Why Europeans don’t like collective investments all that much?

Have you ever wondered why 1/3 of the U.S. population are mutual fund investors? According to the Investment Company Institute’s data at the end of 2008, U.S. mutual funds managed $10 trillion for 93 million U.S. investors. Putting the numbers in perspective, the entire population of Germany, the most populated European country, is just under 82 million, while France has 65.4 million living on its territories.

Are there cultural or legal impediments for a broader acceptance of collective investments in Europe? With this research question I turned to Rudolf Siebel, Managing Director of the BVI, the German Investment and Asset Management Association. BVI represents 75 members, the Kapitalanlagegesellschaften and Asset Managers, with more than €950 billion in assets under management.

According to Rudolf, securities business in Europe is not intermediated, but mostly associated with banking. Therefore, European investment managers do not have to offer a cash product to their clients along with equity or fixed-income investment options, because uninvested cash balances are kept by the sponsoring bank. Before the Glass-Steagall Act was lifted in the U.S., fund managers have had to place clients’ cash in a bank. Each time a fund investor sold shares of a bond or equity fund, the asset manager would lose money to a bank. When money market funds came about, they were embraced by asset managers as a way to keep all cash in house. Accidentally, in 1970s - 1980s, which was a period of high inflation in the U.S., interest rates on bank deposits were regulated. Money market funds offered much higher market interest rates and attracted hoards of retail investors. Money market funds introduced a few generations to mutual fund investing fueling the growth of U.S. middle class.

At our seminar on Wednesday, April 14th, I’ll talk about nailing down my research question(s) and more generally about a super-important step of putting together an MPhil/PhD Transfer application. A wise PhD Candidate strives to learn from a painful experience of others!

Find my presentation slides titled 'Financial Regulation and Development of Financial Products: a Case for Money Market Funds' at my page:
http://westminster.academia.edu/ViktoriaBaklanova/Talks

I hope to see you all on Wednesday!
Viktoria

Why Europeans don’t like collective investments all that much?

Finishing the Job

Two and a half years into the crisis, we are at a defining moment in the debate about the financial reform. On Monday, the U.S. Senate Banking Committee approved the Senator Dodd draft legislation to overhaul the U.S. financial regulatory system. Besides its many important elements, the Dodd bill has two overarching objectives: to end “too big to fail” and to protect consumers from abusive financial services practices.

The ways those objectives are achieved spurred a number of controversies. According to the draft, the Bureau of Consumer Financial Protection (CFPB), which was initially envisioned by the Obama Administration to be an autonomous, independent watchdog, is to be housed within the Federal Reserve. Consumers themselves, living with an impression of the Fed’s apparent failure to regulate the banking system resulting in massive bank bailouts by the taxpayers, are finding the Fed’s revived authority misplaced. Market participants point out that the consumer protection objective may not always be consistent with the Fed’s primary task of maintaining the safe and sound banking system.

Ending “too big to fail” has caused a significant shift in how large money center banks and financial companies are view by investors. Both S&P and Moody’s have commented on a possibility of credit rating downgrades of certain financial institutions if an implicit government backing is removed. In turn, sell-side analysts promptly conducted an analysis concluding that a few U.S. largest banks’ short-term credit ratings may be reduced below “the highest rating category” effectively cutting those institutions from accessing the money markets.

Taking into account that the same banks provide financing for municipal markets and brick-and-mortar companies often through asset-backed commercial paper programs, some unintended consequences the bill might be well beyond of what politicians are expected.

The Dodd bill might be an interesting document to look at for all those interested in paradoxes of financial regulation. The 1,336-page draft can be accessed here:
http://banking.senate.gov/public/_files/ChairmansMark31510AYO10306_xmlFinancialReformLegislationBill.pdf

Viktoria

Finishing the Job

Maritime Law & Policy Postgraduate Research Student Conference 2010

The London Universities Maritime Law and Policy Group

THE MARITIME LAW AND POLICY POSTGRADUATE RESEARCH

STUDENT CONFERENCE 2010

at

The University of Westminster, London

on

Friday 16 April 2010

The London Universities Maritime Law and Policy Research Group are proud to announce that the First Annual Maritime Law and Policy Conference for postgraduate students will be taking place on Friday 16 April 2010. We invite all students wishing to present their postgraduate research work to a friendly and

supportive environment to join us at this conference. We welcome submissions in all areas of Maritime Law and Policy, including interdisciplinary work. 

Each speaker will present their research ideas or papers for 15 minutes and a 10 minute discussion will follow. There will also be invited speakers who will focus on a topic relevant to the maritime law and policy research communities. Postgraduate students who do not wish to give a presentation are also very welcome.

You must prepare an abstract (250 words) and send to Suzanne Bowles:

s.bowles@gre.ac.uk

All submissions must include your institution, a contact address, an email address and a contact phone number. The deadline for the submission is 1 April 2010. Please see our website for further information and a booking form:

www.westminster.ac.uk/schools/law/research/london-universities-maritime-law-and-policy-group

Conference Fee

£20 Speakers

£30 Non-Speakers

The conference fee is to cover the cost of materials, equipment, venue, lunch and refreshments. We have deliberately kept it low to encourage wide participation.

