Margin Call .. Film Review

Margin Call .. Review 

Margin Call is the best imaginary behaviour of the present financial crisis. It's altogether larger to Oliver Stone's hollow Wall Street: Money Never Sleeps and in the same class as Charles Ferguson's revealing, piercingly intelligent documentary Inside Job. In fact, it stands up to comparison with the 1992 film of David Mamet's superbly dirty play Glengarry Glen Ross, which in many ways it look like, not least in containing a peerless ensemble cast that includes Kevin Spacey. Glengarry Glen Ross takes place during a couple of days in a seedy provincial branch of a national company where anxious salesmen peddle worthless real estate. Margin Call, also set over some 36 hours or so, initially appears to be located in an altogether more honourable and affluent place, the Manhattan headquarters of a respected investment bank. But the year is 2008, the sub-prime crisis is under way and except for their Hugo Boss and Armani suits and the stainless steel and plate glass skyscraper they work in, there's little to differentiate the flat workers making $1m trimmings on Wall Street from the grifters in Glengarry Glen Ross.

To turn shareholders’ wants into a drive is to be mortified of a rational confusion.  Like eating food to survive because food is necessary condition of life. But if we lived mainly to eat, making food a sole purpose of life, we would become gross. The purpose of business is not to make a profit; it’s to make profit so that the business can grow and do better in future.

The movie is as fascinating and button-holing as a first-rate thriller and starts with the company's newest round of brutal firings. One of the victims, veteran risk analyst Eric Dale (Stanley Tucci), hands over a file on which he's working to new employee Peter Sullivan (Zachary Quinto), a 29-year-old former rocket scientist now doing much the same job for a rather larger salary at the bank. What Sullivan finds in the file is a forecast of the company's future that makes a twig of explode look like a two-penny firecracker. The company has been buying and passing on worthless packages of mortgages, and it is on the brink of the biggest bank collapse of all time. As night falls, word passes up through the hierarchy from Sullivan to his slick British superior Will Emerson (Paul Bettany) and on to the head of sales Sam Rogers (Kevin Spacey), a basically decent middle-aged man whose main current problem is that his much-loved dog is dying of cancer. Rogers’s dailies back to the office to consult his boss, the cool ruthless 43-year-old Jared Cohen (Simon Baker). Not surprisingly they call in the almost God-like CEO, John Tuld (Jeremy Irons), who reaches by helicopter at midnight. His name is not entirely unlike to that of Richard Fuld, the infamous CEO of Lehman Brothers, one of the chief targets of Ferguson's Inside Job.

At this point the grey areas get darker, the ironic understatements become covered with free-floating obscenities, scapegoats find themselves risked out, the rich protect their backs and get richer, and the public gets screwed. Chandor's language is as exact and undoubted as Mamet’s; the realism never slips into cheap cynicism and, as Jean Renoir says in La Règle du jeu: "The awful thing is this. Everyone has his reasons."

The film showed the main problems of financial crisis which is happening now a days in the business industry. It also gives the opportunity to tackle the root of the main problems that cause current financial crisis. There is a lesson to learn after watching the film about how to handle businesses. Its keeps an audience thinking and assuming their own opinion about what is going to happen next. Apparently this is not the only reason of economic crisis; there are other reasons such as lack of strategy and lack of corporate governance.

Concept of an Optimal Capital Structure

Concept of an optimal Capital structure

 

The optimal capital structure for a business is one which proposals a stability between the model debt-to-equity choices and reduces the company's cost of investment. In theory, debt financing usually bids the lowest cost of capital due to its tax deductibility. Though, it is rarely the optimal structure meanwhile a company's danger mostly raises as debt rises. A company's relation of short and long-term debt must also be measured when investigating its capital structure. Capital structure is best often referred to as a firm's debt-to-equity ratio, which offers understanding into how dangerous a company is for possible stockholders. Influential an optimal capital is a main obligation of any firm's corporate finance department.

The company could be backed through two behaviours: debt by getting loan or delivering bond and equity by distributing shares.  The cost of equity is much higher that cost of debt finance, which makes the equity a higher risk. Equity finance is very expensive, as equity requires high return on projects undertaken in order to generate wealth to the shareholders.  Shareholders do not like to take the risk because they do not want to take the risky decisions which affects the profits of the company and the also affects the money which is coming in the business. However if company use debt to finance their own activities rather than equity they might be paying lower return, because debts are lower risks thus they are lower costs and they are cheaper.

