The Great Mismatch: Addressing Barriers to Global Capital Flows (Part V)

PART V: Ideas for Navigating Capital Flows 

To succeed in the evolving global capital landscape, long-term institutional investors will need to be at the forefront of re-thinking long-standing assumptions and re-shaping markets. Enough success factors have already been identified to serve as a rough guide for investors to navigate the growing opportunities in emerging markets, while mitigating risks, in both the near term and beyond. (See Exhibit below.)

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The Great Mismatch: Addressing Barriers to Global Capital Flows (Part IV)

PART IV: The Barriers to Efficient Capital Flows (continued)

Efficient cross-border capital flows—allowing investors to search for reliable returns, and in the process, meet legitimate capital needs wherever they are—would be a more effective way to finance the global economy than today’s system. In theory, few dispute this. In practice, many barriers have been erected that hamper efficient flows. The deliberate or inadvertent barriers to efficient global capital flows have been erected by a unique combination of regulators, governments, historical conventions and path-dependencies, investor mindsets and capital-seekers themselves (see below exhibit).

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Book Review: The End of Banking By Manuel Stagars, CFA, CAIA, ERP

The End of Banking: Money, Credit, and the Digital Revolution
. 2014. Jonathan McMillan. 

Announcing the demise of the financial system as we know it has become popular in the aftermath of the Great Recession. In fact, the Financial Times has dedicated an entire series to the topic, aptly named Death of Banks, wherein author Izabella Kaminska chronicles the downfall of traditional banking.

A recent book called The End of Banking goes one step further: In addition to carefully explaining how the financial sector maneuvered itself into the financial crisis of 2007–08, it presents several unconventional ideas to do away with regulatory capital arbitrage that sticks taxpayers with the bill for bankers’ risk taking. The book proposes a fairly straightforward policy framework that promises to reduce shadow banking, decentralize financial services from too-big-to-fail banks, improve regulation, and realign the private and the public sector with transparent monetary policy.

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When Fear of Bonds Exceeds Fear of Stocks

Worried about your bonds? You’re not alone.

In speaking with our investors in recent weeks, the most universal theme by far was concern over their bond holdings. Historically low interest rates coupled with the prospect of the first Fed rate hike since 2006 (“rising rates”) were causing anxiety. And most importantly, the average bond fund was down in the first half of the year. There’s nothing more fear inducing to investors than short-term losses.

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Banks’ Financial Reporting and Financial System Stability by Prof. Viral Acharya

Vacharya_photoThe use of accounting measures and disclosures in bank contracts and in regulation suggests that the quality of banks’ financial reporting is central to the efficacy of market discipline and non-market mechanisms in limiting bank debt and risk overhang in good economic times, as well as mitigating the consequences of risk overhang that could compromise the stability of the financial system in downturns. Professors Viral Acharya and Stephen Ryan examine how research on banks’ financial reporting, informed by the financial economics literature on banking, can generate insights about how to enhance the stability of the financial system.

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Lower Earnings, Higher Stock Prices: The Voting Machine

 “The stock market is a voting machine rather than a weighing machine. It responds to factual data not directly, but only as they affect the decisions of buyers and sellers.”- Graham and Dodd, Security Analysis

Earnings drive stock prices, so says investing lore. As earnings rise, stock prices move higher. As earnings fall, stock prices move lower. If it were only that simple.

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Museum Launches Book and Website Tracing the “Family Trees” of the 50 Largest US Banks

GoAF jacket_final_line_webThe Museum of American Finance and Columbia Business School Publishing today announced their collaboration on a new book featuring the genealogical “family trees” of the nation’s 50 largest banks alongside beautifully illustrated narrative histories of each bank. The book will officially be released on March 10, 2015.

Authored by renowned financial historians Dr. Robert E. Wright and Dr. Richard Sylla, Genealogy of American Finance explores how 50 financial companies came to dominate the US banking system and their impact on the nation’s political, social and economic growth. A story that spans more than two centuries of war, crisis and opportunity, it reminds readers that American banking was never a fixed enterprise but has evolved in tandem with the country.

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Do Not Do This in Banking Interviews


Now that internal promotions are all the rage, investment banks are slower to invite people to interviews. Why hire externally when you can promote a junior with far less hassle? When you’re invited to a finance interview, it’s therefore become all the more important that you don’t mess up.

Below, we have a selection of real life interview disasters provided to us anonymously by finance recruiters who work inside and outside investment banks. Read and learn. On no account commit the same mistakes yourself.

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Eight Leading Indicators That Your Banking Job Is Killing You


Is your banking job doing you in?

