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The Digital Financier Update (DFIN.COM Update) provided a weekly commentary on important stories with significant financial, and or Internet implications during the early years of Internet commerce. The purpose was designed to provide finance professionals and staff with a timely brief synopses of recent and news that best illustrates the changing digital economy. The stories have impacted all of us. Many of our stories may have received very little popular press coverage.
This publication is designed to be a quick read and the archive is a good resource for financial history.
The most common sources for the DFIN.COM Update include UP, AP, Fast Company, Business Week,The Economist, Forbes, Wired, Federal Reserve Bank Publications. The Wall Street Journal Interactive, MSNBC, L.A. Times, San Jose Mercury News.
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Week of June 1, 1997
New York Stock Exchange Votes to Trade in Decimals. The Wall Street Journal (June 6, 1997, C1) reported that the New York Stock Exchange voted to trade stock in decimal increments, abandoning the 1/8th point convention. Pressure from earlier moves by the Pacific Stock Exchange, American Stock Exchange and Nasdaq combined to force the action. The conversion is to be complete by the year 2000. The exchange will price in 1/16th points beginning June 23, 1997. The move is expected to help small investors who face wider bid/ask spreads because of the current pricing.
Dow Jones Agrees to License Name for Futures and Options Contracts. Forbes (June 16, 1997, p. 62) reported that Dow Jones & Co. has agreed to license its name for derivative products. Currently, Standard and Poor’s collects license fees for the popular futures and options contracts bearing its name. The fee is estimated to be 10 cents per contract traded. The Wall Street Journal (June 6, 1997, P. C1) reported that the Chicago Board Options Exchange, Board of Trade and American Stock Exchange will offer contracts bearing the name of the 101-year-old industrial average.
French Election Helps Dollar and Puts EMU in Question. Business Week (June 16, 1997, p. 48-50) reports that the election in France, interpreted widely to mean a defense of the welfare state, has raised questions about the future of the European Monetary Union (EMU). Without fiscal discipline by countries like France and Germany, any EMU currency that is issued is expected to be weak against the US dollar and Japanese Yen. The Wall Street Journal (June 3, 1997, p. C21) reported that the US dollar registered sharp gains in the day following the French election of Socialists.
Ahmanson Shelves Bid for Great Western. The Wall Street Journal (June 5, 1997, A4) reported that H.F. Ahmanson & Co. abandoned it takeover plan for Great Western Financial Corp. (GW). This left Washington Mutual Corp. alone in the running to acquire GW. Speculation is now that Ahmanson may itself become a target if it doesn't move quickly to make an acquisition.
Sears, Roebuck & Co. To Settle Credit Dispute for Between $178 and $265 million. The Wall Street Journal (June 5, 1997, p. A3) reported that Sears settled a dispute with the US Federal Trade Commission (FTC) to refund $100 million to consumers who were targets of its "flawed" collection practices. The Wall Street Journal (June 6, 1997, p. B4) reported that Sears will take a second quarter write down of between $178 and $265 to cover the expected costs of the FTC refund combined with claims by consumers and attorneys general from 39 states.
Week of May 25, 1997
Expect growth in use of enterprise-wide risk management tools. Futures (June 1997, pp. 74-76) reports the growing demand for sophisticated risk management models similar to those currently used by futures commission merchants to mark-to-market customer margin positions. The more sophisticated models incorporate the firm’s entire risk position of both market and credit risk. Less complex models now available can be obtained from a service bureau for as little as $15,000 per year or purchased and installed for around $75,000. Large firm’s are spending millions on software and data generation.
REITs the hot product on Wall Street. Business Week (June 2, 1997, pp.120-123) reports that several large real estate owners are planning to create real estate investment trusts to sell portions of their huge real estate holdings. Estimates are that over $9 billion of IPO and secondary offerings of REIT stocks have been sold thus far in 1997. The year should be a record. Experts warn that investors should look carefully at the management structure of these firms since often the management group running the REIT is also selling the real estate to it.