 Therefore the company might invest on projects, which has lower internal rate of return because of lower WACC. So the firms have different mix of capital structure planned by WACC, which could effectively change how they set the return. After all the Debt finance is cheaper they also have the tax advantage because of the tax reductions.  The lenders require a lower rate of return than ordinary shareholders.

Capital structure is the second most rigid. Firms alter their capital structures through various means (e.g., Fama and French 2005), and this happens more frequently than changes in the corporate charter, board composition, or other factors affecting governance stringency. However, security issuance that is driven by the capital structure seems less opportunistic and more rigid than real project choices. ( Anjan V. Thakor 2011).

So for instance what a business needs to do for borrowing is increase the borrowing in such a time where there is less risk of financial distress. There is a less chance of recession. During the period of recession people tends to save more and spend less. Decision making about it changes with the time for example in 2006 a supplier of a company use to see 80% finance through debt as normal, but roll on three years in 2009 the same supplier  sees 80% of the finance through debts bad.

Before the recession in the UK it was easy for the companies to get loans off the government. But after the recession it is hard for the banks to give out the loans to the companies or someone else. Similarly the loan which the UK home students get for their education was approximately £3000, but now it is £9000. This means they will have to give back more than the students use to give back in 2008 as the debt is increased by £6000.

Too much debts can also have a bad impact because companies have to pay the interests, it doesn’t matter they are getting high profits are low profits. They will have to pay the interest. Therefore More debts decreases WACC as it is cheaper than equity but there should be a complex relation between debts and company’s capital structure.

How shareholder reacts upon this further finance might have an influence on how the company make or abolish value and what their hope about that occurring. It might be vary since one person to another as everyone is different in their own way and one business to another as the different businesses takes different decisions at different situations.it drives extremely on the subject of social investment. The impartial of gearing and capital structure is receiving to that optimal point where growth quantity of debt businesses are attractive in such a point overall obligation of equity holder might remain encountered.

The Credit Crunch

A Credit crunch is when there is lack of availability of loans and credit this can also be applied to a sudden reduction of the availability of obtaining loans from the banks. A Credit Crunch also involves the rise of official interest rates. During a credit crunch lenders or investors make less risky investments.

 A Credit Crunch is mostly caused when careless and inappropriate lending is occurred in a continuous manner over a long period of time which therefore results in major losses for lending and investing businesses that end up in debts.

The BBC reveals Northern Rock has asked for and has been granted emergency financial support from the Bank of England, in the latter’s role as lender of last resort. A day later depositors withdrew £1bn in what is the biggest run on a British bank for more than a century. They continue to take out their money until the Government steps into the guarantee their savings.

The symptoms of the problem is that banks are reluctant to lend to other banks, institutions reluctant to lend, and other organizations, because they may not be rewarded. In other words, the banks have a "strike." Why is this? This is because many banks have to lend money to people, their assets, but no one Lenders worry that they have made ​​a lot of loans to inability to pay, so they are reluctant to lend them any more cases by default, along with some old new loan. The fundamental problem is that a large number of non-performing loans, structured bank but because of the financial system and do not know who holds the non-performing loans. It sounds incredible, but it has happened, because regulators have allowed the complex restructuring loans and people to make new loans, support of non-performing loans - because of the government's inflation target.

An estimated how much money lent by the increase in the money supply. The compound annual growth rate of about 11%, in Australia, in the past 30 years, the money supply increased. The money is a reflection of some form of assets. When we borrow money, we expect it to be repaid, if there is no money to pay, we expect to get the return on the assets. The most fundamental problem is that too much money has been created, we now have money, there is no access to assets.

How could this happen? We allow bank loans loan support. As a risk mitigation strategy or insurance, it is a wise idea, but the loan when the loan when it falls as a commodity in their own right. That is, as long as we start the money as a commodity with intrinsic value of the assets to support independent, it is almost inevitable system operation control. It does not bankers greedy or incompetent government, it is a system, an inherent defect.

