Archive for the ‘Financial Markets/ Finance’ Category

Meanwhile, a leadership change at the Rothschilds…

April 18, 2018

Via this story:

Alexandre de Rothschild, 37, will replace his father as chairman of the famed Rothschild investment bank, the group said on Tuesday, with Rothschild keen to keep its leading position in France amid growing competition. Last month, Rothschild reported higher annual profit and revenues, buoyed by its advisory work.

However, Rothschild faces increasing competition, with rival Lazard hiring more staff and Perella Weinberg Partners also looking to open an office in Paris.

The official press release is here.

So much of history behind the firm…

 

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Pakistan’s three major banks are up for sale: Why and who are the probable bidders?

April 16, 2018

The talks to buy large private banks are not just exclusive to India (whether Kotak Bank will buy Axis Bank?) but reach across to Pakistan as well.

There is this interesting piece by Farooq Tirmizi on Pakistan’s major banks up for sale. Interestingly, the bidders are those who have  never ran banks:

For the first time in Pakistani history, three perfectly healthy and viable banks are simultaneously up for sale. None of them is a distressed asset being sold by sponsors who had hastily gotten into the banking business and made too many bad loans that they did not have the capital nor the stomach to be able to cover. And none of them is a bloated, nationalized bank filled with a balance sheet of politically motivated bad loans and an employee roster of people who want a paycheck for doing very little. No, these are all banks in rude health, and worthy targets of any financial institution that wants a strong beachhead on their way to conquering the Pakistani financial market.

The problem? Nobody who knows banking wants to buy them, and (most of) the people who want to buy them have little to no experience in banking.

The three banks up for sale are Bank Alfalah (BAFL), Meezan Bank (MEBL), and Faysal Bank (FABL), which are the sixth, eighth and thirteenth largest banks in the country respectively, as measured by total assets. All three are up for sale for more or less the same reasons: the Gulf Arab investors who initially put up the capital to create these banks have held their positions profitably for decades and are now looking for a suitable exit opportunity.

So far Pakistan’s banks were up for sale for three reasons: Badly managed Nationalised bank, small private bank running losses or a foreign bank with lack of growth strategy. But none of these three apply to the three banks:

None of these three situations apply to any of these banks. Meezan Bank is the fastest growing bank in Pakistan and has never had a single year of losses in its entire history. Bank Alfalah grew from almost nothing to become the sixth largest bank in the country and remains an exceptional bank when it comes to its focus on consumer lending. And Faysal Bank has relationships with most major corporations in Pakistan and has been a solid middle-market player.

So why are these institutions up for sale? Each has its own story, though those stories have a few elements in common. How closely those past trajectories will be a consideration for their prospective buyers is not yet known, though if they are prudent, the potential investors would do well to understand just how these banks got to be where they are today.

Read the long story for more details.

Nice to know all this.

Banking on a ‘shithole’: US-led racial capitalism in Haiti began long before Trump

April 13, 2018

Prof. Peter James Hudson in  this post writes on how City Bank (Citibank now) profited from racial ideology and economic policy to secure control of Haiti’s finances and banking.

In nut shell, so badly named shithole countries have been very lucrative for Wall Street players for a long time.

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Key lesson from Buffet and Munger duo: Simple makes you money…

April 12, 2018

Another nice post from Dhirendra Kumar of Value Research.

For close to two decades, as technology companies took over the world and started eating up practically every industry, the world’s greatest investors ignored it. For all practical purposes, Warren Buffett and Charlie Munger missed the technology bus. They started to invest in Apple and IBM only recently, after the former has transformed into a consumer durables company and the latter into a business services company. Why did they avoid technology? And more importantly, is there anything that us mere mortals can learn from thi

Even during their early years, Buffett and Munger often said that they did not invest in the stocks of companies whose businesses they did not understand. A simplistic response would be that they missed out on a lot of great investments because of that. Despite always having billions of dollars of investible surplus, they never made a dime out of stocks like Google and Amazon, which delivered more than 20X for investors over these years.

And yet, the duo is pretty sanguine about the opportunity lost. The reason for this is that they are still the most successful investors in the world at this scale. They were successful because they invested in businesses they understand. In hindsight it’s easy to say that they missed out on Amazon and Google. However, they also missed out on Pets.com, Webvan, Myspace and other expensive failures. Since they did not understand the business, they were just as likely to invest in these duds as they were to invest in Amazon and Google. After all, the great media moghul, Rupert Murdoch, did buy Myspace for US$ 580 million and then sold it four years later for US$ 35 million. To avoid this 94 per cent loss, all Murdoch had to do was learn from Buffett and Munger and not touch businesses he did not understand.

And that’s exactly what we should do too.

 

No matter what product or service we are buying or using, nothing impresses us more than features, jargon, and complexity. Perhaps the modern technological world has trained our mind to champion most of the new wonders of the world that are too complex to understand. The underlying assumption is that anything that is complex is the best of the lot.