Your banking job may be boring. It may be exhausting, stressful, all-consuming, and fraught with the sort of political machinations better suited to an episode of Question Time, but does it have serious implications for your mortality? Researchers at Stanford Business School and Harvard University have come up with a helpful checklist of workplace stressors which suggest that it might.

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Book Review: Millennial Money


This easy-to-read book encourages millennials to invest in the global stock market for wealth accumulation. It provides the reasons why they should invest, strategies they can follow, and behavioral pitfalls they should avoid.

Millennials have gone through a lot in the last two decades.1 They experienced recessions in 2001 and 2008, with the latter leading to the global financial crisis (GFC). For most millennials, their chosen careers have been a roller coaster ride, and some have already moved on to second careers, mostly because of the GFC’s severe effects on employers. Millennials have seen the life savings of their parents and others dwindle over a relatively short time. Consequently, they are skeptical about investing their hard-earned money in equity markets. In Millennial Money: How Young Investors Can Build a Fortune, Patrick O’Shaughnessy encourages millennials to overcome their skepticism and benefit from the process of wealth creation.

Millennial Money is an easy read that instills high doses of confidence through its analysis of historical data to explain why investing in risky assets is essential. O’Shaughnessy highlights the fact that the millennials’ greatest advantage is their youth and shows how compounding helps them in the long run. One dollar invested today could be worth $15 by the time a millennial retires in 40 years. If one waited 10 years to start investing, however, that dollar would be worth only $7.50 at the same rate of return. In short, postponing investment has a huge impact on one’s retirement lifestyle.

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Telltale Signs Investment Banking Isn’t for You


Investment banking isn’t for everyone. In fact, the industry turns out to not be a fit for the majority of people who enter it. A recent study found that only one-third of investment banking analysts who started in 2012 are still at their current firm.

Why do they leave? A lack of a work-life balance and opportunities elsewhere, particularly on the buy-side, are the two most common responses. But that’s just a shallow dive. We asked several former investment bankers when they could tell that the writing was on the wall—when they knew they’d be leaving the industry in months if not weeks. Here’s what they said. Warning: as they are former bankers, the responses are a bit jaded.

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Book Review: Bonds Are Not Forever


This book is recommended for anyone interested in the contemporary role of bonds in investment portfolios. The author explores the history of debt from ancient to modern times and discusses the growth of derivatives, developments in risk management, inflation in the modern era, the political backdrop of today’s debt standoffs, and why “bonds are not forever.”

Bonds Are Not Forever: The Crisis Facing Fixed Income Investors explores the history of debt from ancient to modern times. It discusses the growth of derivatives, developments in risk management, inflation in the modern era, the political backdrop of today’s debt standoffs, and why “bonds are not forever.”

Author Simon Lack is well qualified to present such a wide-ranging and timely discussion, having spent his entire career in bond trading, derivatives, hedge funds, and investment management, including 23 years at J.P. Morgan overseeing some 50 professionals in a highly profitable group and sitting on the firm’s investment committee. In 2009, he founded SL Advisors, LLC (a registered investment adviser), and he is involved in a number of community volunteer boards. Often quoted in the business press, Lack is the author of the international bestseller The Hedge Fund Mirage and frequently speaks on financial subjects.

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Recent Research: Highlights from November 2014

"Let’s Save Retirement: Repairing America’s Broken System of Funding Workers’ Retirement"
The Journal of Retirement 
Russell L. Olson and Douglas W. Phillip

Far too few American workers can look forward to financial independence as they age. Many will be obliged to extend their working lives, some into their seventies. A patchwork of defined contribution (DC) retirement plans now serve as the primary retirement saving vehicle in the private sector, but they are complex, costly, and challenging for employers and employees to manage. This article presents a comprehensive set of recommendations for a unified private DC pension system to cover all working Americans, with a single set of rules and without cost to the government. A key part is the creation of broadly diversified trusteed retirement funds (TRFs), whose sponsors are trustees, with fiduciary responsibilities. Employee contributions will automatically go into a broadly diversified TRF unless the employee either opts out or selects a preferred TRF or the employer already sponsors a defined benefit (DB) pension plan. TRFs will relieve employers from fiduciary responsibility for all future DC contributions. To protect retirees from inflation, longevity, and asset price volatility risk, retirees will be encouraged to use their TRF savings to buy either an immediate or deferred indexed annuity. A new government agency, the Federal Longevity Insurance Administration, will enable private insurance companies to provide low-cost annuities.

