Were the Real Financial Regulators Actually Existed?

In the world of finance, there are thousands of systems created to keep financial institution in a sustainable position and it make an extremely complex to handle. That is why regulator employed in it, basically to block the governance problems which I had explained in the last blog post. According to Suarez&Weisbrod (1996), regulators are the one; either nongovernment or government body that provide and give clarifications on the banking’s working procedures for everyone’s confidence

At this time, the more solemn debate among quite a lot of parties is occurred because they wondered whether the regulators are there in between financial institutions to regulate them. The most powerful background was the challenge of banking and global financial crisis back to several years ago when the corporate governance was not clearly constructed- giving worst impact to the world economy.

Until these days, I can see that demanding problem regarding to this has not been successfully resolved. Do you consider that this down to the regulators’ work absence or actually there are some others that could make it? It is seen from George Soros analysis that regards to the European banking system. (Worstall, 2012) He sees that regulators were not doing as it is supposed to be because it was such a really odd approach when they created capital weights on sovereign debts. This was from the regulators’ permission from banking industries to take much hold on government bonds and left Germany struggled with its operation at the end, while others like could just easily enjoy the cheap credit offered.

As commercial banks have successfully made a use of those weaker bonds that would increase additional benefits, I consider that this could bring bad impact to the banks itself and in turn to a competition that digressed since this occasion gives emphasis that the credit wouldn’t be that worth enough to be given to the other countries. This accordingly countered to one of Minsky’s (2003) explanations which covered that ‘debt burden and falling appetite put upward pressure on interest rates’ as the fact low credit interest rate were given.

Today, comparable stories also occurred. Not capital weights’ problem but another time, Heritage Bank of Florida finally failed in the market on November 2^nd last year because of the customers’ late payment of debt (asset troubled ratio), in addition to Frontier Bank’s fraud (the fraud from bank explained in my previous writing - BCG) which due to its employee’s scam.

Though different cases are happened, it actually figured out my thought to answer the primary question of ‘Were the real financial regulators actually existed?’ Based on this case I realized that therefore regulators are definitely existed to regulate; not their fault, however they had performed inadequacy of exertion though this can be said that it all about the irresponsibility and mismanagement from the banks itself.

At this point, I see justification from the regulation and penalty settings developed by the regulators, for instance Frontier’s Senior Executive who correspondingly been arrested for doing such immoral action that disadvantaged many parties. But then through anything, besides risk management made by the bank, regulators should anticipate and control what the banks are actually doing which is the only factor to blame. In fact banks indeed rewarding the risk taking, yet regulators must control their risk taking.

The Appraisal of Corporate Governance Significance in Banking Sector

Year 2006-2007 were a prosper moment for banking industry. Employees, Employers, shareholders; all levels of managements were benefited from this. Actually I was thinking that the topic of corporate governance can be broadly analysed and used as the outlook is viewed from variety of scenes. But as I went through I found out that there was such difference and importance for banking sector in the moment of their opulence those years. Before I continue, what does corporate governance mean?

Many sources clarified that corporate governance is basically a participative actions by all members of organisation that must be involved in the firm to structure, direct, control and follow what are required to achieve its corporate objectives. That is why this system needs to be well developed in organization, specifically saying, in banking industry because this topic will analyse this further.

You can see the evidence when banking sector had high profit before tax (PBT) in 2006-2007, however what has happened to the next year? Success ‘in a flash’ became evil failure. A lot of banks in the world shut down their operations due to the lack of resources to preserve in 2008.  Some of them are Sanderson State Bank in Texas, Alpha Bank and Trust in Florida and even dozens of huge banks, HSBC and Lloyds Banking Group’s branches have closed.

On the other hand lately, Bankrate (2013) indicates that there were similar cases as Frontier Bank, Covenant Bank, 1^st Regents Bank and Westside Community Bank disappeared. I am aware that these are the evidences of ineffective banking corporate governance that reflected to the absence of agency model, transparency, risk management and responsibility towards the existing interests which are far more complicated than other business industries.

The challenges for outsiders are dense as they can’t actually see the real point inside the bank, likewise one example from Gregory Bell who used to work in Frontier Bank before it closed down. I think that as he did the bank fraud and money laundering, it opposed the bank to the 4 aspects mentioned in above. Risk management in there was not properly implemented, whilst the CEO of the bank hided the vital transactions of $20 million loans and attempted to illegally take $160,000 from it, which of course he did not accountable for the bank’s ‘going concern’ and definitely not into the interest of shareholders value (agency problem).

