Being head of settlements and trading allowed him to

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Being head of settlements and trading allowed him to behave in riskier ways and on top of this, Barings lack independent risk management as another check on Leeson (they winded up getting independent risk management but not before Leeson had already acted) v. What are the implications of the Barings collapsing for securities firms and for regulators? Exchanges themselves should have monitored the bank’s positions better - they failed to figure out why the bank had such unusually large positions, and were okay with the fake names provided by the bank when it was asked. - They are also not good at sharing information due to competition, but this hampers efforts to prevent firms from going bust and putting members’ capital at risk. International regulators need to work more closely together, as British regulators received very little information from Singapore regulators even after the collapse. - Domestic regulators must monitor their banks activities in other jurisdictions. Derivatives were not at fault - lack of internal supervision and control was. - The rescue operations was hampered by the uncertainties of the stock market, not the fact that the bank’s exposure made its risks unquantifiable. - Banks have simply found it easier to lose large sums of money, especially because they trade so much on their own accounts. regulate the differentiation between departments of securities firms Exchanges to raise concerns about one security firm holding a large position- clear information between firms and exchanges; pool information between various exchanges Necessary for domestic regulators to have information from banks’ activities in other jurisdictions just like it should be necessary for international regulators to have information about other countries exchanges. We should NOT blame derivatives. Derivatives, at ease of which they can be used, assumes risk hazard. D. 1. Read “No empty threat; CDSs and bankruptcy” (Item 18.4) and answer the following: i. When a lender hedges a loan with a CDS, how does it change his incentives? How does your answer depend on the type of loan? Lenders can often make higher returns from CDS payouts than from out-of-court restructuring plans.
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- This is especially true for equity loans, where the value of a company is decreased and thus payouts are lower than hoped. - Debt loans are less incentivized to bankruptcy, because the amount of the payout would be less dependent on the company’s success and because the priority of the loan is higher. ii. “By purchasing a material amount of a firm's debt in conjunction with a disproportionately large number of CDS contracts, rapacious lenders (mostly hedge funds) can render bankruptcy more attractive than solvency.” Explain. In the case of bankruptcy, the lenders would receive payout from the CDS contracts, whereas solvency would mean they would only receive payment based on the firm’s success and the amount and precedence of their loan. - Buying many CDS contracts means the payout from bankruptcy would likely be higher and more immediate than that from solvency. ii. How would the borrower feel about the lender buying a CDS on his debt? How does you answer depend on the type of loan?
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  • Fall '19
  • Derivative, Nick Leeson, Credit default swap, Tokyo Stock Exchange

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