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Recent Research: Highlights from October 2014

"Lightning Strikes: The Creation of Vanguard, the First Index Mutual Fund, and the Revolution It Spawned"
The Journal of Portfolio Management 40th Anniversary Issue 
John C. Bogle

“Lightning Strikes” tells the story of how Vanguard founder John C. Bogle came to create a unique mutual mutual fund structure in 1974, and how the index fund strategy almost inevitably followed. Paul Samuelson’s essay in the first issue of The Journal of Portfolio Management was published at almost the same moment that Vanguard began. In “Challenge to Judgment,” Samuelson urged that somebody, somewhere, somehow form an index fund. Inspired, Mr. Bogle accepted the challenge, and in 1975 created the world’s first index mutual fund. Vanguard’s two disruptive innovations—mutuality and indexing—have combined to make Vanguard the largest firm in the mutual fund industry. In the second part of the essay, Mr. Bogle summarizes 10 of the 13 essays he has written for The Journal of Portfolio Management and provides a perspective on his works.

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Derivatives and Systemic Risk: It’s Also about Jobs

Derivatives are the least understood component of systemic risk. Derivatives pose issues of size, measurement, and behavior—unlike loans. They string the biggest banks together in ways unseen three decades ago and even undermine job creation. Government officials may have had to bail in 2008, but nobody can claim that there will be no more bailouts until derivatives are better understood and managed.

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The “Greatest” Carry Trade Ever? Understanding Eurozone Bank Risks


We show that eurozone bank risks during 2007-2013 can be understood as “carry trade” behavior. Bank equity returns load positively on peripheral (Greece, Italy, Ireland, Portugal, Spain, or GIIPS) bond returns and negatively on German government bond returns, which generated “carry” until the deteriorating GIIPS bond returns adversely affected bank balance sheets. We find support for risk-shifting and regulatory arbitrage motives at banks in that carry trade behavior is stronger for large banks and banks with low capital ratios and high risk-weighted assets. We also find evidence for home bias and moral suasion in the subsample of GIIPS banks. 


–Viral V. Acharya† Sascha Steffen‡

We thank an anonymous referee, Jacob Boudoukh, Martin Brown, Filippo di Mauro, Ruediger Fahlenbrach, Mariassunta Giannetti, Paul Glasserman, Paul Heidhues, Martin Hellwig, Gur Huberman, Vasso Ioannidou, Anil Kashyap, Bryan Kelly, Jan-Pieter Krahnen, David Lesmond, Christian Leuz, Marco Pagano, Hélène Rey, Joerg Rocholl, Anthony Saunders, Phil Strahan, Anjan Thakor, Elu von Thadden, Lucy White, Andrew Winton and participants in the 2014 Moody’s / SAIF Credit Research Conference, 2014 Conference on Regulating Financial Intermediaries, 2013 SFS Cavalcade, 2013 NBER Summer Institute IFM, 2013 CAF Summer Research Conference, 2013 FIRS Conference, 12th annual FDIC / JFSR conference, 49th Bank Structure and Competition Conference, 2012 C.R.E.D.I.T., 2nd Mofir Ancona and seminar participants at Darden, Deutsche Bundesbank, ESMT, Goethe University, Indiana, Lancaster, Leeds, Mainz, Norges Bank, NYU Stern, Ohio State University, Osnabrueck, and Tulane for valuable comments and suggestions. We are grateful to Matteo Crosignani and Diane Pierret for excellent research assistance. 

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John Lennon Said It Best: “Living is Easy with Eyes Closed"

I was floored by this* Saturday’s New York Times article, “Seeing a Supersize Yacht as a Job Engine, Not a Self-Indulgence.”  I was amazed not only by how the subject of the article, Mr. Jones, rationalized his extraordinary consumption habits, but also by the mere fact that the article was published.

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Is Friday Still the Best Day to Apply for a Job in Banking?


Today’s the day. According to our own figures, Friday is the day of the week when the ratio of resume searches per job application is optimal: there are two searches per application, compared to 1.5 to 1.7 on other days. Recruiters appear to be comparatively busy on Fridays, while candidates appear to be comparatively slack. You therefore have a few more hours to send out your resume.

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The Central Contradiction of Capitalism that Piketty Overlooked

It is instructive to observe the reaction to the Piketty phenomenon — a 700-page treatise on political economy that became an overnight Amazon bestseller deserving, according to Larry Summers, of a Nobel Prize. It is similarly instructive to note the spectacle of the viral Russell Brand interview with the BBC’s Jeremy Paxman in which Brand pretty much shreds Paxman and calls for revolution. I can’t claim to have actually read Piketty’s tome, but I’ve read a lot of the reviews, and I have watched the Russell Brand video. Regardless of where you come down on their arguments, the response to Piketty’s book and the wide appeal of Brand’s rant taken together tell us that trouble is brewing.

