A Proposal for the Resolution of Systemically Important Assets and Liabilities: The Case of the Repo Market


One of the several regulatory failures behind the global financial crisis that started in 2007 has been the regulatory focus on individual, rather than systemic, risk of financial institutions. Focusing on systemically important assets and liabilities (SIALs) rather than individual financial institutions, we propose a set of resolution mechanisms, which is not only capable of inducing market discipline and mitigating moral hazard, but also capable of addressing the associated systemic risk, for instance, due to the risk of fire sales of collateral assets. Furthermore, because of our focus on SIALs, our proposed resolution mechanisms would be easier to implement at the global level compared to mechanisms that operate at the level of individual institutional forms. We, then, outline how our approach can be specialized to the repo market and propose a repo resolution authority for reforming this market.

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Book Review: Red Ink

Red-InkThe federal budget is one of the key focal points for the presidential election. The candidates have their proposals to reduce the budget deficit, however, political claims seem to make the subject more confusing than clear. In addition, there are increasing worries about the "fiscal cliff, " the tax increases and automatic spending cut coming in January if Congress fails to act. Moody's has just threatened to downgrade the US triple-A rating if Congress doesn't come up with a budget deal. The opposing political parties have indicated little, if any, inclination to compromise. For those seeking an objective picture of the federal budget, David Wessel's new book will be welcome.

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Do You Have a Responsible Borrowing Strategy?

It is almost inevitable that at some point in your life you will have to borrow money to make necessary purchases. Items that are synonymous with the phrase, “We need a loan,” are typically major financial obligations such as a home, car, or college education.

According to the Federal Reserve System, there was $12.9 trillion in household debt outstanding at the end of the first quarter of 2012. Meanwhile, as of August 2012, the Federal Reserve Bank of New York reports household indebtedness at $11.38 trillion. The bank also reported that student loan debt rose to $914 billion last quarter.

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Book Review: The Lost Bank


At the time of its collapse in 2008, Washington Mutual had assets of $307 billion. It was the largest failure in American history. The details of the epic failure have been covered, but never in the humanizing manner we see in The Lost Bank: The Story of Washington Mutual-The Biggest Bank Failure in American History. Author Kirsten Grind tells the story in detailed and graphic form, providing what others have described as a “fly-on-the-boardroom account” of what happened, which reads like a novel. The uniquely written narrative will appeal to everyone—despite their professional background. Grind provides the number crunching details for finance professionals, in addition to the touching perspectives of the customers. In retrospect, the story sounds fantastic and bizarre as this more than 100-year-old bank rode the subprime mortgage boom over the edge to disaster. But as the bank hurtled to catastrophe, it seemed a hugely profitable and often admired financial institution.

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What's Going to Happen to the Euro?

The Eurozone has changed; it’s very apparent. In the last year or so, the playing field has been tipped with mountainous debt problems that Greece, and now Spain and Italy, are experiencing. Of course, all of Europe will experience a huge knock-on effect from the problems in Greece and Spain—but the question is, by how much? If the Euro fails, will all hell break loose? This article outlines some of the possible outcomes of the current Euro crisis.

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Podcast: Why Zombie Banks Remain Undead

Author Series Podcast

Zombie Banks author Yalman Onaran spoke with NYSSA about the aftermath of the 2008 financial crisis and the barriers blocking the road to recovery. Onaran's book asserts the inconvenient, but rational, view that recovery efforts are actually postponing the problem rather than addressing it—creating "zombie banks." Zombie banks are banks that should have died, but are being artificially preserved by government capital.

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Off-Grid Financing

The ramifications of the Libor scandal—what Warren Buffett glibly called a can of worms that affects the whole world—grow by the day. Criminal indictments of individuals, even if firms are too big to indict, appear to be in the making as the tsunami’s shock waves are about to spread to many of the usual suspects. One can only imagine the trial lawyers licking their chops. Has there ever been a class action lawsuit on behalf of the whole world?

