Most U.S. home loans end up in the nearly $9 trillion market for residential mortgage bonds with government backing, a critical corner of housing finance that boomed in the wake of the subprime-mortgage crisis.
The “agency” mortgage-bond market resembles the roughly $25 trillion Treasury securities market in that it provides some of the lowest borrowing costs available, and in that defaults are considered unlikely because the bonds come with U.S. government backing.
Fitch Ratings on Tuesday followed through with a May threat to cut the U.S. debt rating, pointing to “fiscal deterioration” expected over the next three years as well as the government’s large and growing debt burden and the “erosion” of governance, including through “repeated debt limit standoffs and last-minute resolutions.”
A day later it also lowered the top AAA debt ratings of housing giants Freddie Mac
FMCC,
-2.16%
and Fannie Mae
FNMA,
-3.60%
by a notch to AA+, saying, “firms continue to benefit from meaningful financial support from the U.S. government,” but also that the move wasn’t driven by a deterioration in credit, capital or liquidity at the firms.
Stocks fell Wednesday, with the S&P 500
SPX
booking its sharpest daily percentage decline since April, while the 10-year Treasury yield
BX:TMUBMUSD10Y
rose to nearly 4.1%, as investors focused on the Treasury’s big $1 trillion borrowing plan for the third quarter.
Here’s what to know about the biggest part of the U.S. housing finance market now that Fitch has become the first major credit-rating firm to lower the U.S.’s AAA credit rating to AA+ since S&P Global cut its rating in 2011.
Refi wave is a big buffer
The good news is that most U.S. homeowners already refinanced during the pandemic as the 30-year fixed mortgage rate fell to a 2.68% low in December 2020 from 4.87% in November 2018, according to data from the Urban Institute.
That provides a cushion for homeowners sitting tight with ultralow mortgage rates, sparing them the brunt of the Fed’s rate-hiking campaign.
It also should limit any reverberations from Fitch’s decision to no longer apply its top ratings to U.S. debt. The chart below drives the point home, showing that almost no mortgages are ripe for refinancing with rates hovering around 7%.
Mortgage-backed securities a ‘haven play’
Agency mortgage bonds continue to be viewed in financial markets as a safe-haven play. Like the rally in the Treasury market in 2011 following S&P Global’s surprise downgrade of U.S. credit, Fitch’s rating move could be a shot in the arm for agency mortgages.
“I would not expect this downgrade by itself to have a meaningful impact on the spreads attaching to agency [mortgage-backed securities],” said Yesha Yadav, a professor of law at Vanderbilt University, adding that the sector staged a powerful rally following the S&P Global downgrade roughly a decade ago.
Spreads are the premium investors are paid on bonds above the risk-free Treasury rate, while also serving as a gauge of risk sentiment.
“Of course, there may be broader concerns surrounding the housing market and possible defaults arising out of higher rates,” Yadav said.
She also flagged a “larger and deeper worry” signaled by Fitch in its downgrade: How much can investors continue to trust the default-free reputation of U.S. Treasury securities with Congress continuing to use U.S. credit ratings as a “bargaining chip in negotiations”?
U.S. debt load in focus
Agency mortgage bonds are pools of home loans that are underwritten to stricter credit standards than prevailed in the run-up to the 2007-2008 global financial crisis. U.S. housing giants Freddie Mac and Fannie Mae don’t make home loans, but they do buy ones that fit their tighter lending criteria and issue pools of bonds with the implicit backing of the U.S. government.
Freddie and Fannie didn’t immediately respond to a request for comment. Fitch didn’t respond to a request for comment for this article.
Read: What Fitch’s U.S. credit downgrade means for investors
While financial markets are largely expected to shake off the U.S. losing its top AAA debt rating for a second time in roughly a decade, it could usher in a period of greater “fiscal austerity,” with the lowered ratings likely to become “a political lighting rod,” according to Oxford Economics.
Also, while the Federal Reserve may have only a few more rate hikes in its arsenal before it calls it quits on its inflation fight, the mortgage industry is tethered to fluctuations in longer-dated Treasury yields.
Scott Buchta, head of fixed-income strategy at Brean Capital, told MarketWatch the Fitch downgrade of the U.S. looks less concerning than the potential for volatility in the mortgage market from higher Treasury yields on the back of heavy new supply.
The Treasury earlier this week said it expects to borrow about $1 trillion in the third quarter, an amount that Vivien Lou Chen writes is the largest ever for that time frame and a potential source of pain for investors.
“A bigger concern for the mortgage market is the amount of debt that’s expected to be issued,” Buchta said.
Read: New Jersey house prices rise at fastest rate in the nation — but other states saw prices fall by up to 8%
In options trading, knowing the difference between being “in the money” (ITM) and “out of the money” (OTM) allows the holder of a contract to know whether they’ll enjoy a profit from their option. The terms refer to the relationship between the options strike price and the market value of the underlying asset.
“In the money” refers to options that have profit potential if exercised today, while “out of the money” refers to those that do not. In the rare case that the market price of an underlying security reaches the strike price of an option exactly at the time of expiry, this would be called an “at the money option.”
What Does “In the Money” Mean?
In the money (ITM) describes a contract that would be profitable if its owner were to choose to exercise the option today. If this is the case, the option is said to have intrinsic value.
A call option would be in the money if the strike price is lower than the current market price of the underlying security. An investor holding such a contract could exercise the option to buy the security at a discount and sell it for a profit right away.
Put options, which are a way to short a stock, would be in the money if the strike price is higher than the current market price of the underlying security. A contract of this nature allows the holder to sell the security at a higher price than it currently trades for and pocket the difference.
In either case, an in the money contract has intrinsic value, so the options trader can exercise the option and make money doing so. 💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.
Example of In the Money
For example, say an investor owns a call option with a strike price of $15 on a stock currently trading at $16 per share. This option would be in the money because its owner could exercise the option to realize a profit. The contract gives the holder the right to buy 100 shares of the stock at $15, even though the market price is currently $16.
The contract holder could take shares acquired through the contract for a total of $1,500 and sell them for $1,600, realizing a profit of $100 minus the premium paid for the contract and any associated trading fees or commissions.
While call options give the holder the right to buy a security, put options give holders the right to sell. For example, say an investor owns a put option with a strike price of $10 on a stock that is trading at $9 per share. This would be an in the money option. The holder could sell 100 shares of stock at a price of $10 for a total of $1,000, even though it only costs $900 to buy those same shares. The contract holder would realize that difference of $100 as profit, minus the premium and any fees.
What Does “Out of the Money” Mean?
Out of the money (OTM) is the opposite of being in the money. OTM contracts do not have intrinsic value. If an option is out of the money at the time of expiration, the contract will expire worthless. Options are out of the money when the relation of their strike prices to the current market price of their securities are opposite that of in the money options.
For calls, an option with a strike price higher than the current price of the underlying security would be out of the money. Exercising such an option would result in an investor buying a security for a price higher than its current market value.
For puts, an option with a strike price lower than the current price of its security would be out of the money. Exercising such an option would cause an investor to sell a security at a price lower than its current market value.
In either case, contracts are out of the money because they don’t have intrinsic value – anyone exercising those contracts would lose money.
Example of Out of the Money
Say an investor buys a call option with a strike price of $15 on a stock currently trading at $13. This option would be out of the money. An investor might buy an option like this in the hopes that the stock will rise above the strike price before expiration, in which case a profit could be realized.
Another example would be an investor buying a put option with a strike price of $7 on a stock currently trading at $10. This would also be an out of the money option. An investor might buy this kind of option with the belief that the stock will fall below the strike price before expiration. 💡 Quick Tip: In order to profit from purchasing a stock, the price has to rise. But an options account offers more flexibility, and an options trader might gain if the price rises or falls. This is a high-risk strategy, and investors can lose money if the trade moves in the wrong direction.
What’s the Difference Between In the Money and Out of the Money?
The premium of an options contract involves two different factors: intrinsic value and extrinsic value. Options that have intrinsic value at the time they are written to have a strike price that is profitable relative to the current market price. In other words, such options are already in the money when written.
But not all options are written ITM. Those without intrinsic value rely instead on their extrinsic value. This value comes from speculative bets that investors make over a period of time. For this reason, assets with higher volatility often have their options contracts written out of the money, as investors expect there to be bigger price swings. Conversely, assets considered to be less volatile often have their options written in the money.
Options written out of the money are ideal for speculators because such contracts come with less expensive premiums and are often created for more volatile assets.
Recommended: Popular Options Trading Terminology to Know
Should I Buy ITM or OTM Options?
The answer to this question depends on an investor’s goals and risk tolerance. Options that are further out of the money can be more rewarding, but come with greater risk, uncertainty, and volatility. Whether an option is in or out of the money (and how far they’re out of the money), and the amount of time before the expiry of the option impacts the premium for that option, with riskier options typically costing more.