The built-in defects, we put all the money, it seems to be the same, as long as we have created some of the money, and we want it to pay interest. We treat all of the money, although it has a separate asset-backed value. We let the money you want to create an asset-backed case, we charge interest immediately. Every day, the government and Australia's major banks to create the new currency of approximately $ 500 million as a measure of the increase in the money supply. More and more, they have to create more money than the increase in our total wealth. They not only create more money than we need to pay more money before interest earned what. Our productive assets will not produce more wealth to pay this interest; we have to create more money, which in turn generate interest, which in turn requires more money to pay interest. In fact, we have created a classic Ponzi scheme, the loser is society as a whole unit known as inflation targeting. The government sanctions to encourage this practice a wide range of tax equivalent to the rate of inflation. Of course, this government, because it does not see that as a tax, it said, it promotes economic adjustment, the relative change in value of the different asset classes is rationalization. This rationalization is true, but there is other tax, us through inflation adjusted. A simple rule changes, we can solve the problem immediately and overnight. Allows the creation of new money, but do not pay interest until it turned into a productive asset. This is not a radical idea. It does every day, every week, as people invest in the new joint venture. When you invest in something terrible, something until it is earned, you do not expect the return on your money.

The currency issue is not a new idea to the actual asset-backed. The new idea is that the system does not have the issue of asset-backed currency. Need money, supported by the assets of the reasons why there are so many people called for a return to money backed by gold. Unfortunately unrealistic, because we need more gold than exists, but the proposals we put forward the same principle. Do not create interest-bearing money, unless it is behind an asset. There are a variety of ways for the community to become social investment, rather than a consumer society. In other words, we will not let the interest of the new funds, retained until it is income. Here are a couple of ideas.

Create interest-free money to first-time homebuyers, but it takes money to build a new house. Any interest earned until it has turned into a new house money. The money can be used to buy a second-hand housing, but it does not earn interest until.it is used to build a new house, thus increasing the asset base of. As a side benefit, this policy for those who do not have an affordable housing.

Create interest-free money; it consumes very little energy (the way a few greenhouse gas emissions) as a reward. Interest-free money as a reward frugal people. These people as a side benefit, the need to eliminate the emission permit trading, if we create enough investment incentives in infrastructure, which will reduce emissions - such as wind farms, the use of solar thermal energy production, solar cell, geothermal energy plant, insulation and other incentives, we will be in a few years, we have invested billions of dollars in renewable energy infrastructure money, zero interest rates and zero emissions.This approach will not lead to inflation of special money without interest, until it is invested in productive assets, will go back in time more money, rather than its cost of construction.

The credit crisis can be avoided, because the government has brought obvious need of new capital investment to create real value and real wealth. The Reserve Bank can control the issue of special money, you can use it to keep the inflation rate is zero. The rest of the economy can continue to be safe in their own way the money will not be eroded by inflation in the value of knowledge systems.

M&A

Mergers and Acquisition (Takeover)

Is It an opportunity for a business to make an investment internationally?

Combining of the two businesses entities under common ownership is called merger. Expanding the activities of the firm through acquisition involves significant uncertainties. Very often the acquiring management seriously underestimate the complexion involved in merger and post-merger integration.

The benefits from mergers are often difficult to quantify. The motivation may be to apply superior managerial skills or to obtain unique technical capabilities or to enter a new market.  Acquiring companies often do not know what they are buying. If a firm expands by building a factory here or buying machinery there it knows what it is getting for its money.

By bringing together two firms at different stages of the production chain an acquirer may achieve more efficient co-ordination of the different levels. The focus here is on the costs of communication, the costs of bargaining, the costs of monitoring contracts compliances and the costs of the contract enforcement. In 2011 Google paid $12.5bn to buy Motorola mobility, thus linkage a software company with a hardware manufacturer.

This is a merger that occurs when a larger company buys a competitor and absorbs it into the greater organization. Shareholders have the power to vote to approve or deny such a merger. If the shareholders vote down the acquisition, the corporation cannot legally continue steps to fulfill the merger. To sway shareholders, corporate officers often disseminate information relating to the proposed merger, including how the acquisition will strengthen the corporation and provide a greater share of the profits for investors.

One the biggest mergers in recent years are the mergers of British Airlines and Iberia Airlines (December 2010). The company will have its headquarters in London, with BA shareholders retaining 55% ownership of the company. The merger is seen as a chance for the two airlines to cut costs following two very tough years for the airline industry. Both BA and Iberia are expected to report heavy losses this year, with BA predicted to announce its biggest annual loss since privatisation.

