Do not mix banking with proprietary trading - this seems to be the message Obama administration wants to convey to big banks engaged in proprietary trading, i.e., collecting deposits from customers and conduct trading on bank’s name.

The new rules proposed by the administration are aimed at restricting their activities and thereby, their growth and size. This proposal is part of a series of well-calculated moves to rein in Wall Street. Under this, commercial banks are excluded from having any dealings with hedge funds and private-equity firms. This includes not only owning or investing in them, but also getting involved in advisory capacity.

Banks barred from customer-unrelated trading activities are the ones that are eligible for bailout packages in the form of low-interest loans from Federal Reserve Board during financial crises. This is also applicable to banks that enjoy risk protection through federal-deposit insurance. The big shots in this field are Goldman Sachs, J P Morgan Chase, Deutsche Bank, Merrill Lynch, Citibank and Bank of America.

This landmark decision is bound to shake the foundations of investment banking. The forced choice between banking and proprietary trading is expected to produce a major impact on the direction and volume of growth of such banks. Obama administration appears resolute on severing the unholy alliance between the two.

Let us analyze the reason for their affinity. Investment banks are firms that help other companies raise funds in the capital market with stocks and bonds. As they are required to create a market for these stocks and bonds to make the issue a success, the banks buy them to boost their liquidity. This practice is called proprietary trading.

Over time, this activity evolved. Now, the investment banks indulge in proprietary trading not only to provide liquidity to the stocks and bonds they promote, but also to rake in huge profits. The traders entrusted with trading activities on behalf of banks developed this art to levels unthought-of. This prompted the banks to utilize multiple trader desks to deal only in proprietary trading, making it a large-scale profit-making venture for banks. The profit generated is over and above that earned from its originally intended purpose of liquidity creation.

Proprietary trading is not without risks. Nevertheless, banks engage in this due to the enormous profits generated. Many big names in the investment-banking scene earn a considerable portion of their profit through proprietary trading. Herein lies the trouble.

Another proposal to restrict banks’ growth is to put a cap on their market share. As of now, banks have a ceiling of 10% of insured deposits in the country. The new proposal is to include non-insured deposits and assets in this limitation. The definition of assets is not yet known. This step is aimed at preventing concentration of financial industry markets within the grip of a handful of industry heavyweights.

All these proposals were prompted by the industry goings-on during the just receding economic slowdown, which left the US in shambles, to say the least. What irked the government is the fact that these large banks, which were on the verge of collapse due to the recessive effects and had to be bailed out with financial aids, turned in considerable profit with proprietary trading .

The Obama administration has already made its dissatisfaction known when it proposed a new fee on mammoth banks to recover the money it was forced to dole out to rescue them from crumbling.

Obama’s comment sums up the sentiment - “Never again will the American taxpayer be held hostage by a bank that is too big to fail.”

written by REI Circle (www.reicircle.com)

Leadership is most essential in a team environment. It has the absolute power to make or break the cohesiveness of a team. A leader has the responsibility of ensuring the unity of the team, to bring forth the desired result. With more young people coming directly into management positions, leading a team from day one, they are left with no alternative but to develop leadership skills on the job.

Problems faced by newbie managers

Many new entrants in managerial positions, struggle hard, undecided about whom to turn to for advice and help – unsure whether their approach is a success or not. New managers have a hard task deciding when to be forceful and when to loosen up. Whether it is productive to be distant or friendly to the subordinates is a dilemma faced by them.

Being woman increases the hardship ten-fold, as they have to carry the additional burden of authenticating their selection and job suitability in the male-dominated world.

Searching for solutions

A mentor from a higher management position can help young people overcome the initial hiccups. If the mentor is closely associated with their work, even better. With their vast experience and keen observation skills, mentors can provide the necessary guidance. However, finding a mentor is not an easy task in this dog-eat-dog world.

Another option is to find a role model within the organization and draw inspiration from his/her leadership skills. It is immensely beneficial for youngsters to watch a successful leader at work at close quarters. Paucity of role models, especially for women managers, is a drawback. The difference in personalities of the people involved may also limit its utility.

Developing a good rapport with the boss is one of the best solutions that can be applied in most cases. As a person closely monitoring the team, a boss will be able to provide proper guidance in those difficult days and help in developing a unique leadership style.

