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Becky: Hello everyone and welcome back to EnglishClass101.com. This is Culture Class, Season 3, Lesson 17 -The Top 5 Biggest Duels in Finance. I’m Becky.
Eric: And I’m Eric. In this lesson we're going to present two major financial institutions and then talk about how they compete. This is a long lesson, so let's get to it!
Becky: Number five in our top five biggest duels in finance is the Blackstone group versus KKR.
Eric: And who are those companies exactly?
Becky: It’s funny you should say that. As you’ve no doubt noticed, the industry of finance is a unique one, in that the big players in finance usually specialize in corporations and normal people like us never use them.
Eric: And that’s the case with the Blackstone Group and the KKR?
Becky: Yes, it is. However these two companies are extremely important for a number of reasons. These two companies specialize in what’s called private equity, which is just another term for investment money for companies that aren’t publicly traded.
Eric: If a company is publicly traded, then any person can become a stockholder. Private equity firms can help a person or more likely a corporation invest in a private company.
Becky: KKR, which stands for Kohlberg Kravis Roberts, is a private equity firm. In other words, KKR and Blackstone compete in the same market. Whenever you look at large billion-dollar investments or acquisitions of large billion dollar companies, you’ll usually see either Blackstone or KKR in the paperwork.
Eric: For example, in one of our lessons we talked about the largest corporate buyout in the world, which had a value of nearly $45 billion. This buyout was orchestrated and performed by KKR.
Becky: Before that, the largest corporate buyout ever done was of a company called Equity Office Properties, valued at $37 billion. Guess who orchestrated and performed that buyout?
Eric: Blackstone Group?
Becky: Exactly. These two companies compete for clients in their fields and often try to destabilize the deals of each other.
Eric: Really?
Becky: Yeah, For example, one deal that Blackstone had orchestrated was almost signed when KKR came in and gave a higher bid. Because of KKR, the deal had to be renegotiated at the last minute for an extra $800 million.
Eric: These two firms are major players in the purchase and acquisition of companies in the United States.
Becky: Which brings us to our next duel. Number 4 in our Top 5 Biggest Duels in Finance is Goldman Sachs vs. J.P. Morgan Chase.
Eric: Now these are companies that I’ve heard of. I don’t know that much about Goldman Sachs but J.P. Morgan is the J.P. Morgan Chase Bank, and that’s the Chase Bank that I see everywhere.
Becky: That’s right. J.P. Morgan Chase is a gigantic multinational multibillion dollar bank.
Eric: Goldman Sachs, on the other hand, is specifically an investment firm. That means that Goldman Sachs doesn’t have savings accounts or debit cards like JP Morgan Chase Bank.
Becky: And that’s the interesting part. It’s in this investment banking sector that Goldman Sachs and J.P. Morgan compete. J.P. Morgan has a division of its bank that focuses on investment banking, and it’s this division that competes so heavily with Goldman Sachs.
Eric: These two companies do many different things. One of the most lucrative things that they do is manage investment portfolios for fantastically rich people all around the world.
Becky: An important principle in finance is that interests needs to be higher than inflation. That’s a very simple but important principle, and in the United States, the average inflation rate is 4%.
Eric: My savings account only gives me about 1%.
Becky: Exactly. There’s no savings account in the United States that will give you a 4% or higher interest rate. The only way for your money to “outrun” inflation is by investing it. And that is what Goldman Sachs specializes in.
Eric: So, you give them money and they invest it into companies all around the world?
Becky: Exactly. Now, how they do all that is very complex and way beyond the scope of this lesson, but that’s the basic idea. And the way they compete is with the amount of money that they have to invest and how large of a return they can get back.
Eric: How much are you able to get back?
Becky: That depends on a lot of things. Most of these investment accounts will make around 8% per year, which is more than double the inflation in the United States. So, this is good. The division of JP Morgan that does investment banking can also make about 8% per year.
Eric: This makes these two banks tight competitors because if one bank can perform at 8.1%, then customers will bank with them. Both companies are always trying to maximize the percentage return on these investments. So what’s our next duel?
Becky: Number 3 in our top 5 biggest duels in finance is Bank of America versus Citigroup.