Unfortunately, in personal finance, this idea is fatally wrong. In case of personal finance products, simplicity is not just useful or helpful, it is an absolute necessity. The reason is simple–if an investor does not fully understand a financial product or service, then he or she has no way of telling if it is suitable at all, regardless of how good its seller may claim it is.

Stock investors on higher floors take more risks – here’s why

April 10, 2018

Academics try and link financial behavior to all kinds of things.

Prof Sina Esteky of Miami University (Marketing area) in this research links risk taking in finance to being located in higher floors:

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When students run bank branches at their schools….

April 9, 2018

This bit is interesting from world of banking which is worth emulating.

There is a bank named First Metro which opens branches in schools. It goes a step further and allows students to manage these branches:

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Catholic origins of US Credit Unions…

March 29, 2018

Fascinating piece:

As more and more Americans have learned over the years, a good alternative to a bank is something called a credit union, a financial cooperative controlled by its members and operated on the principle of people helping people.

But what most people don’t realize is the Catholic origins of such arrangements in North America.

According to Nathan Schneider, a professor of media studies at the University of Colorado Boulder, the first credit union in the United States was St. Mary’s Bank in Manchester, New Hampshire. It was developed in 1908 with the help of Alphonse Desjardins, who built Quebec’s famous caisses populaires.

But in fact, Desjardins got the idea from a priest on Prince Edward Island, Fr. George-Antoine Belcourt. “Credit unions take many forms now, but their origins were specific,” Schneider wrote recently in America magazine. “According to Mr. Desjardins, ‘The caisse populaire is truly an organization of the parish.’”

The role of religion in money/banking is as central as one can imagine…

The Gordon Gekko effect: The role of culture in the financial industry…

March 27, 2018

This is a brilliant paper by Prof. Andrew Lo of MIT. It was written in 2016 and somehow missed it all this while.

The paper is written for financial industry but applies to nearly all walks of life. I mean even applies to Australian cricket team which has shocked the cricket world with its conduct much like financial industry did after the financial crisis:

Culture is a potent force in shaping individual and group behavior, yet it has received scant attention in the context of financial risk management and the 2007-09 financial crisis. This article presents a brief overview of the role of culture as it is seen by psychologists, sociologists, and economists, and then describes a specific framework for analyzing culture in the context of financial practices and institutions. Using this framework, the author addresses three questions: (1) what is culture? (2) does it matter? and (3) can it be changed? He illustrates the utility of this framework by applying it to five concrete situations—the collapse of Long-Term Capital Management, the fall of AIG Financial Products, the use by Lehman Brothers of “Repo 105,” Société Générale’s rogue trader, and the Securities and Exchange Commission’s handling of the Madoff Ponzi scheme. The article concludes with a proposal to change culture through “behavioral risk management.”

 

Earlier articles said to learn investing lessons from Dravid, now they are asking Dravid to learn the lessons!

March 26, 2018

No words are sufficient and do justice to Rahul Dravid’s conduct on and off the field. These guys (Laxman, Tendulkar, Sangakara etc) played the game in utmost spirit no matter what the pressures. Last few days have seen cricket slip to a new low  standard and one could have learnt a few things from these guys.

Anyways, this piece is less about cricket and more about personal finances.

When Dravid retired and even later, there were articles on how one should learn personal finance lessons from Dravid. See this for instance:

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Ironies of life: Goldman sees PNB woes hurting GDP

March 21, 2018

Goldman Sachs has recently updated and lowered its India’s growth rate of GDP forecast from from 8% to 7.6%  in 2018-19 due to PNB fraud.

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Yi Gang to Head China’s Central Bank

March 20, 2018

James Dorn in this post reflects on the recent appointment of Yi Gang to head China’s central bank. He also talks about how the recent appointments by President forever Xi Jinping will shape economic policy in China.

As governor, Yi Gang will work closely with Liu He, the newly appointed “economic czar” and vice premier, who is also in favor of economic reform. By making these appointments, President Xi Jinping is signaling that he intends to address structural problems in China’s economic system. The question is whether he can do so while maintaining an iron grip on political power and preventing a free market in ideas.

Cracking down on dissent will be the job of Yang Xiaodu, who has been appointed to head the new National Supervisory Commission (a super “anti-corruption” body), designed to ensure that officials and public-sector workers adhere to the Chinese Communist Party line.

President Trump and his advisors should listen carefully to the PBOC’s new governor and Mr. Liu and work with them to help move China toward a more liberal trading regime, including a larger scope for trade in ideas as well as in goods and services.

Meanwhile, President Xi, who now has absolute power for life, should remember the words of Lao Tzu:

The more restrictions and limitations there are, the more impoverished men will be. . . . The more rules and precepts are enforced, the more bandits and crooks will be produced. Hence, we have the words of the wise [sage or ruler]: Through my non-action, men are spontaneously transformed. Through my quiescence, men spontaneously become tranquil. Through my non-interfering, men spontaneously increase their wealth [Chap. 57, Tao Te Ching, translated by Chang Chung-yuan].

