Managing Your Money - Annotated Bibliography Example

Review No.: 1 Source of article: The Guardian Author’s name: Jill Treanor Date of publication: 13 November 2012 Brief summary of article: The sale of payment protection insurance (PPI) with products such as loans could have been withdrawn a long time ago, but many banks were hesitant to do this because they were wary of the implications of doing so – especially with regard to profitability and share prices. According to Jayne-Anne Gadhia who worked with the Royal Bank of Scotland, she had discussed with a person of a high authority that the scheme be withdrawn. But the RBS and other banks did not want to be the first to act for fear that share price and profitability would be hit. The impact is that due to mis-selling of the PPI, the scheme has backfired and now costs the banking industry £12 billion. At the same time, Stephen Hester who was appointed CEO of RBS in 2009 shortly after the bank had withdrawn from the sale of PPI notes that forcing banks to ring-fence may unintentionally increase financial instability. As bankers, Hester and Peter Sands of Standard Charter and António Horta-Osório of Lloyds Banking Group also discuss the recommendations by the Vickers Commission to introduce a leverage ratio of 4 per cent, which they argue could restrict lending. Personal commentary: The article discusses various measures that have been implemented or are being implemented in the United Kingdom in order to regulate the banking industry. First is payment protection insurance (PPI), which is a package that was sold alongside banks products such as loans as security for repayments in case borrowers fell ill or lost their jobs (Dunkley 2012, Lodge 2012, p. 186). Initially, PPI was a very profitable product, and when companies realised this, they started pushing sales even higher though the products were of questionable value to a number of customers. In 2008, three customers who had bought the PPI complained that the product was worthless as a form of insurance (Dunkley 2012). Eventually, PPI was assessed by the Competition Commission, which termed it to be “uncompetitive”. In turn the Financial Services Authority asked all vertically integrated banks to make restitution to any customers who had been sold the unsuitable products. The implication of this is that the cost to the banking industry had reached about £8 billion by 2011 (McConnell & Blacker 2012, p. 80). Therefore, as noted by Jayne-Anne Gadhia, the withdrawal of PPI as a bank product was long overdue, though banks were hesitant to do so because of the perceived negative implications. Turning to the issue of forced ring-fencing, the impact of this is that customers could face higher mortgage charges if the government compels banks to ring-fence their high-street operations (Treanor, 2011). This observation is made clearly by Stephen Hester who notes that doing so will increase financial instability in the market. This is because as banks incur high operational charges they pass them to the customer. This coupled with the high leverage ratios such as the 4 per cent suggested by the Vickers Commission is likely to discourage lending. References Dunkley, J 2012, ‘Payment Protection Insurance: A brief history’, The Telegraph, 20 February 2012, viewed 15 November 2012 Lodge, S 2002, Managing your money on-line: Investing, saving and borrowing in the e-world, Kogan Page Publishers, London. McConnell, P & Blacker, K 2012, ‘Systemic operational risk: the UK payment protection insurance scandal’ The Journal of Operational Risk, Vol. 7, No. 1, pp. 79–139, viewed 15 November 2012 Treanor, J 2011, ‘Ringfencing will cost customers dear, say banks’, The Guardian, 15 June 2011, viewed 15 November 2012 Treanor, J 2012, ‘Virgin Money boss: banks found PPI habit hard to break’, The Guardian, 13 November 2012, viewed 15 November 2012 Review No.: 2 Source of article: The Guardian Author’s name: Jill Treanor Date of publication: 12 November 2012 Brief summary of article: Because of their speculative tendencies, stock market agents nearly halted the operations of HBOS Bank in March 2008. The stock speculators spread rumours that the bank was in trouble but the Financial Services Authority dispelled these rumours. It is noted that the speculators deliberately caused the shares of the bank to plummet almost 20 per cent, with the intention of selling shares they did not have and then buying them back at a profit due to the lower purchase prices. After the near-collapse of HBOS, the bank was rescued by Lloyds in October 2008, and Llyods was required to set aside some £7 billion for bad loans serviced by HBOS. HBOS had not foreseen any future collapse of the property market and this was attributed to lack of corporate experience of the people who sat on the bank’s board. Personal commentary: The article typically illustrates what happens to stock prices when they are subjected to too much speculation as well as the risks associated with this tendency. Speculation involves engaging in risky financial dealings in an attempt to gain from medium- or short-term fluxes in the market value of stocks. What speculators basically do is to purchase a stock at a lower price so that they sell it a higher price as seen in the HBOS case. Speculators do not care about the inherent worth of the stock; they are only concerned about whether or not they anticipate prices of stocks to rise, as more and more speculators