Foreign Exchange (Forex) Market

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Foreign Exchange (Forex) Market 
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Presently, there are various kinds of financial market, it is divided into: Stock market, interest market (including bond, commercial bill and so on), gold market (including gold, platinum, silver), futures market (including grain, cotton and kapok, oil and so on), option market and foreign exchange market or forex market and so on.

The foreign exchange market is a place to trade foreign exchange currency, or it is also a place for the transaction of all foreign currency. The foreign exchange market therefore is existence, because of:
Trade and investment
Import and export business, people pays one kind of currency when doing business, but when earns another kind of currency when receive the commodity. This means that, when settling account, business people will pay and receive different currencies. Therefore, they must convert the currencies that they received into the currencies that they could buy commodities. With this similar, when buying a foreign property a company must use the concerned country's currency to make payment, therefore, it needs to convert the domestic currency is concerned country's currency.
Speculation
Currencies exchange rates could fluctuate according to the demand and supply between two currencies. A Forex trader buys up one kind of currency in an exchange rate, but up casts this currency in another more advantageous exchange rate, he may gain. Speculation has occupied most of the Forex market.
Hedging
Due to the fluctuation between two currencies, those companies who owns foreign asset (for example factory), when these companies convert these properties into cost country currencies, there consist of certain risks. When the value of a foreign asset which is estimated based on foreign currencies remained unchanged, if the exchange rate changes, when converting this property value according to the domestic currency, there could be profit and loss. The company may eliminate such hidden risk through hedging. This carries out a foreign currency trading, its transaction result just counterbalances the foreign currency property profit and loss which produces by the exchange rate change.
Forex Market Development
The history of the Forex market as an international capital speculation market is much shorter compared the stock, the gold, the stock, the interest market, but it is developing in an astonishing speed. Today, the foreign exchange market daily trading volume has amounted to 150 billion US dollars, it’s scale has gone far beyond the stock, the stock and other finance commodity markets, it has became the world's most biggest sole finance market and the also the speculation market. Since the birth of the foreign exchange market, the fluctuation of the exchange rate of the Forex market is becoming bigger. In September 1985, 1 US dollar exchanged 220 Japanese Yen, but in May 1986, 1 US dollar only could exchange 160 Japanese Yen, in 8 months, the Japanese Yen has revalued 27%. In recent years, the foreign exchange market wave amplitude has been bigger, on September 8, 1992, 1 pound exchanged 2.0100 US dollars, on November 10, 1 pound exchanged 1.5080 US dollars, in the short two months, the pound exchanged US dollar exchange rate to fall more than 5,000, depreciated 25%. Not only that, presently, everyday the fluctuation of the exchange rate of the Forex market enlarges unceasingly, within a day the rise and drop 2% to 3% is commonly seen. On September 16, 1992, the pound exchanged US dollar from 1.8755 to fall to 1.7850, the pound on first lowers 5%.
Due to the large fluctuation of the Forex market, it has created more opportunities for the investor, attracted more and more investors to join this ranks.

Foreign Margin Markets

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Foreign Margin Markets 

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Comparing to other investment, the Foreign Exchange margin trading is one of the fairest and the most attractive investment method.
The Foreign Exchange margin trading meaning the traders borrow loan from bank, finance organization or broker house to carry on the foreign currency trading. Generally, the financing proportion is above 20 times, which means the Forex traders’ fund may enlarge to 20 times to carry on the trading. The bigger the financing proportion, means the Forex traders just need to pay very less fund, for example, the financing proportion provided by the financial organization is 400 times, namely the lowest margin request is 0.25%, the traders just need to pay 25 US dollars, then he or she could trade as high as 10,000 US dollars, fully using the contra method to make big profit by only paying a very less price.
Besides the fund enlargement, another attraction of the Forex margin trading method is that it can be traded in both ways, you can make profit by buying the currency when the currency rise (makes many), or to sell a currency when the currency is dropping to make profit (short-selling), thus does not need to be restricted by the restriction so-called bear market is unable to make money.
 
Making Profit in the Foreign Exchange Market
The currency fluctuate continuously due to reasons such as political, economical reasons, sometimes the changes could be extremely great, therefore, the Forex traders also can have the opportunity in among which makes a profit. For example, the Japanese Yen daily fluctuation is probably between 0.7% to 1.5%, Forex traders may make profit through buying and selling. All trading could be completed in a short time, the trading strategy could be carry up according to the market conditions, it is extremely flexible, even if the direction looks wrong, the lost could be stop immediately, the lost could reduce but profit potential is still great. Therefore, the Foreign Exchange margin trading is the most flexible and the most reliable investment method.
Foreign Exchange Margin Trading elementary knowledge
   