The problem can arise when one company have more than 51% of the shares because they might want to appoint their people on the top jobs. This actually happened in the case of British Airways and Iberia Airlines. Because according to the Spanish they want to cancel this merger. Strike action is being threatened by workers at Iberia in protest against restructuring which will lead to 4,500 job losses. “It’s not fair and it’s not the way things were supposed to be. The merger was supposed to bring growth for both companies and benefits for workers of both airlines,” Sepla head Justo Peral told the Daily Telegraph.

The Spanish carrier’s chief executive Rafael Sánchez-Lozano said: “Iberia is in a fight for survival. It is unprofitable in all markets. Unless we take radical action to introduce permanent structural change, the future for the airline is bleak.”

There are fewer risks; economic risk, political and fear of the recession create a certain type of respond in investing in the company. But in the time of the recession there is a decline in the market confidence, companies focus on their core business and they look at the profitability rather than expanding the business. Because if we compare with the situation of hot kettle as when it is hot it is hard to touch so when the situation is like this than the companies think how to make money and this is the period where good companies will survive and they can create value for the shareholders, and poor companies who do bad purchases they collapses. Recently sports direct bought Republic. It’s a bargain due to low share prices which also supports the M&A (merger and Acquisition).

Foreign Direct Investment

Foreign Direct Investment (FDI)

What it is? Why companies want to spend in other countries companies? How it helps the Businesses?

Foreign direct investment is the purchase of physical assets or a significant amount of the ownership of a company in another country to gain a measure of management control. Company invest direct in production facilities overseas rather than domestically. This includes giving the licence to allow the rights to manufacture company’s products to an overseas company franchise its operations to an overseas company.

Why a company wants to be a multinational company? Well mostly the company’s wants to grow their business and get high profits to improve the image and reputation. As most of the companies are market seekers, some companies can be raw material seekers as they want to improve the quality of the products as they are products and production efficiency seekers. Some companies are also political safety seekers.

Theories of FDI are not mutually exclusive but they can be viewed as collective. Transportation costs incurred when exporting goods. Particularly effect goods that are low value and high weight and can be easily produced any location for example cement. That makes Foreign Direct investment more attractive. Government is the main service of these through the imperium of the tariffs and quotes. These decreases the profitability of exporting and that makes FDI and licensing more attractive too. Companies may have competitive advantage through technology, management and marketing knowhow as well through their core product. Locating particular economic activity in a specific location gives a company a location advantage. The ownership of some special assets, powerful brand, technical advantage, and knowledge and management ability gives a company an ownership advantage.

According to the BBC News (3^rd march 2013) Europe's most senior trade official has said that a free-trade agreement between the US and European Union would boost its growth by as much as 1%, leading to many more jobs. The deal would be the biggest free-trade agreement in history. EU Trade Commissioner Karel De Gucht said that both were still "suffering the effects of the earthquake that hit our economies in 2008".                                                                                                   

"This is the cheapest stimulus package you can imagine," he told an audience at Harvard University on Saturday, saying that for the EU, "the income effects of the deal that we are now trying to achieve should be between 0.5% and 1% of GDP, meaning hundreds of thousands of jobs"

A deal would bring down trading barriers between the two biggest economies in the world. The EU estimates that a "comprehensive and ambitious agreement" will boost annual GDP growth by 0.5%.Mr De Gucht also noted that trade talks at the World Trade Organization had stalled, "largely because of differences of view between developed powers - like the US and the European Union - and the rising stars.

"An EU-US partnership can act as a policy laboratory for the new trade rules we need - on issues like regulatory barriers, competition policy, localisation requirements, raw materials and energy."This can improve the relation between the two countries and can help to boost the economy. There will a lot of the competitors are there in the market to follow them as the following competitors always try to be aware of the acts of the other successful companies .e.g. knickerbockers (1973).

Multinational Tax Management and Corporate Tax Avoidance

How do companies avoid the corporate tax? A company makes all the major strategic investment decision after considering the best possible thing for the company. This is to increase the profits of the company by reducing the costs. The position of an international company is to place it strategically in the more tax efficient position which will minimize the overall worldwide tax burden. There are three major types of Tax. Income Tax, Withholding Tax, Value Added Tax.

