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High-risk and below high-risk investment grade securities in the current financial crisis
Running Head: HIGH-RISK AND BELOW HIGH-RISK INVESTMENT GRADE SECURITIES IN THE CURRENT FINANCIAL CRISIS
High-risk and below high-risk investment grade securities in the current financial crisis
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Introduction
While examining the issue of the financial crisis the role of high-risk and below high-risk investment grading comes into perspective since such affects the behavior of investors in an economy. It should be noted from the very beginning that investors heavily rely on statistics given by rating agencies in making decisions on investments. As such, security-grading agencies play an important role in investing.
In the United States, it emerged that there was a case of highly rated securities being backed by noxious mortgages (Mayer, Pence and Sherlund, 2009). The rating agencies were using inadequate and insufficient data in rating the investments. At the same time, they stand accused of using out of date models in computing the ranks. After reworking on the models and fixing the issue, the rating agencies failed to guide the market for one year. Come the year 2007, the rating agencies downgraded several hundreds of mortgage-backed securities and in the process sparked the financial downturn. In precise terms, the massive downgrading of the securities, which were initially rated as AAA, sent shock waves into the investment industry (Shanley, 2010). Two factors emerge based on this synopsis, at first, the rating agencies erred in giving false confidence by rating some securities as AAA when indeed that was not the case, secondly, the rating agencies even made a bigger error by irresponsibly downgrading the formerly rated AAA investments in a huff. This perhaps underscores the connection between high-risk and below high-risk investment grading in reference to the credit crunch.
The United States’ two largest credit rating agencies, the Moody and the Standard & Poor come into perspective. The two agencies take blame for using models, which could not accurately predict high rates in reference to home loans like Option ARM, subprime, interest on mortgages, which coincidentally made the larger part of the market. The rating personnel acted based on uncertain criteria, unclear guidance, and the complexity surrounding the investment sector (Merkel, 2010).
Higher credit risk presented by mortgage fraud, poor quality loans, and laxity in lending standards. The sudden nature of degrading the high-risk investments was a major contributor towards the collapse of secondary markets. For instance, the Collateralized Debt Obligations and the subprime Residential Mortgage Backed Securities meant investors were left in possession of unmarketable securities. Such an occurrence had only one possible outcome, the precipitation of the credit crunch (Stanyer and Dimson, 2010).
The fall of housing prices over the subprime meltdown coincided with a severe drop in the value of subprime residential mortgage property beyond the principal values. This meant that collateral provision by the structured securities could not be sustained by the mortgages (Brunnermeier, 2009). However, rating agencies did not capture such a discrepancy.
A poor rating results to substantial effects to concerned entities regarding investment. Such a rating is detrimental to the issuer of a security. Based on this, the companies, which issue securities, become under intense pressure to strike cordial relations with the rating agencies. The presence of a limited number of rating agencies further compounds the problem. Based on this realization, there is a possibility of conflict of interest and one cannot rule out an aspect of collusion to present a faked rating to the public. This may also explain why the ratings were not accurately given in the first place. However, if ratings are genuinely given, the emergence that some companies are rated as high-risk ventures, there is every reason to suggest that investors will be unwilling to invest in such companies’ securities. Lending entities may also refuse, or rather become reluctant in advancing credit to such companies based on the high-risk nature of the kind of investment. The fact that the rating companies had given false confidence initially and they hastily revised them underscores the contribution made by high-risk and below high-risk rating. It should be noted that after rejecting to advance credit to high-risk graded ventures, the financial market becomes constrained. The haste nature of the grading companies’ move to downgrade further worsened the situation (Bouchentouf, Dolan, Duarte et al. 2008).
The controversy in investing the two types of security comes into the fore when viewed in reference to the expected returns. A high-risk grade security promises a huge return when compared to a below high-risk security. However, the bigger issue rests on the potential to loose out on an entire investment. While the below high-risk is relatively safer, the other is potentially risky. This affects the potency of raising capital.
Another dimension worthy exploring rests on the fact that below high-risk graded investments are considered attractive investment options for potential investors. Even lending institutions are more receptive to such business ventures. However, the rating agencies had fumbled by presenting an inaccurate picture regarding the grading of high-risk and below high-risk investments. This implies that even if an investment were truly below high-risk in reference to grading, such would not pass convincingly. This is especially held in view of the realization of the inadequacies of the rating agencies. Put in pedestrian terms, the trust had already been lost. While in normal circumstances the below high-risk graded investment could attract financing, this position could not hold afterwards. This meant there was a host of difficulties in raising funds both in reference to high-risk and below high-risk graded investments (Shanley, 2010).
According to Merkel, (2010), it should be noted that there is another pitfall associated with high-risk investments. This follows from the idea that high-risk investments in a poor economy may lead to a rise in interest rates. Rising interest rates may worsen the activities in a financial market as the cost of accessing capital shoots up. This is further augmented by the inverse relationship, which characterises securities and interest rates. Rising interest rates has the net effect of pushing down the prices of securities. Based on this account, it is discernable that high-risk investments play a detrimental role by destabilising the financial markets.
Conclusion
The grading on investments securities is critical. While the grading itself cannot cause a financial meltdown, if done unprofessionally and without due care, there are chances such could play a huge role in triggering a financial crisis as this paper establishes. The errors in grading of the investments were partly attributable to the sinking of the financial markets. However, the mass downgrading of the capital markets presented the sad turn of events. This notwithstanding, high-risk graded investments tend to scare away potential investors, on the other hand, below high-risk graded securities form an attractive venture and consequently facilitate the raising of capital. Nevertheless, the role of grading or rating agencies is equally critical based on the realization presented in this paper.
Reference ListBrunnermeier, M. K. (2009). Deciphering the liquidity and the credit crunch 2007-2008,
Journal of economic perspectives, 23, 77-100.