Central bankers and regulators, understandably panicked at the height of the crisis, may have been complicit in some of the distortions in an effort to create the pretense of financial system stability. However, like the so-called “war on terror,” we find the war on financial system collapse is filled with ends-justifying-the-means moral and legal questions.

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Limericks Économiques: Day of LIBOR Reckoning

Limericks Économiques

Though collusion on rate executions
Was the norm in finance institutions,
When the tide quickly turned
Many bank traders learned
They would naturally face prosecutions.

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Is Jamie Dimon’s Business First Class?

JPMorgan CEO Jamie Dimon went before congress again a few weeks ago to make the case for why a $2 billion trading loss was a stupid mistake, not a willful breach of at least the intent of Dodd-Frank. And again our representatives who wrote the law didn't hold him to the standards set by JPMorgan’s own Code of Conduct: following the spirit and intent, not just the letter, of the law.

When Mr. Dimon’s predecessor J.P. Morgan Jr. was called before the Senate in 1933, he spoke humbly of a banker as a member of a long-standing profession for which there had grown a code of ethics and customs, “on the observance of which depend his reputation, his fortune, and his usefulness to the community in which he works.”

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Understanding the Demand for Financial Advisors in Wealth Management


The demand for financial advisors is strong, seeming to belie the tumult and layoffs impacting many other finance professionals.

In an exclusive interview with eFinancialCareers, John Hyland, managing partner at Private Advisor Group, the largest branch office at LPL Financial and a growing hybrid registered investment advisor (RIA) firm, speaks about the trend, as well as the role of independent broker-dealer firms.

eFC: You describe Private Advisor Group as a hybrid RIA firm. Can you explain exactly what that means versus a full-fledged RIA? What is it like working for an RIA versus a hybrid RIA?

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Flawed, Ignorant, and Dangerous: A Bain Capital Partner’s Worldview

“At base, having a small elite with vast wealth is good for the poor and the middle class.”

This is how Adam Davidson’s piece in the New York Times Magazine summarized the frustrated former Bain Capital partner Edward Conard’s worldview, as expressed in his forthcoming book, Unintended Consequences: Why Everything You've Been Told About the Economy Is Wrong.

The article reveals the logic of what we might call the “extreme compete” elite investment class, as expressed by one of its highly “successful” participants—Conard ran the New York office for Bain Capital.

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Update: Commodities Are Different (in a "Full World")

The concern I raised last June that we should enforce the Bank Holding Company Act and not allow the too often irresponsible, gigantic, TBTF, and taxpayer-subsidized banks to engage in proprietary physical commodities trading has now been raised in a new article by Reuters. Abuse by large-scale, trading-driven firms, more so in physical commodity markets than in financial markets, can lead to drastic harm in the real economy as we learned from Enron's manipulation of the California electricity markets. But, as I detailed in my post, the issue is much bigger than speculators driving price swings in commodities. A world with finite resources and planetary boundaries will have allocation problems that markets cannot handle effectively or fairly. Rising commodities prices, and the effects they have on the poor, are primarily due to the fundamentals of limits to growth we are beginning to bump up against. The confluence of allocation, pricing, equity, and limits questions when dealing with scarcity of critical resources where there are no easy substitutes is already posing real challenges, as we discussed in our “Big Choice” essay.

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CDS Credit-Event Auctions


Introduced in 2005 to facilitate cash settlement in the multi-trillion dollar credit default swap market, credit-event auctions have a novel and complex two-stage structure that makes them distinct from other auction forms. Examining the efficacy of the auction's price-discovery process, we find that the auction price has a significant bias relative to pre- and post-auction market prices for the same instruments, and that volatility of market prices often increases after the auction; nonetheless, we find that the auction generates information that is critical for post-auction market price formation. Auction outcomes are heavily influenced by strategic considerations and "winner's curse" concerns. Structural estimation of the auction carried out under some simplifying assumptions suggests that alternative auction formats could reduce the bias in the auction final price.