Whether to buy ITM or OTM options also depends on how confident an investor feels about the future of the underlying security. If a trader feels fairly certain that a particular stock will trade at a much higher price three months from now, then they might not hesitate to buy a call option with a very high strike price, making it out of the money.
Conversely, if an investor thinks a stock will fall in price, they can buy a put option with a very low strike price, which would also make the option out of the money.
Beginners and those with lower risk tolerance may prefer buying options that are only somewhat out of the money or those that are in the money. These options usually have lower premiums, meaning they cost less to buy. There are also generally greater odds that the contract will wind up in the money before expiration, as it will take a less dramatic move to make that happen.
Investors can also choose to combine multiple options legs into a spread strategy that attempts to take advantage of both possibilities.
Recommended: 10 Important Options Trading Strategies
The Takeaway
In options trading, “in the money” refers to options that have profit potential if exercised immediately, while “out of the money” refers to those that don’t. Options contracts don’t have to be exercised to realize a profit. Sometimes investors buy contracts with the intent of selling them on the open market soon after they become in the money for quick gains.
In either case, it’s important to consider if an option is in the money or out of the money when buying or writing options contracts, as well as when deciding when to execute them. Options trading is an advanced investing strategy, and investors should know what they’re doing before engaging with it – or should speak with a financial professional for guidance.
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Eleanor wrote with a question that could test even the mightiest personal finance expert. “What,” she asks, “can you do when you want to save money and your roommates don’t care?”
I share a house with four roommates. This saves me at least $200 a month from what I would be paying if I lived in an apartment. But roommates raise expenses in other, unexpected ways. I have been trying to cut down on monthly bills and am finding it incredibly difficult.
For example, I live with roommates that want digital cable and high-speed internet bundle. I can live without the cable (I don’t watch TV) and don’t mind having a lower-speed connection. But because three of my five roommates want the more expensive package, that’s what we get, and instead of splitting a $60/month bill five ways we’re splitting a $100/month bill. I end up paying more money overall. While I can simply not watch cable and argue with them that I won’t pay for that fractional cost of the bill, there’s no way I can somehow use a lower speed internet connection without some serious technological finagling.
Another way I find it difficult to cut down on monthly bills is electricity usage. I try to turn off lights, appliances, the air conditioner, and my computer when I’m not using them. My roommates would prefer to leave their computers and air conditioner on and are not as vigilant as turning off lights. The electricity bill is higher, but it still gets split five ways. Again, I have no idea how I would go about dividing the bill by individual electricity usage — how would you even start to go about measuring such a thing, when no one remembers who left the kitchen light on?
But perhaps I’m being too nitpicky — as annoying as these extra expenses are, I doubt they make it worth moving to an apartment.
It’s been a l-o-n-g time since I lived with roommates — wife and cats notwithstanding — and I’ve forgotten some of the stuff that occurs. I certainly remember the passive-aggressive games we used to play out of spite, but I think that, in general, I never had a living situation in which splitting money was an issue.
AskMetafilter often has roommate-related questions. Many of them involve money problems, but none that I could find involve this sort of problem. Though it doesn’t address Eleanor’s specific concerns, UK-based iOWEYOU looks like a great little web tool for tracking roommate accounts:
iOWEYOU is an expenses sharing calculator. It is ideal for people living in a shared house. To use iOWEYOU, you log all the items you buy that you share with your group. This may be bills, food shopping, light bulbs, TV license, etc., etc. iOWEYOU then tells you how much you all owe each other.
What general advice do you have for keeping money matters between roommates peaceful but fair? What specific advice do you have for Eleanor?
When an IPO is “oversubscribed” that means certain investors have committed to buy more than the available number of shares that were originally set for the initial public offering.
That’s because when new stocks or bonds are issued via initial public offerings (IPOs), they’re issued in limited amounts, based around the new company’s financing needs and desired debt-to-equity structure.
Depending on investor appetite for the new stocks, IPOs can either be under or oversubscribed; this reflects the level of demand investors have for the shares.
In most cases, though, only institutional investors and accredited investors can subscribe to an IPO stock before it actually goes public. Retail investors may hear about an IPO being over- or undersubscribed, but they typically can’t take advantage of it — although knowing the information may aid an individual’s assessment of the opportunity.
What Is an IPO?
IPO stands for “initial public offering,” which marks the first time a private corporation offers its securities for sale to the public.
In such a process, a portion of the firm’s shares are transferred from private ownership by company insiders to public markets, so that both retail and institutional investors can buy IPO shares.
IPOs are usually initiated for two reasons: 1. To raise additional capital for a firm’s operations, and 2. As a way for company insiders and early investors to cash out their holdings.
During an IPO, a company that wishes to go public will work with an underwriter, or team of underwriters, to value its business, document and register its shares with the U.S. Securities and Exchange Commission (SEC), and market its shares to the investing public.
Once a company’s board approves the IPO sale, the underwriters set the IPO valuations. The investment banks that underwrite a company’s public offering set the IPO price.
These underwriters use several variables to determine the IPO price, including an analysis of the company’s growth potential, a comparison to related firms, and a determination of market demand conditions.
Once the company has the green light to proceed, the underwriting team proceeds to market the shares and take orders from investors.
What Is Oversubscription in an IPO?
Investors interested in IPO investing may be interested in an IPO’s subscription status. If an IPO is oversubscribed, that means there aren’t enough shares of the new stock issued to meet initial investor demand at the listed IPO price.
To compensate for this mismatch in supply and demand, the underwriters selling the IPO can choose to either raise the IPO price to reduce demand, or increase the supply of shares to meet demand. 💡 Quick Tip: Access to IPO shares before they trade on public exchanges has usually been available only to large institutional investors. That’s changing now, and some brokerages offer pre-listing IPO investing to qualified investors.
How Does Oversubscription Work?
Oversubscribed IPOs generate a shortage in shares that usually results in a higher price or additional shares being issued, which can lead to more capital being raised for the now-public company. These funds are also called the IPO proceeds.
This contrasts with “undersubscription” for IPOs. Undersubscribed IPOs are caused by the converse scenario happening, where there’s insufficient investor demand to buy all available shares at the listed IPO price.
What Is Undersubscription?
When an IPO is undersubscribed, it generally signals a lack of enthusiasm for a newly public company and may be the result of either poor marketing, overpricing, or poor company fundamentals.
When an IPO is undersubscribed, underwriters may work to reduce the size of the issue, cut the share price, or pull the IPO offering altogether.
In some cases, as a result of contract terms with the issuing company, underwriters may be forced to “eat” the cost of the IPO and purchase remaining shares at a pre-agreed price themselves. This is generally an undesirable outcome for underwriters as it may force them to hold shares on their books rather than flip them to investors. 💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.
Pros of Oversubscription
Oversubscription can be beneficial to both the issuer and underwriters of new securities, as well as to investors who manage to obtain an allocation of shares around the IPO price.
The issuing company can benefit, as the high demand for IPO shares allows the underwriting team to either reprice the IPO shares higher or offer up additional shares from company reserves to alleviate demand.
In either case, this results in additional funding for the issuing company at more favorable terms while the underwriter generates additional fees.
Early investors to an oversubscribed IPO may benefit from the initial pop in pricing that excitement can generate. This sometimes leads to positive momentum that may continue to push the price upward in the short run.
Cons of Oversubscription
For most average investors, oversubscription ends up being a net negative. First, it’s rare for individual investors to be able to subscribe to an IPO. Typically that’s reserved for large institutional or high-net-worth investors. Then, by the time the average investor can buy the stock, higher pricing may make the IPO opportunity less attractive — with the risk of being overinflated.
If you’re unable to obtain an allocation at the original IPO price, it’s likely that secondary market prices for these securities may be substantially higher due to the high demand for these shares.
While this may not be a concern for long-term investors, this can pose a challenge if initial momentum causes the price of a new security to skyrocket beyond its reasonable fundamental value. This can cause the value of shares to tumble back to lower levels in subsequent months.
This is one of many reasons that retail investors should be cautious about IPO shares. They are a high-risk proposition at best.
Strategies to Maximize the Oversubscription Opportunity
Even if you were one of the lucky few to obtain early IPO shares, there isn’t much you can do to capitalize on an oversubscription opportunity.
If you receive shares from an oversubscribed IPO, you will want to consider both the long-term prospects of the company as well as the short-term prospects for its share price.
Depending on the company and your investment strategy, this will influence whether you intend to hold the security for the long-run or flip the shares for a quick profit.
If you’re unable to obtain an allocation during an IPO, it’s likely that the oversubscribed IPO would see its shares bid up in the secondary market. In this case, it’s not a bad strategy to wait a few weeks, or even months, after the initial IPO to see whether prices come back down — and gauge the company’s prospects from there.
