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New Financial Instruments and Institutions

New Financial Instruments and Institutions: Opportunities and Policy Challenges

Copyright Date: 2007
Pages: 227
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  • Book Info
    New Financial Instruments and Institutions
    Book Description:

    New financial instruments -such as structured financial products and exchange-traded funds -and new financial institutions -including hedge funds and private-equity funds -present opportunities as well as policy and regulatory challenges in U.S. and Japanese financial markets. This book presents cutting-edge research from experts in academia and the financial industry on new instruments and new institutions while contrasting their developments in the different countries. The contributors highlight the innovative way in which Japanese financiers and government officials have learned from the U.S. regarding the introduction of new instruments into their market. New Financial Instruments and Institutions continues the productive collaboration between the Brookings Institution and the Nomura Institute of Capital Markets Research in examining current issues in capital and financial markets. Contributors include Jennifer Bethel (Babson College),Todd Broms (Managed ETFs, LLC), Frank Edwards (Columbia Business School), Allen Ferrell (Harvard Law School),Yasuyuki Fuchita (Nomura Institute of Capital Markets Research), Gary Gastineau (Managed ETFs, LLC), Ken Lehn (University of Pittsburgh), Josh Lerner (Harvard Business School), Frank Partnoy (University of San Diego Law School), Adam Posen (Institute for International Economics), Ken Scott (Stanford Law School), Steve G. Segal (Boston University, J.W. Childs Associates),Yuta Seki (Nomura Institute of Capital Markets Research, New York), Erik Sirri (Babson College), and Randall Thomas (Vanderbilt Law School).

    eISBN: 978-0-8157-2984-6
    Subjects: Business, Finance

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Preface
    (pp. vii-x)
  4. 1 Introduction
    (pp. 1-14)

    One of the most important characteristics of financial markets and institutions is change. The industry, and the products and services it offers, is constantly evolving in response to financial innovations developed by entrepreneurs within existing and new institutions and the ever-changing needs of users and suppliers of funds.

    This book is about some of the recent innovations—especially new financial instruments—and new institutions that are changing the financial sectors in the United States and Japan. It contains the papers presented, and the formal remarks of discussants, at the third annual conference of financial issues of mutual interest to the...

  5. 2 ETFs and REITs in Japan: Innovation and Steps for Future Growth
    (pp. 15-58)

    In japan, although the markets for exchange-traded funds (ETFs) and the real estate investment trust (REIT) both emerged in 2001, each has a different story of how it came into being. The speed of growth of the two markets has also differed. However, ETFs and REITs are collective investment schemes traded in the public securities market, and both resulted from innovations in investment trusts.

    Like mutual funds in the United States, an investment trust in Japan is a collective investment scheme in which professionals manage pooled funds under a predetermined investment policy, similar to how mutual funds are managed in...

  6. 3 Securitization of Residential Mortgages: Can Japan Create a “Good” GSE?
    (pp. 59-90)

    Securitization of residential mortgages, like derivatives, is a financial innovation that has seen explosive growth over the past two decades or so. In the United States, securitization of home loans got its start as a response to the regional partitioning of the housing finance market caused by state banking regulations. In other words, securitization of residential mortgages in the United States arose from structural problems within the U.S. financial market rather than the advanced state of the market.

    Although structural problems in the financial market were the catalyst, the financial technology of converting illiquid assets into a liquid product became...

    (pp. 91-100)
    Adam S. Posen

    The papers by Yasuyuki Fuchita and Yuta Seki are of extraordinary detail and include some very useful information in their figures and tables. Upon their publication in the latest volume by the Brookings Institution and the Nomura Institute of Capital Markets Research, I am confident that they will become references for all financial market observers. At the same time, it is worth calling attention to the very phenomena that the authors themselves carefully establish in regard to exchange-traded funds (ETFs), real estate investment trusts (REITs), and mortgage securitization: the ongoing innovation in Japanese financial markets and the ever wider adoption...

  8. 4 Gap Filling, Hedge Funds, and Financial Innovation
    (pp. 101-140)

    During the early 1980s, corporate raiders represented a potentially important monitoring mechanism of corporate management in the United States. They bought large stakes in target companies and caused significant restructuring of U.S. businesses. Many companies responded to this hostile takeover wave by adopting stronger defenses; others implemented management-sponsored leveraged buyouts. The bulk of financial innovation during this period was defensive in nature.

    During the 1990s, institutional investors moved to the forefront and accumulated increasing shares of U.S. equity securities. Much ink was spilled over how this shift in ownership structure would lead managers to adopt more shareholder-friendly corporate governance structures....

  9. 5 The Rise of the U.S. Private Equity Market
    (pp. 141-161)

    In a classic article titled “Eclipse of the Public Corporation,” Michael Jensen wrote that “the publicly held corporation . . . has outlived its usefulness in many sectors of the economy and is being eclipsed.”¹ Jensen’s article, written at a time when dozens of large U.S. corporations, including RJR Nabisco, R. H. Macy, and Trans World Airlines, had “gone private” in leveraged buyouts, appears highly relevant today. After a lull during the 1990s, the value of “private equity” transactions generally, and “going private” transactions in particular, have resurged during the past few years.

    A recent editorial in theWall Street...

    (pp. 162-166)
    Franklin R. Edwards

    It is a pleasure to have the opportunity to comment on the papers by Frank Partnoy and Randall Thomas and Thomas Boulton, Kenneth Lehn, and Steven Segal. Both papers cover a wide range of recent developments in financial markets, and both raise provocative policy issues. The Partnoy and Thomas paper provides a comprehensive overview of the increasingly active role of hedge funds in corporate governance, with an assessment of whether increased hedge fund “activism” has, on net, enhanced welfare. The Boulton, Lehn, and Segal paper examines the rapid growth of private equity funds and the reasons for the increased incidence...

  11. 6 Policy Issues Raised by Structured Products
    (pp. 167-192)

    One of the most important changes in modern finance over the last three decades is the increased understanding and use of financial derivatives. These contracts, which include options, futures, and swaps, are created by financial firms for corporate issuers who seek to tailor their liability claims and lower their costs of capital. Derivatives can trade on organized exchanges, but most often they are created in unregistered form and traded in the over-the-counter markets.

    These claims have become commonplace elements of many financial transactions. Within the domain of corporate finance, derivatives have allowed issuers’ financing needs to be divorced from the...

  12. 7 The Development of Improved Exchange-Traded Funds in the United States
    (pp. 193-209)

    Many of mankind’s great ideas owe at least some of their success to serendipity. A popular legend suggests how serendipity helped mankind learn the usefulness of fire. When one of our ancestors came upon the site of a fire that had been started by lightning, this early human discovered that an animal’s carcass had been burned by the fire. The “cooked” meat tasted better than raw meat. This kind of serendipity has been a common theme in many of mankind’s innovations.

    One of the best examples of serendipity in the financial markets—from several angles—is the early development of...

    (pp. 210-216)
    Kenneth E. Scott

    Since i am addressing two papers with distinct concerns, I will take them up in the order presented. Fortunately, my brief does not extend to the Japanese securities market experience, about which I learned a great deal, indeed all I know, during this conference.

    The paper by Jennifer E. Bethel and Allen Ferrell opens with a critique of the current SEC and NASD investor protection rules as they apply to structured products, by which they mean basically complex derivatives, with limited or no secondary markets. Typically, these products have a set level of income or growth over a certain period,...

  14. Contributors
    (pp. 217-218)
  15. Index
    (pp. 219-228)
  16. Back Matter
    (pp. 229-230)