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Book Review: The Dollar Trap


The author, an international finance expert, focuses on the complexities of the US dollar as the global reserve currency. Exploring current fundamental modeling and the politics of international financial coordination, he details why, in spite of news reports concerning its demise, the dollar will continue to be the dominant world currency.

International investments are ultimately driven by the value of the dollar, the core currency around the globe. Currency movements are a primary determinant of international fixed-income diversification and are important for any international equity decision. Nonetheless, hedging is the default approach among money managers because their ability to forecast currency movements is so limited. Given the difficulty of forecasting, relatively little time is spent analyzing the fundamental components of currency returns. Dollar dynamics are often relegated to being treated as a mystery.

–Mark S. Rzepczynski

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Forward Thinking on Collateral Management

Most financial firms in the present day would need an overhaul of their current collateral management practices. This comes in the midst of the burden being experienced by an already intensely regulated financial industry and the new measures of regulation on OTC derivatives in the post financial crisis world. The costs of regulation are near-crippling to some firms. Big dealers are planning to exit or divest certain lines of business that will face huge operational costs as a result of regulation, and are no longer deemed profitable.

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Recent Research: Highlights from June 2014

"Go Big or Go Home: The Case for an Evolution in Risk Taking"
The Journal of Investing (Summer 2014
Mike Sebastian

This article argues that alternative investments—private equity, real estate, and hedge funds—have natural advantages in risk and return over traditional stock and bond investments. A large allocation to alternatives relative to current institutional practice is needed for a material contribution to an institutional investor’s bottom line. Investors should consider whether moving toward an “efficiency” portfolio with an emphasis on low-cost passive management or an “opportunity” portfolio with heavy reliance on value added through active management—especially alternative investments—is most appropriate for them. Investors who can tolerate the cost, complexity, and illiquidity should consider opportunity-type allocations of 40% of their return-seeking assets to private equity, non-core real estate, and hedge funds. Over time, institutional investors will likely choose alternative investments and indexing as their primary investment options, and traditional active management will likely transform to take on qualities currently associated with alternative investments.

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When Markets Fail: Part Two

There are five main reasons for market dysfunction:

  •  Transaction costs and market frictions;
  • Information asymmetry and adverse selection;
  • Market externalities;
  • Existence of public goods (bads), nonexclusivity of consumption, and Pigovian markets (activities that reduce society’s welfare, or marketing bads); and
  • Problems of collective action (e.g., arms races).

In Part I of this article, I discussed the first two reasons. Below I cover the remaining three.

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Yellen’s 2.25% Target for 2016 May Be a Huge Mistake

Janet Yellen surprised almost everyone on March 19 by speaking off-script and providing forward policy guidance that can undermine the Fed’s credibility, at best, or cause another crisis, at worst. If the economic data comes in weak by the end of tapering and the markets swoon, the Fed will have no choice but to implicitly admit it was wrong and keep interest rates close to zero indefinitely. However, if the Fed continues with its plan to raise rates in the face of a weaker economy and declining market, the actions may cause another violent crash.

Zero short-term rates and the first round of QE were essential to avoid a complete financial meltdown. Subsequent rounds did little for the real economy yet unintentionally produced high leverage and asset bubbles in various places by providing cheap financing for companies, investors, and speculators alike. The policy also resulted in a massive transfer of wealth from labor to asset owners leading to the largest wealth and income inequality in recent history.

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Book Review: In Bed With Wall Street


In his book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy, Larry Doyle is analyzing the relationship between Wall Street, the regulators, and Washington. Using his experience in Wall Street, Larry’s goal in writing this book was the pursuit of “truth” and “desire to help people.”  These are noble goals and Larry was brave enough to ask questions many people were afraid to ask.  Who regulates the regulators? How do we know that regulators didn’t collude with Wall Street firms?

However, Larry wasn’t clear about what type of truth he was looking for or how was he going to help people who were victimized by the crisis.  He wanted to expose the corrupt relationship between Wall Street and Washington even though we knew all along that this type of relationship existed before: revolving doors from Wall Street to Washington, or Wall Street to regulators and vice-versa.  We also know the role of lobbying from Wall Street to Washington. This is the structure of capitalism and the way we function here in the US.

