week 1.2 comlaw 305

Introduction

  • Opening remarks to the class.
  • Overview of resources available on Canvas, specifically in-class presentations, and slides for the semester.
  • Encouragement for questions regarding resources or curriculum.
  • Noted attendance by students.

Review of Previous Class

  • Revisiting the financial crises of 1929 and 2007.
  • Discussion on policymakers' responses and the aftermath of both crises.

Financial Crisis of 1929

  • Federal Reserve's approach: allowed market to crash, operated under Adam Smith's theory of the invisible hand.
  • Belief that markets would correct themselves over time; actual recuperation took several years.
  • The Federal Reserve's failure to act and its defense of the gold standard.
    • Gold Standard: Money supply backed by gold, restricting the issuance of money to gold reserves.
  • Resulting implications:
    • The US market crashed, leading to a significant economic downturn and prolonged recovery (approximately 10 years).
    • Analogous impacts on Europe were tempered by WWII, which facilitated US recovery through military and economic engagement.

Financial Crisis of 2007

  • Contrast between the Federal Reserve's responses in 1929 and 2007.
  • In 2007, following the collapse of key financial institutions (e.g., Lehman Brothers), there was urgent action from policymakers.
  • Bailout Definition: Provision of funds to financial institutions in distress, with specific terms attached.
  • Significant intervention led to stability in the financial market, contrasting with the laissez-faire approach of 1929.
  • Discussion on global ramifications of the 2007 crisis due to interconnected financial systems.

Financial Innovations

  • Historical context of financial innovations:
    • The last beneficial innovation was the ATM (Automated Teller Machine).
  • Buying on Margin: Purchasing securities by borrowing a significant percentage (up to 90%) from brokers.
  • Securitization: Creating financial instruments by grouping various financial assets (e.g., mortgages) into marketable products.
    • Risk mismanagement in securitization led to the devaluation of these financial products during downturns.

New Zealand Context

  • Market impacts in New Zealand post-global financial crisis:
    • Notable failures of finance companies and significant financial losses for investors (approximately NZD 3 billion lost).
    • Increased regulatory scrutiny and the establishment of the Financial Markets Authority (FMA) post-crisis.

Ethical and Philosophical Implications

  • Reflection on greed and systemic failures contributing to financial crises.
  • Importance of foundational principles in financial markets:
    • Safety, Soundness, Systemic Stability, Consumer Protection, Capital and Liquidity, Information Transparency, Market Integrity
    • Trust is essential for functional financial markets.

Financial Market Law

  • Definition: Body of legal rules, regulations, and principles guiding financial market operations.
  • Market Participants:
    • Financial institutions, supervisory agencies, investors, consumers, and companies.
  • Purpose: Prevent, identify, and punish detrimental market behaviors.

Types of Financial Institutions

  • Various institutions include:
    • Banks, hedge funds, private equity firms, insurance companies, superannuation funds, brokers.
  • Discussion on financial market indexes: E.g., S&P 500 - tracks the performance of the largest companies in the US.

Regulatory Framework of Financial Markets

  • Overview of major regulatory acts in New Zealand:
    • Financial Markets Conduct Act: Covers market operations, securities offerings.
    • Act on Financial Service Providers: Focuses on registration, licensing requirements, competency in financial service provision.
    • Related acts include the Companies Act and Fair Trading Act.
    • NZX Listing Rules: Governance rules for firms seeking liquidity through public offerings.

Market Structure and Function

  • Definition of a Financial Market: A venue for the buying/selling of financial products, encompassing the development and trading of these products.
  • Market participants include:
    • Financial Intermediaries: Investment companies, pension funds, financial advisors.
    • Supervisors and Regulatory Bodies: FMA, Reserve Bank of New Zealand (RBNZ), Ministry of Business, Innovation, and Employment (MBIE), Department of Internal Affairs (DIA).

Financial Market Authority (FMA)

  • Objective: Promote fair, efficient, and transparent financial markets.
  • Functions include:
    • Licensing, supervising, enforcing compliance among financial intermediaries.
    • Monitoring market behavior and protecting consumer interests against misinformation.

Reserve Bank of New Zealand (RBNZ)

  • Distinction between RBNZ functions and central banking.
  • Role in maintaining banking system stability and overseeing monetary policy.

Concluding Remarks and Next Steps

  • Review upcoming class discussions on specific sections of relevant acts.
  • Emphasize the interconnections among regulatory bodies, financial institutions, and market participants.
  • Assignment: Investigate a hypothetical case regarding investment fund misrepresentation and determine the applicable regulator and jurisdiction based on legislative provisions.