The CEO Game

Two more banks in the US were closed during the last weekend, increasing the number of banks that were closed since the beginning of the year to 22.

Carson River Community Bank from Nevada held 51.5 million dollars in assets and 50 million dollars in deposits, while Rainier Pacific Bank from Washington held 717.8 million dollars in assets and 446.2 million dollars in deposits. The closing of River bank will cost to the Deposit Insurance Fund 7.9 million dollar, while closing Rainier bank will cost 95.2 million dollar to the fund.

Rainier Pacific Bank.

According to estimations  by fund officials, closing bank rate is expected to overcome in the coming months. The “problematic” banks list of the insurance fund in the fourth quarter climbed to 702 from 552 in the previous quarter, although the industry recorded a small profit.

The banks earned 914 million dollars in the fourth quarter, compared to the loss of 37.8 billion dollars during the same period last year, which is considered the climax of the crisis. Still, nearly one in three banks has reported a loss last quarter.

During the year of 2009- 140 banks were closed, the highest number since 1992. These closers have cost the Deposit Insurance Fund more than 30 billion dollars. In comparison, during 2008- 25 banks were closed, while during 2007 only 3 banks were closed. The Deposit Insurance Fund estimates that the cost of closing the banks will climb to 100 billion dollars during the next four years.

Lucy.

The CEO Game.

If you’re getting confused every time you hear all the Mumbo Jumbo about why the financial crisis had occurs than I suggest you watch the following movie. This movie explains in a very simple and easy way, more or less, how the financial system worked and what led to the financial crisis. The movie also explains the roles of different organizations that had a hand in leading the U.S to one of hardest times.

Ailon.

The CEO Game.

In an interview on “Political Capital with Al Hunt” earlier this week, US Treasury Secretary Timothy Geithner criticized both the huge bank bonuses continue to be doled out, even following billion-dollar government bailouts, and dismissed the Goldman Sachs’ claim that the company would have weathered the financial crisis without government help. So continues the public and the politician’s horror at the audacity and arrogance of the banks.

"Classic Bank Run"

Many analysts agree that one component that lead to the financial crisis was the huge bonuses that were given out on Wall Street. These absurd bonuses reward the sort of risk-taking that led banks into the sub-prime mortgage fiasco. These bonuses also enrage Americans on a moral level. How could it be that those people who so recklessly led the country into recession are now the ones who are receiving huge sums of money while many Americans are, as a result of their behavior, unemployed? And furthermore, how can these companies take money from the very taxpayers who are now suffering only to use it to lavish bonuses on their execs? Something is amiss.

And Geithner agrees. “We want to see fundamental constraints on how senior executives are paid at these institutions,” he said in the interview. The question is, of course, if the banks care what he says. Research done by Johnson Associates in November found that bonuses in 2009 would be up 40% from 2008, which was the low point of the financial crisis. In 2008, almost $20 billion in cash awards and billions in stock and other perks were given to Wall Street employees. People who trade bonds, commodities, and currencies might even see their bonuses back at their pre-crisis levels.

Perhaps in an attempt to reign in this supreme arrogance shown by the banks, Geithner also criticized the golden boy of Wall Street, Goldman Sachs. Lloyd Blankfein, CEO of Goldman, claimed recently that the company would have survived the crisis even without the 10 billion dollars it took from the federal government. In the interview, Geithner said that during the crisis all banks in the US were experiencing a “classic bank run” and “none of them would have survived a situation in which we had let that fire try to burn itself out.”

Tamar.

The CEO Game.

After Barack Obama attacked the banks, now it’s Brown’s turn.

Britain’s Prime Minister, Gordon Brown has called today all members of the G20 to place taxes on bank transactions worldwide. The revenue, according to him will go to fund social and environmental causes like fighting world poverty and dealing with climate changes.

Brown: Time to Tax the Banks

Brown made this announcement at the stage of the G20 summit which was held today in Scotland, two months after the Pittsburgh Summit in September. The G20 countries represent 90% of the world’s wealth, 80% of its trade, and approximately two thirds of the world population.

Brown’s words symbolize a change in Britain’s approach, which up till now opposed putting a “Tobin Tax” on foreign currency bank deals. The tax which is named after 1981 Nobel Prize winner for Economics, Professor James Tobin of Yale University, is intended to put a penalty on short-term speculation in currencies and in the same time raise funding for meaningful social projects. Nevertheless, the opposition both in the US and in Britain at the time has caused the idea to be put in the back of one’s mind.

“I think we all share a basic interest in trying to make sure we build a system where taxpayers aren’t exposed in the future and where the financiers are bearing the consequences of their mistakes – that they are responsible for the risks they take” he said. “We proposed in the United States a way to achieve that, by making sure that if … the government is exposed to any risk of loss, that we recoup that loss by assessing a fee on the liabilities of banks” he then added. He continued to justify his plan by saying that “it’s fair to the tax payer and it doesn’t put us in the position where retail investors and pension funds are the ones bearing the burdens of that cost”.

Brown went on to tackle obstacles in the way: “I do not in any way underestimate the enormous and difficult practical and technical issues that will need to be overcome that a globally cohesive system requires and raises”. He pointed out that any tax that will be decided on (if at all), should be worldwide and related to all the financial centers of the world- US, the European Union, Asia, the Middle East and Switzerland. Some G20 officials claimed that the tax that Brown referred to could be wider than a Tobin tax, and might include all financial transactions or even banks’ profits. Yet, the tax is supposed to be on a low level of 0.005% – only a tenth of the original Tobin Tax, when the profits will help prevent future crises in the banking sector.