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When Markets Fail—Part I

“The only function of economic forecasting is to make astrology look respectable.” J. K. Galbraith

The reputation of financial economics as a “dismal science” (a phrase that Thomas Carlyle coined in relation to economics) was richly deserved during the 2008–2009 financial crisis and its aftermath. Although many scholars, including Robert Shiller, Paul Krugman, and Raghuram Rajan, rightly viewed the impending situation as a crisis (see also Lerner 2008), the perceived failure of economic scientists and high-level Wall Street practitioners to predict the meltdown reinforced this low reputation.

Several well-educated and skilled financial regulators were corrupt, as the documentary Inside Job points out. Yet I must remind readers that the handling of the crisis as it unfolded was highly competent, thanks mostly to Ben Bernanke, chairman of the Federal Reserve, and Tim Geithner, then president of the Federal Reserve Bank of New York. Economic knowledge, then, still stands for something. Below I discuss what contemporary economics has learned about cases in which markets fail and the state has to intervene.

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Falling Short of Expectations? Stress-Testing the European Banking System

The Single Supervisory Mechanism – a key pillar of the Eurozone banking union – will transfer supervision of Europe’s largest banks to the ECB. Before taking over this role, the ECB will conduct an Asset Quality Review to identify these banks’ capital shortfalls. This column discusses recent estimates of these shortfalls based on publicly available data. Estimates such as these can defend against political efforts to blunt the AQR’s effectiveness. The results suggest that many banks’ capital needs can be met with common equity issuance and bail-ins, but that public backstops might still be necessary in some cases.

The Eurozone is mired in a recession. In 2013, the GDP of the 17 Eurozone countries fell by an average of 0.5%, and the outlook for 2014 shows considerable risks across the region. To stabilise the common currency area and its (partly insolvent) financial system, a Eurozone banking union is being established. An important part of the banking union is the Single Supervisory Mechanism, which will transfer the oversight of Europe’s largest banks to the ECB (Beck 2013). Before the ECB takes over this responsibility, it plans to conduct an Asset Quality Review (AQR) in 2014, which will identify the capital shortfalls of these banks.1

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The Quality Dimension of Value Investing

Buying high quality assets without paying premium prices is just as much value investing as buying average quality assets at discount prices. Strategies that exploit the quality dimension of value are profitable on their own, and accounting for both dimensions of value by trading on combined quality and price signals yields dramatic performance improvements over traditional value strategies. Accounting for quality also yields significant performance improvements for investors trading momentum as well as value.

Benjamin Graham will always be remembered as the father of value investing. Today he is primarily associated with selecting stocks on the basis of valuation metrics like price-to-earnings or market-to-book ratios. But Graham never advocated just buying cheap stocks. He believed in buying undervalued firms, which means buying high quality firms cheaply.

–Robert Novy-Marx is assistant professor of finance at the Simon Graduate School of Business at the University of Rochester, New York, and a faculty research fellow of the National Bureau of Economic Research.

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Book Review: Mission in a Bottle

Mission-In-A-BottleMission in a Bottle: The Honest Guide to Doing Business Differently--and Succeeding is the story of the start up and building of Honest Tea, authorized by co-founders Seth Goldman and Barry Nalebuff. This is an entrepreneurial story with a happy financial ending, when the company was sold to Coca Cola. While you have read your share of entrepreneurial autobiographies—this is unique, simply because of its comic-book presentation. The format engages the reader in a fascinating way.

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15 Frightful Reasons Why Job Hopping Could Kill Your Banking Career


Are you a banker in Asia with a track record of moving between banks after short stints? You may want to stick with your current role for many more years.

Job hopping is high on hiring managers’ lists of pet hates in Asia. Bin Wolfe, managing partner of talent at EY for Asia Pacific, told us yesterday that China was awash with job-hopping candidates. And earlier this year, Nicholas Johnson, an MD at J.P. Morgan in Hong Kong, bemoaned receiving “bits-and-bobs CVs”, while Andrew Hendry, Asia managing director of M&G Investments, said there were too many job hoppers in Singapore.

But the tide may now be turning against career flip-floppers as cost-conscious banks in Asia shy away from investing in candidates who may not be with them for very long. “Most investment banks now count the number of jobs you’ve had, and if it’s more than one firm every two or so years, you’re ruled out,” said Vince Natteri, a Hong Kong-based director at recruiters Pinpoint Asia.

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Corporate Culture and Adverse Selection in Banking

JP Morgan’s $13 billion regulatory settlement is the latest case of banking indigestion attributable to long-tail liabilities stemming from practices almost a decade old – well over $100 billion so far, with more to come. Most people thought the global financial turbulence would have passed by now - a time-span longer than World War II - even allowing for lethargic growth in the world economy and the need to patch a lot of financial potholes.