In some instances, shares often decline a few months later after the expiration of the initial lockup period, once insiders are free to sell their shares. However this isn’t always the case, and can vary widely from company to company.
Seek Advice From a Professional
If you’re allocated shares from an IPO and are unsure of what to do with your new holdings, it might be worth consulting with a financial advisor or investment advisor to determine your next steps.
Financial professionals can help inform your decision making on how to proceed with an oversubscribed IPO. However, the final decision will ultimately be up to you and should be made within the context of your overall investment portfolio.
Do Your Research
Regardless of whether you’re able to gain access to the IPO, you should base your investment decisions on your own due diligence and fundamental analysis, i.e. a thorough review of a company’s disclosures, financial statements, and future prospects.
Reviewing the track record of company executives and the board of directors can offer insight into how competent the company’s management may be when it comes to executing on long-term strategies.
Thoroughly reading the prospectus of the new IPO shares can help you understand the core drivers of a firm’s business, its core customer base, key markets, and major risks it might face.
Additionally, there’s a multitude of research out there that follows your stock’s performance on both fundamental and technical grounds; these can go a long-way towards informing your investment actions for new IPOs.
The Takeaway
Oversubscriptions for hot IPOs can sometimes offer opportunities for investors who are able to secure allocation of shares; however, they can also turn into feeding frenzies for retail investors who wish to buy these securities on the secondary market.
The resulting media blitz, and (typically) wide swings in valuations, can easily end with inexperienced investors getting burned on the share price. In short: IPOs can be volatile. To protect yourself, it’s important to understand the drivers of IPO pricing and how it impacts demand.
Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it’s wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.
Invest with as little as $5 with a SoFi Active Investing account.
FAQ
What is the meaning of oversubscription?
Oversubscription, as it pertains to IPOs, refers to a supply and demand mismatch of the newly issued IPO shares. Either the price must adjust upward, the supply of shares issued must be increased, or a combination of the two must occur to meet investor demand.
In the event that the supply of IPO shares is unable to meet all investor orders, shares will typically be issued out to investors on a partial pro rata basis, or in proportion to each investor’s requested order size, subject to minimum block sizings.
In some instances, a lottery system may be implemented to maintain impartiality. Any unfilled orders will be rejected and cash returned to investors.
How can you calculate oversubscription?
At the basic level, IPO oversubscriptions are calculated as a ratio of the aggregate order size for IPO shares relative to the total number of IPO shares available to be distributed.
For example, if there are 1,000,000 shares of new stock available for an IPO pricing, but the underwriters receive an orderbook totaling 3,000,000 shares from investors, this IPO would be considered “3X oversubscribed.”
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The Jefferson Avenue commercial district in Buffalo, New York, is anchored by a supermarket.
There are dozens of other businesses and services along the 12-block corridor — a couple of bank branches, a library, a coffee shop, gas stations, a small plaza with a dollar store and a primary care clinic and a business incubator for entrepreneurs of color.
But Tops Friendly Markets, the only grocery store on Buffalo’s vast East Side, is the center of activity. More than just a place to buy food, pick up medications and use an ATM, the store is a communal gathering space in a predominantly Black neighborhood that, for generations, has been segregated, isolated and disenfranchised from the wealthier — and whiter — parts of the city.
Which explains how it came to be the site of a mass shooting on a spring day in May of last year. On that Saturday, a gunman, who lived 200 miles away in another part of the state, drove to Jefferson Avenue and went into Tops, and in just a few minutes killed 10 people, injured three and inflicted mass trauma across the community.
It is a scenario that has sadly, and repeatedly, played out in other parts of the country that have experienced mass shootings. But this one came with a twist: The gunman’s intention was to kill as many Black people as possible.
To achieve that, he specifically targeted a ZIP code with one of the highest percentages of Black residents in New York state. All 10 who died that day were Black.
“The mere fact that someone can research, ‘Where will the greatest number of Black people be … on a Saturday morning,’ that’s not by chance,” said Franchelle Parker, a community organizer and executive director of Open Buffalo, a nonprofit focused on racial, economic and ecological justice. “That’s not a mistake. It’s a community that’s been deeply segregated for decades.”
The day of the shooting, Parker, who grew up in nearby Niagara Falls, was driving to Tops, where she planned to buy a donut and an unsweetened iced tea before heading into the Open Buffalo office, which is located a block away from Tops. The mother of two had intended to complete the mundane task of cleaning up her desk — “old coffee cups and stuff” — after a busy week.
She saw the news on Twitter and didn’t know if she should keep driving to Jefferson Avenue or turn around and go back home. She eventually picked the latter.
When she showed up the next day, there were thousands of people grieving in the streets. “The only way that I could explain my feeling, it was almost like watching an old war movie when a bomb had gone off and someone’s in, like, shell shock. That’s how it felt,” said Parker, vividly recounting the community’s collective trauma in a meeting room tucked inside of Open Buffalo’s second-story office on Jefferson Avenue.
Almost immediately following the May 14, 2022, massacre, which was the second-deadliest mass shooting in the United States last year, conversations locally and nationally turned to the harsh realities of the East Side and how long-standing factors that affect the daily life of residents — racism, poverty and inequity — made the community an ideal target for a white supremacist.
Now, more than a year after the tragedy, there is growing concern that not enough is being done fast enough to begin to dismantle those factors. And amid those conversations, there are mounting calls for the banking industry — whose historical policies and practices helped cement the racial segregation and disinvestment that ultimately shaped the East Side — to leverage its collective power and influence to band together in an effort to create systemic change.
The ideas about how banks should support the East Side and better embed themselves in the neighborhood vary by people and organizations. But the basic argument is the same: Banks, in their role as financiers and because of the industry’s history of lending discrimination, are obligated to bring forth economic prosperity in disinvested communities like the East Side.
I know banks are often looked upon sort of like a panacea, but I don’t particularly see it that way. I think others have a role to play in all of this.
Chiwuike Owunwanne, corporate responsibility officer at KeyBank
“Banks have been very good at providing charitable contributions to the Black community. They get an ‘A’ for that,” said The Rev. George Nicholas, an East Side pastor who is also CEO of the Buffalo Center for Health Equity, a four-year-old enterprise focused on racial, geographic and economic health disparities. “But doing the things that banks can do in terms of being a catalyst for revitalization and investment in this community, they have not done that.”
To be sure, banks’ ability to reverse the course of the community isn’t guaranteed — and there is no formula to determine how much accountability they should hold to fix deeply entrenched problems like racism. Several Buffalo-area bankers said that while the Tops shooting heightened the urgency to help the East Side, the industry itself cannot be the sole driver of change.
“There are a lot of institutions … that can certainly play a part in reversing the challenges that we see today,” said Chiwuike “Chi-Chi” Owunwanne, a corporate responsibility officer at KeyBank, the second-largest bank by deposits in Buffalo. “I know banks are often looked upon sort of like a panacea, but I don’t particularly see it that way. I think others have a role to play in all of this.”
A long history of segregation
How the East Side — and the Tops store on Jefferson Avenue — became the destination for a racially motivated mass murderer is a story about racism, segregation and disinvestment.
Even as it bears the nickname “the city of good neighbors,” Buffalo has long been one of the most racially segregated cities in the United States. Of the 114,965 residents who live on the East Side, 59% are Black, according to data from the 2021 U.S. Census American Community Survey. The percentage is even higher in the 14208 ZIP code, where the Tops store is located. In that ZIP code, among 11,029 total residents, nearly 76% are Black, the census data shows.
The city’s path toward racial segregation started in the early 20th century when a small number of job-seeking Black Americans migrated north to Buffalo, a former steel and auto manufacturing hub at the far northwestern end of New York state. Initially, they moved into the same neighborhoods as many of the city’s poorer immigrants and lived just east of what is today the city’s downtown district. As the number of Blacks arriving in Buffalo swelled in the 1940s, they were increasingly confronted with various housing challenges, including racist zoning laws and restrictive deed covenants that kept them from buying homes in more affluent white areas.
Black Buffalonians also faced housing discrimination in the form of redlining, the practice of restricting the flow of capital into minority communities. In 1933, as the Great Depression roiled the economy, a temporary federal agency known as the Home Owners’ Loan Corporation used government bonds to buy out and refinance mortgages of properties that were facing or already in foreclosure. The point was to try to stabilize the nation’s real estate market.
As part of its program, HOLC created maps of American cities, including Buffalo, that used a color coding scheme — green, blue, yellow and red — to convey the perceived riskiness of making loans in certain neighborhoods. Green was considered minimally risky; other areas that were largely populated by immigrant, Black or Latino residents were labeled red and thus determined to be “hazardous.”
“The goal was to free up mortgage capital by going to cities and giving banks a way to unload mortgages, so they could turn around and make more mortgage loans,” said Jason Richardson, senior director of research at the National Community Reinvestment Coalition, an association of more than 750 community-based organizations that advocates for fair lending. “It was kind of a radical concept and it has evolved over the decades into our modern mortgage finance system.”