“Those responsible for bank failures were also ultimately responsible for the weakening of our economy,”- John Walsh, the USA’s counsel. If one bank affect this much how about if the rest do the same?

Considering this implication, the meaning of banking corporate governance should be working really hard because those results was affected upon the inappropriate coordination of BCG and thus may again, lead to the banking as well as global financial recession like that time. The remaining banks consequently have to make sure that in order to avoid this kind of worst disease, strategic decisions to make solid construction of relationship among owners or stockholders and stakeholders should be developed and carried out. Some of the schemes could be: one, the more practices from the top level of management towards the risks studies that will enable bank management to avoid immoral actions and quickly tackle the issue with backup strategies; two, adequate control system that get the most out of particular leverage; and three, provide adequate and firmed corporate structure along with its parameter so that word of power will never be misinterpreted.

So basically, enabling users’ right of entry to a complete information resource is strongly recommended in banking system because it may test professionals towards the key component of banking accountability and responsibility as well. However risks that may appear should be well-managed so that there is security to the information itself and it should be ensured that the security is met. Therefore, I believe that it will shift the access decisions in the course of the banking industry that can contribute to the sustainability of the banks, mainly the economy as the whole.

What is Wrong with M&A?

This time my discussion will be about the merger and acquisition activities which can be performed by the company in some cases. As you can find on my earlier blog, FDI approaches are including merger and acquisition, therefore the objectives of these doings are similarly set according to the benefit of that particular investment. Let's say if FDI is aimed to increase company’s cash flow in the long run because it will multiply the asset generation of the business, merger and acquisition won’t offer differently.
 
In reality, a merger is an activity of firm to combine their organizations with another into one new company, while acquisition is when one company is bought by another company, yet no new corporation is established throughout this undertaking. Looking at these definitions, do you think that it sounds really good if company perform them and in fact quite a lot of successful and famous firms, for example Microsoft and Skype; Polycom and HP Visual Collaboration; Google and Motorola Mobility; and even Kellogg’s and Pringles done this in the previous years? 

Investment plan over another company I assume will enable company to expand and increase capability for achieving additional value, and indeed according to Flught (2009); Kaplan (2010) performers are trying to maximise the shareholders’ wealth through this.  In Kellogg’s and Pringles case, I could see that they were determined that acquiring Pringles will nearly triple Kellogg’s business dimensions and additive constituent of earnings will be occurred as well, hence companies are likely to be ready in spending lots of money for the deals according to the figure shown in below. (Thomson Reuters Mergers and Acquisitions Review, 2012)- Calculated until first 9 months, in billion US$.

10 Largest M&A Deals 2012

However, what is wrong with merger and acquisition if they can do so? Actually I also concerned about the statement which clarifies that this approach will likely to reduce financial risks besides the advantages mentioned; furthermore it appears that M&A trends were declined from the year 2011-2012. The real argument in this slanting moment is that various sources point out that performance of M&A turns out to be worst very often. So tragic, yet it is so true that such great strategy can end up with the reduction or even destruction of neither shareholder value nor wealth. We, as the acquirer in all probability will suffer this. This can be seen from the fact on which the clash available to one of the international companies called HP in recent year. Disaster came as share price dramatically dropped by 12.4% after the bidding transaction, the lowermost since 2002, plus there was huge loss of $8.9 billion (the most senseless in 73-year history). It seems that it opposed the fact since financial risk was not diminished, but arouse. Shareholder value was cut due to the bad strategic move dedicated for Autonomy Corporation.

I believe additional market power that may lead to ‘prosperity’ assumed by the acquirers is included as one of the main forces for the overconfidence of doing the M&A. The management did not provide adequate planning and study, resulting in puzzling, greasy path that won’t allow the acquirer to step into further operational synergy; in fact, acquirer is additionally prompted to truly comprehend its market circumstances to be able to make corporate power as well as to challenge the control of target firm. Culture difference and certain transformation by some means made inconsistency to realize target and here the outcome was performance can’t be as good as before. HP in that case finally experienced that there was certain accounting scandal to be blamed; nonetheless I think that it is primarily because of the doubt as regard to the boldness to turn their business to software company from hardware.  