Meantime, banks like Morgan are painfully adapting to new rules of the game designed to make the system more robust, the inevitable costs being passed along to customers and long-suffering shareholders. One can hope the high tuition pays-off down the road in better financial stability.

Still, memories are short. Redirection of financial flows through the shadow banking system, creation of new products, persistent regulatory faultlines, and renewed erosion of due diligence in some markets show the persistent need for vigilance. Meantime, banks have been called on the carpet for an amazing variety of transgressions that encompass fixing Libor and foreign exchange benchmarks, aiding and abetting money laundering and tax evasion, rigging metals and energy markets, and an assortment of fiduciary and consumer protection abuses. Most of these allegations are independent of the crisis legacy, and have surfaced despite what were thought to be adequate legal and regulatory safeguards. All of them first came to light at individual banks. But most of them later turned out to be “industry practice.”

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Book Review: Making It Happen

Making-it-Happen"Make it happen" was the advertising slogan of Royal Bank of Scotland, RBS. It expressed the optimistic aggression of RBS which grew from its 1727 founding and long history of prudent banking to being the largest bank in the world just before its collapse during the 2008 financial crisis. The author of Making It Happen, Iain Martin, has written one the best accounts of a bank that rode the credit bubble over the edge. The book is clearly written and organized, and brings in the wider political and cultural context. Martin interviewed over 100 individuals, many of whom were former RBS bankers, all off the record. He concluded this group had "at best a partial understanding of the businesses that made them so much money."

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Behold the Growing Job Sector Where Investment Banks Are Actually Hiring


If you’re an experienced banker in debt capital markets, you might want to send your CV to a regional bank in Asia.

With investment banking recruitment still stuck in the doldrums globally, DCM in Singapore and Hong Kong is providing a welcome wave of hiring, fueled by an active market.

DCM revenue in Asia Pacific hit $3.0bn in the first nine months of this year, accounting for a record 34% of IB revenue in the region, significantly above the 22% average over the past 10 comparable periods, according to figures from Dealogic.

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50 Things You’ll Need to Sacrifice If You Want to Make It in Banking

1. Sleep

Heard of the ‘Magic Roundabout’? No? Familiarize yourself, especially if you plan to work as a junior in M&A.

2. Lunch 

It’s supposedly for wimps…

In fact, you will probably have lunch. Banks like Goldman have impressive cafeterias for this exact purpose. But you will probably have a quick lunch and may not leave the building or your desk in order to purchase and consumer it.

3. Midweek sorties with old friends

There’ll be none of that. Old friends who work in government-type jobs might be meeting up for midweek drinks. You will have drinks with the team, or not at all.

4. Midweek sorties without any friends

Most banks will feed you if you work late enough into the evening. Grocery shopping will become a thing of the past.

5. Saturday mornings in the countryside

You’ll be in bed, or at work.

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Are We Not All Jasmines Now?

What is it about a Woody Allen film that leaves us always with a discomforting feeling of identification with its most abysmal character? This is certainly true with his latest film “Blue Jasmine,” which initially disappointed me, Kate Blanchett’s hauntingly brilliant performance notwithstanding. But given a little more time and reflection, its deeply disquieting meaning slowly seeped in.

I began to realize that it was more than an overdone cliché about a greedy Wall Street huckster who lavishes “everything one could want” on his attractive and well-kept wife “Jasmine,” who never asks or wants to know the true source of all that “success.” Easier to shop and party on Park Avenue and in the Hamptons as a socialite dripping platitudes about responsibility for “helping poor people.” Her husband “Hal” is a younger and flashier Bernie Madoff, higher up the Wall Street food chain perhaps, but nothing more than a sociopathic shyster, serially cheating on his complicit wife whom we cannot help but associate with Ruth Madoff.

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Book Review: The AIG Story


The AIG Story is corporate history, and the first look at confidential company information. Maurice Greenberg's driving force created what became the world's largest insurance company. When he left AIG, it had $ 1 trillion in assets, and $ 11 billion net income. This is one of the most dramatic success stories in American corporate history.

My view of the story is tempered by having read two similar books by CEOs, for whose companies I worked. At times, I reported directly to one of the CEOs. I know enough about both of them to know something of how they operated—the dark side as well as the sunny side. But despite this caveat, The AIG Story is well worth reading, and instructive.