Bouchentouf, A., Dolan, B., Duarte, J. Et al. (2008). High-Powered Investing All-In-One For
Dummies. Publisher For Dummies.
Mayer, C., Pence, K. &Sherlund, S.M. (2009). The rise in morta-gage defaults, Journal of
economic perspectives, 23, 27-50.
Merkel, S. (2010). Are High-Yield Bonds Too Risky? Investopedia ULC.
Shanley, N.M. (2010). What Is an investment grade? Conjecture Corporation.
Stanyer, P. & Dimson, E. (2010). Guide to Investment Strategy: How to Understand Markets,
Risk, Rewards, and Behaviour. Bloomberg Press.
Public Speaker
Name
Professor
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Case study: Four Skills you Need to Master to become a Great Public Speaker
Public speaking is an art of presenting or performing a speech to a live audience. A skilled and eloquent public speaker can also be called an orator. According to Weisman, a leadership and communications expert, there are four important characteristics of a good professional public speaker.
Focused
A good presenter should focus on providing value to the audience. This can be done by;
Researching and identifying interests and background knowledge of the audience.
Speak about the subjects and topics that the audience can relate to and are most interested. Address the audience from their perspective.
Inform the listeners about the objectives of the presentation.
Maintain a simple flow of ideas while offering examples that would relate with the audience.
Good delivery skills
Delivery skills are important when reinforcing points and engaging the audience.
A good presenter should:
Maintain a good body posture, with the feet slightly apart in a firm position.
Neutralize hand movements by keeping them relaxed at your sides. Using gestures also increases the listener’s engagement.
Maintain an equal eye contact with everyone in the audience.
Improve and maintain voice clarity by opening the mouth a bit wider.
Storyteller
A good presenter should be a great story teller with the ability to speak to and not at the audience. A good speaker must:
Connect stories with learning points relevant to the audience based the presentation.
Set a vivid context that shows the details and flow of ideas.
Improves some of the details to make the story more interesting and engaging.
Keep the story short.
Good presenter are patient
Give the audience a brief moment to reflect on key points and statements.
Create a discussion with the audience by asking reflective questions.
Take time to explain your points in details.
Clarify on misunderstood points.
The Highway funding trust was created to ensure the systems financing through an account mechanism
Transportation
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Q1.The Highway funding trust was created to ensure the systems financing through an account mechanism in the federal budget that comprises two separate accounts one for the highways and other for mass transit. All the fuel tax was transferred to the trust fund and all general fund revenue returned to the highway trust. This could help reshape federal, state and local decisions’ on how to spend transportation funds. Trust fund programs are supplied at least 90% dedicated revenue from user fees or excise taxes(Green, 1992).Fuel taxes provide a stable and predictable level of funds because highway fuel use changes little from year to year .This is advantageous to transport companies as they are able to assist in areas where it is hard to reach. A project such as the gulf turtle expedition would be extremely expensive to do since not many companies have the facilities carry such mass of turtles. They encourage people to be better and also a sense of responsibility by giving back to the community. The oil spill was an eye opener to the world that we should care about our environment including wildlife.
Fuel taxes acts as a revenue/source of highway funding from those who benefit from expenditure such as courier services (wall mart, fed ex) that the taxes finance (citizens).The fund has to be sustained to increase trust fund revenues that are inadequate to meet needs, by raising the fuel excise tax so that all users pay their fair share in. While transporting cargo or other items it has emerged that per mile charges would be an effective way of funding the trust since fuel consumption also depends on it. This will give individuals the right opportunity to do the right thing helping generate revenue to help solve the problem of insufficient funds.
PROS: About 80% goes to government grant for construction and rehabilitation of existing roads and safety programs. Without such funds vaccinations of the H1N1 would not have reached inaccessible areas. The funds assist in infrastructure development to meet the requirements of the community and general population globally. Higher rates of fuel taxes are warranted to pay costs of importing and burning oil that is not reflected in the market price. It also encourages development of renewable domestic and less pollutant fuel sources. CON: It distorts market prices and causing producers and consumers to allocate personal and business spending inefficiently. If the rates are too high it can cause, horizontal inequalities as individuals who use vehicles to job tend to spend more on gasoline than others at the same level of income.
Q2.Wal-Mart had a vision and economic model that was based on low price directly proportional to high volume business model. They were able to reduce miles between routes by carrying large volumes to be distributed to areas other than having trucks to deliver in smaller routes. The trucks were more aero dynamic and this helped to save the fuel cost.To make an impact, smaller companies realized that they had to rethink their processes and factor in sustainability (Soderquist, 2005). Wall mart amazed the logistics world by committing to reduce the energy needs, Packaging across its global supply chain and carbon dioxide omission. This will spur suppliers and other companies to develop manufacture and source in more
Wall mart recently unveiled plans to measure the sustainability of every product it sells through substantive information to consumers about sustainability and lifecycles of the product they purchase. It will also be guided by its logical strength of numbers to increase large influence in area beyond discount retailer (Soderquist, 2005). Its effort in product efficiency, supply chain transparency and disaster response has greatly influenced public policy. Through its assistance in hurricane Katrina Wall mart showed that it had the capability to support the community. This created customer loyalty and motivated most individuals in positive thinking. Such industries have created a sense of belonging to the global world. Through creation of employment C.S.R and impact to assist smaller firms realize goals. They have promoted the going of green by being role models
Reference
Soderquist, D. (2005). The Wal-mart way: The inside story of the success of the world’s largest company. (pp. 152-160). Illinois: Thomas Nelson Inc
Green, M. J. (1992). Changing America: Blueprints for the new administration. (pp. 426-568). Canada: Newmarket Press.