The Federal Housing Administration, which was established as a permanent agency in 1934, used similar methods to map urban areas and labeled neighborhoods from “A” to “D,” with “A” considered to be the most financially stable and “D” considered the least. Neighborhoods that were largely Black, even relatively stable ones, were put in the “D” category.
The result was that banks, which wanted to be able to sell mortgage loans to the FHA, were largely dissuaded from making loans in “risky” areas. And Buffalo’s East Side, where the majority of Blacks were settling, was deemed risky. Unable to get loans, Blacks couldn’t buy homes, start businesses or build equity. At the same time, large industrial factories on the East Side were closing or moving away, limiting job opportunities and contributing to rising poverty levels.
“Today what we’re left with is the residue of this process where we’ve enshrined … a pattern of economic segregation that favors neighborhoods that had fewer Black people in them and generally ignores neighborhoods that had African Americans living in them,” Richardson said.
Case in point: Research by the National Community Reinvestment Coalition shows that three-quarters of neighborhoods that were once redlined are low- to moderate-income neighborhoods today, and two-thirds of them are majority minority communities.
Adding to the division between Blacks and whites in Buffalo was the construction of a highway called the Kensington Expressway. Built during the 1960s, the below-grade, limited-access highway proved to be a speedy way for suburban workers to get to their downtown jobs. But its construction cut off the already-segregated East Side even more from other parts of the city, displacing residents, devaluing houses and destroying neighborhoods and small businesses.
As a result of those factors and more, many Black residents have become “trapped” on the East Side, according to Dr. Henry Louis Taylor Jr., a professor of urban and regional planning at the University at Buffalo. In 1987, Taylor founded the UB Center for Urban Studies, a research, neighborhood planning and community development institute that works on eliminating inequality in cities and metropolitan regions. In September 2021, eight months before the Tops shooting, the Center for Urban Studies published a report that compared the state of Black Buffalo in 1990 to present-day conditions. The conclusion: Nothing had changed for Blacks over 31 years.
As of 2019, the Black unemployment rate was 11%, the average household income was $42,000 and about 35% of Blacks had incomes that fell below the poverty line, the report said. It also noted that just 32% of Blacks own their homes and that most Blacks in the area live on the East Side.
“Those figures remain virtually unchanged while the actual, physical conditions that existed inside of the community worsened,” Taylor told American Banker in an interview in his sun-filled office at the center, located on the University at Buffalo’s city campus. “When we looked upstream to see what was causing it, it was clear: It was systemic, structural racism.”
Banks’ moral obligations
As the East Side struggled over the decades with rampant poverty, dilapidated housing, vacant lots and disintegrating infrastructure, banks kept a physical presence in the community, albeit a shrinking one. In mid-2000, there were at least 20 bank branches scattered across the East Side, but by mid-2022, the number had fallen to around 14, according to the Federal Deposit Insurance Corp.’s deposit market share data. The 14 include four new branches that have opened since early 2019 — Northwest Bank, KeyBank, Evans Bank and BankOnBuffalo.
The first two branches, operated by Northwest in Columbus, Ohio, and KeyBank, the banking subsidiary of KeyCorp in Cleveland, were requirements of community benefits agreements negotiated between each bank and the National Community Reinvestment Coalition. In both cases, Northwest and KeyBank agreed to open an office in an underserved community.
Evans Bank opened its first East Side branch in the fall of 2021. The office is located in the basement of an $84 million affordable senior housing building that was financed by Evans, a $2.1 billion-asset community bank headquartered south of Buffalo in Angola, New York.
Banks have been very good at providing charitable contributions to the Black community. They get an ‘A’ for that. But doing the things that banks can do in terms of being a catalyst for revitalization and investment in this community, they have not done that.
The Rev. George Nicholas, an East Side pastor who is also CEO of the Buffalo Center for Health Equity
On the community and economic development front, banks have had varying levels of participation. Buffalo-based M&T Bank, which holds a whopping 64% of all deposits in the Buffalo market and is one of the largest private employers in the region, has made consistent investments in the East Side by supporting Westminster Community Charter School, a kindergarten through eighth-grade school, and the Buffalo Promise Neighborhood, a nonprofit organization focused on improving access to education in the city’s 14215 ZIP code.
Currently, Buffalo Promise Neighborhood operates four schools. In addition to Westminster, it runs Highgate Heights Elementary, also K-8, as well as two academies that serve children ages six weeks through pre-kindergarten. Twelve M&T employees are dedicated to the program, according to the Buffalo Promise Neighborhood website. The bank has invested $31.5 million into the program since its 2010 launch, a spokesperson said.
Other banks are making contributions in other ways. In addition to the Jefferson Avenue branch and as part of its community benefits plan, Northwest Bank, a $14.2 billion-asset bank, supports a financial education center through a partnership with Belmont Housing Resources of Western New York. Meanwhile, the $198 billion-asset KeyBank gave $30 million for bridge and construction financing for Northland Workforce Training Center, a $100 million redevelopment project at a former manufacturing complex on the East Side that was partially funded by the state.
BankOnBuffalo’s East Side branch is located inside the center, which offers KeyBank training in advanced manufacturing and clean energy technology careers. A subsidiary of $5.6 billion-asset CNB Financial in Clearfield, Pennsylvania, BankOnBuffalo’s office opened a month after the shooting. The timing was coincidental, but important, said Michael Noah, president of BankOnBuffalo.
“I think it just cemented the point that this is a place we need to be, to be able to be part of these communities and this community specifically, and be able to build this community up,” Noah said.
In terms of public-private collaboration, some banks have been involved in a deeper way. In 2019, New York state, which had already been pouring $1 billion into Buffalo to help revitalize the economy, announced a $65 million economic development fund for the East Side. The initiative is focused on stabilizing neighborhoods, increasing homeownership, redeveloping commercial corridors including Jefferson Avenue, improving historical assets, expanding workforce training and development and supporting small businesses and entrepreneurship.
In conjunction with the funding, a public-private partnership called East Side Avenues was created to provide capital and organizational support to the projects happening along four East Side commercial corridors. Six banks — Charlotte, North Carolina-based Bank of America, the second-largest bank in the nation with $2.5 trillion of assets; M&T, which has $203 billion of assets; KeyBank; Warsaw, New York-based Five Star Bank, which has about $6 billion of assets; Northwest and Evans — are among the 14 private and philanthropic organizations that pledged a combined $8.4 million to pay for five years’ worth of operational support, governance and finance, fundraising and technical assistance to support the nonprofits doing the work.
Laura Quebral, director of the University at Buffalo Regional Institute, which is managing East Side Avenues, said the banks were the first corporations to step up to the request for help, and since then have provided loans and other products and education to keep the program moving.
Their participation “is a signal to the community that banks cared and were invested and were willing to collaborate around something,” Quebral said. “Being at the table was so meaningful.”
Richard Hamister is Northwest’s New York regional president and former co-chair of East Side Avenues. Hamister, who is based in Buffalo, said banks are a “community asset” that have a responsibility to lift up all communities, including those where conditions have arisen that allow it to be a target of racism like the East Side.
“We operate under federal charters, so we have an obligation to the community to not only provide products and services they need but also support when you go through a tragedy like that,” Hamister said. “We also have a moral obligation to try to help when things are broken … and to do what we can. We can’t fix everything, but we’ve got to fix our piece and try to help where we can.”
In the wake of a tragedy
After the massacre, there was a flurry of activity within banks and other organizations, local and out-of-town, to respond to the immediate needs of East Side residents. With the community’s only supermarket closed indefinitely, much of the response centered around food collection and distribution. Three of M&T’s five East Side branches, including the Jefferson Avenue branch across the street from Tops, became food distribution sites for weeks after the shooting. On two consecutive Fridays, Northwest provided around 200 free lunches to the community, using a neighborhood caterer who is also the bank’s customer. And BankOnBuffalo collected employee donations that amounted to more than 20 boxes of toiletries and other items that were distributed to a nonprofit.
At the same time, M&T, KeyBank and other banks began financial donations to organizations that could support the immediate needs of the community. KeyBank provided a van that delivered food and took people to nearby grocery stores. Providence, Rhode Island-based Citizens Financial Group, whose ATM inside Tops was inaccessible during the store’s temporary closure, installed a fee-free ATM near a community center located about a half-mile north of Tops, and later put a permanent ATM inside the center that remains there today. And M&T rolled out a short-term loan program to provide capital to East Side small-business owners.
One of the funds that benefited from banks’ support was the Buffalo Together Community Response Fund, which has raised $6.2 million to address the long-term needs of the East Side.