Hmm…

 

How to establish a local bond market and avoid the original sin? Lessons from Germany..

March 19, 2018

Interesting speech by Andreas Dombert of Bundesbank. She spoke at this conference organised by South African Central Bank.

She says countries should avoid borrowing in other markets which is also called as Original Sin in economics. They should try and develop their own bond markets:

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What happens when a bank is put into curatorship: Case of VBS Mutual Bank of South Africa

March 19, 2018

South Africa’s central bank recently put VBS Bank under curatorship as it was facing liquidity constraints.

Prof. Jannie Rossouw of  University of the Witwatersrand explains what it means to put banks under the curatorship in S. Africa:

In simple terms curatorship of a bank means that its board and executive management are relieved of their duties. A curator is appointed by the South African Reserve Bank in consultation with the National Treasury and the Minister of Finance. The curator takes over the full management functions of the bank with the purpose of rehabilitating it.

Curatorship is triggered by concerns about the management or financial viability of the bank. For example, if the board or executive management are found guilty of fraud, the central bank can remove them and appoint a curator to manage the bank until new management is put in place.

Financial viability concerns can trigger curatorship if a bank faces liquidity or solvency problems. This is what happened at VBS. The central bank’s view was that it faced a liquidity crisis – in other words it was running short of cash to meet its obligations, mainly repayment of deposits.

Liquidity problems happen when bank deposits are withdrawn at a faster rate than they can be replaced by new deposits. This is normally a temporary problem, as a well functioning bank can restore its liquidity levels by taking in new deposits or by reducing in its lending activities.

Banks can also face solvency problems. This is different to a liquidity crunch: it’s when a bank goes bust because loans it has made can’t be repaid. In 2001 a South African bank, Regal Treasury Bank went insolvent.

Although the South African Reserve Bank can still appoint a curator when a bank experiences solvency problems, the chances of recovery are slim. This was the case with Regal Treasury Bank which was placed under curatorship but never recovered. It was subsequently liquidated.

Always useful to know about types of banks in other countries and myriads of regulations around them…

Creating a world-class financial sector workforce with a strong Singapore core

March 16, 2018

Ms Indranee Rajah, Senior Minister of State for Law and Finance in Singapore in this speech says need to invest in workforce to maintain Singapore financial centre. They have prepared a tripartite plan to address the challenges:

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Did UK monetary policy spillovers to US during first age of financial globalisation (1880-1913)?

March 15, 2018

Food for thought post by Georgina Green of Bank of England (full paper here).

She questions the conventional wisdom that UK monetary policy led to monetary spillovers to US in the first age if globalisation. We think of it other way round in second age of globalisation. What is interesting is how she uses the archival material with econometrics:

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Central Bank of Ireland to review Culture and Behaviour at key banks

March 12, 2018

I just blogged about how other central bankers are under pressure on banking crisis in other countries and there is no such pressure on Indian central bank. Ireland is one such example which is going through so called tracker mortgage scandal which saw how banks missold mortgage products.

In this speech, Derville Rowland (Director General at the central bank) says they are reviewing culture and behavior at key Irish banks:

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When central banks have to intervene to ensure responsible recruitment in the financial advisory industry…

March 9, 2018

Financial industry is showing no signs of improving and continue to pay crazy incentives especially when they poach talent from other companies. This is requiring intervention from authorities who are scared of repeat of 2007 crisis.

Of all such authorities, Monetary Authority of Singapore has taken action against such poaching tactics:

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FinTech cooperation between Maharashtra State and Singapore

March 9, 2018

Came across this Memorandum of Understanding signed between Monetary Authority of Singapore and Maharashtra State.

One thought finance/banking was a Centre subject under the Indian Constitution. One also does not see RBI mentioned in the press release. Not sure about political economy around such decisions.

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Artificial intelligence (AI) in finance – six warnings

March 9, 2018

Prof Joachim Wuermeling of the Deutsche Bundesbank cautions against all this rise of tech and AI in finance:

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How a historic meeting laid the foundations of US fiscal policy and choice of Washington as capital…

March 8, 2018

Interesting bit of history by Vitor Gaspar and David Amaglobeli of IMF.

On the evening of June 20, 1790, James Madison and Alexander Hamilton met at Thomas Jefferson’s home on Maiden Lane, in New York. Over a long dinner, the three struck a historic deal that laid the financial groundwork for the fledgling nation. Madison agreed to have the US federal government take over the states’ Revolutionary War debt; in return, Hamilton agreed to support the move of the nation’s capital to the banks of the Potomac River, a location favorable to Madison’s home state of Virginia. The deal is an early and vivid example of how fiscal politics can shape history. The episode remains relevant because it shows that politics plays a crucial role in far-reaching reforms of public finances. Public finance reform is fundamentally political, and it has the potential to shape the political system itself. As this most famous dinner shows, political negotiation can help overcome apparently insurmountable obstacles and become a force for institutional transformation. Today’s policymakers who disregard political realities are doomed to be ineffective.

The whole narrative is fascinating to read…


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