accumulate the stock. The fact that speculation nearly led to the near-collapse of HBOS Bank when the value of its shares plunged shows that too much market speculation is a risky affair and calls for a stronger regulator such as the Financial Services Authority to restore market confidence. This view is noted by El-Din and Hassan (2007, p. 240), who argue that excessive speculation can be perceived as being harmful and non-productive to the use of a society’s resources. Evidently, in the HBOS case, short-sellers sold HBOS shares they did not even own hoping that that they could capitalise on the situation by buying the shares back at lower prices. Short-selling involves seasoned speculators who ‘borrow’ shares , the value of which they expect to decline from a third party, and then buying them back after the value of shares has plunged (Morrison 2011, p. 208). The idea behind all this fiasco was the notion implied to the public that HBOS was facing financial difficulties. Essentially, speculation is not a bad thing per se, but too much speculation can be harmful. A note given by Proudhon (cited by Juhel & Dufour 2008, p. 6) is that speculation is the art of becoming rich, “without working, capital, trade or genius”. Notably, the result of speculation was the massive loss for HBOS as its stocks plummeted and as it incurred bad loans amounting to £7 billion. On the other hand, speculators had projected significant gains from the scenario. The Financial Services Authority notes in its investigation report that the decline in the prices of the shares of HBOS Bank was fuelled by “unscrupulous traders who spread false rumours to make unjustified profits, having earlier short-sold the shares” (Financial Services Authority 2008). Finally, the article unravels the incompetency of some company boards, as it is evident that the HBOS board could not foresee the collapse of the property market although a forewarning had been given in 2003 that the future of the property market was not promising. This points to how great companies fail as noted by Phillips (2011, p. 153). References El-Din, S E T & Hassan, M K 2007, ‘Islam and speculation in the stock exchange’ K Hassan & M Lewis, The handbook of Islamic banking, Edward Elgar Publishing, London. Chapter 15, pp. 240 – 255. Financial Services Authority 2008, ‘FSA concludes HBOS rumours investigation’, FSA/PN/086/2008, 01 August 2008, viewed 16 November 2012, Juhel, J & Dufour, D 2008, ‘A discussion of stock market speculation by Pierre-Joseph Proudhon’, 12th World Congress of Accounting Historians, Istanbul-Turkey, 20-24 July 2008, viewed 16 November 2012, Morrison, J 2011, Essential public affairs for journalists, 2nd edn, Oxford University Press, Oxford. Phillips, T 2011, Fit to bust: How great companies fail, Kogan Page Publishers London. Treanor, J 2012, ‘Short-sellers nearly brought down HBOS, inquiry told’, The Guardian, 12 November 2012, viewed 16 November 2012, Review No.: 3 Source of article: Financial Times Author’s name: Tom Braithwaite Date of publication: 9 November 2012 Brief summary of article: Citigroup’s CEO Vikram Pandit resigned from the group and will receive more than $15 million in compensation as well as a ban on working for 13 companies for a period of 12 months, including Barclays and Goldman Sachs. Also resigning with Pandit was the group’s chief operating officer John Havens, who will receive $6.8 million as bonus compensation for 2012 and the same ban conditions. Although the majority of the group’s investors opposed the pay awarded to the two, the Citigroup board, through its chairman Mike O’Neill, noted that it was yet to amend the pay scheme, and that the award is therefore legitimate. In addition, the board asserted that Pandit and Havens made significant contributions to Citigroup during the five years they were at the helm of the group’s leadership. Notably, Pandit helped the group to survive during the global financial crisis by bolstering its risk management processes and returning it to profitability while Havens’ focus on institutional businesses increased the group’s capacity and enabled it to steer its customers through the volatile times. The two will however not be awarded severance payments. Personal commentary: A number of issues are highlighted in the article; among them are power and organisational environment and change. The high pay package awarded to the two former leaders shows how powerful the posts of chief executive officer and chief operating officer are. The role of organisational environment and change is reflected by the exit of Vikram Pandit and John Havens, which ushers in new leadership. That the organisational environment of Citigroup dictates that resigning officers should be compensated is depicted by the decision by the group’s board to award the two for their ‘good work’. The same is also highlighted by the decision of the board to bar Pandit and Havens from working for 13 companies which are the group’s main competitors for 12 months. What is at stake is whether the decision by the Citigroup board to compensate Pandit and Havens for terms they have not completed and for work they have not done is justified. Citigroup’s investors argue that the decision is unfair for the company’s shareholders; while the board argues that the pay is commensurate with the exemplary work done by Pandit and Havens and is within the pay scheme regulations of the board, which has not been amended. While