Currency name Commonly used currency code
Singapore dollar
Thai Bath
Swedish krona
Danish Krone
Norwegian krone
Spanish peseta
German Mark
US dollar
Euro
Japanese Yen
Pound
Swiss franc
Australian dollar
New Zealand Yuan
Canadian dollar
Hong Kong dollar
French franc
Italian lira
Belgian franc
SGD
THB
SEK
DKK
NOK
ESP
DEM
USD
EUR
JPY
GBP
CHF
AUD
NZD
CAD
HKD
FRF
ITL
BEF

Weighs Down on Euro Price

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IRISH DEBT CONCERNS WEIGHS DOWN ON EURO PRICE MOVEMENT

Reaching highs of $1.428 versus the USD after last Wednesday’s announcement from the Fed that it was extending its quantitative easing activities, the euro has moved broadly lower as the week kicks off, with concerns about the public finances in some peripheral eurozone countries finally impacting on the currency. Speculators trimmed positions as the focus switched to uncertainties that could be caused by tough budgetary talks and local elections in Ireland and Greece, with the USD/EUR rate falling back below the $1.40 level. The dollarhttp://www.topnews.in/files/Crude-oil_10.jpg is also finding some support in Friday’s release of a better than expected US non-farm payrolls report for October. The data showed that 151,000 jobs were added over last month, well ahead of expectations of a 60,000 gain. The number marked the fastest pace of hiring since last April, with previous months data also revised higher. The unemployment rate, however, remained unchanged at 9.6%.
The Fed statement this week made the US dollar data dependent by explicitly making their quant easing (QE) program dependent on the labour market conditions. The introduction of QE told investors that when the economy drowns and equities drop the Fed will speed up the printing press. By this then limits the safe haven appeal of the US dollar, which used to get stronger when equities fell. On Thursday the ECB made clear that it will not participate in a tit for tat game and weaken the euro in response to US QE. Japan, as we learned on the same day, has a stronger bias to do this. The labour market report, the final highlight of the week, challenged the Fed’s QE with quite a strong reading. However, a series of improvements are needed, before the Fed can change its mind. We therefore expect the EURUSD exchange rate to remain close to 1.40 for the remaining two months of the year.
In a rare reference to the dollar last week, Bernanke said that “we’re certainly aware that the dollar does play a special role in the global economy”, and that “the best fundamentals for the dollar” will occur when the US economy is growing strongly. Treasury Secretary Geithner reaffirmed that a strong dollar is in the interests of the US, and that the US will never use its currency to gain competitive advantage. He said the flow of capital into emerging markets is fundamentally positive as it shows confidence in their growth prospects.
The sterling/euro rate, meanwhile has started the week trading around Stg0.865, with sterling holding on to some of its gains seen versus the USD last week despite the fact that dollar sentiment has improved somewhat. Sterling may struggle to remain firmer versus the USD if Wednesday’s quarterly inflation report proves to be a dovish one. The report will contain updated growth and inflation forecasts and should shed some light on the prospects for further quantitative easing. The near term outlook for inflation is likely to be revised upwards, reflecting recent higher than anticipated CPI numbers. The longer term view, however, that inflation will move back below target should be unchanged. The euro, meanwhile, will be looking to Friday’s release of the first estimate of Q3 GDP for support. Solid growth of 0.4% is anticipated, though this is well below the previous quarter’s robust growth rate of 1.0%.

 

Dollar stronger

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Dollar stronger as speculators consider global economy

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Currency speculators are struggling to make sense of everything happening around them in the global economy. At the moment (November 10), the dollar is in a stronger position following the Central Bank sell off of some 10-year debt at a lower than expected yield.
Relatively strong earnings reports of late, a smaller trade deficit of $44 billion in September, and reduced appetite for risk are among other reasons the dollar has risen against some of its foreign counter parts.
The euro and pound have been fallen back after surging last week to medium-term highs against the dollar. Concerns about the re-emergence of debt issues in leading European economies like Portugal combined with pro-dollar sentiment mid-week have contributed.
One euro is currently worth just $1.3778 after a euro netted over $1.42 late last week. The British pound is holding up a bit better at $1.6081, but it too had climbed significantly last week to over $1.62 late in the week.
One dollar is worth 82.46 yen in early Wednesday morning New York trade. It appears that technical analysts that suggested the dollar would not fall below 80 in the short-term and seemed primed for a reversal earlier this week were accurate.
The dollar is higher against the Japanese currency even as the Chinese government works to appreciate the Yuan ahead of the G20 summit.
A leading cause of this week’s three day losing streak for the euro-dollar and a similar drop for the pound against the greenback is hesitation on the part of aggressive investors.
The European currencies have moved noticeably higher against the dollar in recent weeks as investors have shown more appetite for risk.
In the big picture, dollar firmness is likely attached to the job and housing market as indicators of US economic recovery. The Fed just purchased over $600 in Treasury bonds to spark the economy. This leads most analysts to believe an interest rate hike this year is unlikely.
However, some economists believe it is certainly possible the Fed could step in quickly in 2011 to raise rates if the economy improves and inflation becomes a concern.
Meanwhile, the European Union has expressed a commitment to tighten its monetary policy in belief that it has done what is necessary to stimulate the economies of member countries.