New risk-return measure for mutual funds. The Economist (May 24, 1997, pp. 72-73) reports that devising new measures for assessing risk in mutual funds is a lively topic. The US Securities and Exchange Commission requested comments from the public in 1995 to assess reporting quality in mutual fund prospectuses. The result was over 4,000 comments. One area of dispute was measuring risk of mutual funds. A Morgan Stanley researcher, Leah Modigliani, daughter of the Nobel-prize-winning economist, Franco Modigliani, has proposed M2 as a measure of risk. Simply put, the measure attempts to adjust the fund’s returns to a level at which its risk equals the risk of a market index. The higher this risk-adjusted return the better the risk-adjusted performance.
Nasdaq plans to trade in sixteenth-of-a-point increments. The Wall Street Journal (May 29, 1997, p. C1) reports the Nasdaq, the largest trading market in terms of market capitalization after the New York Stock Exchange, has filed with and received approval from the US Securities and Exchange Commission to quote stock prices in 1/16th point increments. This follows a similar action by the Pacific Stock Exchange some weeks ago. The action is expected to eventually realize buyers and sellers better pricing, while dealers profits are squeezed.
American Express to launch smart card program. The American Banker Online (May 29, 1997, cover) reports that American Express will issue smart cards at a number of Hilton Hotels. The cards will include a computer chip with personal information about the customer, travel preferences, information to permit check out at hotel kiosks, and travel incentives information.
Prudential policy holders line up for restitution. The Wall Street Journal (May 30, 1997, P. A3-4) reports that over 700,000 Prudential Insurance Co. of America policy holders have expressed interest in receiving restitution for alleged deceptive sales practices. Estimates of the cost to Prudential are as high as $1.6 billion.
Week of May 18, 1997
Bank powers legislation moving forward. The Wall Street Journal (May 22, 1997, p. A16) reports that legislation to expand commercial bank powers to reduce 1933 Glass-Steagall restrictions on banks wishing to participate in most security industry activities, to allow banks to expand into insurance, and to remove restrictions on the mingling of commercial and banking firms is moving forward in Congress with support by the Clinton Administration.
New European stock markets focus on startup companies. Business Week (May 26, 1997, p. 76E10) reports that Europe is spawning a number of new markets whose focus is trading in emerging companies, especially high-tech firms. Unlike the United States, Europe has had few opportunities for startups. The Alternative Investment Market in London, the EASDAQ in Brussels, the Nouveau Marche in Paris and three other new European markets launched in March 1997 all have a focus in trading startup firms. The emergence of these markets marks a dramatic favorable change in the risk-taking sentiment of Europe’s investment community and stands to substantially increase the supply of risk capital to European startups.
Banc One Corp. plans an aggressive nationwide expansion on ATMs. The American Banker Online (May 19, 1997, p. 1) reports that Banc One, a $102 billion super-regional bank holding company headquartered in Columbus, OH, is planning a 3-5 year program to expand its ATM network to 20,000 machines located in fifty states. The Bank One plan for 20,000 units compares to an estimated 7,000 units at BankAmerica Corp., currently the largest bank system, and 6,000 units at EDS Corp., the largest nonbank ATM system. It is estimated that over 132,000 units are now in service.
Week of May 11, 1997
Shadow economy growth is making life difficult for tax collectors and economists. The Economist (May 3, 1997) reports that new estimates of the size of the shadow (underground) economy in developed countries indicate that it may be growing at three times the rate for the official economy. If so, government tax collectors are missing a growing source of revenue. At the same time, the off-the-books economic activity makes it hard to determine the true employment rate and other indicators of economy activity. Several reasons for the growth are the growth of smaller service businesses which are easy to hide and such activities as illegal drug sales.