Maritime Law & Policy Postgraduate Research Student Conference 2010

How To Get Your PhD

 

(Thanks to Dion) 

I am starting some work on analyzing the Bar and barristers with a young researcher at Manchester University, Anna Zimdars. Her research is in the field of equal opportunity and social justice issues in higher education and employment.

I got to know her at the SLSA conference last year--which I posted about--when her paper was one of the few bright moments among some dire sessions. Anna was doing a large-scale study of entrants to the Bar about which we know little. She and I are going to work further on these data taking into account practice areas.

Having received her PhD in 2007, Anna was inspired to write a short guide, How to Get Your PhD: A Guide for Students. It is the sort of guide everyone wishes they'd had at the start. I recommend it and it's a free download.

How To Get Your PhD

PhD Studentships at Westminster

Thanks to mgratzer

PhD Studentships
 
The Law School, University of Westminster is advertising a number of PhD studentships. For further information, including on how to apply, see 

http://www.westminster.ac.uk/research/research-studentships-2010

Please note that applications are limited to EU/Home students. 

The closing date is 5pm Friday 19 February 2010; and, applications should be made through UKPASS (details online).

565NPCXDCPAW

PhD Studentships at Westminster

The Impact of Our Students' Research

(Thanks to politics.co.uk)

James Surowiecki, in the New Yorker, writes on business, the markets, and the economy. His article for September 21, 2009, concentrates on the power of credit rating agencies and the ways they are entangled in the financial regulatory system.

Of especial concern is the impact of a ratings downgrade. Surowiecki refers to a 2007 article in Business Week which describes how two mortgage-backed bonds were downgraded from AAA to CCC in a single day--a cataclysmic fall from top quality to junk.

Surowiecki goes on to say

As I mention in my column, one of the more curious aspects of the rating-agency controversy is that big investors, many of whom were arguably burned by the recent performance of the agencies, remain supportive of keeping them as regulatory gatekeepers. This study by academic Viktoria Baklanova explains why so many investors think the current system is superior to any that could replace it, and argues that the investors are right.

Viktoria is one our research students being supervised by Joe Tanega and myself. I'm sure her research on credit rating agencies will continue to have an impact and add to the discourse on their role in financial markets.

The Impact of Our Students' Research

Use of Credit Ratings in Financial Regulation

Last month the Joint Forum of the Basel Committee on Bank Supervision released the results of the survey on the use of credit ratings by its member authorities in the banking, securities, and insurance sectors. The survey answered the call of the G7’s “Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience” to review whether the current regulations and/or supervisory policies unintentionally give credit ratings an official seal of approval that discourages investors from performing their own due diligence. The survey’s questionnaire was designed to elicit information regarding member authorities’ use of credit ratings in legislation, regulations, and supervisory policies. The goal of the survey was not only to collect information on internal references to “credit ratings,” “credit rating agencies,” or any references to specific credit rating agencies, but also to assess whether the use of credit ratings has had an effect of implying an endorsement of such ratings and rating agencies or discouraging investors from performing their own due diligence. The Joint Forum collected 17 surveys from member authorities, representing 26 separate agencies from 12 different countries, as well as five responses describing international frameworks.

Both in the U.S. and in Europe, credit ratings are generally used for five key purposes: (1) determining capital requirements; (2) identifying or classifying assets, usually in the context of eligible investments or permissible asset concentrations; (3) providing a credible evaluation of the credit risk associated with assets purchased as part of a securitization offering or a covered bond offering; (4) determining disclosure requirements; and (5) determining prospectus eligibility.

The first regulatory reference to the ratings in the U.S. is found in 1931 in the Office of the Comptroller of the Currency (OCC) and Federal Reserve examination rules, and was mainly based on distinction between investment grade securities, generally rated BBB/Baa and above, and securities of below-investment grade quality. Over time, regulators in the U.S. and globally have incorporated credit ratings into laws and regulations to set capital requirements for regulated entities, provide a disclosure framework, and restrict investments. Recognizing possible unintended consequences of the regulatory use of ratings, in the summer of 2008 the SEC in three separate releases proposed and sought public comments to amendments to most of the SEC’s rules that rely on security ratings with alternative requirements.

Sixty three comments were submitted in response to the SEC's call. The analysis of the responses highlights a high level of dependency of all market constituents on the CRA ratings as a common measure of creditworthiness, especially in the world of less transparent structured credit securities. The behavior of market constituents, including investors, issuers, and regulated entities has been affected by such dependence. The SEC proposal came about to address the perceived failure of the CRA to accurately indicate riskiness of structured credit securities. Still, the feedback to the SEC proposals to eliminate references to credit ratings assigned by CRAs in its rule indicates that the market participants are not ready to accept responsibilities for an independent credit risk assessment. We infer that investors, fiduciaries, and regulated entities are looking to regulators to offer a common measure of risk, accurate and free of conflict of interests. At the very minimum, the market participants expect the SEC and European regulators to assume a more important role in controlling the integrity of the credit rating process.