 

Dollar Index Climbs

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USD Graphic Rewind: Dollar Index Climbs As Rising Yields Bolster Greenback

USD_Graphic_Rewind_body_dxy11.png, USD Graphic Rewind: Dollar Index Climbs As Rising Yields Bolster Greenback

The dollar index climbed smartly on Monday as the buck continued its journey higher, touching the highest level since October 1. The dollar was boosted early in the day by stronger than expected retail sales in the US, the recent string of better-than-expected data out of the US is calling into question if QE2 is warranted and how much will really be implemented. The index continued to gain late Monday as Treasury prices deepened their decline, pushing 10-year yields towards the highest level in three months follow a report that a Moody’s analyst said extending Bush tax cuts would be bad for the US credit rating. As Treasury prices tumbled US stocks erased the bulk of their gains with the positive sentiment that prevailed after the jump in retail sales getting knocked.
The index has come under some pressure in the over-night session as US Treasury prices climbed (and yields fall) after attracting some bargain hunting interest out of Asia with market players call the massive sell-off over the last two days as over-done. Adding to the pressure are Fed Yellen’s comments in a WSJ interview defending QE2 and with a generally bearish outlook for the US economy she stays in line with her generally dovish stance.

US Dollar to Extend Gains

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FOREX: US Dollar to Extend Gains on Risk Aversion in European Trade

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  • Australian Dollar Finds No Lifeline in RBA Meeting Minutes
  • Euro, British Pound Fail to Gain Traction on Rebound Attempt
Critical Levels
CCY
SUPPORT
RESISTANCE
EURUSD
1.3495
1.3681
GBPUSD
1.5970
1.6115
The Euro and the British Pound were little changed in overnight trade. A corrective bounce took both currencies higher against the US Dollar in early Asian hours but the rally faltered toward the end of the session, yielding a nearly flat result for both sterling and the single currency. We remain short EURUSD and have now entered long USDJPY.
Asia Session Highlights
CCY
GMT
EVENT
ACT
EXP
PREV
JPY
23:50
Housing Loans (YoY) (3Q)
3.6%
-
3.6%
JPY
23:50
Tertiary Industry Index (MoM) (SEP)
-0.9%
-0.5%
0.1% (R+)
AUD
0:30
Reserve Bank of Australia Nov Meeting Minutes
-
-
-
CNY
2:00
Conference Board Leading Econ Index (MoM) (SEP)
0.6%
-
0.7%
CNY
2:00
Actual FDI (YoY) (OCT)
7.9%
10.4%
6.1%
JPY
6:00
Machine Tool Orders (YoY) (OCT F)
71.0%
-
70.9%
Minutes from November’s Reserve Bank of Australia monetary policy meeting generated little interest, with the central bank reiterating its statement at the time of the announcement to argue that “the balance of risks had shifted to the point where a modest tightening of monetary policy was prudent.” Policymakers went on to say that although this month’s rate hike was preemptive, the recent moderation in inflation was likely now “largely complete”, opening the door for a move higher after a couple of quarters at current levels.
Perhaps most significantly, the RBA reiterated that the recent appreciation of the Australian Dollar has helped contain price growth, hinting at a limited scope for continued monetary tightening in the near term. Indeed, markets are pricing in a mere 3 percent chance of another rate hike in December according to a Credit Suisse gauge of traders’ expectations. The Aussie declined against all of its major counterparts in overnight trade, down 0.2 percent on average.
Euro Session: What to Expect
CCY
GMT
EVENT
EXP
PREV
IMPACT
EUR
7:00
EU 25 New Car Registrations (OCT)
-
-9.6%
Low
EUR
7:45
French Non-Farm Payrolls (QoQ) (3Q P)
0.2%
0.2%
Low
EUR
7:45
French Wages (QoQ) (3Q P)
-
0.4%
Low
EUR
8:00
ECB's Constancio Speaks in Frankfurt
-
-
Low
EUR
9:00
Italian CPI - EU Harmonized (YoY) (OCT F)
2.0%
2.0%
Low
EUR
9:00
Italian CPI - EU Harmonized (MoM) (OCT F)
0.7%
0.7%
Low
EUR
9:00
Italian CPI (NIC incl. tobacco) (MoM) (OCT F)
0.2%
0.2%
Low
EUR
9:00
Italian CPI (NIC incl. tobacco) (YoY) (OCT F)
1.7%
1.7%
Low
GBP
9:30
DCLG UK House Prices (YoY) (SEP)
8.3%
Low
GBP
9:30
Retail Price Index Ex Mort Int.Payments (YoY) (OCT)
4.6%
4.6%
Low
GBP
9:30
Consumer Price Index (MoM) (OCT)
0.2%
0.0%
Medium
GBP
9:30
Consumer Price Index (YoY) (OCT)
3.1%
3.1%
High
GBP
9:30
Core Consumer Price Index (YoY) (OCT)
2.6%
2.7%
Medium
GBP
9:30
Retail Price Index (OCT)
226
225.3
Low
GBP
9:30
Retail Price Index (MoM) (OCT)
0.3%
0.4%
Low
GBP
9:30
Retail Price Index (YoY) (OCT)
4.6%
4.6%
Low
EUR
10:00
Euro-Zone Consumer Price Index (YoY) (OCT F)
1.9%
1.8%
Medium
EUR
10:00
Euro-Zone Consumer Price Index - Core (YoY) (OCT)
1.0%
1.0%
Medium
EUR
10:00
Euro-Zone Consumer Price Index (MoM) (OCT)
0.3%
0.2%
Medium
EUR
10:00
Euro-Zone ZEW Survey (Economic Sentiment) (NOV)
2
1.8
Medium
EUR
10:00
German ZEW Survey (Current Situation) (NOV)
75
72.6
Medium
EUR
10:00
German ZEW Survey (Economic Sentiment) (NOV)
-6.0
-7.2
Medium
UK Consumer Price Index figures are set to show the annual inflation rate held at 3.1 percent in October, printing above the upper threshold of the central bank’s target range for the seventh consecutive month. The outcome may prove supportive for the British Pound, reinforcing the unexpectedly hawkish quarterly inflation report published last week and weighing against bets the Bank of England will follow the Federal Reserve down the path of renewed quantitative easing (QE).
Germany’s ZEW Survey of investor confidence is expected to show economic sentiment narrowly improved for the first in seven months in November. Likewise, the region-wide Euro Zone ZEW gauge is set to tick slightly higher, marking the first improvement since August. While these outcomes may offer the Euro a bit of a lifeline after the single currency dropped to the lowest in seven weeks over the five days through last Friday, lingering sovereign risk concerns are likely to cap gains. Indeed, traders may prove more concerned with the outcomes of today’s Spanish and Greek bond auctions, with a disappointing uptake pointing to lingering fears of contagion and likely reviving selling pressure.
Turning to sentiment, risk aversion looks likely with stock index futures tracking the FTSE 100 and the S&P 500 deep in the red in late Asian trade, down 0.8 and 0.5 percent respectively and pointing toward gains for the safety-linked US Dollar at the expense of most of its major counterparts.

