Question

Basically, "The Big Short" is a movie and a fictionalized recap of what happened in the securities market and banking sector when the subprime fiasco took place. It has been noted that when a similar kind of fraud took place with the Savings and Loan Crisis in the 1980's that a number of the bad actors were imprisoned. No one went to prison as a result of the subprime crisis - though it is estimated that hundreds of thousands of jobs were lost, thousands of homes, particularly in California, were foreclosed upon and a number of communities were decimated by what had occurred. Since that time, some financial regulation designed to head off a similar disaster has been put into place, but most experts contend that those rules still put the economy at grave risk of a similar crisis.There has been talk of reintroducing the Glass Steagall regulation that would prohibit banks to participate in sepculative investment banking activities, but it has gone nowhere and the current congress and administration are moving toward less financial regulation - not more. Given the state of the regulatory climate and the protections that are currently in place for the investor, what should you do as a personal investor, saving for retirement, as a licensed professional who audits these firms (or firms that invest with these banks), or as a licensed professional who deals with tax compliance for these firms? How do you protect yourself and your clients from in this environment? What will you do going forward knowing some of the risks of the financial industry?

Answer 1

A personal investor i.e. an individual investor is an investor that invests his/her savings/capital in the banks who further invest in securities markets or himself/herself invest in securities for the purpose of earning future return.

A personal investor can be protected in the following ways:-

1. When the personal investor invests himself/herself, he/she can protect themselves by purchasing shares of only those companies which they can understand and which remain calm through market volatility.

2.Personal Investors must invest in those companies providing returns in the form of dividends on consistent basis and have a positive chance of maintaing its rate of dividends.

3.Personal Investors must invest in those companies maintaing sustainable growth in earning their profits and also fulfilling statutory compliance requirement on regular and timely basis.

4.Personal Investors can also be protected by governmant agencies by eliminating the fraudulent activities in the market and creating a fair market environment for investment purposes.

5. Personal Investor should invest through those stock brokers who put his client interest before his interest and must fully disclose any conflicts of interest.

6. Strict penalties must be imposed by the market regulator for protecting personal investors interest.

A licensed professional who audit and deals with tax compliance of firms that invests in banks should follow the following:-

1. Investment should be made in those banks having a good credit score given by the authorised credit agency.

2. Tax has been regularly deposit by these firms on timely basis and statutory compliance related to tax deduction at source and tax collection at source have been complied with.

3. Before making any investment in the banks, these firms should check its previous year balance sheet to check its EBIDTA and distribution of its earnings as dividends.

4. Firms should check that the banks are making compliance with their investment norms and other regulations implemented on them by the central bank of the country.

Protection of Clients in the hostile environment:-

1. In case of volatile market , meeting should be conducted on regular basis with the clients for making a healthy investment strategy.

2. Risks and returns related to several good companies must be compared and then advise the clients for those companies in which an investment can be made in the volatile market.

3. Decisions related to long term investments and short term investments must be taken keeping in mind estimated tenure period of volatility in the market.

4. Buying and Selling options can be taken by keeping in mind the bullish or bearish effect on the market.

5. Several hedging strategies such as straddle,hedge ratio technique, butterfly,strip and strap can also be used to advise clients for making investments in markets.

6. Investment should be made through registered stock brokers having a good reputation in the market and which are maitaining the clients trust first in their priorities.