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Regulators Walk the Line on the Volcker Rule

Regulators are on the horns of a dilemma as they attempt to balance the conflicting concerns raised by their proposed rule for the implementation of the Volcker Rule, a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act banning FDIC-insured financial institutions from proprietary trading. Those concerns will be the topic of a discussion moderated by Martin Fridson, Global Credit Strategist for BNP Paribas Asset Management, at NYSSA’s upcoming 22nd Annual High Yield Bond Conference.

The Securities and Exchange Commission, the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency released their joint implementation proposal in October 2011, and their request for comment resulted in over 14,000 letters. The Agencies’ proposal states the upfront challenge: that the delineation of what constitutes a prohibited or permitted activity under the Volcker Rule “often involves subtle distinctions that are difficult both to describe comprehensively within regulation and to evaluate in practice.” It goes on to say that the Agencies’ proposed rule was crafted to “not unduly constrain banking entities” in their business to provide “client-oriented financial services including underwriting, market making, and traditional asset management services,” but, at the same time, not to conflict with “clear, robust, and effective implementation of the statute’s prohibitions and restrictions.”

Not surprisingly, the Agencies’ best efforts to navigate these contentious waters appear to have satisfied few. On the one hand, industry lobbyists claim the Agencies’ rule places complex and onerous requirements on banks to prove that they are not engaged in propriety trading. They contend that the proposed rule will seriously compromise their market making function, raise the cost of capital, and result in knock-on effects for the economy, employment, and the banking industry’s global competitiveness.

Public interest advocacy groups, on the other hand, are clamoring just as energetically for a “bright line” interpretation of the Volcker rule that ensures banks have no room to circumvent its original intent. The latter claim it is the banking industry’s own success at lobbying to create exceptions to the Volcker Rule prohibitions on proprietary trading that led to the complexity of the Agencies’ current ruling. Many on both sides of the fence now argue that the proposed regulations will be unenforceable and should be simplified or scrapped and entirely rewritten.

A study by Oliver Wyman commissioned by the Securities Industry and Financial Markets Association illustrates the industry’s broad case against what it calls a “restrictive interpretation of the Volcker Rule. It warns of the huge liquidity impacts that would arise, including higher corporate funding costs, a reduction in household wealth due to compromised functioning of securities markets, reduced access to credit for small businesses, reduced ability for investors to exit investments, higher trading costs and lower returns for pension and mutual funds, and reduced ability for companies to transfer risks resulting in a “reduction in overall efficiency of the broad economy.”

Perhaps one of the most closely reasoned responses to industry’s criticisms of the Volcker Rule has been advanced by Wallace Turbeville, a former Goldman Sachs investment banker who testified in January 2012 before the House Committee on Financial Services on behalf of Americans for Financial Reform. In his testimony he pointed out that industry analyses of liquidity impacts have downplayed or largely ignored the reality that the Volcker Rule could not be interpreted in any way as a prohibition against proprietary trading. These activities, Turbeville, says, will instead migrate to non-taxpayer protected institutions. The Volcker Rule, he notes, merely “prohibits institutions that enjoy the benefits of a federal safety net from engaging in the risky businesses of proprietary trading and hedge fund sponsorship and ownership.” In his opinion, it will be a good thing if the rule does result in “the unavailability of cheap capital (subsidized by the public) that induces financially unsound trades.”

NYSSA HYB Conference

Turbeville also describes another positive outcome of the Volcker Rule if properly enforced—a reduction in covered banks’ capital bases. “The massive growth of [covered bank’s] assets and the capital to hold them dates from about 1980 when they started a race to compete with each other in the increasingly de-regulated trading markets,” he reports. “Every day until the Volcker Rule is implemented, the American people bear the risk associated with de facto guaranteeing these bloated capital bases.”

Turbeville acknowledges that the rule will have impacts on block trading but he maintains that is also all to the good. “Large market participants, such as mutual funds, can direct massive flows of trading activity to banks and commonly take advantage of this market power,” he notes. “In the post-Volcker Rule environment a given block trade may have to be transacted in smaller units. This is because the non-bank institution will be more sensitive to risk, and because the capital charge will reflect reality, not public subsidy.”

