting http://www.theoffshorebankaccount.com - it is a website offering solid tips and information on offshore banking and investing.
 

Although it seems like fortuitous hindsight at this point, Magic Formula investors have largely been spared from the absolute calamity in the banking industry over the past year. The strategy throws out the financial industry as a matter of course, because their businesses are fundamentally different from nearly every other industry out there, and valuation techniques used by the strategy do not allow them to be accurately valued. Magic Formula investors would never have bought stocks like Bear Stearns, Lehman Brothers (LEH), Merrill Lynch (MER), or AIG (AIG) - at any price.

Photo: elliottback.com

In actuality, this has been a lucky break. However, those who value the economics and principles of business models know that banking is an inherently risky industry. And over the past decade, it has become even more risky as "innovative" new financial products have been made available to drive ever higher incomes for these companies, especially the investment bank variety. This article will take a look at the basic business of banking and show why these stocks are best avoided by individual investors.

Banks do not make money the way everyone else does. For traditional banks, the core of the business is simple: the bank earns money on the interest paid to it through loans, which is at a higher rate than the interest it pays to depositors. The spread between these two rates is where the bulk of revenues comes from. Because it is a pain for people and businesses to switch bank accounts, many banks also make incremental revenue by charging fees to customers (like ATM fees, maintenance fees, overdraft fees, etc.). Since banking is not capital intensive in a buildings-and-equipment sense, the cash flow generated can be put back to work into more loans, which leads to more interest spread income.

Investment banks are somewhat different. While most have a traditional banking arm, these banks earn the majority of their revenues by helping businesses raise capital by underwriting debt (usually through bonds), advising on business transactions, and buying and repackaging securities.

While most businesses are valued primarily based on revenues, earnings, and cash flow, these are not effective methods for valuing a bank. Traditional banks have little control over the interest spread, which leads to fluctuating levels of revenue and earnings. Investment banks can see business levels vary depending on the prevailing interest rate and climate for large deals. The primary way to value a bank is by looking at it’s book value, or the net value of it’s assets. Historically, the rule of thumb has been to look for banks trading at under 2 times book value. This ensures you are not paying too much for the bank’s assets, while still accounting for future growth.

The difficulty arises in determining what these assets are truly worth. For traditional banks, this primarily consists of valuing outstanding loans. In essence, the loan is worth the principal plus the interest to maturity, minus a provision for inevitable loan defaults. The assets of investment banks are largely the same, except instead of consumer loans we’re talking about corporate debt. This is a very simple way to look at things. One reason for the recent collapse is the invention of exotic debt securities that are even more difficult to value.

Before making a loan or underwriting debt, there is a process that needs to be performed to protect against default. First, the bank needs to accurately evaluate the creditworthiness of the borrower through documentation and credit history. Then it needs to ensure that the loan is collateralized by an asset that can be sold to recoup the principal amount. Lastly, it needs to put aside an allowance for revenue losses due to loan or debt defaults, which are unavoidable. That’s a lot of assumptions, and when you have to make a lot of assumptions, inevitably mistakes will be made. Which leads us to the core problem…

The problem with banks is that bad assumptions snowball into unrecoverable problems! When banks get lax on lending standards, as we saw during the real estate boom of the early decade, loans are given to non-creditworthy borrowers, asset values are overstated (leaving loans under-collateralized), but loan default allowances remain the same. As more and more loans default, the default allowances are greatly exceeded, leading to additional write-downs. Eventually, management does not have the capital to cover these write-downs.
When this bad news gets out, things snowball. The stock price falls, making raising capital through issuing equity increasingly difficult. Depositors can get spooked and rush to pull their assets, compounding the problem.

At this point, there is no way to survive outside of undesirable actions such as taking on more debt, selling assets at fire-sale prices, or diluting shareholders by selling massive amounts of equity. All of this leads to more tanking stock prices and unhappy shareholders. If the bank is unable to complete one or more of these actions, it may even go bankrupt. Perhaps the scariest part of all of this is that it can happen in a matter of months. Consider Lehman Brothers (LEH), which had never even reported a quarterly loss in nearly 160 years until June, and just 3 months later is filing for bankruptcy protection.

Even in the best of circumstances, investors have very little solid ground to stand on when valuing a financial institution. That 2x book value rule? Well, you are valuing assets that are theoretical in value. Nobody knows what a loan is really worth. When you add in the absurd amount and style of loans owned by most banks, it becomes impossible to tell which loan values are real or not. How many people really know how to value a credit swap, a collateralized debt obligation (CDO), or a mortgage-backed security that is composed of possibly thousands of real estate loans?

By sticking to the Magic Formula, we automatically stick to companies that have real assets, predictable revenues, and stable cash flows. By sticking with MagicDiligence, you are buying companies that can maintain those attributes over the long term. Steven Alexander is the founder and voice behind MagicDiligence (http://www.magicdiligence.com), a website dedicated to researching stocks appearing in Joel Greenblatt’s Magic Formula Investing screen.