 

USAA's Battle Plan

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USAA's Battle Plan

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When Staff Sergeant Corey Mason wants to deposit a check, he doesn't use an ATM, a teller at a branch, or even a stamped envelope and deposit slip. Rather, the 37-year-old GPS systems specialist takes a picture of the check with his iPhone, uses an app to send it to his bank, and within minutes the money shows up in his account. Although he's now stationed at Fort Knox, Ky., it's the kind of service Mason knows his fellow troops in Iraq, where he served in 2004, surely appreciate. "The mail over there is extremely slow," he says. "They know what it's like."
By "they," Mason means his bank and insurance company, USAA, which counts military members and their families as the bulk of its clients. But he also means the 23% of USAA's top management and new hires that have served in the military. Says Mason: "It's not every day I get addressed 'sergeant' by a customer service agent."
In almost everything it does, the financial-services outfit puts itself in the spit-shined shoes of its often highly mobile customers, many of whom face unique financial challenges. USAA was the first bank to allow iPhone deposits, it routinely texts balances to soldiers in the field, and it heavily discounts customers' car insurance while they are deployed overseas. "They do all this really creative stuff that applies to guys and gals who are in Afghanistan," says Karen Pauli, a research director at consulting firm TowerGroup. "There is nobody on this earth who understands their customer better than USAA."
Although few large companies have such a specialized focus, managers everywhere could learn plenty from USAA about coddling customers. A private company with $68.3 billion in assets, USAA has unrivaled staying power atop Bloomberg BusinessWeek's annual Customer Service Champs ranking. Since we first produced the list in 2007 with our research partner, J.D. Power & Associates (MHP), no other company has come close to achieving USAA's feat: a No. 1 or No. 2 spot for four years running. No fewer than 87% of respondents to J.D. Power's syndicated surveys say they will definitely buy from the company again, far higher than the average, which is just 36%. Its client retention rate? A near-perfect 97.8%.
For USAA, though, maintaining that track record could become a bigger challenge. In November its insurance business scrapped some of its eligibility requirements, more than doubling its potential customer base, from 26 million to 61 million. USAA's property and casualty insurance is now open to anyone who has ever served honorably in the military; in the past, customers had to have served or signed up for USAA between certain dates. And while most of its banking and brokerage units have sold to anyone for years, it began advertising those services widely only last year.
While the company has no plans to offer insurance to the general public, expanding beyond its traditional customer could make it harder to provide the same lauded service. For one thing, a broader membership could lead to more consumers who present a greater insurance risk, which may mean service reps will need to be more skeptical about claims, says Brian Sullivan, editor of Auto Insurance Report. "If you rarely question the claim, you don't create any conflict," he says.
And while new members may be armed forces veterans and their families, their needs may be different, says Bruce Temkin, who heads up Forrester Research's (FORR) customer experience practice and has studied USAA. "The real trick for USAA will be how they continue to serve their core military customer while serving this broader set," he says. "It can get really messy if they grow too fast." A USAA spokesperson contends the insurer's pricing will correct for any greater risks that come from expansion. 