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Book Review: After the Music Stopped


Throughout this long and multifaceted work on the recent financial crisis and its aftermath, Professor Blinder demonstrates that he is the rare academic economist who writes clearly about a complicated topic, clarifying complex issues for readers who remain confused about what happened. Some readers may find his proposed remedies problematic.

If writing the second draft of history is supposed to involve both fact telling and interpretation, Alan Blinder’s After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead certainly qualifies. But if books written several years after the worst financial crisis since the Great Depression are supposed to reflect a deeper understanding than those written in the throes of the emergency, this one falls short. Moreover, as the subtitle indicates, the author attempts to combine work of adescriptive nature and work of a prescriptive nature into a single, large, and far-reaching undertaking.

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The ETFG Monthly Liquidation Watch List

June’s bond market rout captivated investors’ attention as fixed income ETFs saw their largest monthly redemptions in history. But this month’s ETF Liquidation Watch List, compiled by ETF Global, contains only four fixed income products, one less than last month, and they are all inverse funds.

The monthly compilation, found on ETF Global's website, quantifies all exchange traded products that hold below $5 million in AUM, have existed for at least two years and had negative performance for the trailing 12 months. That said, most fixed income ETFs that are older than two years still have positive performance for the trailing 12 months and have more than $5 million in assets. That is not the case for equity products that meet the three criteria and have seen their ranks swell on the list that contains a record 78 ETPs this month.

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Recent Research: Highlights from August 2013

"Standing Out From the Crowd: Measuring Crowding in Quantitative Strategies"
The Journal of Portfolio Management (Summer 2013)
Rochester Cahan and Yin Luo

One of the most frequently cited criticisms of quantitative investing has been the charge that everyone uses the same factors and models. In other words, the popular strategies of the last few decades, such as value and momentum, have become crowded, leaving little room for investors to generate alpha. But is this actually true? The authors propose an empirical framework for measuring crowdedness, and use this to study the crowding in common systematic strategies.

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Commodities Are Different (In a “Full World”): Part 3

(This post is the third in an occasional series on why stronger oversight of commodity markets must be a public policy priority.)

JPMorgan has announced that it plans to exit the physical commodities businesses, while remaining committed to its historic roots in commodity financing and risk management, and to the precious metals business.  Is this Jamie Dimon recognizing an unstoppable paradigm shift now taking place in the financial sector as policymakers finally find the political will to reign in the power of too big to fail banks?

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When Bankers Rant: Six Reasons Why Big Banks Are Bad Places to Work


As anyone who’s worked for a large international bank will know, saying something adverse about your employer in a public forum is cause for instant dismissal. Saying something adverse about your employer even after your employment has terminated can lead to the removal of any stock that has yet to vest and to which you are still entitled despite moving on. Doing anything to damage the reputation of current and past banking employers is a no-no. And yet, employees bitching about investment banks is becoming quite the thing.

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Recent Research: Highlights from July 2013

"Framing Lifetime Income"
The Journal of Retirement (Summer 2013)
Jeffrey R. Brown, Jeffrey R. Kling, Sendhil Mullainathan, and Marian V. Wrobel

We provide evidence that individuals optimize imperfectly when making annuity decisions, and that this result is not driven by loss aversion. Annuities are more attractive when presented in a consumption frame rather than in an investment frame. Highlighting the purchase price in the consumption frame does not alter this result. The level of habitual spending has little interaction with preferences for annuities in the consumption frame. In an investment frame, consumers prefer annuities with principal guarantees; this result is similar for guarantee amounts below, at, and above the purchase price. We discuss implications for the retirement services industry and its regulators.

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Recent Research: Highlights from June 2013

"An Investment Strategy in Active ETFs"
The Journal of Index Investing (Summer 2013)
Sharon Garyn-Tal

Previous evidence suggests that selectivity or active management positively affects mutual fund performance, hedge fund performance, and passive ETF performance. I examine whether active ETF performance is also positively affected by active management. First, I look at active ETF performance estimated via the Fama–French–Carhart four-factor model. Second, using weekly return data on 10 active ETFs for the period 2008–2012, I find an investment strategy in active ETFs that earns a positive risk-adjusted excess return, based on R2 as extracted from the regression of the ETFs’ excess return on the four-factors’ excess return.

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Thoughts on Reputation and Governance in Banking


"In the end, it is probably leadership more than anything else that separates winners from losers over the long term – the notion that appropriate professional behavior reinforced by a sense of belonging to a quality franchise constitutes a decisive competitive advantage."