Depository customers still favor face-to-face branches. The Wall Street Journal (May 16, 1997, p. B1) reports that despite the last decade’s major effort by depositories to reduce the number of branch offices through ATMs, home banking and direct deposit, the number of branches has increased from 58,211 to 66, 700 offices. The lower costs of some transactions, such as those using ATMs, has produced one unexpected result, however, many customers are reacting to the lower transaction costs and greater convenience by making more transactions. More transactions lead to higher, not lower, costs.
Small Business Administration’s insured 7(a) lending program running out of budget authority. The Wall Street Journal (May 16, 1997, p. B2) reports that the Small Business Administration (SBA) is concerned that will run out of budget authority for its popular small business insurance program before the end of the fiscal year on Sept. 30, 1997. If authority appears to be inadequate, the SBA could cap the size of the loans made under the program or restrict refinancings.
Electronic money transfer business booming between Mexico and the United States. Business Week (May 26, 1997, p. 76E4) reports that growth in the money transfer business from the United States to Mexico is estimated to be growing at 30% per year. The latest entrant is the U.S. Postal Service - Bancomer joint service, which began as a test in Texas and California a year ago. Free phone calls, discount pricing and faster service are all being used to attract business. One reason for the growth may be tighter U.S. borders which makes it harder for Mexican’s working in the U.S. illegally to get back and forth across the border with cash.
Week of May 4, 1997
REITs to bailout Japan’s real estate? The Economist (May 10, 1997, pp. 76-77) reports that the Japanese government is looking at its tax law in to see if U.S.-type real estate investment trusts can be used there to help banks unload of billions in foreclosed property. Critics, however, argue that there are serious flaws with the idea. First, many Tokyo properties have multiple mortgages making it difficult to negotiate with owners and creditors. Second, most buildings are of uneconomic size and property value is primarily in the land not the structures. Finally, tenants have short-term leases which make the cash flows uncertain.
Pacific Stock Exchange plans to trade stocks in sixteenths rather than eighths. The Wall Street Journal (May 5, 1997, p. C1) reports that the Pacific Stock Exchange (PSE) is planning to file a rule change with the Securities and Exchange Commission permitting stocks to be quoted in sixteenths of a point rather than eighths. This comes after several members of Congress and others have argued that the old one-eighth pricing convention is unfair to traders and excessively profitable for brokers. The PSE and other regional exchanges are discussing the change which is expected to put considerable pressure on the New York Stock Exchange.
Smart Cards ready to attack U.S. market. Business Week (May 19, 1997, p. 119-122) reports that plastic cards with computer chips (smart cards) which store information - everything from money balances to frequent flyer miles - are expected to sweep the U.S. after making it big in Europe. The cards are expected to expand from use primarily as phone cards, now the major use, to more widespread use, even in Internet commerce. The Internet will also be used to download money from banks to smart cards, thus avoiding a trip to the automated teller machine.
Week of April 27, 1997
Tax receipts swell Treasury and reduce deficit. The Wall Street Journal (April 29, 1997, p. A2) reports that the Treasury department plans to pay off $65 billion in debt during the second quarter of 1997 as a result of unexpectedly large tax receipts. The current estimate for the annual budget deficit has been lowered to $70 billion for the fiscal year ending Sept. 30, 1997, the smallest in 16 years.
Limited Partnerships’ lack of liquidity remains a serious problem for investors. The Wall Street Journal (May 2, 1997, p. C1) reports that finding valuations for limited partnerships that get caught up in estates and IRAs is a growing problem. IRA distributions are based on market valuations which then determine gains or losses. Incorrect valuations, a common problem for limited partnerships, can create problems for the owners including causing them to pay excessive custodian fees and taxes.