That focus goes back to its roots, when 25 Army officers got together in 1922 to insure each other's vehicles. By 1972 five out of six military officers belonged to USAA, and in 1996 the company expanded its membership to active-duty enlisted soldiers, too.
So it's little surprise that training for USAA employees is steeped in the military experience. New reps attend sessions where they dine on MREs, or "meals ready to eat," which troops consume in the field. They try on Kevlar vests and flak helmets. And each rep is handed a bona fide deployment letter—with the names changed, of course—to get them thinking about the financial decisions customers face at such an emotional time. Colleen Williams, a Phoenix-based service rep who joined the company in 2008, says the training clued her in to family issues that help her when answering calls. "I speak to women who haven't talked to their husbands in six weeks," she says. "It never really registered to me, the real disconnect" deployed soldiers have from their families.
Training isn't the only thing USAA lavishes on employees. After all, it takes satisfied workers to get satisfied customers. In 2009, even call center agents at USAA saw bonuses nearing 19% of their pay, up from 13.5% the year before. A new $5-an-hour concierge service lets employees outsource errands on the cheap during the workday. And when the company closed two call centers in 2009, it offered every employee a company-paid relocation package to jobs at other locations, even helping staffers burdened with underwater mortgages unload their homes. Of the 1,200 affected workers, 50% accepted move offers, far more than the fewer than 20% USAA expected.
Staffers get time to do their jobs, too. Employees aren't rushed through calls with customers or evaluated on how fast they handle the inquiries. "Member satisfaction trumps every single metric," says Forrester's Temkin. Other call centers "may relax things like average handle time, but they still measure it, and still you get in trouble if you're out of bounds."
Reps are also armed with software that lets them view a history of the online screens a particular customer has viewed on USAA's Web site, letting them know what policies or business lines the customer was perusing—and may be ready to buy.
The mobile lives of its core consumers—troops stationed in distant locales or military families constantly on the move—have made the company an unlikely innovator in the world of personal finance. Because USAA has just one physical bank branch, at its headquarters in San Antonio, deposit-by-iPhone is a logical step. (It also launched an app for Android users on Jan. 22.) Since August, more than $260 million in deposits have been made using the mobile service, as USAA's customers, whether in Camp Pendleton, Calif., or Iraq, send in checks. Giants like Bank of America (BAC) are just testing a similar service.
Lieutenant Randall Blakeslee, a plans and operations officer stationed at Fort Sam Houston, Tex., is on two-hour standby to depart for Haiti, where he'll stay at least 90 days to help with relief efforts. That means his mail will be forwarded to him there, and he fully expects to use the mobile deposit service to submit checks from his job at home or when family sends him money. He already used the service to deposit checks when he was based in El Salvador. USAA is "really ahead of the game when it comes to technology," says Blakeslee, 34. "If I'm on the run, I can text a command and within seconds get a message back with my balance."
Blakeslee is referring to another high-tech service USAA rolled out in 2008 that lets its far-flung customers—a sizable number of whom are young, tech-savvy, and living paycheck to paycheck—get text messages about their account balances before, say, making a big purchase. Later in 2010, USAA is planning mobile peer-to-peer payments, which let customers e-mail or text-message money to friends or family for immediate deposit, no matter where they are at the time.
USAA was among the first to let customers initiate an insurance claim using their phones from the scene of an accident. And it soon will expand that app so policyholders can attach photos to the claim and complete the entire process via phone. By 2011 customers will even be able to attach voice recordings to their file, immediately retelling exactly what happened.
Also coming this year: a mobile car-buying service that lets customers standing at a dealership snap an iPhone pic of a vehicle's VIN number and instantly get back insurance quotes, loan terms, and pre-negotiated rates at approved dealerships. "The idea is you can turn that phone around to the salesman," says Bob Otis, USAA's vice-president for auto product management, "and say 'this is the price I'm going to pay.' "
Besides helping policyholders, such technology benefits USAA. As it adds customers, both through advertising banking services for the first time and vastly expanding the pool of vets who can buy its insurance, such self-service tools could mean it won't have to increase the size of its 13,000-strong army of reps at the same rate as its membership. "If you can have the member self-serve on certain parts of the claim, or the entire claim," says Ken Rosen, senior vice-president for claims service, "clearly there's an efficiency gain."
If USAA leans too much on self-service, of course, its vaunted reputation could suffer. Widening its risk pool and taking on more customers could have the same impact. But USAA's executive vice-president for member experience, Wayne Peacock, isn't worried. He says expanding USAA's customer ranks is "gradual and purposeful." And that's something the company has done incrementally since 1996, continually racking up top service scores along the way.