Please, see the fuller version of the analysis here. The paper can be downloaded from SSRN.

Use of Credit Ratings in Financial Regulation

Graduate Conference Follow Up: First Amendment Opportunism

There is something deeply counterintuitive in constitutional rights claims such as freedom of speech that are rooted not in protection of private life, but in mitigating financial losses. The fact that businesses can invoke the First Amendment arguments is not in itself new. In late 70s, the First Amendment was used to protect economic liberty in cases of commercial speech and, more specifically, price advertisement. Frederick Schauer (2000) pointed out quite insightful that people and organizations with a wide array of goals use First Amendment argument when "find that society has not given them the doctrinally or rhetorically effective argumentative tools they need to advance their goals."

The unique problem associated with granting the First Amendment protection to market players and, more specifically, credit rating agencies, is their ability to argue that their function is merely to provide “opinions”. The credit rating agencies long maintained that their core business is financial publishing and, therefore, were generally shielded from liabilities under the securities law unless actual malice is demonstrated. The credit rating agencies had some success in persuading courts that their core activities constitute a matter of public concern and holding a credit rating agency liable for its bond ratings would have an oppressive effect on the publication of important financial information to the public.

My conference presentation illustrated the phenomenon with a series of court cases. Various courts have reached a range of results in cases filed against the rating agencies. Even though the rating business can be positioned as publishing of financial opinions, such a publisher can be held liable for malfeasance. Further, the securities law regulates commercial speech by providing for liability for false and misleading statements. Applicable to the credit rating business, the court have distinguished whether rating agencies were merely collecting and analyzing information or were playing a more significant role in the transaction thus can be qualified as agents of the issuer. On the other hand, the United States Supreme Court has stated that it is difficult to see why the expression of opinion about a marketable security should not also be protected: credit rating agencies do not profit from the sale of the bonds of any company that they rate for creditworthiness and they perform an essential service for economy and efficiency of the capital markets.

In light of the on-going credit crisis fueled, in part, by poor performance of the credit ratings and heightened concerns regarding rating agencies independence, the courts are less likely to establish First Amendment protection of credit rating opinion. We can point out at least two reasons: (1) if a credit rating opinion is not disseminated to investment public at large, but only made available to a limited number of investors (i.e., private ratings) then such an opinion is less likely to qualify a "matter of public concern;" (2) if a credit rating opinion is published in regard to a security that was structured followed an instructive communication process between a rating agency's analysts and underwriters then such a process is less likely to qualify as merely publishing, but could be viewed by the courts as administering a professional advice. In addition, in foreign jurisdictions where the freedom of speech argument is less culturally accepted, credit rating agencies may have to use other argumentative tools to organize the defense.

Schauer, F., 2000, First Amendment Opportunism, KSG Working Paper No. 00-011

Graduate Conference Follow Up: First Amendment Opportunism

PhD - From Enrolment to Successful Viva

This week I have been asked to complete my annual progress reports for my PhD students. Last week I saw one of my PhD students successfully defend his thesis at a very scintillating viva voce. Next week I shall be examining a PhD thesis at the University of Essex. All this makes me reflect on what makes a successful PhD student. From my experience, first, there has to be an appropriate research question – this is an issue many doctrinal researchers could well fall prey to. I have examined many a thesis where there is simply no research question. The PhD student has simply described the state of the law – be it, the law on electronic bills of lading in Nigeria to some fine exception in the law of cheques. There is no discovery to be made and no theoretical question to be tested. This is where perhaps the empirical or jurisprudence researcher is usually so much better at – it seems to me that their disciplines much more readily lend themselves to a clear delineation of the research question. Secondly, a manageable methodology. It really goes without saying that a research without an appropriate methodology is like cooking a fancy meal for the first time without a recipe. Thirdly, a constructive relationship with the supervisor. The researcher certainly deserves much autonomy in the research process and experience, but without constructive criticism and discussion with his or her supervisor, the work is not properly tested and is much more likely to collapse during examination. Fourthly, the right motivation. I have interviewed more PhD applicants than I care to remember who have no idea what they want to research and are “quite happy to do whatever I suggest”. A refrain, in bad syntax, I hear often is “Can you please suggest me a topic?”. To me, these students simply have no idea what the PhD is about. Lastly, the commitment and determination to complete the thesis. The going will get hard and it takes sheer determination and much support from peers, friends and family to see oneself to the “bitter” end. However, I feel compelled to add that whilst confidence is a good thing, over-confidence is a dangerous trap. Humility as to the depth and wealth of expertise out there help tremendously to appreciate the amount of work needed to produce a good thesis.

In all this, the research environment in any law school is exceedingly important. It is in that environment that the student will learn from his or her supervisors, college and peers. Here at the University of Westminster I think we provide much support for the student to succeed. For this I feel very proud.

jason

PhD - From Enrolment to Successful Viva