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October 2013

Volume-1 Issue-1

Finance Club, Management Association, BITS Pilani

Email: finomanic@gmail.com Blog: finomaniac.blogspot.com FB page: finomaniac@facebook.com

Contents

Cover Story : USDebt Ceiling

CompanyWatch : Wells

Fargo

Finance Corner: Financial

Inclusion and

Marginal

Standing

Facility

Market ThisMonth

Cover Story

U.S. Debt Ceiling

-Sirisha Marrapu & Ravali Bhogaraju

MBA, BITS Pilani

Since October the social media slots has been filled up with news saying that thegigantic U.S. Federal government had shut down its operations for 16 days.

Its horrible to imagine its impact on economy. We should be very thankful for thelow response of Stock market, but the luck didnt favor everywhere; Hundreds ofthousands of federal workers remain furloughed without pay, while federal employeeswho provide essential functions, such as air traffic controllers, border patrol agents

and federal prison staff, had to work unpaid until the end of the shutdown.

In addition to the furlough of federal workers, states had been forced to make furloughs

of their own as a result of spending cuts stemming from the federal shutdown.

Washington state, for instance, had furloughed significant sections of its Employment

Security Department, which runs the states unemployment insurance program, as

federal funds for administering unemployment insurance had been cut.

Small businesses reeled from frozen government contracts and stalled business loans.

Tourism was badly hit by the shutdown of national parks, zoos, museums. M ilitary

families saw childcare and other services shuttered. This shut down had happened 18

times in past 30 years before in U.S.

Standard & Poor's says the shutdown has cost the US economy $24bn (15bn),

shaving 0.6% off of economic growth this quarter.

All this happened due to disagreements between the two houses over federal

government spending by borrowing, which has a limit called debt ceiling, the USCongress failed to pass a budget before the fiscal year ended on 30 September.

What is debt ceiling?

It is the maximum amount of money US Federal government could borrow to perform

its tasks and commitments. This limit is defined by the Congress. They get the money

by issuing bonds and they pay interests for the bonds issued until they repay the

borrowed amount.

What if it is not raised?

If the debt ceiling is not raised, the debt doesnt decrease, it just stops being financed.Currently, the debt limit is$16.394 trillion.The government has already spent all themoney, so it should now finance all its financial commitments and pay its billsdepending all alone on revenues, which is anyways not sufficient; which means that if

http://money.cnn.com/2013/10/14/smallbusiness/shutdown-impact/index.html?iid=ELhttp://money.cnn.com/2013/10/03/news/economy/military-families-shutdown/index.html?iid=ELhttp://money.cnn.com/2013/10/03/news/economy/military-families-shutdown/index.html?iid=ELhttp://crfb.org/blogs/debt-ceiling-watch-2013http://crfb.org/blogs/debt-ceiling-watch-2013http://money.cnn.com/2013/10/03/news/economy/military-families-shutdown/index.html?iid=ELhttp://money.cnn.com/2013/10/03/news/economy/military-families-shutdown/index.html?iid=ELhttp://money.cnn.com/2013/10/14/smallbusiness/shutdown-impact/index.html?iid=EL

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HIGHLIGHTS

Arundhati Bhattacharya,

took over as the new

chairperson of the State

Bank of India (SBI).

The powerful US Federal

Reserve will soon be

headed by a woman.

Janet Yellen will replace

the outgoing Ben

Bernanke.

Eugene F. Fama, Robert

J. Shiller and Lars Peter

Hansen shared the 2013

Nobel Prize in Economic

Sciences for at times

conflicting research on

how financial markets

work and assets such as

stocks are priced.

the debt limit isn't raised, we need to immediately cut spending by $560 billion, or $46billion per month which would be roughly the equivalent of wiping out the entireDefence Department; or wiping out two-thirds of Social Security; or wiping out all ofMedicaid + all unemployment insurance + all food assistance + all veterans' benefits.

Or the failure to raise the debt limit would cause the U.S. todefault on the debt they

currently have. Since deficit spending is funded by the sale of Treasury Bonds, the

government needs to make regular payments to its bondholders. If those payments are

not made, interest rates rapidly increase. Since bond markets rely on government ratesas a price indicator, everybody who wanted to borrow money would have to pay more

interest, whether it was a car loan, mortgage, or something else. This would then

inflate the prices of goods which would eventually leads to decrease in the money

value, since all this things has mutual effect on each other, the condition worsens day

by day.

Whenever U.S. sneezes the world catches cold

For any developed market and particularly for the United States which has seen as

having the safest bond market of any country in the world a default is almost

unthinkable. The result of this scenario, which has a very low probability of ever

occurring, would be a large hit to economic growth and a substantial downturn across

the global financial markets.