Turbevile reports that as the current July deadline for conformance to the rule approaches, the conversation around what it means to make a market has gotten more detailed and more focused. “There has been an informal sharing of thoughts that has been highly constructive,” he notes. What has emerged, says Turbeville, is a line in the sand. On the one side of that line are those who contend that covered banks must not under any circumstances enter into a transaction unless it has information from a market source about what the outcome of that transaction will be. On the other side are those who would say there should be exceptions to that rule. Whether the Agencies’ final ruling will reflect one or the other interpretation, or will remain in something like its present problematic state remains to be seen.

“We are analyzing the comments and determining a prudent way forward in close consultation with the banking agencies and the CFTC,” says David Blass, Chief Counsel and Associate Director for the SEC’s Division of Trading and Markets. “It is a challenge given the quality and quantify of comments—there are 14,000–15,000 responses in form letters alone.”

The bulk of comments have come from industry groups—not just from covered banks but from an array of institutions on both the buy side and sell side, including mutual and pension funds, hedge funds, and sovereign debt and municipal securities issuers. “I can say we are taking to heart the volume and the diversity of the messages from the comments that have come in,” says Blass. “But we know at the end of the day it is our responsibility to look to what the Volcker Rule was intended to do and not just to listen to interest groups.”

“We have to work through the comments and this goes with every rule, the Volcker Rule is not unique,” Blass reports. “But an added complexity here is that other agencies are involved in the process and we need to coordinate with them. I cannot predict at this time what will happen between now and July 21, though commenters have called for the Fed to extend the conformance period for the statutory provision past July 21, the date the statutory provision otherwise takes effect.”

–Susan Arterian Chang

Susan Arterian Chang is a contributing writer to The Finance Professionals’ Post and Director of Capital Institute’s Field Guide to Investing in a Resilient Economy


Too Systemic to Fail: What Option Markets Imply about Sector-Wide Government Guarantees


A conspicuous amount of aggregate tail risk is missing from the price of financial sector crash insurance during the 2007-2009 crisis. The difference in costs of out-of-the-money put options for individual banks, and puts on the financial sector index, increases four-fold from its pre-crisis level. At the same time, correlations among bank stocks surge, suggesting the high put spread cannot be attributed to a relative increase in idiosyncratic risk. We show that this phenomenon is unique to the financial sector, that it cannot be explained by observed risk dynamics (volatilities and correlations), and that illiquidity and no-arbitrage violations are unlikely culprits. Instead, we provide evidence that a collective government guarantee for the financial sector lowers index put prices far more than those of individual banks, explaining the divergence in the basket-index spread. By embedding a bailout in the standard one-factor option pricing model, we can closely replicate observed put spread dynamics. During the crisis, the spread responds acutely to government intervention announcements.

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Does the Tail Wag the Dog? The Effect of Credit Default Swaps on Credit Risk


Concerns have been raised, especially since the global financial crisis, about whether trading in credit default swaps (CDS) increases the credit risk of the reference entities. We use a unique, comprehensive sample covering 901 CDS introductions on North American corporate issuers between June 1997 and April 2009 to address this question. We present evidence that the probability of credit rating downgrade and the probability of bankruptcy both increase after the inception of CDS trading. The effect is robust to controlling for the endogeneity of CDS introduction, i.e., the possibility that firms with upcoming deterioration in creditworthiness are more likely to be selected for CDS trading. We show that the CDS-protected lenders’ reluctance to restructure is the most likely cause of the increase in credit risk. We present evidence that firms with relatively larger amounts of CDS contracts outstanding, and those with more “No Restructuring” contracts, are more likely to be adversely affected by CDS trading. We also document that CDS trading increases the level of participation of bank lenders to the firm. Our findings are broadly consistent with the predictions of the “empty creditor” model of Bolton and Oehmke (2011).

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Book Review: Zombie Banks


Zombies are most commonly known as undead, lifeless creatures that usually take hold of a living being through some type of supernatural force. However, as Yalman Onaran graphically illustrates in his new book, zombies can also inhabit the inanimate objects—in this case, banks. “Zombie Banks” are described as “insolvent financial institutions whose equity capital has been wiped out so that the value of their obligations is greater than their assets.” These are banks that have bankrupt balance sheets, and are kept alive by governments in the hope of avoiding financial and economic collapse.