The epic financial crisis of a few years ago inflicted immense damage on the process of financial intermediation, the fabric of the real economy, and the reputation of banks and bankers. Even today, some five years later, little has happened to restore financial firms to their former glory near the top of the reputational food-chain in most countries. For reasons of their own, many boards and managers in the banking industry have little good to say about the taxpayer bailouts and the inevitable regulatory tightening. In the words for former Barclays CEO Bob Diamond, "There was a period of remorse and apology for banks. I think that period is over. Frankly, the biggest issue is how do we put some of the blame game behind us? There's been apologies and remorse, now we need to build some confidence.”

There have been some notable exceptions, of course. In the middle of the crisis Josef Ackermann, former CEO of Deutsche Bank and Chairman of the International Institute of Finance (the preeminent lobbying organization for the world’s largest banks), noted in 2008 that the industry as a whole was guilty of poor risk management, with serious overreliance on flawed models, inadequate stress-testing of portfolios, recurring conflicts of interest, and lack of common sense, as well as irrational compensation practices not linked to long-term profitability – with a growing perception by the public that banking was the playground of “clever crooks and greedy fools.” Ackermann concluded that the banking industry had a great deal of work to do to regain its reputation, and hoped that this could preempt damaging regulation. It was already too late for that.

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What JPMorgan's Recently Released Internal Reports Unintentionally Say

After apologizing at Davos—but only to his shareholders—according to William Cohan on the Bloomberg View, the JPMorgan Chairman and CEO hastened to add about 2012, “We did have record profits. Life goes on.”

It is true; JPMorgan reported a strong financial performance in 2012, “London Whale” trading fiasco notwithstanding. I must admit that despite my 18 years inside the firm (when it had a meager $300 billion balance sheet), I struggle to comprehend $100 billion of revenues, and a $2.3 trillion balance sheet, with an “off-balance sheet” managed by a few handfuls of mostly male, mostly 30-something traders that is many orders of magnitude larger. Maybe I’m a dinosaur. Life goes on.

Not so fast.

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Book Review: The New Tycoons


For Jason Kelly, “private equity by its nature and design, is secretive, a breathtakingly wealthy corner of the world.” Kelly is a writer at Bloomberg News, where he covers the global PE (private equity) industry. In his new book, The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything (Bloomberg) he uncovers hidden aspects of the field. Readers new to PE will find value in the book’s frontmatter, which includes a list of key organizations, individuals, and terms, and a chart illustrating the flow of money. Financial professionals will appreciate Kelly’s depictions of the major businesses and individuals and his coverage of trends and challenges.

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Limericks Économiques: Punitive Measures

Limericks Économiques

A six-billion loss dealt a blow
To the name of a bank's CEO.
To atone for this trade,
He merely was paid
A paltry ten million or so.

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Recent Research: Highlights from December 2012

"Framework for Hedge Fund Return and Risk Attribution"
The Journal of Investing (Winter 2012)
Rob Brown

This article provides a framework for hedge fund return and risk attribution through the construction of a relevant benchmark. It is shown that volatility is a source of systematic risk, volatility measures based on equity market returns are more robust, fees have averaged between one-half and one-third of total gross returns, and high explanatory power can be achieved without the use of exotic systematic risk factors. Finally, the article suggests that alpha and systematic risk loadings are best estimated when regressed on gross returns and that systematic risk exposures are multi-dimensional and effectively modeled using a four-factor model. Hedge fund performance is determined by exposure, skill, and cost. The framework presented here provides robust attribution to exposure, skill, and cost.

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Four Questions with Pinto Suri

With the Securities and Exchange Commission’s (SEC) decision on the possible incorporation of International Financial Reporting Standards (IFRS) into the US system still outstanding, many are wondering about the implications for their work and organizations. In anticipation of the potential upcoming changes, IASeminars and NYSSA will host the 18th Annual NYSSA International Financial Reporting Conference & Workshops January 8-10, 2013.

Here, we spoke with Pinto Suri, a principal of Prudential Fixed Income’s Credit Research Group where he covers the insurance sector. Suri has been an active member of the Corporate Reporting Users Forum, a global organization formed to enable professional investors and analysts to engage in the debate on current and future corporate reporting issues. Prudential Fixed Income, a business of Prudential Financial, Inc., is one of the largest fixed income asset managers in the US with $348 billion in assets under management as of June 30, 2012.

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No Security in Book Value

Limericks Économiques

Said a banker: "The Crisis revealed,
In investments we carried for yield,
How extreme fluctuations Affect valuations,
So better to keep them concealed."

Said investors: "It's better to trust
In the price you could fetch if you must,
And the equity value
Which, hopefully, now you'll,
Accordingly, have to adjust."

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