Bank of America and Evans Bank each donated $100,000 to the fund, whose list of major sponsors includes four other banks — JPMorgan Chase, Citigroup, M&T and KeyBank. Thomas Beauford Jr., a former banker who is co-chair of the response fund, said banks, by and large, directed their resources into organizations where the dollars would have an immediate impact.
“Banks said, ‘Hey, you know … it doesn’t make sense for us to try to build something right now. … We will fund you in the work you’re doing,'” said Beauford, who has been president and CEO of the Buffalo Urban League since the fall of 2020. “I would say banks showed up in a big way.”
Fourteen months later, banks say they are committed to playing a positive role on the East Side. For the second year, KeyBank is sponsoring a farmers’ market on the East Side, an attempt to help fill the food desert in the community. Last fall, BankOnBuffalo launched a mobile “bank on wheels” truck that’s stationed on the East Side every Wednesday. The 34-foot-long truck, which is staffed by two people and includes an ATM and a printer to make debit cards, was in the works before the shooting, and will eventually make four stops per week around the Buffalo area.
Evans has partnered with the city of Buffalo to construct seven market-rate single family homes on vacant lots on the East Side. The relationship with the city is an example of how banks can pair up with other entities to create something meaningful and lasting, more than they might be able to do on their own, said Evans President and CEO David Nasca.
The bank has “picked areas” where it can use its resources to make a difference, Nasca said.
“I don’t think the root causes can be ameliorated” by banks alone, he said. “We can’t just grant money. It has to be within our construct of a financial institution that invests and supports the public-private partnership. … All the oars [need to be] pulling together or this doesn’t work.”
‘Little or no engagement with minorities’
All of these efforts are, of course, welcomed by the community, but there is still criticism that banks haven’t done enough to make up for their past contributions to segregating the city. And perhaps more importantly, some of that criticism centers on banks failing to do their most basic function in society — provide credit.
In 2021, the New York State Department of Financial Services issued a report about redlining in Buffalo. The regulator looked at banks and nonbank lenders and found that loans made to minorities in the Buffalo metro area made up 9.74% of total loans in Buffalo. Overall, Black residents comprise about 33% of Buffalo’s total population of more than 276,000, census data shows.
The department said its investigation showed the lower percentage was not due to “excessive denials of loan applications based on race or ethnicity,” but rather that “these companies had little or no engagement with minorities and generally made scant effort to do so.”
“The unsurprising result of this has been that few minority customers or individuals seeking homes in majority-minority neighborhoods have made loan applications … in the first instance.”
Furthermore, accusations of redlining persist today, even though the practice of discriminating in housing based on race was outlawed by the Fair Housing Act of 1968.
In 2014, Evans was accused of redlining by the New York State Attorney General, which said the community bank was specifically avoiding making mortgage loans on the East Side. The bank, which at the time had $874 million of assets, agreed to pay $825,000 to settle the case, but Nasca maintains that the charges were unfounded. He points to the fact that the bank never had a fair lending or fair housing violation, no specific incidents were ever claimed and that the bank’s Community Reinvestment Act exam never found evidence of discriminatory or illegal credit practices.
The bank has a greater presence on the East Side today, but that’s because it has grown in size, not because it is trying to make up for previous accusations of redlining, he said.
“Ten years ago, our involvement [on the East Side] certainly wasn’t what you’re seeing today,” Nasca said. “We were looking to participate more, but we were participating within our means and our reach. As we have grown, we have built more resources to be able to do more.”
Shortly after accusations were made against Evans, Five Star Bank, the banking arm of Financial Institutions in Warsaw, New York, was also accused of redlining by the state Attorney General. Five Star, which has been growing its presence in the Buffalo market for several years, wound up settling the charges for $900,000 and agreeing to open two branches in the city of Rochester.
KeyBank is currently being accused of redlining by the National Community Reinvestment Coalition. In a 2022 report, the group said that KeyBank is engaging in systemic redlining by making very few home purchase loans in certain neighborhoods where the majority of residents are Black. Buffalo is one of several cities where the bank’s mortgage lending “effectively wall[ed] out Black neighborhoods,” especially parts of the East Side, the report said.
KeyBank denied the allegations. In March, the coalition asked regulators to investigate the bank’s mortgage lending practices.
Beyond providing more credit, some community members believe that banks should be playing a larger role in addressing other needs on the East Side. And the list of needs runs the gamut from more grocery stores to safe, affordable housing to infrastructure improvements such as street and sidewalk repairs.
Alexander Wright is founder of the African Heritage Food Co-op, an initiative launched in 2016 to address the dearth of grocery store options on the East Side, where he grew up. Wright said that while banks’ philanthropic efforts are important, banks in general “need to be in a place of remediation” to fix underlying issues that the industry, as a whole, helped create. (After publication of this story, Wright left his job as CEO of the African Heritage Food Co-Op.)
Aside from charitable donations, banks should be finding more ways to work directly with East Side business owners and entrepreneurs, helping them with capital-building support along the way, Wright said. One place to start would be technical assistance by way of bank volunteers.
“Banks are always looking to volunteer. ‘Hey, want to come out and paint a fence? Want to come out and do a garden?'” Wright said. “No. Come out here and help Keshia with bookkeeping. Come out here and do QuickBooks classes for folks. Bring out tax experts. Because these are things that befuddle a lot of small businesses. Who is your marketing person? Bring that person out here. Because those are the things that are going to build the business to self-sufficiency.
“Anything short of the capacity-building … that will allow folks to rise to the occasion and be self-sufficient I think is almost a waste,” Wright added. “We don’t need them to lead the plan. What we need them to do is be in the community and [be] hearing the plan and supporting it.”
Parker, of Open Buffalo, has similar thoughts about the role that banks should play. One day, soon after the massacre, an ATM appeared down the street from Tops, next to the library that sits across the street from Parker’s office. Soon after the ATM was installed, Parker began fielding questions from area residents who were skeptical of the machine and wanted to know if it was legitimate. But Parker didn’t have any information to share with them. “There was no outreach. There was no community engagement. So I’m like, ‘Let me investigate,'” she said. “I think that’s a symptom of how investment is done in Black communities, even though it may be well-intentioned.”
As it turns out, the temporary ATM belonged to JPMorgan Chase. The megabank has had a commercial banking presence in Buffalo for years, but it didn’t operate a retail branch in the region until last year. Today it has four branches in operation and plans to open another two by the end of the year, a spokesperson said.
After the Tops shooting, the governor’s office reached out to Chase asking if the bank could help in some way, the spokesperson said in response to the skepticism. The spokesperson said that while the Chase retail brand is new to the Buffalo region, the company has been active in the market for decades by way of commercial banking, private banking, credit card lending, home lending and other businesses.
In addition to the ATM, the bank provided funding to local organizations including FeedMore Western New York, which distributes food throughout the region.
“We are committed to continuing our support for Buffalo and helping the community increase access to opportunities that build wealth and economic empowerment,” the spokesperson said in an email.
In the year since the massacre, there has been some progress by banks in terms of their interest in listening to the East Side community and learning about its needs, said Nicholas. But he hasn’t felt an air of urgency from the banking community to tackle the issues right now.
“I do experience banks being a little more open to figuring out what their role is, but it’s slow. It’s slow,” said Nicholas. The senior pastor of the Lincoln Memorial United Methodist Church, located about a mile north from Tops, Nicholas is part of a 13-member local advisory committee for the New York arm of Local Initiatives Support Coalition, or LISC. The group is focused on mobilizing resources, including banks, to address affordable housing in Western New York, specifically in the inner city, as well as training minority developers and connecting them to potential investors, Nicholas said.
Of the 13 members, seven are from banks — one each from M&T, Bank of America, BankOnBuffalo, Evans and KeyBank, and two members from Citizens Financial Group. One of the priorities of LISC NY is health equity, and the fact that banks are becoming more engaged in looking at health disparities is promising, Nicholas said. Still, they have more work to do, he said.
“I need them to think more on how to strengthen and build the economy on the East Side and provide leadership around that, not only to provide charitable things, but using sound business and banking and community development principles to say, ‘OK, if we’re going to invest in this community, these are the types of things that need to happen in this community,’ and then encourage their partners and other people they work with … to come fully in on the East Side.”
Some bankers agree with the community activists.
“Putting a branch in is great. Having a bank on wheels is great,” said Noah of BankOnBuffalo. “But if you’re not embedded in the community, listening to the community and trying to improve it, you’re not creating that wealth and creating a better lifestyle for everyone.”
What could make a substantial difference in terms of banks’ impact on the community is a combination of collaboration and leadership, said Taylor. He supports the idea of banks leading the charge on the creation of a comprehensive redevelopment and reinvestment plan for the East Side, and then investing accordingly and collaboratively through their charitable foundations.
“All of them have these foundations,” Taylor said. “You can either spend that money in a strategic and intentional way designed to develop a community for the existing population, or you can spend that money alone in piecemeal, siloed, sectorial fashion that will look good on an annual report, but won’t generate transformational and generational changes inside a community.”