Economists fear that as interest rates are skyrocketing and debt holders are unloading

their bonds, it could create a market panic similar to the stock market crash of 2008,

but possibly worse. No one knows for sure what would happen; the U.S. government

has never gone into default, and the unpredictability would fuel the market unrest.

What if debt ceiling is raised?

Since the government relies heavily on borrowing to make payments on existing debts,

raising the debt ceiling would prevent default on those payments. Not raising the

ceiling would result in America's firstdefault ever, and some leaders of the financial

community believe that would be disastrous. A higher ceiling only compounds a debt

burden that's already unsustainable. If borrowing and spending are left unchecked, the

government could owe $20 trillion, maybe more, by 2020. By then, interest payments

alone could reach $800 billion a year.

http://topics.bloomberg.com/nobel-prize/http://www.whitehouse.gov/omb/budget/historicalshttp://www.businessinsider.com/goldman-sachs-explains-what-default-actually-means-2013-10http://bonds.about.com/od/bondinvestingstrategies/a/Lowest-Risk-Bonds-What-Types-Of-Bonds-Have-The-Lowest-Risk.htmhttp://www.investopedia.com/terms/d/default2.asphttp://www.investopedia.com/terms/d/default2.asphttp://bonds.about.com/od/bondinvestingstrategies/a/Lowest-Risk-Bonds-What-Types-Of-Bonds-Have-The-Lowest-Risk.htmhttp://www.businessinsider.com/goldman-sachs-explains-what-default-actually-means-2013-10http://www.whitehouse.gov/omb/budget/historicalshttp://topics.bloomberg.com/nobel-prize/

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Company Watch

Wells Fargo

Wells Fargo & Company, January 24, 1929, is a bank holding company. The Companyis a diversified financial services company. It is thefourth largest bank in the U.S.byassets and the largest bank bymarket capitalization.In 2007 it was the only bank in theUnited States to be rated AAA byS&P.Its headquarter is situated inSan Francisco,California,United States.It has three operating segments: Community Banking,Wholesale Banking and Wealth, Brokerage and Retirement.

Community Banking

Community Banking offers a line of diversified financial products and services toconsumers and small businesses. Banking also offers investment management andother services to retail customers and securities brokerage through affiliates. Theseproducts and services include the Wells Fargo Advantage Funds, a family of mutualfunds. Loan products include lines of credit, auto floor plan lines, equity lines andloans, equipment and transportation loans, education loans, origination and purchase ofresidential mortgage loans and servicing of mortgage loans and credit cards.Community Banking also purchases sales finance contracts from retail merchantsthroughout the United States and retail installment contracts from auto dealers in theUnited States and Puerto Rico.

Wholesale Banking

Wholesale Banking provides financial solutions to businesses across the United Statesand to financial institutions globally. Wholesale Banking provides a line ofcommercial, corporate, capital markets, cash management and real estate bankingproducts and services. Wholesale Banking manages customer investments throughinstitutional separate accounts and mutual funds, including the Wells Fargo Advantage

Funds and Wells Capital Management.

Wealth, Brokerage and Retirement

Wealth, Brokerage and Retirement provides a range of financial advisory services toclients using a planning approach to meet each clients needs. Wealth Management

provides affluent and high-net-worth clients with a range of wealth managementsolutions, including financial planning, private banking, credit, investmentmanagement and trust. Family Wealth meets the needs of ultra high-net-worthcustomers. Brokerage serves customers advisory, brokerage and financial needs as

part of full-service brokerage firms in the United States. Retirement is providing

institutional retirement and trust services (including 401(k) and pension plan recordkeeping) for businesses, retail retirement solutions for individuals, and reinsuranceservices for the life insurance industry.

HIGHLIGHTS

Highlight 1 Highlight 2 Highlight 3 Highlight 4 Highlight 5 Highlight 1 Highlight2 Highlight 3 Highlight4 Highlight 5 Highlight 1 Highlight 2 Highlight 3 Highlight 4 Highlight 5 Highlight 1 Highlight 2 Highlight 3 Highlight 4 Highlight 5 Highlight 1 Highlight 2 Highlight 3 Highlight 4 Highlight 5 Highlight 1 Highlight 2 Highlight 3 Highlight 4 Highlight 5 Highlight 1 Highlight 2 Highlight 3 Highlight 4 Highlight 5 Highlight 1 Highlight 2 Highlight 3 Highlight 4 Highlight 5

HIGHLIGHTS

Integratedfinancial

services firmICICI

Securities Ltd today

entered into a

strategic alliance

withGCA Savvian

Corporation, a

leading Japanese

independentinvestment bank, to

jointly pursue

mergers and

acquisitions

opportunities in

India and Japan.