Insurance Corporation

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Federal Deposit Insurance Corporation

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Created in 1933, the Federal Deposit Insurance Corporation has long had the power to take over failed banks. Now it is preparing to perform a similar role for giant, global financial institutions that are not traditional commercial banks.
Financed by banks and backed by the United States, the F.D.I.C. was created to prevent the kinds of bank runs seen during the Great Depression by insuring bank deposits. In its first decade, it was busy closing failed banks and paying off insured depositors. For years following World War II, the F.D.I.C. had a quieter role as the banking industry was considered relatively stable.
In what became known as the Savings and Loan crisis of the late 1980s, hundreds of S&L's made a torrent of bad loans, ending in a government takeover of those institutions and bailout costing more than $200 billion. By 1991, the F.D.I.C. had a negative fund balance and had to borrow from the Treasury.
As the economy recovered, from 1996 to 2006 bank failures were so rare that the F.D.I.C. waived most of the premiums it normally would have collected to insure bank deposits.
But the collapse of the housing boom in 2008 and the huge bank losses that followed have put the agency under greater strains than it has faced in years. In September 2009, it estimated that the deposit insurance fund could pay out $100 billion over the next four years, far more than the agency has in its reserve fund. Rather than tap its credit line with the Treasury, agency officials asked the banking industry to make up the difference by prepaying premiums on the insurance.
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The financial regulatory reform bill passed in July 2010 significantly expanded the agency's powers, allowing it to seize and dismantle large, failing financial institutions so that taxpayers are not on the hook, as they were in the 2008 financial crisis.
The Dodd-Frank overhaul of Wall Street regulations designates the F.D.I.C. as the agency to be appointed as a receiver to bring about the “orderly liquidation” of huge financial companies as an alternative to bankruptcy court. The new power, known as resolution authority, is intended to avoid a recurrence of an event like the September 2008 bankruptcy of Lehman Brothers, which plunged financial markets around the world into turmoil and quickly led to several government-financed bailouts.
Background
In 1983, the Federal Deposit Insurance Corporation celebrated its 50th anniversary by issuing a history that began with this passage:
" 'On March 3 banking operations in the United States ceased. To review at this time the causes of this failure of our banking system is unnecessary. Suffice it to say that the government has been compelled to step in for the protection of depositors and the business of the nation.'
"As President Franklin D. Roosevelt spoke these words to Congress on March 9, 1933, the nation's troubled banking system lay dormant. More than 9,000 banks had ceased operations between the stock market crash in October 1929 and the banking holiday in March 1933. The economy was in the midst of the worst economic depression in modern history.
"Out of the ruins, birth was given to the FDIC three months later when the President signed the Banking Act of 1933. Opposition to the measure had earlier been voiced by the President, the Chairman of the Senate Banking Committee and the American Bankers Association. They believed a system of deposit insurance would be unduly expensive and would unfairly subsidize poorly managed banks. Public opinion, however, was squarely behind a federal depositor protection plan.
"By any standard, deposit insurance was an immediate success in restoring stability to the system. The bank failure rate dropped precipitously, with only nine insured banks failing during 1934. During the 30-year period beginning with World War II,the workings of the economy and the conservative behavior of bank regulators and the banking industry created a situation that posed few risks to the financial system, and the importance of deposit insurance in maintaining stability declined. Indeed, Wright Patman, the then-Chairman of the House banking committee, argued in a speech in 1963 that there were too few bank failures - that we had moved too far in the direction of bank safety. ''
Savings and Loan Crisis
In the late 1980s, hundreds of Savings and Loan Associations made bad loans, ending in a government takeover and bailout that ultimately cost taxpayers over $120 billion. The savings and loan crisis led to a reshaping of the F.D.I.C. and new attention on the importance of tight regulation of banks holding federally insured deposits.
Changes in the marketplace and in the legal landscape kept banking in turmoil, but few banks were failing. The collapse of the housing market and the credit crunch that followed in 2007 raised new worries, however, and by the spring of 2008 the F.D.I.C. was warning that the banking sector was facing alarming new strains.
Global Credit Crisis
In July 2008 Indymac, a California-based bank, was seized by the agency as its mortgage-related losses mounted. A rash of bank failures followed, causing the F.D.I.C.'s deposit fund to drop to its lowest point in years.
Federal regulators said on Sept. 29, 2009, that they expect bank failures to cost the deposit insurance fund about $100 billion in the next four years, much higher than the earlier estimate.
They also announced that the fund, which had more than $50 billion before the crisis began, had been so battered by bank collapses that it would fall into deficit by the first week of October.
After slipping into the red, the F.D.I.C. moved swiftly to refill its coffers. The agency imposed a special assessment on banks that gave it an immediate $5.6 billion cash infusion. That assessment was in addition to the ordinary payments that banks make to the F.D.I.C. fund.
The F.D.I.C. also ordered banks to prepay quarterly assessments that would have otherwise been due through 2012. That provided an additional $46 billion to restore the fund to normal.
In the spring of 2010, with some troubled banks being taken over by private investors, rather than closed by the government, the pressure on the F.D.I.C. was beginning to ease.
The news was not all good, though. Seventy-two banks had already collapsed in 2010, and banking analysts worried that more failures will follow, particularly among small and midsize lenders exposed to troubled commercial real estate.