this commentary cannot determine the accuracy of the points made by the board, there are different views from different writers on the matter. For example, Rajghatta (2012), writing in The Times of India, notes that Citigroup was “staggering under monumental bleeding from the mortgage melt-down and other expenses” and it only resurfaced when Pandit intervened to have it bailed out – but at a salary of $1 million – which many people argued was too high. While Citigroup did not disclose the reasons for Pandit’s and Havens’ resignations, BBC News (9 November 2012) cites disagreements with investors as part of the reasons. Further, the Huffington Post (16 October 2012) notes that Pandit denied that he was forcefully removed from Citi. Whatever the case, the Citigroup board must show cause why it agreed to compensate Pandit and Havens when they voluntarily stepped down. The board can argue that officers’ compensation is fixed by the board of directors as noted by Minars (2003, p. 53) and as articulated by chairman Mike O’Neill, but it must give reasons why the compensation should be that high. Notably, the compensation must be reasonable in amount based on the magnitude of the officers’ activities, but again, excessive compensation is regarded a waste of corporate resources (Minars, 2003, p. 53). The article therefore raises the question of whether Pandit and Havens were awarded the huge perks because of their exemplary performance or merely because of the power they wielded in Citigroup. References Rajghatta, C 2012, ‘Citi CEO Vikram Pandit quits abruptly, shocks financial world’, The Times of India, 17 October 2012, viewed 17 November 2012 Minars, D 2003, Corporations Step/step, 2nd edn, Barron’s Educational Series, New York. Braithwaite, T 2012, ‘Citi’s Pandit to leave with $15m payout’, Financial Times, 9 November 2012, viewed 17 November 2012 Huffington Post 16 October 2012, ‘Vikram Pandit resigns: Citigroup CEO to be replaced by Michael Corbat (UPDATE)’, viewed 17 November 2012 BBC News 9 November 2012, ‘Citigroup’s Vikram Pandit to receive $15m’, viewed 17 November 2012 Review No.: 4 Source of article: The Telegraph Author’s name: Garry White Date of publication: 23 October 2012 Brief summary of article: HICL, an infrastructure fund, has purchased a 30 per cent stake in a school project in Fife to boost its future income. This follows another purchase of a stake in Prime LIFT. The writer of the article recommends infrastructure funds because they offer a considerably safe channel of long-term income. And as the writer notes, generating good sources of income as HICL has done is the most powerful way to increase the value of a portfolio over time without having to encounter too much risk. This can be facilitated through a dividend reinvestment strategy, which involves purchasing high-yielding shares with dividend payments, leading to greater returns over time especially when the dividends are compounded. According to the writer, the dividend reinvestment strategy has been employed in the US with high returns, and if the same were implemented in the UK where dividends are higher, it can result to very high returns. Personal commentary: The article basically describes the benefits of adopting the dividend reinvestment strategy for a company like HICL as it makes future investments. A dividend reinvestment plan is a plan that allows stockholders to have cash dividends reinvested in stock instead of being received in cash (Mayo 2010, p. 266). Through the plan therefore, shareholders can automatically invest dividend payments in additional shares of the company’s stock (Van Horne & Wachowicz 2005, p. 490). The gist of the article is that HICL aims to increase its future long-term income, and having a dividend reinvestment plan would be the best way to achieve this. According to Mayo (2010, p. 266), dividend reinvestment plans offer advantages to both firms and investors. For holders of stock, the advantages include the purchase of shares at a substantial reduction in commissions. Mayo adds that even reinvestment plans in which the fees are paid by the stockholder provide savings. Both versions of plans are especially attractive to a small investor, since not many brokerage firms are willing to buy stocks of a low value, and significant commissions are charged on such small transactions (Mayo 2010, p. 266). HICL would therefore benefit greatly from this scheme since it would significantly help its small stockholders. To investors, the most important advantage of dividend reinvestment plans is that the plans are automatic. The investor does not receive the dividends since the proceeds are automatically reinvested. This is beneficial to any investor who does not have the discipline to save, as such forced saving may be a means to steadily build up shares. For the company, the primary benefits of dividend reinvestment plans are the goodwill that is achieved by offering another service for its stockholders (Mayo 2010, p. 267). Plans that involve the release of new shares also help to raise new equity capital. This reflexive flow of new equity eliminates the need for the sale of shares through underwriters (Mayo 2010, p. 267). Further, the company retains the cash that would otherwise be sent out to shareholders and this also reduces the transaction costs of making the payments (Clayman, Fridson & Troughton, 2011). Therefore, it is important for a company like HICL that aims to