Investors without high quality access to venture capital and other private opportunities are missing out on potential gains.oAlso, facing concentration risk because all of their investments are public which are few and not well diversified (public market is highly concentrated)There’s been less investment in stocks because there are less stocks to pick from
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Choices on what to invest in are harder now than they were with double the options- stock picking ismuch more competitive because the companies left in the public market are old, big, easier to analyze, and more profitableMaking it more difficult and less profitable E. Read “Mutual Banks Moving to Shareholder Owners”(Item 15.6) and “Thrift Conversions Will Be Governed By Tighter Rules” (Item 15.7) and answer the following questions:1. Why were thrifts mutuals in the first place? Have those reasons changed?Manager of mutual is compensated by a straight salary- no incentive for risk so you’ll play it safe unlike corporateMutual is safer than corporate, for mutual to gain more funds they need to invest riskierThey were a cooperative agent in the 19thcentury, to help low income individuals who were shunnedby commercial banks. Banks would only lend to merchants, not poor peopleoRegulations discouraged lending to small, usually unprofitable borrowers, also tax advantages to mutualsThe banking system has now realized the gains of investing in lower income borrowers, and providing them a safe place to deposit their money2. What are the advantages to a mutual thrift from converting to corporate form? Raising capital: making it easier to meet capital requirementsoThis would allow them to pad the losses on risky loans, perhaps allowing them to get involved in more high-yield risky investmentsAlso makes transfers in ownership such as mergers, acquisitions and restructuring easier, encouraging growthThis also provides a performance bond for managers in the same way as stock-options because managers can buy stocks like depositors, and the value of their shares depends on the performance of their bank3. How would you estimate the value of an institution up for conversion? This is the job of underwritersYou would have to look at their loan portfolios, the return on the loans they have given out, the costs of their deposits, basically looking at their book valueShould also look at similar institutionsIf you were to estimate the value of its shares, you would have to look at its balance sheet and comparables (similar institutions).Mutuals can’t consolidate4. Who are the pre-sale owners? To whom should the stock be sold? At what price should it be sold? What should happen to the proceeds of the sale?
Technically the mutual funds that are converting or have already convertedThe stock is sold to managers and depositors who are qualified. The second article recommended you also open the sale to employees5 Why do institutions tend to be converted at less than their ultimate market value? [Hint: The proceeds of the sale are generally retained by the institution. How does this affect its market value?]Since managers are keeping a portion of the retained capital, the market value of the company is decreasedoThis is because capital is used to maintain production or help growth
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