Archive for the ‘Financial Markets/ Finance’ Category

The Origins of the Superrich: The Billionaire Characteristics Database

February 19, 2016

Caroline Freund and Sarah Oliver have this interesting paper on superrich across world regions:

This working paper presents a new dataset on the sources of billionaire wealth and uses it to describe changes in extreme wealth in the United States, Europe, and other advanced countries. The data classify wealth as either self-made or inherited and identify the company and industry from which it comes. Among self-made billionaires, individuals are further classifi ed as company founders, executives, politically-connected, or in finance.

Data analysis shows that the superrich in the United States are more dynamic than in Europe. Just over half of European billionaires inherited their fortunes, as compared with one-third in the United States. The median age of a company of a European billionaire is nearly 20 years older than that of an American billionaire. Traditional sectors explain more than half of the rise in wealth in Europe; the financial sector and technology-related sectors together are largely responsible for the rise in US wealth.

There is some evidence that rents are higher in the United States than Europe, as not only is the number of US billionaires expanding rapidly, but US billionaires are also getting richer on average over time, especially when wealth is connected to resources, nontradables, or finance.

 

History and future of financial centres..

February 18, 2016

Financial centres is perhaps the least studied but one of the most fascinating areas of finance. We ignore the locational aspects of finance/banking which combine so much of scholarship – history, economics, politics and finance..

There are two recent speeches – first by Clara Furse of Bank of England and another by Mr Tharman Shanmugaratnam, Chairman of MAS Singapore. Both obviously look at their own financial centres.

Clara Furse takes you to history of fin centres:

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The case for growth-indexed bonds in advanced economies today

February 17, 2016

Times are changing. The growth indexed bonds were advised by advanced world econs to the developing economies. Now they advise the same for the advanced economies as well. The idea is simple – you get paid as per the growth rate of an economy. If growth goes up, payments to investors rise and vice-versa. Given the volatile and uncertain growth pattern in advanced world, one could look at growth bonds for them as well.

Olivier Blanchard and others have a piece on the same:

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Role of globalised finance in the 2008 crisis..

February 8, 2016

Anton Brender and Florence Pisani of Paris-Dauphine University look at how financial globalization shaped the 2008 crisis.

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When negotiating a price, never bid with a round number

February 3, 2016

Interesting research on bidding. We usually round off numbers but while bidding make a precise offer. It signals the seriousness of the bidder:

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The rich history of mistrust behind China and western financial advisers..

February 2, 2016

Tom Plate has a nice piece on the topic.

Beijing’s warnings are directed generically rather than individually – at the global class of fast-buck investment jackals that care for no one’s welfare but their own.

He says this mistrust took shape post South East Asian crisis:

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Colombia’s discount currency exchanges are funneling drug money

February 1, 2016

I really like the way these illegal/informal exchanges work. This one is on currency exchange in Colombia:

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Tracking investment portfolio to figure which politician is corrupt..

January 28, 2016

Interesting piece of research. It says one could actually figure corrupt politicians by looking at their investment portfolio. Corrupt politicians usually have more riskier portfolio (have a higher share of equity). I had earlier pointed to another such research on Mumbai politicians as well.

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What happens in an economy when banks close down?

January 21, 2016

Ben Norman and Peter Zimmerman have this fascinating post on financial history.

Greece banks closed last year and the post draws parallel from Irish example in 1970s. Now unlike Greece banks Ireland banks closed due to strikes. What happened was interesting:

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Making World Bank more relevant in today’s times…

January 19, 2016

Ngaire Woods (Dean of the Blavatnik School of Government) has a nice piece on future of World Bank, one of the Bretton Woods institution. The other one – IMF got a new lease of life during this crisis. But World Bank continues to flounder:

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Somnath Temple to invest in Gold Monetisation Scheme…

January 18, 2016

Today s a day of posting on temples. Earlier pointed to how temples helped develop cuisines in India.

And now this one on Somnath temple signing up for the Goldscheme. Well if Indian temples sign up for the scheme, nothing much is needed.  Though the amount is small, but a start nevertheless. It has politicians on board which has helped push the scheme.

All this is so exciting really. Indian financial history is coming back in interesting ways. Temples were the original bankers/financiers and you had kings which are today’s politicians in many ways. There were deep connections between the two and one is seeing them today as well:

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How many currencies does the world need?

January 7, 2016

Mark Griffith poses this interesting question and gives equally food for thought answers.

He says this idea that a country should have one currency needs to be questioned:

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Why is there no creative destruction in economic ideas and economists’ ranking?

January 5, 2016

Federico Fubini (a financial columnist) hits out at the murky world of economists (read economists based at US Ivy league).