Companies make long term strategic plans in which they also discuss about moving a business in a country where the tax rate is low. This can also help the company to generate more profit because of the currency. For example if a UK based company will try to invest in India they will generate more profit because the value of the pound is more than the value of the Rupee. Recently the power of the pound is increased more it is now £1 is equal to 81.55 Indian rupees. Which has increased recently and it shows that investing in India will help the British company to generate more profit with less investment. The tax rate in India is less than the Tax rate in England which is another reason to spend in India. Another good reason of investment in a country like India is the labour there is cheaper than the England. Whereas if an Indian company will spend in the UK they will have to invest in a lot to settle down in the market. But if they do that they will help England economy to be stable.

According to the India Times,Multinational companies in India have delivered higher returns across sectors such as pharmaceutical, automobile ancillaries and capital goods over the last three years compared with their Indian peers, riding on the back of superior technology, products and brand equity. The Indian units of global consumer goods firms such asHindustan, Nestle and Colgate-Palmolive have posted returns of over 95%, 110% and 150%, respectively, on an average during the last three years, more than double the 35-42% returns reported by Indian companies such as Dabur and Godrej Consumer. This shows the impact of the foreign companies.

According to the BBC News (22^nd February 2013), The UK is looking to become a centre for the Chinese currency, also known as the renminbi. Such agreements allow central banks to swap currencies and can be used by firms to settle trade in local currencies rather than in US dollars, as happens now, since China's currency is not fully convertible to other currencies. This can also help them in the improving the trade between two countries and opening new will also encourage the investors to invest in the countries. This will allow the UK based companies to business in china as has the most improved economy in the recent years according to the surveys.

The system of tax incentives is to encourage companies to pay dividends, rather than to reinvest their profits. This cannot be the best way to encourage long-term investment. Many pension funds is essentially surplus many companies enjoy pension holidays. Companies move the businesses to the countries such as Cayman Island where the Tax rate is 0%. This can avoid the Tax which can lead to improve the capital whereas if the company is moving business in a country where people do not know anything about the company and its products that can take a lot of time for the companies to settle down.

Minimising Costs to Raise Capital

The world is moving fast and technology is growing every day. This is making the companies to act quickly, make the decisions quickly, and introduce new products to the markets quickly. This is all because of the competition level in the market which is making every one to be on their toes. Most of the new companies concentrate on generating profit rather than minimizing costs and controlling costs from the beginning.

The working capital is a measurement of liquid assets to establish business availability. Under normal circumstances, the enterprise will be more successful because they can expand and improve their business if there is a lot of working capital. Companies without working capital may lack the funds necessary for growth.

Small businesses often use to pay short-term debt, such as inventory or advertising, but it can also be used for long-term projects, such as renovation or expansion. These are the elements of the business cycle which can rapidly absorb cash. If the working capital dips too low, the risk of an enterprise's cash. Even if it is a very profitable business encounters trouble, if they lose the ability to meet its short-term debt. Commercial financing or small business loans can be used as a quick cash option, when traffic is not ideal, or ready-to-use buffer period.

In the football business when a club want to generate money either they sell player or release them if there is no one who wants to buy them players. This can help them in buying new players and generating more money to spend. The drawback of this can affect the performance of the team. This can be demotivating for the team.  What about the fans? Are they going to be happy?   Losing a player to generate more capital and minimize cost is not going to make the fans happy but sometimes business are in a kind of situation where they do not have any other options. Business who plans for long term always do good because they know who to get profits because the profits can make the board of directors happy, shareholders and stakeholders happy.

For example Premier League football club Arsenal recorded a £2.5m ($4m) loss in the half year to December 2010, largely on the back of reduced player revenues. There were no major player sales in summer 2010, unlike in previous years when the club made a big-name sale. The loss contrasts with a £29.2m profit in the corresponding period a year earlier.

According to the BBC News the proportion of income that Premier League clubs spend on wages hit a new high in the 2010-11 season, says a Deloitte report into football finance. Clubs in England's top football league paid some 70% of their income on salaries for the first time. Manchester United, who won the league that year, spent 46% of revenue on pay, but Manchester City spent 114%.The Deloitte report says that control of wages "continues to be football's greatest commercial challenge”. Its 21st Annual Review of Football Finance also says that pay discipline is needed "in order to deliver robust and sustainable businesses"

What makes the costs of the football clubs to increase? In my opinion it’s the wages of the footballers which is the main reason of the costs. Business can get rid of this cost by selling the players and generating more money to buy other players on a lower wages but can they get the same replacement?