Property and casualty insurers facing rising disaster losses. Business Week (May 12, 1997, p. 92) reports that changing weather patterns, continued movement of more people to coastal areas, and less use of reinsurance has insurers reeling. While many insurers have been bracing for another huge $16 billion Hurricane Andrew-type loss of 1992, it has been the smaller, more frequent, small-disaster events that are hurting the most. Many of these losses come in under the reinsurance limits and are not covered. Moreover, there have been more such events covering more people
European Central Bank (ECB) plans lead to more questions than answers. The Wall Street Journal (May 2, 1997, p. A10) reports that planning for the new single monetary central bank, ECB, and currency for Europe has analysts wondering. Will it happen? Will the new ECB be an inflation fighter like Germany’s Bundesbank or roll over to political pressure to stimulate Europe’s economies? The governance of the bank is yet another question. One of the biggest problems is that while interest-rate policies will be the same all over Europe with the ECB, tax and spend policies of the individual countries will not. Coordination may be a nightmare.
Week of April 20, 1997
Emerging country banking systems suffer from four big problems. The Economist (April 12, 1997, Supplement "Banking in Emerging Market Survey, pp. 7-12) reports that banks in emerging economies have been subjected to serious crises because of four common problems: (1) excessive macroeconomic volatility; (2) insider lending; (3) excessive government involvement in banking, especially using banks to finance poorly operating state-owned enterprises; and (4) financial liberalization without sufficient transition safeguards.
Junk bonds hit Europe. The Economist (April 26, 1997, pp. 70-71) report the U.S. investment bankers are introducing below-investment grade bonds in Europe to a receptive investment public. With low interest rates in Europe, the United States and Japan, institutional investors are looking for yield. Investment bankers expect that deregulation of telecommunications companies will set off a huge demand for capital by companies that can’t support investment-grade ratings. The result is expected to be a booming junk market.
Belgium hosts largest "electronic purse" (smart card) experiment. The Economist (April 26, 1997, pp. 72-78) reports that Belgium is operating the largest nationwide smart card program thanks to the fact that the sixty banks that run that nation’s payment system are cooperating. Over 900,000 cards have been issued with 10,000 merchants accepting the cards. The limitations of the program will be obvious when the cardholders want to leave Belgium and use their cards. Another problem is that it holds only one currency. The card, called the "Proton," protects the holder against a lost card since the unused balance is stored on computer.
Muni market could be adversely affected by New York state takeover of Long Island Lighting Co. The Wall Street Journal (April 22, 1997, C1) reports that New York state’s plan to issue $7 billion in new muni debt to take over this company could be adversely affecting other issuers. Other issuers of New York muni bonds are concerned that the huge new supply will cause bond prices to slide.
Fannie Mae causes stir with plan to provide mortgage borrowers with free mortgage-protection insurance. The Wall Street Journal (April 22, 1997, p. C1) reports that the government sponsored enterprise will use its favorable borrowing authority to raise funds to pay premiums to insurance companies which, in turn, will pay interest to Fannie Mae on the premiums at a higher rate than its borrowing cost, thus, creating a profit. Critics question whether the firm’s "preferred borrowing" position should be used for these types of purposes.
Tax-free divestiture deals put in jeopardy. The Wall Street Journal (April 21, 1997, p. A3-A8) reports that proposed federal legislation designed to close down so called "Morris Trust" tax-free sales of divisions is putting a number of major transactions on hold. America Online Inc’s acquisition of H&R Block Inc.’s CompuServe and other divestitures by GM Hughes, W.R. Grace, Tenneco and Walt Disney are but a few of the firms affected.
Current stock market advance one of three major bull markets since 1900. Monetary Trends (Federal Reserve Bank of St. Louis, p. 1) reports that the 1982-1997 bull market, as measured by the Dow Jones Industrial Average, has produced a 15% annual compound return. The 1923-1929 advance was even higher, registering a 25% annual compound return, while the 1942-1966 bull market provided a 10% annual compound return. The bad news is that each of the previous bull markets was followed by a long period of very poor market performance.