Banks might be incentivized to work together because it could mean two things for them, according to Taylor: First, they’d have an opportunity to spend money in a way that would have maximum impact on the East Side, and second, if done right, the city and the banks could become a model of the way to create high levels of diversity, equity and inclusion in an urban area.
“If you prove how to do that, all that does is open up other markets of consumption all over the country because people want to figure out how to do that same thing,” Taylor said.
Some of that is already happening, at least on a bank-by-bank case, said KeyBank’s Owunwanne. Through the KeyBank Foundation, the company is able to leverage different relationships that connect nonprofits to other entities and corporations that can provide help.
“I see this as an opportunity for us to make not just incremental changes, but monumental changes … as part of a larger group,” Owunwanne said “Again, I say that not to absolve the bank of any responsibility, but just as a larger group.”
Downstairs from Parker’s office, Golden Cup Coffee, a roastery and cafe run by a husband and wife team, and some other Jefferson Avenue businesses are trying to build up a business association for existing and potential Jefferson-area businesses. Parker imagined what the group could accomplish if one of the banks could provide someone on a part-time basis to facilitate conversations, provide administrative support and coordinate marketing efforts.
“In the grand scheme of things, when we’re talking about a multimillion dollar [bank], a part-time employee specifically dedicated to relationship-building and building out coalitions, it sounds like a small thing,” Parker said. “But that’s transformational.”
June 21 (Reuters) – Commonwealth Bank of Australia (CBA.AX) on Wednesday cut its buffer rate for some borrowers refinancing their existing home loan to 1% from the industry standard of 3%, providing relief to many clients who would otherwise fail to qualify due to high interest rates.
The country’s prudential regulator advises lenders to refinance home loans only if they believe the customer could repay at 3% higher than current market rates.
While CBA’s alternate buffer is not in line with the regulator’s recommendation, it does not break the serviceability buffer, the regulator said, as it allows exceptions to the policy but warns against high volumes.
CBA has a quarter of the Australian mortgage market, where thousands of borrowers are expected to end their fixed rate loans this year, forcing them to shop around for new loans at current rates.
The Australian Prudential Regulation Authority (APRA) in a letter earlier this month said banks could face heightened supervisory attention if they report large volumes of policy exceptions which could pose risks to the banks’ loan books.
Starting Friday, CBA will allow select customers who meet some “strict eligibility criteria” to refinance their loans if they are capable of repaying at 1% above current market rates, the bank said, adding that a track record of no missed payments for at least a year was among several criteria for customers to be considered eligible.
“We know that due to the current interest rate environment some home owners are facing challenges refinancing their home loans so we are introducing an alternate interest rate serviceability buffer,” CBA’s Michael Baumann, executive general manager home buying said.
Westpac Banking Corp (WBC.AX), the country’s second-biggest mortgage provider, also offers modified serviceability assessment rate to customers unable to meet the industry standard.
The Reserve Bank of Australia has raised interest rates by 400 basis points to an 11-year high of 4.1% since May last year.
Reporting by Sameer Manekar in Bengaluru and Byron Kaye in Sydney ; Editing by Nivedita Bhattacharjee
Our Standards: The Thomson Reuters Trust Principles.
The term “gross spread” refers to an important element of the initial public offering (IPO) process: Gross spread is the money underwriters earn for their role in taking a company public.
When a company IPOs, or “goes public,” it releases its shares onto a public stock exchange, an undertaking that demands a tremendous amount of work behind the scenes. That work involves bankers, analysts, underwriters, and numerous others. All of that work must be compensated, which is where the gross spread — also called the underwriting spread — comes into play.
How Gross Spread Works
The gross spread refers to the cut of the money that is paid to the underwriters for their role in taking a company public. In effect, it’s sort of like a commission paid to the IPO underwriting team. But the underwriting spread isn’t a flat fee, but a spread in the sense that it represents a share price differential.
Underwriters
Underwriters are common players in many facets of the financial industry. It’s common to find underwriters working on mortgages, as well as insurance policies.
When it comes to IPOs, underwriters or underwriting firms work with a private company to take them public, acting as risk-assessors, effectively, in exchange for the underwriters spread. Their job is to evaluate risk and charge a price for doing so.
Recommended: What Is the IPO Process?
The Role of Underwriters in the IPO Process
These IPO underwriters generally work for an investment bank and shepherd the company through the IPO process, ensuring that the company covers all of its regulatory bases.
The underwriters also reach out to a swath of investors to gauge interest in a company’s forthcoming IPO, and use the feedback they receive to set an IPO price — this is a key part of the process of determining the valuation of an IPO.
In order to generate compensation for all this work, the underwriters typically buy an entire IPO issue and resell the shares, keeping the profits for themselves. So, the underwriters set the IPO price, buy the shares, and — assuming the shares increase in value once they become publicly available — the underwriters generate a profit from reselling them, the same way you would selling the shares of an ordinary stock that had risen in value.
For companies that are going public, the benefit is that they’re essentially guaranteed to raise money from the IPO by selling the shares to the underwriters. The underwriters then sell the shares to buyers they have lined up at a higher price in order to turn a profit. That difference in price (and profit) is the gross spread.
For the mathematically minded, the gross spread — basically the IPO underwriting fee — would be equal to the sale price of the shares sold by the underwriter, minus the price of the shares it paid for the shares. 💡Quick Tip: Keen to invest in an initial public offering, or IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.
Gross Spread & Underwriting Costs
The gross spread, for most IPOs, can range between 2% and 8% of the IPO’s offering price — it depends on the specifics of the IPO. There can be many variables that ultimately dictate what the gross spread ends up being.
The gross spread also comprises a few different components, which are divided up by members of the underwriter group or firm: The management fee, underwriting fee, and concession. The underwriters typically split the gross spread, overall, as such: 20% for the management fee, 20% for the underwriting fee, and 60% for the concession. More on each below:
Management fee
The management fee, or manager’s fee, is the amount paid to the leader or manager of the investment bank providing underwriting services. This fee essentially amounts to a commission for managing and facilitating the entire process. It’s also sometimes called a “structuring fee.”
Underwriting fee
The IPO underwriting fee is similar to the management fee in that it is collected by and paid to the underwriters for performing their services. Again, this is more or less a commission that is taken as a percentage of the overall gross spread and divided up by the underwriting teams.
Concession
The concession, or selling concession, is generally the compensation underwriters get for managing the IPO process for a company. So, in this sense, the concession is a part of the gross spread during the IPO process and is, effectively, the profits earned by selling shares when the process is complete. It’s divided up between the underwriters proportionately depending on the number of shares the underwriter sells. 💡Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.
Examples of Gross Spread
Here’s an example of how gross spread may look in the real world:
Company X is planning to IPO, and its shares are valued at $30 each. The underwriters working with Company X on its IPO purchase the full slate of shares prior to the IPO, and then go off and sell the shares at $32 each to investors and the general public.
In this case, the gross spread would be equal to the difference between what the underwriters paid Company X for the shares, and what they then sold the shares for to the public — $32 – $30 = $2.
Or, to express it as a ratio, the gross spread is 6.7%. More on the ratio calculation below.
Gross Spread Ratio
As mentioned, the gross spread can be expressed or calculated as a ratio. Using the figures above, we’d be looking to figure out what percentage $2 is (the gross spread) of $30 (the share price sold to the underwriters).
So, to calculate the ratio, you’d simply divide the gross spread by the share price — $2 divided by $30. The calculation would look like this:
$2 ÷ $30 = 0.0666
The figure we get is approximately 6.7%. Also note that the higher the ratio, the more money the underwriters (or investment bank serving as the underwriter) receives at the end of the process.
IPO Investing With SoFi
Though the gross spread, or underwriters spread, is not a well-known aspect of the IPO process, it’s relatively straightforward. Underwriters, who shepherd a company through the IPO process, ultimately buy the initial shares from the company at one price, and sell them to the public at the IPO at a higher price. The spread between the two is considered the gross spread, or the compensation the underwriting team earns for all their work.
Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it’s wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.
Invest with as little as $5 with a SoFi Active Investing account.
FAQ
What is meant by the underwriting spread?
The underwriting spread is another term for the gross spread. Underwriters pay issuers, or an issuing company, for a company’s shares prior to the IPO. The underwriting firm then turns around and sells shares to investors. The difference (expressed as a dollar amount) that the underwriter pays the issuer and that it receives back from selling the shares during an IPO is the underwriting spread.
What are gross proceeds in an IPO?
Gross proceeds, in relation to an IPO, refers to the total aggregate amount of money raised during the public offering. This is all of the money raised by investors during the IPO.
What is a typical underwriting spread?