generate meaningful income streams to also have a dividend reinvestment strategy as pointed out by Oakley (22 June 2012). References Clayman, M R, Fridson, M S, & Troughton, C G H 2011, Corporate finance: A practical approach, John Wiley & Sons, New York. Mayo H B 2010, Investments: An introduction (with Thomson one - business school edition and stock-trak coupon), 10th edn, Cengage Learning, New York. Oakley, P 2012, ‘Build an income portfolio that could set you up for life’, Moneyweek, 22 June 2012, viewed 17 November 2012 Van Horne, J C & Wachowicz, J M 2005, Fundamentals of financial management, 12th edn, Pearson Education, Inc, New York. White, G 2012, ‘Questor share tip: HICL worth its place in a portfolio for the long-term income stream’, The Telegraph, 23 October 2012, viewed 17 November 2012 Review No.: 5 Source of article: Post Online Author’s name: Dave Carey Date of publication: 09 October 2012 Brief summary of article: Price is an important consideration when buying insurance, but in the modern business world, it should not necessarily be the most important factor. It is important for mid-sized businesses to consider the valuable management information, specialist resources and technical expertise that insurance companies have to offer. Effective insurers have dedicated teams of experts that focus on the practical implications of the needs of each business industry. Effective risk management is about understanding a business’s operations and alleviating the risk they embody. Essentially, the writer argues that good insurance companies are those that offer tailored solutions based on an analysis of what businesses have and what they need. Importantly, the insurer must be one who interacts with the government and industry players to understand what the market carries especially for mid-sized businesses Personal commentary: The article by Carey argues that effective insurance is not just about paying low premiums; rather, it is about the insurers knowing and understanding the trends in the business world, the regulations put in place by the government, the types of risk that businesses are subject to, and how to effectively deal with these risks. This is true given that no insurance firm can offer a one-size-fits-all insurance scheme to all businesses because different businesses are exposed to different types of risks. The business needs of a supermarket for instance are different from those of an online blog company. Similarly, the risks that these businesses are exposed to are different. While a fire may destroy the goods in a supermarket, a blog company will be more worried about the loss of information in its data centre. It is easier to value the worth of stock in store, but to value the information stored in a data centre, an insurer needs to be more oriented in information systems and valuation. Carey argues that the most effective insurance companies not only respond to the needs of clients but also seek to favourably shape the environment in which they operate. To achieve this, insurers have to interact with players as well as the government to understand what is required. Such participation enables them to tailor their services to respond to the changes in the environment in which the insureds operate. For instance, working with the government in Andhra Pradesh, India, insurance companies were able to come up with crops insurance, rainfall and weather insurance (World Bank 2006, p. xxviii). The World Bank (2006, p. xxviii) further notes that in such cases, insurance schemes should be able to provide an incentive for farmers to switch permanently to more sustainable agricultural economic practices. Similarly, in Ghana, the National Insurance Commission and the Ministry of Finance and Economic Planning have collaborated to ensure that insurers come up with “innovative insurance products for the adaptation to climate change” (Innovative Insurance Products for the Adaptation to Climate Change Project (IIPACC) Ghana). It is obvious as stated in the article that today’s businesses should not just focus on price as they search for an insurer. There are a host of other features to look at in addition to those mentioned above. These include different customer expectations, products access, information transparency, product choices, and behavioural and lifestyle shifts among others (Garth 2011). In addition, businesses that seek insurance should seek insurance firms that are flexible to customer innovation, product innovation, service/claims innovation as well as business model innovation (Garth 2011; IBM, n.d. p. 2). Therefore as the articles opines, there is no doubt that the most important aspect of insurance is not just its price. References Carey, D 2012, ‘Price is naturally a factor medium-sized businesses consider when choosing an insurance partner, but it’s time they learned that it shouldn't be the most important’, Post Online, 09 October 2012, viewed 17 November 2012 Garth, D 2011, ‘The insurance tipping point: Innovation and transformation’, The Journal of Insurance Operations, 01 March 2011, viewed 17 November 2012 IBM n.d. ‘Insurance 2020 Now what? Exploring initiatives for innovation’, viewed 17 November 2012 Innovative Insurance Products for the Adaptation to Climate Change Project (IIPACC) Ghana), viewed 17 November 2012 World Bank 2006, Overcoming drought: Adaptation strategies for Andhra Pradesh, India, World Bank Publications, Washington. Read More