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Recent Research: Highlights from March 2012

"Topics in Applied Investment Management: From a Bayesian Viewpoint"
The Journal of Investing (Spring 2012)
Harry M. Markowitz

When John Guerard, the special editor for this issue, was assembling the articles to be published, he asked Harry Markowitz to write the introduction. By the author’s own words, once he had completed that task he could see that his remarks were more like discussant comments than an introduction and could equally well be read after reading the articles.

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Too Big to Fail or Too Small to Save? Dodd-Frank and the Ripple Effect on Big and Small Banks

Over the past decade, the United States has legislated huge responses to national crises. Shortly after 9/11, the Patriot Act was passed by Congress. In the wake of Enron and other accounting scandals, Sarbanes-Oxley was introduced. Troubled Asset Relief Program (TARP) was released to address the mortgage crisis of 2008 and, as a result of the bailout and other issues prevalent throughout the financial industry, the Dodd-Frank Wall Street Reform and Consumer Protection Act was legislated in 2010.

Dodd-Frank aims to “promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.”1 2

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Video: US Financial Sectors and Europe

Glenn Reynolds, CEO of credit research firm, CreditSights, Inc., presents his outlook on US economic and financial sectors. Despite the general discourse, US banks and  the corporate field are in relatively good shape compared to previous projections. Rather than lack of ability, uncertainty is the main barrier to progress. Continued growth is unfortunately heavily dependent on the unstable economic situation in Europe. Overall, Reynolds believes US markets should be able to survive any hurdles that lie ahead.


A Q&A with the Compensation Expert Who Thinks Banking Pay Could Fall Another 50% in Five Years


What’s happening with investment banking compensation? Are lower pay and higher deferrals really inevitable? We asked Jon Terry, remuneration partner at PricewaterhouseCoopers.

Q: Over the next five years, how much would you expect investment banking compensation to fall by—on average?

A: Two big factors are likely to influence compensation levels: profitability and the share of profits distributed to employees. If banks continue to de-risk, profits will fall. If shareholders demand a higher share of profits, pay will fall exponentially.

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Are You a Candidate for Private Wealth Management?

Interested in a career in the private wealth management space? It is an increasingly complex profession, and successful candidates will need to possess a wide range of skills - sale skills and a personable nature being of high importance on the list. Listen to our panel of experts from a NYSSA Career Chat™ on the state of private wealth management discuss the changes in private wealth management, and what makes an ideal candidate.

(Hint: Owing to the relationship between private wealth and investment banking, former investment bankers make good candidates for private wealth management.) 


If the Bonus Season Made a Fashion Statement, Color it Gray


Let’s face it. The forecast for this year’s bonus season is down right gloomy. And judging by eFinancialCareers most recent survey on the subject, most financial professionals were not surprised.

Like we do every year around this time, eFinancialCareers took a look at the year-end payouts that begin in December and last on through February by surveying Wall Street professionals who are bonus-eligible and know the amount of their annual bonus.

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New Report Paints Optimistic Yet Challenging Picture for US Banks in 2012

EfinancialCareers CreditSights, an independent credit-focused research company, has issued a giant two-part report on what’s coming for US banks in 2012. Naturally, it’s credit-focused. Surprisingly, it’s also quite optimistic and suggests positive implications for jobs (in comparison to a more gloomy report also issued by JPMorgan Cazenove).

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Book Review: Anglo Republic


Anglo Republic is the story of the remarkable rise and fall of the Anglo Irish Bank—once one of the fastest growing financial institutions worldwide, an in-depth review of how, "a small Dublin bank became too big to fail and too rotten to save—and how it dragged an entire country to the brink of bankruptcy." Anglo Irish had a spectacular rise on the Irish property boom, and an equally dramatic fall into eventual oblivion in 2008. Along the way, the Irish government and bank regulators, management, and board appear to have been largely oblivious to the bubble they were riding, and its end result. While the cast of characters may be unfamiliar to American readers, the book is a graphic chronological record of a bank failure, authored by journalist Simon Carswell, Finance Correspondent of the Irish Times. Carswell covered the Anglo Irish story throughout its peril.