As underwriting spreads are usually expressed as dollar amounts, the typical underwriting spread can vary depending on several variables in the IPO process — including share price, share volume, etc. But in general, it can amount to between 3.5% and 7% of gross proceeds during an IPO.
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Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.
New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures. Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
I hate plumbing. Whenever a faucet begins to leak or a drain clogs, my stomach sinks. I know it means hours of frustrating work. It’s not that plumbing is difficult — it’s just that I’m not well-versed in the ways of home-improvement. Somehow I missed that part of Manhood Training.
Despite my apprehension, over thirteen years of homeownership, I’ve made it a point to do as much repair work as I’m able. It has saved me a lot of money. And while I’m a ball of nerves going into a project, I get tremendous satisfaction when I finish something and know that I did the work with my own hands.
Yesterday we woke to find water on the floor of the upstairs bathroom. When we couldn’t immediately locate the source of the leak, we debated calling a plumber. Because it was the weekend, and because we’re trying to save money, Kris and I decided to tackle the problem as a team. While she buried herself in the Readers Digest Complete Do-It-Yourself Manual, I took the toilet apart. Ultimately we diagnosed the likely culprit: corroded fasteners connecting the tank of the toilet to the bowl. We drove to the hardware store, picked up replacement parts, and then put Humpty Dumpty back together again.
We were able to repair our toilet for $6.49 and an hour of time. Had we called in a plumber, it would have cost much more. This is how home repairs usually seem to play out for us: some initial frustration, a Eureka! moment, a trip the hardware store for a $10-$20 part, and then a final repair.
Here are some things we’ve learned when dealing with home repairs:
Don’t panic. A zen-like state is important for repair work. I don’t mean this in any mystical sense, but it’s helpful to be calm and relaxed when doing this sort of thing. Rash actions can turn a small problem into a disaster.
Act quickly. Don’t put off repairs. While you don’t want to charge blindly ahead, you do want to take care of the problem as soon as possible. We once put off fixing a small leak in the roof. You can guess how that ended during a rainy Oregon winter.
Use a reference. Google is your friend. We’ve found lots of answers on the internet. As I mentioned above, though, Kris and I find it convenient to have a book on hand. In 1994, we paid about 20 bucks for a copy of the Readers Digest Complete Do-It-Yourself Manual. The book has literally saved us hundreds of dollars.
Work methodically. When you take something apart, neatly set the pieces someplace safe. Label them, if appropriate. Be orderly. Follow instructions. Measure twice, cut once. If you have a digital camera handy, take pictures of how things were assembled before you dismantled them. These sorts of careful steps make repair work run smoothly.
Don’t make assumptions. Some of my most frustrating do-it-yourself experiences have come when I’ve made assumptions about a problem, only to be proven wrong. Here’s an example from my days as a computer consultant: I once spent several hours trying to fix a software problem that had caused a printer to stop working. As it turned out, it wasn’t a software problem at all — the power cord had gone bad. Boy did I feel stupid. Don’t assume things.
Pay attention. As you work, try to notice details. You never can tell what piece of information will be important. Are the electrical outlets you’re replacing two-prong or three-prong? How big were the screws on that gizmo, anyhow?
Be safe. Some tasks are dangerous. Electricity can kill you. So can a chainsaw. I have a friend who accidentally wired his outside power for 220 instead of 110. The first time he plugged in his Christmas lights, it was like the fourth of July! When one of our trees fell into the neighbor’s yard, I had my first experience with a chainsaw. I learned quickly that even a small tree has a great deal of mass.
Know when to call in an expert. Not everyone can fix every problem, of course. Some things do require a specialist. But there are many nuisances around the home that can be solved with patience, research, and elbow grease. Don’t be intimidated by replacing a light fixture or a garbage disposal. But call an electrician to replace the knob-and-tube wiring in your attic.
Home-improvement can be intimidating if you don’t have much experience with it. But with time, you can develop the confidence and the basic skills necessary to perform many common household repairs. If you’re interested in developing further competence, take classes from your local community college, or attend seminars at a home-improvement store. (I’ve also learned a lot by shadowing contractors as they work on our home. I always ask permission first, though. Some are happy to explain what they’re doing, but others are nervous to have an observer.)
Next on my home repair agenda: Diagnosing why the light in our guest room sometimes switches on, but mostly doesn’t.
Have you ever considered taking out a personal loan to invest? If so, you aren’t alone.
When you hear about the ability to make money in the stock market, it can be tempting to find a way to start investing today. This is true even if you don’t have any available cash.
Want to invest, but don’t have cash? Find a personal loan with Fiona
If you’re trying to get ahead, it may seem tempting to take shortcuts to get there faster. Unfortunately, some alternatives are a very bad idea. This includes taking out a personal loan to invest in the stock market in the vast majority of cases.
There may be a very rare time when it makes sense to take out a personal loan to invest. However, I don’t think I would ever do it. Here’s what you need to know.
What’s Ahead:
How personal loans work
Personal loans have a couple of key characteristics that are important to understand.
Personal loans are unsecured debt
First, they are unsecured loans. This means the lender can’t foreclose on your home or repossess your car if you don’t make payments.
Unsecured loans, such as personal loans, have higher interest rates than secured loans. This makes sense because there is nothing the lender can directly seize if you default on your loan. It is riskier for the lender.
Personal loans have a fixed term
Next, personal loans are fixed-term loans. This means you have a set number of months or years to repay the loan after you take it out.
Based on your balance, interest rate, and term, you’ll have to make a payment each month that results in paying off the loan at the end of the term.
This is unlike a credit card where you can carry a balance from month to month and make minimum payments.
This is important if you’re considering investing the money. It means you have to make a fairly decent monthly payment each month. You can’t pay the minimum and pay the rest off at the end of the loan.
Can I use a personal loan to invest?
Unless your lender specifies otherwise, a personal loan can be used for anything you want. This includes investing in the stock market.
That said, some lenders will offer you lower personal loan interest rates if you use the money for certain purposes. That’s because some uses may result in a lower risk to the lender than others.
For instance, personal loans for debt consolidation may require the funds to be disbursed directly to the loans you’re consolidating. Read the terms of your loan to understand if there are any restrictions on the money.
Why would someone take out a loan to invest?
A person may be tempted to take out a personal loan to invest if they see an opportunity to make money. If a person could earn higher returns investing the money they borrow than they pay in interest, they could come out ahead.
This can be very tempting after a stock market crashes and then starts rebounding. In some cases, you may see sharp gains for a few days or weeks that would exceed the costs of some personal loans over a year.
When would this be worth it?
Taking out a personal loan to invest only makes sense when you’re very confident your investment gains will exceed the costs of the loan.
For instance, let’s say you can take out a personal loan with an 11.99% interest rate. It would only make sense to use this money to invest if your returns could exceed that 11.99% cost.
Investing is volatile, though. Nothing is guaranteed. It probably wouldn’t make sense to take out an 11.99% personal loan to earn 12% by investing. Due to taxes and the minimal amount you’d gain, you wouldn’t come out ahead.
In order for the risk to be worth it, you’d likely have to get returns that greatly exceed the interest rate you pay on your personal loan.
There are other types of investments other than the stock market. Some of these investments may make more sense to use a personal loan for.
For instance, let’s say you have the opportunity to invest in your small company that has a huge profit margin. Unfortunately, you can’t get access to cash any other way than a personal loan for whatever reason.
If you put in $10,000 but could earn $20,000 from that investment in three years, it may make sense to take out a personal loan to invest.
Why it may be a good idea to take out a personal loan to invest in the stock market
Taking out a personal loan to invest in anything, including the stock market, only makes sense in one scenario. This scenario is when you know with a relative degree of certainty that your returns will exceed your costs.
Investing in the stock market at any rate of return is far from certain. I personally do not believe it is ever a good idea to take out a personal loan to invest in the stock market.
Why it may not be a good idea to take out a personal loan to invest in the stock market
There are several reasons why taking out a personal loan to invest in the stock market is a bad idea.
Personal loans have fixed terms
First, personal loans have fixed terms that are usually relatively short. Personal loan terms typically don’t exceed seven years, although they can be longer in some cases.
Short terms are a problem because most investments vary in returns greatly from year to year. The returns average out over the long run, but the short-term returns are very unpredictable.
While seven years seems like a long time, it isn’t in the grand scheme of the stock market.
High interest rates
Personal loans don’t offer low interest rates like car loans and mortgages do. While you may see low personal loan rates advertised, such as 5.99% APR, people rarely qualify for them.
These low rates are usually for funds for a specific use, such as debt consolidation. Additionally, they’re typically for the shortest term loan, such as 24 months. Finally, you normally have to have impeccable credit to qualify for these rates.
To make matters worse, the longer the loan term is, the higher your interest rate will be, too. In order for you to invest for a long enough period to have investment returns be less volatile, it would cost you even more in interest payments. This could cut down on your potential profit.