He starts with this idea that say you sleep in 2006 and wake up in 2016, you see a very different world. Based on how much economic world has changed, one would imagine status of economists changing as well. But nothing happens here. People who called shots in 2006 remain as powerful in 2016 as well:

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Swiss to now vote for 100% reserve banking

December 28, 2015

Marc Thornton of Mises alerts me to this new Swiss referendum.

Post rejection of gold backed currency referendum, they are now looking at 100% reserve banking. What does this mean? Well, under this banks maintain all their demand deposits as reserves. As of now, they just maintain a fraction of deposits as reserves and lend the rest. This 100% rule shall limit banks role in creation of money which has increased significantly over the years. This restriction though does not usually apply to time deposits which are not payable on demand. Not sure what the details are of the proposed referendum.

So what is the new Swiss deal?

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Was the crisis caused by too much govt intervention in financial markets, or by too little?

December 23, 2015

The answer to this question is really important as the answer in turn has shaped the political outcomes in the respective countries.

Howard Davies says the answer to the q are of 3 types:

I may not be the only finance professor who, when setting essay topics for his or her students, has resorted to a question along the following lines: “In your view, was the global financial crisis caused primarily by too much government intervention in financial markets, or by too little?” When confronted with this either/or question, my most recent class split three ways.

Roughly a third, mesmerized by the meretricious appeal of the Efficient Market Hypothesis, argued that governments were the original sinners. Their ill-conceived interventions – notably the US-backed mortgage underwriters Fannie Mae and Freddie Mac, as well as the Community Reinvestment Act – distorted market incentives. Some even embraced the argument of the US libertarian Ron Paul, blaming the very existence of the Federal Reserve as a lender of last resort.

Another third, at the opposite end of the political spectrum, saw former Fed Chairman Alan Greenspan as the villain. It was Greenspan’s notorious reluctance to intervene in financial markets, even when leverage was growing dramatically and asset prices seemed to have lost touch with reality, that created the problem. More broadly, Western governments, with their light-touch approach to regulation, allowed markets to career out of control in the early years of this century.

The remaining third tried to have it both ways, arguing that governments intervened too much in some areas, and too little in others. Avoiding the question as put is not a sound test-taking strategy; but the students may have been onto something.

Knowing govts and such choices, the answer is usually the middle choice or the third one here:

Now that the crisis is seven years behind us, how have governments and voters in Europe and North America answered this important question? Have they shown, by their actions, that they think financial markets need tighter controls or that, on the contrary, the state should repudiate bailouts and leave financial firms to face the full consequences of their own mistakes?

From their rhetoric and regulatory policies, it would appear that most governments have ended up in the third, fence-sitting camp. Yes, they have implemented a plethora of detailed controls, scrutinizing banks’ books with unprecedented intensity and insisting on approving cash distributions, the appointment of key directors, and even job descriptions for board members.

But they have ruled out any future government or central-bank support for ailing financial institutions. Banks must now produce “living wills” showing how they can be wound down without the authorities’ support. The government will wash its hands of them if they run into trouble: the era of “too big to fail” is over.

Perhaps this two-track approach was inevitable, though it would be good to know the desired end-point. Is it a system in which market discipline again dominates, or will regulators sit on the shoulders of management for the foreseeable future?

What about the political outcomes? The research show post such crises, it is the rightists which come to power:

But what have voters concluded? In the first wave of post-crisis elections, the message was clear in one sense, and clouded in another. Whichever government was in power when the crisis hit, whether left or right, was booted out and replaced by a government of the opposite political persuasion.

That was not universally true – see Germany’s Angela Merkel – but it certainly was true in the United States, the United Kingdom, France, and elsewhere. France moved from right to left, and the UK went from left to right. But voters’ verdict on their governments was more or less identical: things went wrong on your watch, so out you go.

But now we can see a more consistent trend developing. Three German economists, Manuel Funke, Moritz Schularik, and Christoph Trebesch, have just produced a fascinating assessment based on more than 800 elections in Western countries over the last 150 years, the results of which they mapped against 100 financial crises. Their headline conclusion is stark: “politics takes a hard right turn following financial crises. On average, far-right votes increase by about a third in the five years following systemic banking distress.”

The Great Depression of the 1930s, which followed the Wall Street crash of 1929, is the most obvious and worrying example that comes to mind, but the trend can be observed even in the Scandinavian countries, following banking crises there in the early 1990s. So seeking to explain, say, the rise of the National Front in France in terms of President François Hollande’s personal and political unpopularity is not sensible. There are greater forces at work than his exotic private life and inability to connect with voters.

The second major conclusion that Funke, Schularik, and Trebesch draw is that governing becomes harder after financial crises, for two reasons. The rise of the far right lies alongside a political landscape that is typically fragmented, with more parties, and a lower share of the vote going to the governing party, whether of the left or the right. So decisive legislative action becomes more challenging.