Gordon Brown’s suggestion is expected to fuel rage among British economists and critics. Chairman of the FSA (Fellow of the Society of Antiquaries), Adair Turner, has already suggested the idea of a Tobin Tax in August and encountered severe criticism in London. Still, British charity organization Oxfam has blessed Brown for his idea- “The tax on the banks, might be a big step in the road to destroying the banks’ greed”. “The G20 is responsible to act. The money raised can really effect the day to day course of regular people”, an Oxfam official added. Among the fans of the Tobin Tax, you can find French President, Nicolas Sarkozy and German Chancellor, Angela Merkel who already tried to promote the idea in the Pittsburgh Summit. According to them, this kind of taxing will shrink the banks’ profits and by doing so decrease the bonuses which banks can hand out to veteran bankers.

Some G20 members, had already began taxing on their own, like Brazil which putted a tax on foreign investments in stocks and debentures, keeping in mind funding their 2016 Olympic Games in Rio. Experts proclaim a Tobin tax in the rate of 0.05% (the original Tobin Tax), can yield up to 700 billion dollars yearly almost equal to the entire financial bailout package introduced by Obama’s administration. In conclusion I must say, that it’s only a shame that Tobin who passed out in 2002, missed out on all the action and the publicity.

Omer Shachnai

The CEO Game.

Barak Obama attacks US banks: When you needed, you were helped; now it’s your turn to give back.

The President of the US addressed all the banks that were helped during the ongoing financial crisis and requested them to return a favor. In his words, now it’s the time for the banks to do their part and chip in to help the financial recovery and give more credit to little businesses. He is practically saying, hey the US tax payer helped you bail out; now the time has come for you to give something back to the public.

Time For A Change?

Obama made this statement at his “weekly address” which is broadcasted live via the radio and the internet. In his speech, he commented that many business owners in America are having a hard time to get credit from the banks, even though the government had done a lot to improve the financial situation of the banks after the economic collapse in September 2008, which afterwards the banks stopped handing out loans for small and medium businesses.
“These are the very taxpayers who stood by America’s banks in a crisis, and now it’s time for our banks to stand by credit worthy small businesses and make the loans they need to open their doors, grow their operations and create new jobs” Obama said. He pointed out the White House is willing to take the steps needed to encourage the banks to give credit, but he didn’t mention what steps will be taken if at all. “It’s time for those banks to fulfill their responsibility to help ensure a wider recovery, a more secure system and more broadly shared prosperity” he added.

Earlier last week, Barak Obama criticized the American banks and financial institutes and claimed that they were working through Congress to try and sabotage his idea of a federal agency the “Consumer Financial Protection Agency”. Obama blamed them for “using every bit of influence they have to maintain the status quo” that has helped them get richer “at the expense of American consumers”. That is in spite of the fact that recently those same consumers helped them bail out as a consequence of their wrong decisions.

According to estimations, the financial bailout package cost taxpayers around 700 billion dollars. In his address last Saturday, Obama also said that small businesses have created two thirds of US new jobs over the last 15 years, thus making them a crucial part of the economy, that we must help to sustain- “they must be at the forefront of our recovery”, he said. In addition, last week, he asked Congress to increase the size of SBA loans (small business administration) and announced his rewarding plan: to give low interest loans to banks, who do help and agree to lend more money to small businesses.

When playing business simulation games, you can learn from these past mistakes and learn how to foresee the consequences of your actions. During the development of The CEO Game, we have kept in mind the financial crisis and have taken a great deal of effort in creating and simulating a vast real-life like economic system which generates and is influenced all the time by unplanned events and misfortunes, that every CEO has to cope with in order to succeed.

Omer Shachnai

The CEO Game.

Interest rate – What does that means? Well, interest rate is the extrapayment a borrower needs to pay the lender in addition to the loan, at the end of the loan period. In other words, it is the price paid for borrowed money.

Reacting To The Rates

How do the lender and the borrower decide what interest rate fits the?

First of all there is a benchmark for the interest rate; this benchmark is the central bank’s interest rate. The central bank in each country determines its interest rate in order to manage macro parameters such as: investment rates, unemployment, and inflation. Why is the central bank’s interest rate a benchmark? Because the main bank can always print more money and so there is no way that the central bank won’t return its debt and therefore this interest is considered to be free of risk or “safe”. This is not entirely true, however; if inflation increases the lender have less purchasing power in the end of the loan process.

But the central bank only gives loans to other banks, and then those banks give the public loans at a higher interest rate. How do those banks decide what interest rate to offer to which client? The commercial bank uses data it gathers on us as individual and estimates what the risk is that we won’t be able to repay the loan. The interest rate the bank offers us is based on a statistical model that most accurately predicts this chance.

How does the central bank control the investment in the country? Well, it’s easy to guess … The main bank uses the interest rate to control how much money will circulate the market and how much individual will desire to invest money. If the central bank’s interest rate is high, most people will prefer to save the money in the commercial banks and profit from the high interest rate. The high rate will cause much money to sit in the bank, and if the money just sits in the bank you can’t use it to open new businesses and promote new initiatives. On the other hand, a low rate of interest may cause many people to use their money to open new businesses and create more workplaces. For example, if you can open a business that promises a return of 7.5% of the money you invested each year, and the interest rate is 10%, you would just put your money in the bank and get 2.5% more on your investment. But if the interest rate is 2.5%, then you can open your business and earn 7.5%, 5% more than the interest rate that you will get form the commercial bank.

So, what does this have to do with the CEO Game? Well, the CEO Game is unique among business simulations for the degree of realism involved in game play — that is why it is a serious game, and not just a game. Interest rates will change as you play the CEO Game, reflecting changes in the real world. In order to be a successful business tycoon, you will have to understand how the changing interest rate changes your interests — and make changes accordingly.

Omri.

The CEO Game.