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The Threats of Investment Banks on Financial Markets

 5 min read / 

Since the financial crisis of 2008, there have been great disputes regarding the activities of investment banks. Reputation of various banks and the investment banking industry has declined severely in recent years. As a response to investment banks taking on too much risk and harming financial instability worldwide, there has been a substantial need for stricter regulation. This article uncovers why investment banks are needed, but also how they can be dangerous to a financial system and the manner by which they have the potential to harm economies around the globe.

The importance of investment banks

Despite investment banks often being portrayed in a negative light, they are significantly necessary for large and emerging economies. Aside from various investment banks offering private, commercial and wealth management services, they provide financial services to governments and large financial institutions. For instance, corporate finance facilities are provided that involves accumulating finance for governments through issuing bonds. Investment banks also assist leading financial and non-financial companies by offering specific advisory services and mitigating any form of financial exposure they may incur through currency and commodity hedging and derivatives.

Overall, investment banks are essential in providing credit, capital and insurance for households and consumers, namely through indirect methods. Without investment banks, financial markets around the globe would struggle. As a result, global investment banks are vital for the day-to-day economic activities for all large nations. However, as the crisis exposed the various risks of these banks and the need for structural reforms within the industry, the dangers have become more apparent.

Why investment banks can be harmful

When investment banks suffer, not only will the bank itself experience losses, but there would also be a chain of events that would harm other financial corporations, non-financial institutions and the economy as a whole. The recent economic crisis demonstrated this, as economies around the globe were suffering in terms of declining economic activity, output and growth levels.

Current forms of trading securities that are becoming increasingly popular are known as dark pools of liquidity. Dark pools are unique because there is a lack of transparency, i.e. individuals trade anonymously. This form of trading benefits participants by lowering transaction costs. Whilst this can seem to benefit those involved, it does indeed cause risks and issues to financial stability, especially as often the risks are difficult to identify, due to the limited amount of transparency. Firstly, if the usage of dark pools of liquidity continues to gain pace, this decreases liquidity within the market, potentially hampering efficiency. For example, dark pools effectively divide up markets and so negatively impacting market prices for trading. Secondly, trading in dark pools may lead to the prices of stocks on the exchange market not reflecting the true market price. As the main feature of dark pools prevents regulators from performing extensive actions, the most that can be done is to watch the evolution of anonymous trading and see if any further potential issues arise.

Investment banks often hold assets that are difficult to price, which can often lead to mispricing. An example of this would be collateralised debt obligations (CDOs), which have been seen in the past. In terms of the investment banking activity, banks that operated with securitisation of loans had miscalculated the risk of the loans included in the pool. Following this, after the US housing market prices began to fall, which was not expected nor taken into consideration by banks, the estimated values of CDOs dropped significantly. After the CDO bubble had ruptured, financial institutions had suffered great losses, which led to bailouts, driving the financial crisis. The events that followed showed that CDOs were one of the worst financial instruments to date.

The term, ‘too big to fail‘ can be attached to global investment banks. If an investment bank becomes insolvent, the negative impacts caused would ripple throughout the industry due to their interdependent nature and consequently pose great dangers to financial markets. So investment banks play such a vital role in financial markets that if one fails it would cause chaos to financial stability. For instance, central counterparty clearing houses would also take a hit if a bank became insolvent. The losses that a bank made would also impose losses on to such clearing houses, which would then be passed onto financial institutes that are a part of the clearing house. Due to one bank failing, the losses would continue to be imposed and passed on to other corporations involved, which in turn damages the financial market as a whole. If the losses are so severe that various banks begin to fail then this would impact the solvency of central clearing houses and so the effect would spread throughout the entire financial system.

Investment banks make a financial system much stronger, but in its strength lies an inherent vulnerability. Financial markets rely on the operations of investment banks. For instance, these institutes have become so important and necessary that if one begins to fail, the economy and other nations begin to suffer. Due to threats and riskiness imposed by the banks, there has been a greater purpose for regulatory bodies. It is increasingly important to spot and solve potential risks that activities from global banks pose on financial markets and use certain matters to prevent or minimise the threats. However, it is important to note that there are other key factors that can harm financial markets to a greater extent.

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Companies

Uber Eats to Offer Europe Couriers Insurance

 1 min read / 

Uber Eats insurance

Uber has announced that it will be offering a free insurance package to its food couriers in nine European countries.

The company has teamed with AXA Corporate Solutions for the insurance product, which will be introduced from January 8 next year. It will cover personal accidents, cash benefits for hospitalisation, property damage and cover for third-party liability of up to a maximum of $1m. Uber eats operates in Austria, Belgium, Poland, Italy, the Netherlands, Portugal, Spain, Sweden and the UK.

If a driver is involved in an accident, they will simply need to fill in an online claim form available on the Uber Eats app.

Previously, both Uber Eats and Deliveroo have come under scrutiny over how workers are treated. In the UK, Deliveroo riders went to court to seek employment rights, including the minimum wage. The UK government has looked at whether the employment law needs to be changed to take account of modern working practices, such as the gig economy.

Keep reading |  1 min read

Companies

Google News: The Secret War Against Net Neutrality

 5 min read / 

Google Net Neutrality

Anyone watching Google News can see that mainstream news outlets are a monoculture, with 100 different outlets reporting essentially the same “big” story. That is, whatever is the top scandal of the day. With click-bait headlines the norm, mainstream news and fake news look indistinguishable. Readers struggle to tell the difference. It’s all negativity and shouting. That’s changing our culture, and not in a good way.

