The Finance Professionals' Post

Cartoon: Double Dip Nightmare

Illustration by Karl Wimer.

As an impartial, nonprofit forum for the finance and banking industries NYSSA encourages discussion and debate among its member and other professionals. Commentaries, however, should be taken as the sole opinion of the author(s) and not of NYSSA. If you would like to submit a commentary to the Finance Professional's Post, send your article to the editor.

Career Podcast: Using Your Online Presence

In this edition of Friday Career Coffee, "Using Your Online Presence: Strategies for Career Advancement," Shelly Palmer gives invaluable advice regarding creating, shaping, and maintaining a strong, healthy online presence. In the brave new world of social media and web 2.0, a carefully maintained online presence is just as important as a tidy physical appearance. Palmer has strategies for users of Facebook, LinkedIn, Twitter, and everything in between. In the clip below, Palmer explains how to get the most out of your LinkedIn. 

If you like what you hear, the full audio of the event is available on NYSSA's On-Demand website.

Book Review: Managing Hedge Fund Managers

Edward Stavetski’s Managing Hedge Fund Managers provides a thorough analysis of the factors to be considered when investing in hedge funds. The book is particularly relevant now, at a time when less capital (due to deleveraging and redemptions) is chasing more alpha (due to market dislocations), making the hedge fund space more attractive. It is all the more compelling in our post-Madoff environment, as due diligence gains new significance, and investors are forced to play detectives.

Poll: Considering the Estate Tax

In the wake of the death of George Steinbrenner, the discussion surrounding the looming reinstatement of the estate tax has taken a turn for the morbid. The inheritance tax has been abolished for the year 2010, and consequently Steinbrenner's estate will not be taxed. In 2009 the tax was at  Starting in 2011, the tax will jump up to 55%. In his Freakonomics blog, Stephen J. Dubner speculates that changes in the inheritance tax may affect how much heirs are willing to invest in their parents' health care. Some aging individuals may even consider taking their own lives, according to an article in the Wall Street Journal. 

Danse Macabre: The Banking and Brokerage Sectors Reel from Crisis to Crisis

The financial services sector is caught in a death waltz, spun around by bad loans, trapped in the embrace of plunging stock prices, and dizzied by embarrassing scandals. And like Hans Christian Andersen’s little girl with the red shoes, it’s driven to keep on dancing. Nearly a trillion dollars in government bailouts have sunk almost without a trace, leaving global stakeholders desperate to stop the music.

What kind of future can possibly be in store for us? Chastened executives may wince at the thought of government regulators and outside forces reshaping the industry, but transformation is by now a foregone conclusion. The only questions are what types of institutions will live to see another sunrise, and what attributes executives must cultivate to ensure that their companies are among those that endure.

Book Review: Restoring Financial Stability

When it comes to the causes of the current financial crisis, Restoring Financial Stability (also known as the “NYU Stern Report”) takes a multifaceted perspective. The book features 18 papers, written by 33 New York University and NYU Stern faculty members. Taken together, the papers give a system-wide context for the meltdown and offer insights into the role played by market participants—banks, the shadow banking system, rating agencies, regulators, and government. Each paper also suggests reforms intended to minimize the possibility of similar future crises.

The Greater Fool Theory: Managing and Modeling Risk

The most dramatic financial meltdown since the Great Depression occurred despite recent advances in risk management techniques. Because of a fervent but unfounded belief in some quarters that VaR (value at risk) measures worst-case scenarios, financial institutions were exposed to crippling losses when VaR models failed to anticipate the extent of potential price movements, in some cases by whole orders of magnitude. 

Poll: The Goldman Sachs Ruling

On April 16 the SEC filed charges against Goldman Sachs for defrauding investors in a mortgage-backed collateralized debt obligation. The SEC alleged that Goldman Sachs omitted and misstated crucial facts about the CDO, most importantly the role of the hedge fund firm, Paulson & Co.’s direct involvement in the selection of the portfolio and bet against the deal. Three months of uncertainty over the case ended last week when Goldman Sachs agreed to make a $550 million settlement with U.S. regulators. While some watchdogs are disappointed that the settlement is much lower than the estimated $1 billion, others believe that $550 million is enough to stir a change and influence other institutions to employ better business practices. Tell us what you think. 

Wall Street Meets the EPA

Where can I, as a securities analyst or portfolio manager, gain access to free, consistent, and reliable data on sector-based environmental performance that avoid the current limits of voluntary company reporting?

This question was central to a session entitled “Dialogue to Explore the Use of EPA Data in Financial and Investment Analysis,” held in New York City on June 19, 2008. The invitation to the meeting, which attracted 85 participants drawn in large part from the financial-services industry, was jointly issued by the New York Society of Security Analysts, Inc. (NYSSA), and the US EPA (Environmental Protection Agency) Region 2 (which includes New York). The meeting was part of the EPA’s National Dialogue on Access to Environmental Information, an attempt to cope with the increasing demand for environmental information from numerous professional sectors, including community leaders, academics, and the financial sector.

What We Talk About When We Talk About Quality Dividend Yield

How to formulate an effective equity investment strategy in today’s uncertain market will be the topic of an upcoming NYSSA Market Forecast seminar. Merrill Lynch’s Head of U.S. Quantitative Strategy, Savita Subramanian, who will be a featured speaker at the luncheon, maintains that companies with “high-quality” dividend yields are particularly prudent picks in this environment, and that quantitative screening can enable investors to distinguish the “good” dividend plays from the “bad.” 