Best leadership styles

A best leadership style, readymade for all situations, is an illusion. Each individual has to develop a repertory of styles for use in specific situations. This depends on the people involved, demands to be met and many more.

Leadership styles can be broadly classified as visionary, coaching, democratic, affiliate, pacesetting and commanding, based on the team status quo and personalities of team members. Each comes with its own merits and demerits. When utilized in situations where advantages are more pronounced, their disadvantages become inconsequential.

Visionary style is appropriate for teams without direction or goal. A visionary leader can get the people moving towards a dream goal. Here goal is fixed, but the choice of path is left to team members. Coaching style is more suited for developing individuals, but can turn too stifling, when applied incorrectly.

Democratic style calls for inputs from team members and use the collective knowledge to move forward. Delay in decision-making is its main drawback. Affiliate style encourages team effort by building rapport among team members. However, exceptional talent and mediocrity may co-exit in this style.

Pacesetting style is taxing for team members, when the leader sets too high a standard for them to follow. It can lead to dissatisfaction and low morale in the team. Commanding style is abandoned even by its proponents, viz. the army. Fast turnaround during a crisis is its only advantage.

Those who have led successful teams, stress the need to borrow from all the styles to suit the occasion. However, in general, leaders should be firm, open, compassionate, clear and direct in their approach towards team members, to be successful.

written by REI Circle (www.reicircle.com)

The United States Housing and Urban Department gave a New Year gift to the new homeowners in the form of new federal rule, which requires use of a redesigned and more simplified Good Faith Estimate Form commonly known as GFE. The GFE is a calculation of fees in relation with a mortgage loan that is due at closing. Lenders and brokers/mortgagees provide these costs to the borrowers in a span of three days, but these costs increase until the closing time.

The main motto behind this revision is to prevent the close-table shocks, which the new homeowners get at the time of closing when they have to shell out extra bucks at the closing table.

Under the old system, there was not set format and fees were communicated in various ways, which only made the act of comparing costs complicated. However, under the new rule, lenders will have to use the same form of GFE, issued by the HUD. This new rule has brought a substantial change in the process in which lenders convey the information related to fees to the borrowers.

These new rules have also brought the increments in costs disclosed on the Good Faith Estimate and provide guidelines that are listed on the first GFE to be in accordance with the actual cost of settlement. This means that the fees that are charged at the initial stages of the process will be uniform to the charges that are paid at the closing process.

Though the new GFE guidelines are beneficial for borrowers, they also possess some drawbacks. These drawbacks mainly come in the form of opportunistic pricing. That is, if two different borrowers go to the same lender, and if the lender gives each of them different estimates by bifurcating one of them as a sophisticate and the other, a dupe, and charges the latter substantially higher than the former, there is no hardcore way in which the disclosure statement can prevent the activity of lenders.

Potential buyers should also keep a note that though the new GFE rules will give them some kind of respite with respect to cost related with closing, they won’t be fully free from clutches of other overhead costs which the lenders will thrust on them. These overhead costs include the costs incurred by the lenders such as buying of new software, training loan originators, printing of documents, which the buyers will have to pay at the time of the closing.

Another point of criticism of this GFE is that, whether it will help borrowers to shop around in search of loans and its puzzling complexity. Richard Vetstein, a real estate attorney in Framingham, stated that the forms are complicated and that he even being a real estate attorney, it literally took him several hours to make out its exact idea.

Given below is a summarized version of charges, which you’ll get to see on your GFE

• Fees that remain unchanged from the initial GFE to final settlement, which include the lender’s underwriting and origination charges, the ‘points’ or credits on the chosen specific interest rate.

• Fees, which can go up to 10% at the time of the settlement such as services, recommended and required by the lender. The fees cannot go beyond the 10% mark from the direct estimate to final if the borrower opt for a third party to provide title insurance, title services and recording charges which are in accordance to the lender’s acknowledged list.

• Fees with unlimited changes: This includes fees of service providers, which the borrowers opt as against the recommendations of the lender. This category also involves things such as homeowner’s insurance, daily interest charges, pet and flood insurance. It gives a major fillip to borrowers and allows them to do their own shopping.

As the new rules of GFE promise reduction in the burden of borrowers, considering its complex nature, it will be quite interesting to see how many borrowers will actually be able to use it to their advantage.

written by REI Circle (www.reicircle.com)