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The Lost Profession of Banking

Banking used to be a profession, not just a business. That profession is vital to the real economy, and essential at a time of profound economic system transition. It's about time we rebuild the banking profession, using public-private hybrid models when necessary, to promote banking's critical public purpose, such as rebuilding our energy infrastructure for the post-carbon era.

All this was brought home to me while listening to the presentation for a large-scale rooftop solar project at the Business-Climate conference hosted by PriceWaterhouseCoopers.

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Book Review: The Wizard of Lies

The-Wizard-of-LiesThe Wizard of Lies is hard to put down. It reads like a novel. Diana B. Henriques of The New York Times was the go-to reporter for the Bernie Madoff scandal since its beginning in 2008. The first reporter to be granted on-record interviews with Madoff post-arrest, the a recent Times review boasts Henriques “…probably knows more than anyone outside the F.B.I. and Securities and Exchange Commission about the mechanics of the fraud.” She uses that knowledge and resource here to offer an in-depth look into the man behind the $65-billion-dollar Ponzi scheme that rocked the nation.

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Robert Litterman: Who Should Hedge Tail Risk?

CFA InstituteIn a somewhat ironic turn of events, many investment banks began selling insurance against equity tail risk to institutional investors following the financial crisis. Ironic because one might expect that investment banks, with high leverage and quarterly earnings reports to worry about, would be the natural buyers of such insurance and long-horizon investors the natural sellers.

Surely, those with deep pockets and long horizons, who would be little affected by the crisis, should be selling insurance to those with short horizons and leveraged positions, who would be most highly affected.

Of course, there will always be a price low enough that a given investor would be willing to buy insurance, and there will always be a price high enough that the same investor would be willing to sell insurance. But investors who have long horizons, sufficient liquidity, and low leverage should consider carefully whether, in practice, the price at any given time is low enough that buying tail-risk insurance makes sense for them. That scenario is unlikely because long-horizon investors are not natural buyers of tail-risk insurance.

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The Bank Panic of October 1907—A Spectator's View

Bank Panic 1907, Harpers This is a story not an analysis: the “what happened” of this event is well-known. Several studies have focused on the economy, the money supply and systemic faults in the banking system, and the bank events have been well discussed. Behind them there was the stock market and the behavior of stock speculators in the month of October. This story explains more about the “why” of this event; it is the story of Charles W. Morse and his friend, Fritz Heinze.

To give some background on Morse and Heinze, we need to go back to 1900. A short man with penetrating blue eyes, Morse combined many ice companies to create the American Ice Company, which monopolized the natural ice business in New York (estimated to be two million pounds a year). Morse doubled the price of ice on May 1, during an early warm spell, and suddenly everyone in New York knew Charles W. Morse, including William Randolph Hearst and Governor Theodore Roosevelt. Under pressure in the press and through many law suits, the price was reduced, and in two years Morse was forced out of the company, taking at least $11 million with him.

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The President's Counsel on Jobs and Competitiveness ... and Tax Avoidance

The NY Times report by David Kocieniewski on GE’s aggressive tax strategies under the leadership of John Samuels, a former Treasury Department tax lawyer, which enabled the company to pay no income taxes to Uncle Sam on their $5.1 billion of US-based income has many justifiably outraged.

Some, including GE on their website, are saying what GE is doing is legal so they are doing their job for shareholders. No one at GE made “the system.” They just compete in it.

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Reputational Risk

The global financial crisis of 2007–2009 was associated with an unprecedented degree of financial and economic damage. For investors and financial intermediaries, the estimates seem to have risen to over $4 trillion or so worldwide by the time things began to stabilize, according to the International Monetary Fund (2009). Along with the financial damage has come substantial reputational damage for the financial services industry, for financial intermediaries and asset managers, and for individuals.