In spite of the strong financial position obtained by the company, management especially HP’s need a critical success factor of M&A to contribute its shareholder value generation. Some economists perhaps prevent these actions, but once admitted, I suggest that they should be integrated within robust scopes such as agency principle (clarified at first blog) to avoid the over optimism and provide more anticipation; fair number of deals to make the company focus on necessary challenges; good tactical deed for instance make a use of the low P/E ratio so as to grab higher average return; real correct planning and judgement over the targeted firm; and all resources and organization culture to be assessed as I found this statement on which HP need to truly consider:  “To succeed as a software-touting hardware player requires a “fundamental shift in corporate culture,” he added, and is not something that can be easily bought”.

Year 2013 is estimated as a good year for M&A. The survey says that there will be optimism headed in financial transaction because of consumer market, besides growths in geography, customers and others are existed and economy are continue to stabilize since the financial crisis. As the bidder, we should focus on some industries which may be potentially giving great return from the activities. These industries include software/ telecommunications/ technology, health/ pharmaceuticals, energy and even financial services. (KPMG, 2013) As the result, M&A approaches will not simply be a coin that is thrown to give either a queen face or value of the coin that is too risky to be chosen.

I had provided this following video to support this outlook. Enjoy!

http://www.youtube.com/watch?v=waSSpmOYVng&list=WL-CnPOF3WrCzqq8ePg4IP5tnVYukrsS2p

Foreign Direct Investment (FDI) and How is it Going

 

To open my discussion, I would like to remind about some multinational companies that I had clarified in my previous blog post. It has relation with this topic since its extent is rightly involved in international business investment similar to what those companies are most likely doing up until this time. Then, what is FDI? FDI can be defined as a corporate action that focuses on adding value to the company by having overseas investment, particularly within the interest of growth of the business itself.

A number of FDI approaches are things such as M&A (Merger and Acquisition), share purchase and green field investment; however it have to be noticed that share mentioned here is different with investment that people may obtain from the nations’ stock exchanges. The reasoning behind this is that FDI’s players have to take degree of management control (or power) in the environment that they are invested in, not only ‘gaming’ in its money market. Just to give first enlightenment, John Deere, the US Company which has a plant to manufacture its heavy equipment in Indonesia and other countries is one of the examples to look at. Hence here, those who are performing FDI will likely to take durable moments, and further look for proficiency upgrade through the new resources that they can access as to realise the concept of ‘great boundless prospects’ from FDI.

According to Reinhardt (2013), Kearney‘s surveys shows that China still holds the top rating for global investors’ destination, and India as well as Brazil follows respectively. Then it is certain that these countries are the most beneficial for FDI- giving the participants ‘special deals’ such as savings from low cost employment and distribution; broader target market; brand recognitions from marketing point of view; intellectual property; environment supports (e.g. technology) and sometimes tax advantage which I elucidated last week. For instance Sony Computer Entertainment, the Japanese electronics manufacturer and retailer has been vastly benefited from low cost labour, low-priced lands for manufacturing their products, cheap spare parts in China as well as corporate tax rate on which China takes only 25%, whereas Japan is 38.01%.

Furthermore I can interpret that this destination preference is also due to huge economic growth that they had at present, allowing FDIs, for instance in retail, to obtain forces from consumer buying behaviour that is influenced by their higher living standard. Those great advantages can be also applied to multinational company that invested directly in China like Bentley, a British luxury car company. They had been surprised by China’s demand on 2,253 cars, calculated by the end of 2012. The case shown that there was a 23% sales increase, correspondingly the highest sales volume ever and a quantity of expensive limited edition models were also impressively established and received in their market. And so you will think that it is such very interesting facts for these firms. True?

Having seen the global prospects might pursue FDI’s players, still, such question might appear. Does this method concerned long term issue? Have you heard the fact that Chinese claimed higher for these and those things, for example employees’ salary? Be careful. Some countries mainly China might become inappropriate country to perform FDI several years later. Indeed, at the moment it is great to see customers come and see you often time to treat your company, yet consider that as the expense increased unfortunately you will have to cut your profit margin and well, the return for investment  too. Tougher operational undertakings to control therefore are creating more risks.

Some companies now prefer to ‘inshore’ rather than ‘offshore’ their business to China because of this thing. Commodities prices or distribution cost keep increasing while labours demand higher wages, moreover in the long run; how this will be? Companies who are having FDIs in country like this might have to take plan B. It is just because at that moment China will be no longer become the greatest country for FDI and they have to alter everything to make their investments on track to provide best possible return for the business and shareholders. FDI might work better in another country with other ways; hence in conclusion even though FDI can be able to grant foreign companies so many rewards, it is really essential to say that they should take advance consideration to this activity, mainly to the future potential situation in the other countries that they are invested in so as to let the objectives of FDI continue to emerge.