Eric: This duel is a bit more historical. For a long time, Citigroup was one of the most powerful banks in the world. However, Bank of America has challenged that status and, depending on who you ask, is succeeding at being a “better” bank.
Becky: That’s right. If you look just at the pure numbers, Bank of America “overpowers” Citigroup in revenue and number of employees. However, Citigroup tends to have a higher profit margin, which means that even though they have less total revenue, they tend to make more profit.
Eric: And that’s how these two banks compete. They're both gigantic multinational banks. Both of them have every range of financial service from billion-dollar equity firms to college checking accounts.
Becky: In the end, which bank you choose is probably just a matter of who has the best deal or which bank you prefer. However, if the fighting between these two banks continues for much longer, it could hurt their public image and as a consequence may hurt their customers.
Eric: At that point, we’ll see which bank is really the stronger bank.
Becky: And next on our list is?
Eric: Number two of our top five biggest duels in finance is Visa versus MasterCard. To put it simply, Visa and MasterCard facilitate the exchange of money in transactions from one bank to another.
Becky: In other words, when you go to pay for your food at a restaurant, your money is in your bank account and the restaurant has their own account in some other bank. When you swipe your card, MasterCard or Visa makes the connection between the two bank accounts.
Eric: Now the competition between these two is over how many people they can get using their cards. And the way they do that is through the banks. For example, you can’t get a Visa card. In truth, you have a Wells Fargo card that operates through the Visa network. Or MasterCard if it’s a MasterCard.
Becky: These two companies, as well as American Express and any other card company, make money based on the number of transactions they process. So, for example, if you’re at a restaurant and you swipe your card, MasterCard does that bank transfer that we talked about before.
Eric: Then MasterCard charges a 3% fee for processing the transaction. I don’t know if it’s always 3% but, in our research for this lesson, 3% was the most common amount.
Becky: So, the more money you spend using your Visa or MasterCard, the more fees they can charge.
Eric: That’s why you see so many commercials and ads telling you that you should use your credit or debit card.
Becky: Okay, so what’s our number one duel?
Eric: Number 1 of our top 5 biggest duels in finance is the Fed versus inflation.
Becky: That almost makes me laugh. However, this really is a big problem and probably one of the most complex and difficult rivalries in all of finance in all the world.
Eric: Now the “Fed” is a short way of saying the Federal Reserve. The Federal Reserve is kind of like the United States National Bank. It isn’t really a bank, but it’s close.
Becky: Exactly. However, one of the main purposes of the Fed is to control inflation. Inflation is when there is a general increase in the level of prices and goods and services in an economy over a period of time.
Eric: The reason inflation is so difficult to control is because it requires a tricky balancing act. Typically, inflation goes up when unemployment is low, and governments — especially democratic ones — are almost always motivated to keep unemployment as low as possible.
Becky: But if the inflation rate gets too high, it can cause an economy to stop functioning because the people don’t have enough money to purchase the goods and services they need. It also causes wealth, in the form of savings and investments, to lose value. Of course, if unemployment is high, people start running out of money to purchase goods and services and the economy stops growing.
Eric: Because of this, the government always wants to keep both inflation and unemployment low. However, low inflation suggests that demand is low in the economy, and this entails unemployment.
Becky: Brazil during the 1980s and 90s is an excellent example of out of control inflation. They had what is sometimes referred to as hyperinflation, where, in a matter of a few hours, something simple like a piece of chicken could double or triple in price and never get cheaper again. Just a constant increase in price at a rapid rate.
Eric: Of course, this kind of inflation can happen in a lot of different ways — and it can even happen when unemployment is high — a kind of double whammy that is called an economic depression. To control inflation, the Fed uses many methods that, sadly, are way beyond the scope of this lesson.
Becky: However, thousands of people all over the United States work day in and day out to study, understand, and support the Fed in how it controls inflation. Because if inflation gets out of hand, not only will the United States be in a difficult situation, but the rest of the world will be affected as well.
Eric: It really is a big responsibility, and that’s why we said at the beginning that it’s one of the most complex and difficult rivalries in all of finance. Inflation, when controlled properly, can be a good thing. However, there are very few things that can destroy an economy or country faster or more effectively than out-of-control inflation. Okay, that’s all for this lesson.
Becky: Thanks for listening, and we’ll see you next time!
Eric: Bye!