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A Blueprint for Mortgage Finance Reform


The goal of reforming housing finance should be to ensure economic efficiency, both in the primary mortgage market (origination) as well as in the secondary mortgage market (securitization). By economic efficiency, we have in mind a housing finance system that

  • corrects any market failures if they exist; notably in this case is the externality from originators and securitizers undertaking too much credit and interest rate risk as this risk is inherently systemic in nature;
  • maintains a level-playing field between the different financial players in the mortgage market to limit a concentrated build-up of systemic risk; and
  • does not engender moral hazard issues in mortgage origination and securitization.

Motivated from economic theory, we argue that such a mortgage finance system should be primarily private in nature. It should involve origination and securitization of mortgages that are standardized and conform to reasonable credit quality. The credit risk underlying the mortgages should be borne by market investors, perhaps with some support from private guarantors. There should be few guarantees, if any, from the government.

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Commentary: Footprints and Foreclosure

The global economy now uses 1.5 times the earth’s capacity to regenerate the natural capital we use every year, up from the 1.4 times of the prior year, according to a report of the well-respected Global Footprint Network. In their Living Planet Report 2010, released this week but based on 2007 data, the most recent available, WWF together with the Global Footprint Network and the Zoological Society of London record the most significant milestone since we crossed parity (an ecological footprint of one) back in 1975. This is not good news.

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Book Review: Dealings: A Political and Financial Life

Dealings by Felix Rohatyn Dealings: A Political and Financial Life is the autobiography of Felix Rohatyn, who is viewed as the preeminent investment banker of his generation. In addition, he received widespread recognition for his role in the financial rescue of New York City in the 1970s. He is a classic relationship banker, who played a key part in a number of major mergers. Rohatyn's history serves as a valuable lesson to today's generation of financial professionals who are transaction focused to the point of missing the importance of relationship building in ongoing business and in job searches.

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UBS Really Needs to Stop Paying So Much, but Absolutely Insists It Won’t

EFinancialCareerseFinancialCareers takes a look at the recently released financial results from UBS. Despite the fact that UBS is absolutely nowhere near reaching its targets, UBS insists that it WILL pay its investment bankers this year.

Click here to read the full article. 


Introduction to Islamic Finance (Part I): Context and Concepts

Globally, Islamic finance is one of the fastest growing areas of finance, however measured. So says the popular press. Practitioners concur. The foundation for such assertions, like much that is “known” about Islamic finance, is anecdotally based. Hard numbers are elusive and probably nonexistent.

The dramatic rate of growth of modern Islamic finance, since its birth in the mid‐1990s, is clear. Lawyers, accountants, bankers, and investment firms now proclaim long experience with Islamic finance, enhancing the pool of anecdotal evidence. The publicity, the perception of growth, the simultaneous influx of oil wealth into traditionally Muslim countries, the formation of financial centers, and the rapid regional expansions all work to further expand both interest in and assertions of experience.

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Bullard Concerned about Japanese-Style Inflation

If you’re worried about a deflationary spiral taking hold in the US, you’re not alone. James Bullard, president of the St. Louis Federal Reserve Bank and a member of the Fed’s Open Market Committee, has been an outspoken proponent of aggressive Fed action to prevent such an outcome.

In a paper titled “Seven Faces of ‘The Peril’,” which was recently published by the St. Louis Fed, Bullard argues that the Fed must take immediate action to stimulate the US economy, otherwise the economy could stagnate for years, much like Japan’s “lost decade,” when prices fell during a more than 10-year period.

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Strategies for Avoiding Hiring Freezes

eFinancialCareersAs usual, at this time of year, hiring is becoming increasingly frozen. If anything, it may be worse this year because: (a) banks got a little carried away and may have hired too many people, and (b) they’ve announced redundancies and can’t be seen to be recruiting anyone while they’re trying to reallocate internally.