Book Review: Hedge Funds Humbled

What went wrong? The hedge fund industry had seen tremendous growth in the last decade with assets coming close to three trillion dollars. Hedge fund managers were the kingpins of the investment world—but in 2008, the industry collapsed. Only one in five hedge funds had a positive year, more than 1,400 hedge funds closed, and investors were clamoring for the doors. In Hedge Funds Humbled, Trevor Ganshaw, a partner at a multistrategy hedge fund in New York City, explores the reasons for the dramatic turn of events and describes an industry definitely in need of some humbling.

Are All Components of ESG Scores Equally Important?

Our research questions whether all aspects of responsible investing are equally important for stock analysis. Can the different aspects of ESG performance—that is, performance in environmental and social sectors and corporate governance, as well as operations in “sin” areas—be combined for stock analysis? Our research is geared toward investment practitioners, and we therefore concentrate on stock returns (the main parameter affecting the performance of investment managers) and ROE (return on equity, which is arguably the most important parameter of corporate performance and stock quality). 

Poll: Volcker Rule

Pundits are divided on the impact of the Volcker Rule: the editors of the Economist argue that the reform will not have much effect on alternative investors, but Jennifer Rossa, writing for the Wall Street Journal, defends the Volcker Rule, pointing to new research that shows that stopping banks from having private equity arms may not be such a bad idea.

Have more to say about this topic? Comment here.

Book Review: Confidence Game

Christine S. Richard's new book, Confidence Game, tells the controversial story of how hedge fund operator Bill Ackman shorted municipal bond insurer MBIA. The short selling was done with credit default swaps, and the ultimate profit for his Pershing Square Capital Management was $1.1 billion. The controversy arose from first shorting the stock, then issuing a negative research report. Ackman engaged in what the book describes as “perhaps the most aggressive 'short' campaign in Wall Street history.”

Recent Research: Highlights from July 2010

"Index Volatility in Perspective" The Journal of Index Investing  (Summer 2010). Joanne M. Hill.

As the number of indexes and index-based investment products expands, it is critical for investors to understand relative index volatility. This article discusses the issues to consider when evaluating index risk and shares insights and data from the author’s recent historical index volatility analysis. The research evaluates the risk of index exposure from multiple perspectives—over time and on a relative basis—and encompasses U.S. equity, global equity, U.S. sector, U.S. Treasury, and select commodity market indexes. Specifically, the author explores how time dimension affects perception and assessment of risk, the cyclicality of volatility measures, patterns that may signal a future shift in risk, how index volatility measures trend compared to index return measures, and how index volatility behaves above and below the median, as well as under increasing levels of risk. Based on this research, the author shares several important insights, including the observation that risk can suddenly shift well above median levels for a given index, and those shifts often occur simultaneously across multiple indexes. As a result, significant short-term value changes may occur if portfolios are not modified to reduce risk when the inherent volatility of indexes rises. Alternatively, heightened risk may also present tactical investment opportunities for investors who have an ability to anticipate directional index moves.

The Ghost of Credit Past: The Specter of the Heilig-Meyers Fiasco Haunts Today's Failed Lenders

“Heilig-Meyers: From AAA to Junk Bond”

“CDO Ratings Are Whacked by Moody’s—AAA to Junk in a Day Raises More Questions about Credit Agencies”

The first of these headlines appeared from Credit Card Management in 2001, and announced the collapse of what was then one of the largest American furniture retailers. The origins of that collapse lie in the late 1990s, when Heilig-Meyers began to service its own debt. As much as 75% of its sales were made with two-year installment loans.

Rise and Shine: ARRA Stimulates the Municipal Funding Market

With the implementation of TARP (Troubled Asset Relief Program) and the passage of ARRA (American Recovery and Reinvestment Act of 2009), the federal government has pledged to rebuild the United States, both literally and figuratively. Some of the methods President Barack Obama’s administration will employ to revive the economy include monetary support for financial institutions, bringing liquidity back to the credit markets, and creating jobs by reconstructing aging infrastructure. Traditionally, the funding for these tremendously expensive fiscal policies has come either from increased taxes, or from municipalities borrowing money by issuing municipal bonds, or munis.

Book Review: Going to Extremes

Cass Sunstein writes, “The economic crisis that began in 2008 was a product, in significant part, of a form of group polarization, in which skeptics about the real estate bubble, armed with statistical evidence, did not receive a fair hearing or were in a sense silenced.” This raises a couple of immediate questions. For example, how do group dynamics influence individual and group (that is, market) decisions? What can astute investors or financial decision makers learn from Sunstein that will improve the way they process information and arrive at conclusions?

New Data Uncovers Opportunities in the IPO Market

This white paper, authored by Renaissance Capital, examines how and why the IPO market attracts such a significant amount of capital, and explains the benefits of incorporating IPOs into the asset allocation strategy and shows that if structured properly, IPOs can add superior risk-adjusted returns to a portfolio. Renaissance highlights the FTSE Renaissance IPO Composite Index, which is the first comprehensive benchmark index to track the activity and performance of the US IPO market. This index can be used to accurately compare the performance of the IPO market to the broader equity market. 

Click here to read the white paper "New Data Uncovers Opportunities in the IPO Market."

The FTSE Renaissance IPO Index Series, includes a set of indexes designed to give investors unparalleled exposure to the investable US IPO market.