You have to make monthly payments on your loan
Personal loans require you to make equal monthly payments. When you’re invested, you don’t want to have to sell portions of your investment to make payments.
Doing so would lower your return. It could also cause you to sell when your investment is performing poorly, resulting in locking in a loss.
Other types of investments that have greater returns may not be as liquid. This means you can only sell them at certain times. If you can’t get your money out to make your monthly payment, you could default on your loan.
Who should consider taking out a personal loan to invest?
In my opinion, only people with investments that have guaranteed returns and very little to no risk should take out a personal loan to invest. These investments rarely exist.
The risk isn’t worth the relatively low amount you’ll earn over the interest costs of the loan in the vast majority of cases.
This means most people should avoid taking out a personal loan to invest.
It’s about risk and return – here’s an example
Let’s say you take out a five-year personal loan for $10,000 to invest in the stock market. There is no origination fee, so you get the full $10,000 upfront. Interest rates from these loans vary, but you get an 11.99% APR for the purposes of this example.
Your investment has a break out period and you get an incredible 15% return on your investment each year. In this case, it might make sense to take out a personal loan to invest. Unfortunately, you’d only know this after the fact.
At the same time, your interest is not tax-deductible. You would have to pay income taxes on the gains on your investments. This would reduce your profits.
Even without taxes, you’d only theoretically earn a 3.01% difference between the loan APR and the return from the investment.
Once you consider the fact that you’d have to make a monthly payment of about $222, things get trickier. You’d have to have cash on hand to make this monthly payment or you’d have to sell some of your investment each month to make your payments.
If your investment varies in price, you may end up having to sell low to make your monthly payment. This could reduce your future returns below the 15% per year the investment would have returned if you left the money in the investment the entire time.
Let’s now look at an example with a more reasonable rate of return for the stock market. Let’s assume you earn an 8% return each year.
In this case, you’d be paying 3.99% per year to invest. This makes no sense. You wouldn’t take out a personal loan to invest because it’d cost you money to do so.
Personal loan providers you may want to consider
If you happen to have an investment opportunity that would likely result in a higher return than the cost of the loan, here are a few lenders you may want to consider.
Fiona
Fiona doesn’t directly offer personal loans, but they do help you find a personal loan lender. Once you pick the type of loan you want, you input a few details about your situation. In the case of personal loans, you input your credit score range, zip code, loan purpose, and the amount of the loan you’re requesting.
Based on this information, Fiona will display several lenders that may match your needs. They show you estimated terms, APRs, and monthly payments. If you find an offer you like, click continue. You’ll be directed to input information to get personalized loan offers for your situation.
Find a personal loan lender with Fiona.
Monevo
Monevo is another personal loan aggregator website. You’ll just some basic information about yourself and the purpose of your loan to get quotes from more than 30 different lenders. The process won’t affect your credit score, and you’re under no obligation to accept any of the offers.
If you want to get a feel for the lenders and rates being offered, you can browse a list before you even start the quote process. Loans are available in amounts up to $100,000, with rates range between 1.99% – 35.99% APR. If you like one of the offers, you’ll then progress to the full application.
By shopping multiple lenders at once, you’ll save time and increase your chances of getting great rates. Whether you go with one of the quotes offered or not, you’ll get a great idea of the rates and terms you can expect.
Get personal loan rate quotes from Monevo.
Credible
Credible is another personal loan aggregator. They allow you to check your personal loan rates without impacting your credit. Since it doesn’t hurt your credit, it doesn’t hurt to check to see if they have any offers the other aggregator sites don’t that may offer you a better rate.
Credible is so confident in their ability to offer the best rates that they’ll give you $200 if you find a lower rate. Of course, terms apply so look at the details of the offer. See Terms*. Even with this guarantee, it still makes sense to shop around to ensure you’re getting the best rate.
Get personal loan quotes from Credible.
Credible Credit Disclosure – Requesting prequalified rates on Credible is free and doesn’t affect your credit score. However, applying for or closing a loan will involve a hard credit pull that impacts your credit score and closing a loan will result in costs to you.
Places to consider investing if you decide the potential returns are worth the risk
If you decide to take out a personal loan to invest, here are a few of the options you may consider.
Robo-advisors
Robo-advisors manage your money on your behalf by using technology instead of human financial advisors. Based on your risk tolerance, robo-advisors generally set up a well-diversified portfolio.
Robo-advisors usually charge a fee for their service, which will cut into your returns. Since robo-advisors typically take a diversified approach, you aren’t likely to hit a home run and get amazing returns.
Self-directed brokerage accounts
Self-directed brokerage accounts allow you to pick what you want to invest in. You could invest in several options including individual stocks, mutual funds and ETFs.
Self-directed brokerage accounts allow you to have a better chance of getting returns that exceed a personal loan’s interest rate. At the same time, they can also result in a larger loss.
ETFs
Exchange-traded funds (ETFs) are a basket of investments that help you diversify. When you buy an ETF, you’re normally purchasing several investments. Some ETFs are as large as the S&P 500 index while other ETFs only follow a small sector or industry.
If you want to bet on a particular industry with an ETF, there is a chance your returns could be high enough in the short term. If you bet wrong, your losses could also be massive.
Mutual funds
Mutual funds also allow you to invest in a basket of investments. Rather than trading live throughout the day, mutual funds settle all trades and reprice once per day after the markets close.
Like ETFs, you can use mutual funds to purchase a very diversified basket of investments or a small portion of investments such as a certain industry.
Real estate crowdfunding
Real estate crowdfunding is a much talked about investment option. Here are two companies that may offer investments you could be interested in.
Roofstock
Roofstock currently offers two main services. The first allows you to buy rental properties from around the country. Personal loans normally won’t provide enough cash to invest in most of these properties, so it isn’t really an option to invest personal loan proceeds.
What may be an option is Roofstock’s Roofstock One offering. This allows you to buy shares of a rental property rather than the whole thing. Only accredited investors can invest in Roofstock One, though. Most people taking out a personal loan to invest don’t likely fall into this category.
Learn more about Roofstock.
Fundrise
Fundrise is a real estate crowdfunding option that doesn’t require you to be an accredited investor. Rather than let you invest in individual properties, you invest in a portfolio of properties Fundrise sets up. They have a starter portfolio as well as three other portfolios you can choose from depending on your goals.
Unfortunately, Fundrise displays its historical annual returns (8.7% to 12.4%) on the front page of its website. These returns aren’t high enough to allow significant profit after taking out a personal loan, so it isn’t a good idea in most cases.
Learn more about Fundrise.
This is a testimonial in partnership with Fundrise. We earn a commission from partner links on MoneyUnder30. All opinions are our own.
Summary
Ultimately, it almost never makes sense to take out a personal loan to invest in the stock market. In rare cases, it may turn out to be profitable if you get lucky.
Even so, the profit probably won’t be very large compared to the risk you’re taking.
Our Style Your Staples series has been such fun. We’ve looked at the Pencil Skirt, the Oxford Shirt, and now we’re back with the last installment: the Denim Short!
Yet again, all the ladies put their stylish spin on this summer must-have and now I want to give each and every one of their looks a go. But first, here’s how I tried my hand at working denim cut-offs, Apartment 34 style:
I have to say, this assignment was my biggest styling challenge yet. Though I’m tall and obviously have long legs, I’ve never been a huge short-shorts wearer. I don’t know what it is – maybe being in my 30s, maybe living in slightly chilly San Francisco…I just haven’t been a huge shorts fan. But when I put these super-cropped puppies on, they were decidedly the most flattering for my body shape, so I went with ’em! I couldn’t rock the boy short – they just felt frumpy on me. I guess you ought to flaunt it while you got it, right?!
get your shop on: shorts // top // blazer (similar) // heels (similar) // necklace // sunglasses // clutch (similar)
The key to feeling comfortable with this look was covering up up top. I firmly believe a girl can never have too many stripes in her closet and a good tee can always be dressed up. By throwing on my favorite oversized double-breasted blazer, I didn’t feel overexposed. By toting a structured clutch, a touch of gold jewelry and putting on a pair of clean and classic nude sandals, my shorts suddenly felt more sophisticated and ready for primetime.
I was also pleased to discover that denim shorts can be highly versatile. A tank and sandals is all you need for the beach. Sneakers, t-shirt and hat and you’re ready for an afternoon at the baseball park. I’d switch out my blazer for a leather jacket and a Celine-inspired heel to take this look from day to date night!
Be sure to check out Casey, Hilary, Jen, Sara, and of course, the masterminds of this whole operation, Kat & Em’s, takes on the denim short. I’m quite certain you’ll find more than one look to love!
PS: Did you like this series? Are you interested in seeing more ways to wear some of your favorite fashions? I’m thinking of bringing something like this back to the blog on a more regular basis if you do!
original photography for apartment 34 by Emily Scott, bike courtesy of Public Bikes