 

Orderly Resolutions’

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Bailouts, Reframed as ‘Orderly Resolutions’

DISTASTEFUL as it may seem, we need to prepare for the next financial crisis, which, of course, will arrive eventually. Right now, though, people are so angry about the recent bailouts of Wall Street that the government may not be able to use the same playbook again.
David G. Klein

The criticism has emphasized the trillions of taxpayer dollars that the bailouts put at risk. But, in fact, the realized losses were minuscule when compared with the widespread suffering they averted. The net losses of the $700 billion Troubled Asset Relief Program, for example, which ran from October 2008 to October 2010, amounted to only $30 billion by the latest estimate. Yet TARP may have prevented many trillions of dollars of losses in gross domestic product. 
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Our principal hope for dealing with the next big crisis is the Dodd-Frank Act, signed by President Obama in July. It calls for bailouts of a sort, but has reframed them so they may look better to taxpayers. Now they will be called “orderly resolutions.”
Psychologists tell us that subtle changes in framing — in the names we call things, the context in which we observe them, and their superficial appearances — can bring major changes in perception. Title II of the Dodd-Frank Act, “Orderly Liquidation Authority,” stipulates that the next time a Bear Stearns or a Lehman Brothers heads toward crisis, the Federal Deposit Insurance Corporation can act swiftly to create a “bridge financial company” that can keep doing much of the company’s business — thereby bailing out many people who count on it, excluding its stockholders, to prevent a house-of-cards collapse of the financial system.
“Bridge financial company” is a new term, but there is a precedent, called a “bridge bank,” that the F.D.I.C. has used for many years. In essence, Dodd-Frank is asking the F.D.I.C. to do much the same thing for a wide spectrum of financial companies as it has done with traditional banks.
On a Friday in July 2008, for example, the F.D.I.C. kept IndyMac Bank alive when its survival was in doubt. The agency moved in swiftly to transform IndyMac into a bridge bank, called the IndyMac Federal Bank, and the changeover went so smoothly that many depositors might not have even noticed. The cash machines remained in operation over the weekend, and, on Monday, customers saw what seemed to be the same bank.
Later, OneWest Bank took over IndyMac accounts and mortgages — but only after the F.D.I.C. promised to share the losses on the bad mortgages being acquired, according to a complicated agreement.
When life is smooth, people tend to remain complacent, reflecting confidence in the economy. In times of crisis, such confidence is also vital, even if government can’t absolutely guarantee that it’s justified. In the future, extending such bridge operations to the likes of a Bear Stearns or a Lehman would hold risks as well as benefits for taxpayer money. That’s where the reframing comes in.
The Dodd-Frank Act acknowledges that when the F.D.I.C. moves into deals like this with financial companies, it may need some assistance. So the law creates an Orderly Liquidation Fund at the Treasury, which can issue debt for it as needed. Of course, that could be interpreted as a bailout that uses taxpayers’ money, since the debt has to be repaid somehow.
But here’s the reframing: The Dodd-Frank Act specifies that the F.D.I.C. will be paid back through “assessments” on financial companies. These assessments won’t be paid immediately — because such burdens on weakened financial institutions during a financial crisis would put the whole economy at risk. The Treasury can intervene first and be repaid later.
This is a classic and potentially effective reframing. Why? The payments are called “assessments,” not taxes. And the context has changed, with the burden appearing to fall squarely on Wall Street, and not on taxpayers.
Of course, reframing won’t convince everyone that the government’s interventions are benign. In fact, an assessment is much the same thing as a tax — but placed on businesses rather than on individuals. Ultimately, however, this tax is really paid by the public, because those financial companies are owned by thousands upon thousands of individuals, even though many may not know it. Many people of middle income hold their shares in pension plans or mutual fund accounts, or in the endowments of the churches or colleges to which they contribute.
The government has been carefully framing its actions for years. The corporate profits tax, for example, is framed as a tax on “them” rather than “us,” but, in fact, the public owns corporations. And a good part of that tax is passed on to consumers in the form of higher prices. (The same, of course, would happen with the Dodd-Frank assessments.)
In another example, Keynesian economic stimulus through government deficit spending might be ineffective if it were subjected to rational analysis by consumers, as Robert Barro of Harvard has eloquently argued. People might hesitate to spend their tax rebates today, for instance, if it were clear that future tax increases would be needed to offset the resulting national debt.
The general taxpaying public may never figure out the true effect of the corporate profits tax, or the present value of tax bills far in the future. But many people have acquired a sense of suspicion that anything that looks remotely like government largess will show up in higher taxes someday. That is part of the reason for the rise of the Tea Party movement, and was a factor in the recent midterm elections.
STILL, well-thought-out framing packages can work. They can help sell crucial intervention packages to people who don’t fully understand the financial system’s complexities or how government interventions prevent disasters.
Unemployment is near 10 percent, though it certainly would be much higher had the government not embarked on bailouts. We have to hope that the Dodd-Frank reframing succeeds — and that taxpayer anger doesn’t scare the government away from following the law’s intent aggressively. Such timidity could allow more Lehman-type failures.
The framing of the Orderly Liquidation Authority might be regarded as a form of diplomacy, needed to avoid unwanted anxieties that could prevent the Treasury and the F.D.I.C. from taking strong action to support our financial system.
This is vitally important. We avoided a depression in 2008 and 2009, and we need to do so again when the next crisis arrives.