Week of April 13, 1997
Basle Committee of central bankers publishes list of "core principles" for banking regulation and supervision. The Economist (April 12, 1997, pp. 17-18) notes that the world’s developed-country central bankers are working to upgrade standards of bank regulators in developing countries. The magazine notes that it has cost over $250 billion to clean up banking problems in developing countries since 1980. The list of actual and potential banking problem countries includes China, Indonesia, Malaysia, Mexico, South Korea, and Vietnam. Often the problem is politically-motivated lending. The Basle Committee’s principles are designed to help developed countries develop sounder bank regulatory and supervisory programs.
Sears hit with suit over bankruptcy law violations. The Wall Street Journal (April 18, 1997, p. A12) reports that Sear, Roebuck & Co. was sued in Federal District Court over alleged violations of federal bankruptcy statutes. Last week the company admitted that it entered into collection agreements with delinquent cardholders who had filed bankruptcy without notifying the bankruptcy court of these actions. The individuals were released from these debts due to the bankruptcy action. Sears plans to stop collection and reimburse the individuals affected.
Foreigners love U.S. Treasury debt. Business Week (April 28, 1997, p. 26) reports that foreign buyers purchased a net of $225 billion in U.S. Treasury debt in 1996, twice the national deficit for that year. At year-end 1996, foreigners owned nearly 33% of all Treasury securities. While ownership of U.S. Treasury debt is on the rise, overall foreign ownership of U.S. private and public debt and equity is only 8.5% in 1996 versus 4.8% in early 1978. Most economists consider the threat of foreign dumping of U.S. debt to be small.
Week of April 6, 1997
Insurance companies enter currency and commodity risk hedging businesses. Forbes (April 21, 1997, pp. 52-53) reports that insurance companies are designing insurance packages that add insurance against adverse foreign currency and commodity price swings to traditional coverage's such as workers’ compensation and property liability. This is cutting into the lucrative derivative businesses dominated by money center banks and Wall Street investment bankers. The concept is to sell multiple-year policies to cut underwriting costs and to insure against a variety of risks that are unlikely to be positively correlated with one another.
Bre-X scandal embarrasses Toronto Stock Exchange (TSE). Business Week (April 21, 1997, p. 106) reports that the sharp fall in the share prices of gold mining company Bre-X highlighted serious flaws in TSE’s systems and procedures. Following news that Bre-X’s Indonesian gold mine may have little value, the shares of Bre-X did not trade for four days because TSE’s computers could not process orders fast enough. Adding to TSE’s problems were signs that listing and disclosure requirements were inadequate and supervision lax.
Plastic currency spreading around the world. The Economist (April 5, 1997, p. 70) reports that 1990’s experiment with currency printed on plastic film by the Reserve Bank of Australia may be catching on. The early experiments with plastic currency jammed note-counting machines and suffered from ink smudges. The latest version, however, is hard to forge and lasts about 4 times longer than paper currency. The Australian bank is now printing the currency for export to Thailand, Brunei and Western Samoa.
Bankers Trust New York, Corp. buying Alex. Brown Inc. The Wall Street Journal (April 7, 1997, pp. A1-A5) reports that the anticipated merging of commercial banks and investment bankers got a jump start with the acquisition of Alex. Brown by Bankers Trust for a stock swap valued at $1.7 billion. The announcement resulted in a short-term run up in prices of other small- and medium-sized investment banks. The deal is the largest announced since the Federal Reserve Board, regulator of bank holding companies, expanded the amount of revenue bank holding companies can derive from securities affiliates from 10% to 25%.
Bureau of Labor announces experimental new formula for consumer price index (CPI). The Wall Street Journal (April 11, 1997, p. A2) announced an experimental new formula for calculating the CPI. The new formula responds to a panel of economists convened by Congress who claim the CPI overstates the inflation rate. The Bureau of Labor’s experimental index would reduce the inflation rate by an average of .25% per year. Any decrease in the CPI would cause lower federal government expenditures on indexed programs like Social Security and raise tax revenue by reducing the increase in the federal tax-indexed standard deduction.
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