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Excerpt: The Fearful Rise of Markets, 2010 and After

The condition is easily diagnosed. Over the last half century, the rise of the investment industry has created overwhelming incentives for investors to follow one another into risks they often do not understand. As a result, world markets are hopelessly synchronized. This obstructs rational pricing and, in a capitalist world that relies on markets to set prices, endangers our prosperity. Finding a cure, however, is more difficult.

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Micro-origins of the Financial Crisis

The current global financial crisis and the US government’s response to it—bailouts of too-big-to-fail banks, tax-financed props for an ailing auto industry, mortgage-rescue plans for overextended households—have upset the public’s sense of fair play. Citizens have also had to struggle with their attempts to link the fragile, ethereal, economic construct revealed by recent events to the concrete realities of food on their tables and roofs over their heads. And they don’t want to have to study the intricacies of monetary policy, public debt management, and international capital flows to maintain their faith in capitalism.

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Tails, I Win; Heads, You Lose

Illustration by Mark AndresenAbout a decade ago, in the advent of the Internet era, Wall Street was consumed with the “paradigm shift” occurring in the “New Economy,” where earnings no longer mattered and all that counted were “eyeballs.” Remember that drivel? Based on this flimsy, overweening logic, many investment bankers managed to convince successive waves of investors to buy the IPOs of companies that were little more than a few recent college graduates holed up in quasi-loft spaces south of San Francisco’s Market Street or in the shadow of Manhattan’s Flatiron building. Who can forget such spectacular flameouts as and For a while, though, the ruse worked and many people got rich. 

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EU Banks Sovereign Debt Mystery Deepens

EU Banks Sovereign Debt Mystery Deepens
Just when you thought it was safe to trust European banks again, the Wall Street Journal analyzed recent EU bank stress tests and found that a number of banks underreported their sovereign debt liabilities. Many investors, and EU regulators, were hoping to put the Greek debt crisis in firmly in the rear view mirror, but given the spotty nature of the bank’s disclosures, this may heighten concerns, rather than put them to rest.

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One Big Happy Family: The Global Crisis Tests Postwar Alignments


If the global institutions and alignments created after World War II were looking a bit long in the tooth at the dawn of the 21st century, the economic crisis has pushed them one step closer toward irrelevance, if not extinction. Up-and-coming powers like China and India, no longer content with a subsidiary role on the global stage, are clamoring for more power, and the financial crisis is giving them the opportunity to explode the political and economic status quo.

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Book Review: High Financier

High Financier: The Lives and Time of Siegmund WarburgNiall Ferguson's biography of Siegmund Warburg, High Financier, combines the life of this successful banker with the history of the capital markets of his era. The Warburg family was based in Hamburg as one of Germany's major banking firms. As a refugee from Nazi Germany, Siegmund Warburg came to London as an outsider, started over again, and became an important factor in the London banking world. He changed merchant banking there with the first hostile takeover in England—of British Aluminum. And, in a move that was unusual for that time, Warburg brought modern management into banking. An even greater impact came from his role in creating the Eurodollar and Eurobond markets. At that time in postwar England, London's survival as a major financial center was far from assured.

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Commentary: From Risk to Uncertainty

Stress-test complacency will be a cause of the next financial meltdown.

Economic commentators have been increasingly using the word “uncertainty” as of late. The context has included the business climate, the stimulate vs. austerity debate, and forecasting the investment outlook across capital markets. 

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

Danse Macabre 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.

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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.


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.

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Rise and Shine: ARRA Stimulates the Municipal Funding Market

Rise-and-Shine 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.

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Some Mark-to-Market Concerns about Liquidity

This article is in response to Neil O'Hara's "The Unfair Attack on Fair-Value Accounting."

In early April of 2009, FAS 157, the mark-to-market accounting statement, was amended amid great controversy. Depending on the categorization of an asset (as belonging to one of three “levels”), FAS 157 had required firms to value financial assets on a mark-to-market basis. Level three assets such as mortgage-backed securities and collateralized debt obligations were subject to this requirement, even though, unlike traded securities, they did not benefit from liquid markets. The new rule gives firms greater discretion as to how level three assets are valued, and allows them to take into consideration the illiquid market for these securities.

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