 

Work for Freer Trade

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Asia Leaders to Work for Freer Trade

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YOKOHAMA (AP) — Asia-Pacific leaders endorsed a blueprint for future growth Sunday that calls for pushing ahead with free trade agreements and rolling back protectionist measures put in place during the financial crisis.
Wrapping up the annual Asia-Pacific Economic Cooperation, the leaders of 21 economies put aside differences over currency policies to voice a strong commitment to increasing the trade and investment crucial to the region's growth and resilience.
Leaders representing the U.S., China, Japan, Russia and other regional economies also agreed on the need to reduce trade imbalances and government debt and avoid sharp, potentially disruptive fluctuations in exchange rates.
While many participants remained at odds over currency policies and other issues, they appeared to agree on the vital role freer trade can play in sparking growth.
"We reaffirm our unwavering commitment to achieving free and open trade and investment in the region," the leaders said in a declaration released after the talks ended Sunday.
The leaders also agreed to take "concrete steps toward realizing a Free Trade Area of the Asia-Pacific," but set no timetable. The declaration said this goal should build on regional groupings such as the Trans-Pacific Partnership, a U.S.-backed free trade agreement that nine APEC members are negotiating.
At APEC, where congeniality usually trumps conflict, leaders of the world's three largest economies pledged Saturday not to backslide into retaliatory trade tactics, after discord over such issues marred the meeting of the Group of 20 major economies in Seoul, South Korea, late last week.
The 21 APEC members, whose economies account for more than half of all world commerce, have agreed to refrain from imposing any fresh barriers to trade and investment, or measures to stimulate exports, until the end of 2013.
"We commit to take steps to roll back trade distorting measures introduced during the crisis," said the declaration titled "Yokohama Vision" after the Japanese port city where the summit was held. The statement acknowledged that some economies may have resorted to emergency tactics to blunt the impact of the global slowdown. 
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Asia's robust and resilient growth has hinged on trade, and APEC, founded in 1989, has made knitting the region closer together its main objective.
The document also notes a need to reduce trade imbalances and government debt to help ensure stable and sustainable economic growth. In a rare reference to contentious currency issues, it includes a pledge to move toward more "market-determined exchange rate systems."
Washington contends that China's currency, the yuan, is significantly undervalued, giving Chinese exporters an artificial advantage in overseas markets and contributing to the huge U.S. trade deficit. China and some other countries have slammed the U.S. for printing money to help spend itself out of recession, a policy they say is driving the value of their own currencies higher, flooding their markets with excess cash and fueling inflation.
But APEC's focus is mainly on long-term goals, such as working toward a vast region-wide free trade zone that would encompass all its member economies, from giants China and the U.S. to tiny Brunei and Hong Kong.
Forging such a free trade area, an idea first floated by the U.S. in 2006, would happen outside the confines of APEC, which is not a negotiating body. One possibility would be to build on the Trans-Pacific Partnership, which currently includes only four small economies — Brunei, Chile, New Zealand and Singapore. The U.S., Australia, Malaysia, Vietnam and Peru are in talks to join them.
Other countries such as Japan are exploring the possibility of joining these trade talks — although Japanese farmers are vehemently opposed because they worry an influx of cheaper agricultural goods would ruin them.
For the first time, the leaders also approved a growth strategy calling for balanced, sustainable and innovative growth both in the region and within their own borders. Countries should provide better access to credit and social services for women, the poor and other vulnerable groups, it said. They also intend to improve energy security and reduce carbon emissions that contribute to global warming.
Although APEC's focus is mainly economic, it noted the need to combat terrorism and other threats to security and stable growth, such as corruption, food shortages, disease and natural disasters.
APEC also said that 13 of its member economies had made "significant progress" toward a goal set out in 1994, in Bogor, Indonesia, to achieve free and open trade and investment by 2010 for industrialized economies, while conceding more work was needed.
Developing economies in the region were given until 2020 to reach these so-called "Bogor goals." However, eight such members volunteered to be evaluated along with five industrialized ones, the U.S., Canada, Japan, Australia and New Zealand.

 

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