Government gave

green signal to

Singapore Airlines'

proposal to start an

aviation venture

with Tata Sons

entailing an initial

foreign investment

of $ 49 million.

http://en.wikipedia.org/wiki/Big_Four_%28banking%29#USAhttp://en.wikipedia.org/wiki/Market_capitalizationhttp://en.wikipedia.org/wiki/Standard_%26_Poor%27shttp://en.wikipedia.org/wiki/San_Francisco,_Californiahttp://en.wikipedia.org/wiki/San_Francisco,_Californiahttp://en.wikipedia.org/wiki/United_Stateshttp://economictimes.indiatimes.com/topic/financial-serviceshttp://economictimes.indiatimes.com/topic/financial-serviceshttp://economictimes.indiatimes.com/topic/financial-serviceshttp://economictimes.indiatimes.com/topic/financial-serviceshttp://economictimes.indiatimes.com/topic/ICICI-Securitieshttp://economictimes.indiatimes.com/topic/ICICI-Securitieshttp://economictimes.indiatimes.com/topic/ICICI-Securitieshttp://economictimes.indiatimes.com/topic/GCA-Savvianhttp://economictimes.indiatimes.com/topic/GCA-Savvianhttp://economictimes.indiatimes.com/topic/mergers-and-acquisitionshttp://economictimes.indiatimes.com/topic/mergers-and-acquisitionshttp://economictimes.indiatimes.com/topic/mergers-and-acquisitionshttp://economictimes.indiatimes.com/topic/mergers-and-acquisitionshttp://economictimes.indiatimes.com/topic/mergers-and-acquisitionshttp://economictimes.indiatimes.com/topic/financial-serviceshttp://economictimes.indiatimes.com/topic/financial-serviceshttp://economictimes.indiatimes.com/topic/ICICI-Securitieshttp://economictimes.indiatimes.com/topic/ICICI-Securitieshttp://economictimes.indiatimes.com/topic/GCA-Savvianhttp://economictimes.indiatimes.com/topic/mergers-and-acquisitionshttp://economictimes.indiatimes.com/topic/mergers-and-acquisitionshttp://economictimes.indiatimes.com/topic/mergers-and-acquisitionshttp://economictimes.indiatimes.com/topic/mergers-and-acquisitionshttp://economictimes.indiatimes.com/topic/GCA-Savvianhttp://economictimes.indiatimes.com/topic/ICICI-Securitieshttp://economictimes.indiatimes.com/topic/ICICI-Securitieshttp://economictimes.indiatimes.com/topic/financial-serviceshttp://economictimes.indiatimes.com/topic/financial-serviceshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/San_Francisco,_Californiahttp://en.wikipedia.org/wiki/San_Francisco,_Californiahttp://en.wikipedia.org/wiki/Standard_%26_Poor%27shttp://en.wikipedia.org/wiki/Market_capitalizationhttp://en.wikipedia.org/wiki/Big_Four_%28banking%29#USA

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Finance Corner

Financial InclusionFinancial inclusion is delivery of banking services at an affordable cost to the vast

sections of disadvantaged and low income group. As financial services are in the

nature of public good, it is essential that availability of banking and payment services

to the entire population without discrimination is the prime objective of the public

policy.

With a view to enhance the financial inclusion, as a proactive measure, the RBI in its

Annual Policy Statement every year recognizes the concerns in regard to the banking

practices that tend to exclude rather than attract vast sections of population, and urge

banks to review their existing practices to align them with the objective of financial

nclusion.

No-Frills' Account - Zero or Nil balance account openings facility is one such

measure adopted by banks to attract weaker sections of society as per RBI guidelines.

Marginal Standing FacilityMSF rate is the rate at which banks borrow funds overnight from the Reserve Bank ofIndia (RBI)against approved government securities. This came into effect in May

2011. The scheme has been introduced by RBI with the main aim of reducing volatility

n the overnight lending rates in the inter-bank market and to enable smooth monetary

transmission in the financial system. MSF, being a penal rate, is always fixed above

the repo rate. The MSF would be the last resort for banks once they exhaust all

borrowing options including the liquidity adjustment facility by pledging through

government securities, which has lower rate of interest in comparison with the MSF,

thus MSF represents the upper band of the interest corridor and reverse repo as theower band and the repo rate in the middle.

HIGHLIGHTS

Twitter Inc revealed

more modestambitions, saying its

initial offering would

raise up to $1.6 billion

and value the company

at up to about $11

billion.

Tatas give financial

Inclusion a push :

company to install15000 ATMs in next 3

years.

http://www.business-standard.com/search?type=news&q=Rbihttp://www.business-standard.com/search?type=news&q=Rbi

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Market this Month

Sensex

Nifty

INR v/s USD

HIGHLIGHTS

Second Quarter Review

of RBI Monetary Policy

CRR unchangedat 4%

Repo rateincreased by 25

bps to 7.75%

Reverse Reporates increased

by 25 bps to

6.75%

MarginalStanding

Facility rate

reduced by 25

bps to 8.75%