Google News is making the news monoculture worse by blocking independent news publishers seeking to join Google News. There’s an almost insurmountable headwind for new publishers who haven’t been “grandfathered in” to Google News. Google urges us to take action to support net neutrality while at the same time defeating net neutrality by giving favoured nations treatment to big business news organizations at Google News. Why is that a real problem? Let’s talk about what happened to news in Spain.

The Case in Spain

Spain’s repressive Google tax, and consequent Google News blackout, crippled independent news there. When that happened at the time, Google may have thought, serves Spain right for passing a stupid law. However, the suppression of independent news in Spain has had consequences. The Spanish news blackout by Google News played into the hands of the Spanish government seizing mainstream media, reducing mainstream news to official propaganda.

In its early days, Google News was a tremendous democratic influence for good. Smaller news sites you wouldn’t otherwise know about could get to the top of Google News based on merit. A colleague once wrote a story about a TV movie premiere starring Jennifer Love Hewitt. There was surprisingly big interest in this story. It was the only story that quoted Hewitt talking about her film. That story went to the top of the entertainment section of Google News on a Sunday morning and stayed at the top all day. It drove tremendous amounts of traffic to the news site that published it. They took a lesson from it.

Their success with that story on Google News changed their editorial mandate. The new marching orders? Find more stories that we can uniquely cover that will put us at the top of Google News. What Google had done, intentionally or not, was support diversity and make journalism better. For years that publication ranked on the front page of Google News almost daily. They survived on that traffic. It doesn’t work that way anymore. It isn’t how good you are. It’s how big you are that gets you into the Google News club today.

Difficulty for Small Publishers

In fairness to Google News, this publication, The Market Mogul, is carried by them, so clearly it’s not impossible for a new publisher to gain access. However, given their loud support of net neutrality, why doesn’t Google News have a program that nurtures net neutrality on their own platform? Why not help small publishers, rather than making it more difficult for them to launch and sustain themselves?

Maybe Google simply hasn’t thought about the consequences of not helping small publishers. After all, it can be more work to deal with them. They may have more questions to answer than establishment outlets. However, big mainstream publishers aren’t actually subject to the official rules. Google News isn’t about to drop the New York Times or Washington Post if they make a web template change that moves the author byline down a line or another superficial change that might confuse Google crawler robots.

A small publisher, however, is expected to play 100% by Google’s rules. A long-time Google News forum advisor talks about how things have changed at Google News:

In simple terms, the Google News guidelines have tightened up over time.  I joke that the NYTimes might not be accepted these days.  Yes, that tight.  So your goal is not to generate a marginally passable website that might get accepted into Google News, but one that is so wonderful that Google will drop all of your perceived competitors to find room for you.

Maturity.  If the site doesn’t have 6 months of strong journalism history to review, don’t bother applying.  Maybe 1 year in some niches.  And don’t be surprised to be rejected as 99% of all sites that apply will be rejected.  Think of this as a challenge and go forth and make the best possible news site in your niche.

Why should better journalism mean dropping a perceived competitor? Has the Internet run out of space?

If the above observation is correct, and it is judging from what small publishers have told me and the general feedback on the Google News forum, then Google News has changed. No longer a news democracy with room for every legitimate news publisher no matter what size, Google News has morphed into a walled garden that embraces big business. It’s the opposite of net neutrality. Google News has become a censor promoting the establishment viewpoint. Think that’s bad? It gets worse.

What billionaires think, is the establishment viewpoint. Billionaires control the mainstream press. Google News is boosting the 1%. Whether that’s Jeff Bezos, owner of the Washington Post, which continues to provide outstanding journalism, or Rupert Murdoch, owner and head of Fox News, which does not. Warren Buffet owns 31 news dailies and 50 weeklies. In the UK, five billionaires, Rupert Murdoch, Jonathon Harmsworth, Richard Desmond and the Barclay twins own 80% of the newspapers, plus TV stations, press agencies, book companies, and cinemas. None of the top UK billionaire press owners actually live in England.

Conclusion

A handful of billionaires, many tax avoiders living mostly beyond the law by bending it to their wills, has become our society’s thought overlords through their control of the press. And Google is helping them do it. Why has Google become a gatekeeper to enforce a news mono-culture? Will Google reconsider, stop suppressing small publishers and demanding they be “better” than the New York Times before allowing them a voice?

What society needs is news net neutrality.

Keep reading |  5 min read

Americas

Bulletproof Clothing: How US Fashion Is Going Ballistic

 2 min read / 

Bulletproof Clothing

As the US continues to allow civilians to carry weapons and gun violence becomes more of a concern, an increasing number of bulletproof apparel retailers are emerging across the country. Their target clients? The average Joe. Or at least those who can afford the hefty price tags associated with the “exotic” new fashion segment.

Miguel Caballero, a Colombian designer, sells his bulletproof blazers for 4,343.50 euros, and his tank tops for 2,023 euros. At a lower price, but still too high for most people, Joe Curran, who owns BulletBlocker, sells his bulletproof leather jacket for $875 and bulletproof classic two-piece suit for $1,200.

Source: Miguel Caballero

Caballero said that his clients include world leaders from South America and the Middle East, and international businessmen. Damien Ross, another manufacturer of bulletproof clothing, said that his clients are mostly college-educated, professional men, between the ages of 34 and 75.

Ross said:

“They [clients] see what’s happening on the news, and, any time they’re in a crowd or an area that can be prone to attack, they are concerned.”

Source: Bullet Blocker

Body armour manufacturing is a $465 million-a-year industry in the US, according to a report in August from Market Research. The retailers, who mostly entered the industry because of the surge in gun violence taking place around them, are presenting upscale bulletproof clothing, from blazers to tank tops.

Owning body armour is completely legal, and does not require a special permit or background check. However, guidelines vary from state-to-state, and felons are not able to purchase it.

Keep reading |  2 min read

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