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International Finance
Temple University School of Law
Blaine, Jonathan C.

International Finance, Class 1                        01-14-09
This quest may be attempted by the weak with as much hope as the strong. Yet such is oft the course of deeds that move the wheels of the world: small hands do them because they must, while the eyes of the great are elsewhere
 
The Structure and Workings of the Finance Industry
BCM: banking and capital markets
AM: asset management
PE: private equity
RFR: risk-free rate
SPV: special purpose vehicle
SPC: special purpose company
 
·         YOU NEED TO KNOW FOR THE EXAM: banking regulation is concerned primarily concerned with systemic risk (it is not investor specific or even just one bank, it is concerned with the system), while capital market regulation is for disclosure fraud and fraud of the market – capital markets regulation is to protect investors
o   The US financial regulatory system that is a wait until something breaks and then fix it; there is not a comprehensive view on how to regulate it
o   Japan and the EU have comprehensive systems
·         One of the main focuses of the class is the various types of risk; all of these laws are made to identify and lessen the risk of a market collapse
·         The “spread” is the difference in interest rate at which the banks borrow money and then lend it out
o   There is nothing that is actually and completely risk free because there is an interest rate; if there is absolutely no risk, then there is not return
o   The reason that a completely risk free return has no interest is because the interest rate charged and paid is a factor of the risk the lender is taking
o   Thus, the higher the risk, the higher the potential return; but the problem is that the return is never divorced from the risk
o   The risk of buying instruments from a nation is called “sovereign risk”
§ This goes hand in hand with political risk, like a business is going to be nationalized
§ For example, Russia and Argentina has a higher sovereign risk than the US because they have defaulted
·         Banks only keep the minimum reserve – money should never sit idle because it will be slowly eaten away by inflation – so they do not always have money on hand
o   Banks, unlike investment banks, can accept depositors’ money
o   Depositor banks get overnight loans for the federal reserve, which is why the investment banks changed the form
·         Liquidity is the name of the game: if you are illiquid and have nowhere to get money, you are dead in the water (like Lehmann Bros.)
·         The current problem with interest rates is that the risks around the interest rates have changed significantly in the last few years
o   They have been low, but now with the threat of banks collapsing, the interest rates went through the roof because of the immense or unknown level of risk
o   But this of course hits a limit when people can pay, so nobody was lending
·         The United States government is and has historically been the lender of last resort
 
International Aspects of Financial Markets
 
·         People putting money into a different jurisdiction to avoid regulation or taxes in one jurisdiction: this is called arbitrage
·         Regulation is problematic because regulation is jurisdiction-specific, but transactions are not jurisdiction specific
·         It is very common for a company to have their office in Tokyo or New York, but there transactions are booked in Hong Kong or somewhere else; there is an advantage for physically being where the customer is, but not doing the transaction there as well
·         Regulatory arbitrage is a big problem because international transactions cannot be covered by jurisdiction-specific regulation
·         When you have an international transaction, how do they settle up?
o   There needs to be a system for settling up; which is the payments and clearance system
·         Securitization is taking illiquid assets and converting them into a security to give you cash
o   Anything can be securitized; the security is the bond
o   The SPV is a legal entity that holds assets
o   The investment firms usually does the securitization of the mortgages
o   Monetization is turning a hard asset into cash
 
 
Major Markets
·         FOREX
·         Capital markets (securities)
·         Derivatives (swaps, etc.)
·         Developed markets (US, UK, and Japan) and the other developing players (Hong Kong, Singapore, Korea, etc.)
Costs and Benefits of International Transactions
·         The costs of investing and financing will go down because of competition
·         The diversity of places to invest
·         A negative is “contagion,” where one nation goes down and it brings down others, and it incredibly difficult or impossible to stop
·         Even if some risks decrease, others will certainly will rise
o   Legal risks
o   Sovereign risk
o   Domestic protection vs. foreign competition (this is often a political issue among the people in a certain industry and/or jurisdiction – like the US auto industry)
o    
International Finance, Class 2                        01-21-09
Introduction to Stock and the ’33 and ’34 Acts
·         The stock certificate itself has no intrinsic value, because nobody is obligated to give you money for something
o   The prof. says that the only value in the certificate is if you can convince someone to pay more for it than you did
o   He is also against secondary markets because he sees it as something that just transfers money from people who do not have it to those that do not need it
·         1933 Act covers the investors in the primary market; the 1934 act regulates the exchanges on which the secondary market on which it occurs
·         The ’33 act and the ’34 act do not cover private issuances to private investors
·          The ’33 act attempts to protect investors by requiring disclosure in accordance with US GAAP for annual reports
·         The lifecycle of the stock is generally the life of the corporation: indefinitely
·         What you have you know: 1933 Act covers initial public offering, and 1944 covers the secondary market, but neither looks at the quality of the investment, but just whether the is proper notice and auditing; investor protection is the name of the game in securities regulation [banking regulation is to protect the system, not depositors] ·         Value is perception; in

ill be worth, the tendency is for the bank to talk up the IPO
o   They put a “Chinese wall” between the investment banking arms and research
·         Historically, in the US, state’s covered in-state offerings, called blue sky laws, and some still exist
o   Under the current environment, there is a call for complete federal preemption over all blue sky laws
·         IPO allocation is when an investment bank does an IPO, so they go around to see who will buy them, and according to their research they allocate the IPO shares to certain investors; now the allocations have to take place in a certain order
Disclosure Standards
·         This is to fight disclosure fraud: that the numbers you are looking at are not real
·         There is still no international disclosure standards
o   There are lots of GAAPS, and IFRS (international financial reporting standards)
o   There was an attempt to streamline accounting in order to make financial reporting the same so companies in different jurisdictions can be compared; otherwise, as an investor, people will have to know the difference, for example, between US and Japan GAAP
o   The EU is now all on IFRS
o   The US has not adopted IFRS, and the reason is that US GAAP is based on rules and standards, while IFRS is based on principles
·         Historically, all companies listed in the US had to make a GAAP statement or make a reconciliation between IFRS and GAAP, which is a barrier to list in the US, so it has been done away with by the SEC, who said that if the home of the company is in an IFRS jurisdiction, foreign companies can list in the US with only IFRS
·         Japan is also moving toward IFRS, but want to see how it works, so they will set a date for them to set a date to reconcile the IRFS and Japan GAAP
·         Still, US companies CANNOT use IFRS, it is only open to foreign companies
·         Blaine thinks eventually everyone will go along with IFRS, but the US and Japan will get to carve out some specific changes
Listing on International Exchanges
·         The issue with international exchanges is, whose regulations should apply?
·         For example, if you buy Microsoft stock on the Tokyo exchange, Japanese regulation applied, but should US apply as well? 
o   Regulation is to protect the investor, so if are an American, should you still be protected? Should you be protected against investor fraud wherever you go? 
o   This is an argument the SEC makes; it is called extraterritorial application of securities law, and it is the only country that does it