At the same time, a surge of extra-parliamentary mobilization occurs: more and longer strikes and more and larger demonstrations. Control of the streets by government is not as secure. The average number of anti-government demonstrations triples, the frequency of violent riots doubles, and general strikes increase by at least a third. Greece has boosted those numbers recently.

The only comforting conclusion that the three economists reach is that these effects gradually peter out. The data tell us that after five years, the worst is over. That does not seem to be the way things are moving now in Europe, if we look at France’s recent election scare, not to mention Finland and Poland, where right-wing populists have now come to power. Maybe the answer is that the clock starts ticking on the five years when the crisis is fully over, which is not yet true in Europe.

So politics seems set to remain a difficult trade for some time. And the bankers and financiers who are widely blamed for the crisis will remain in the sin bin for a while yet, until voters’ expectations of economic and financial stability are more consistently satisfied.

Nice bit..

A different kind of Call money market in Andhra Pradesh (and a tragic one)..

December 18, 2015

Call money is something usually associated with money markets. The name literally means money is available on a call from a lender and to be delivered back to the lender on a return call. Nowadays it means a market where lenders lend their surpluses on an overnight basis (if weekend then 3 days) on an unsecured basis (no collateral). Accordingly, you have call market interest rates which have become the preferred way for targeting interest rates for central banks.

It seems there is a different call market existing in Andhra Pradesh which is more on traditional lines. Here, money is available on a phone call and is given back on a call. The interest rates are crazily high. In a real tragedy, one such family committed suicide as they could not pay back the interest after getting a call. Thiis how one got to know of this market. 

On Thursday morning, 36-year-old Siva Kumar, a resident of Diguvanagulavaripalle village in Chittoor district, took his family to the Ayyappa temple. After offering prayers, they rode on a mobike to neighbouring Errajivaripalem village. On the banks of the Sitamma lake, they then posed for a family photograph.  

It was a picture of a family on an outing — till all of them jumped into the water. Eyewitnesses said villagers tried to save the family of four — Siva Kumar, his wife Leelavathi (30) and their two children Naveen (8) and Kavya (6) — but failed. Their bodies were retrieved in the evening.

The mass suicide showed that the ‘call money lending’ racket in Andhra Pradesh has taken a deadly turn. The family has left behind a note naming the moneylenders whose harassment forced them to take the extreme step. Their neighbours too told the local media that Siva Kumar was being constantly harassed by moneylenders.

The ‘call money lending’ racket makes loans readily available on the basis of phone calls. The moneylender comes to the borrower’s doorstep with the cash and a promissory note. The interest rates range between 120% and 200%. The lender, similarly, can ask for the money back over the phone at any time. If the borrower can’t repay, life and property comes under threat.

It runs both deep and wide in Andhra Pradesh, evidence gathered by the police during raids in Krishna, Guntur, Kadapa, Prakasam, East Godavari and several other places show. The raids also exposed the deep-rooted association private moneylenders have with leaders of all political parties as well as some bureaucrats. The police also discovered how moneylenders threatened, coerced and dragged women into prostitution when they could not repay loans in time.

This is such a sad story. How distorted financial markets continue to create havoc with public. How people continue to avail loans from informal financial sector and pay via their lives. So many years of efforts of financial inclusion is still far from complete.

One also needs to note how such informal financial markets emerge and thrive with huge political support. This one uses technology to give money in a very prompt manner but on non-payment use the traditional coercive  ways to force repayment or think of other ways to escape.

The role of banks and devil in growing an economy..

December 17, 2015

Here is a two month old interview of Adair Turner which is a great read. He discusses his new book, Between Debt and the Devil: Money, Credit, and Fixing Global Finance and the critical questions — and radical solutions — that can help put us on a better economic path.

First some bit on banks:

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Rise of peer to peer funding networks in China..

December 9, 2015

I pointed to this interesting article on rise of P2P funding networks in India.

There is an article on the same happening in China too and of course on a bigger scale:

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Teaching Corporate finance basics via a verse..

December 8, 2015

The Pfizer reverse merger for tax gains is one of those classic corporate finance cases. Jessica Einhorn, (former dean at Johns Hopkins University) has a verse on corp fin. She has prepared similar verses on central banks, unemployment and bicoins as well..

The rise and fall of Brazil’s banking golden boy..

November 27, 2015

Another of those once golden banking boy bites the dust. This one is a Brazilian banker – Andre Esteves.

Andre Esteves, the brash banker who once joked his firm’s name, Grupo BTG Pactual, stood for “better than Goldman”, became the latest high-profile executive dragged into Brazil’s widening corruption scandal.

The 47-year-old billionaire was arrested in on Wednesday, along with Senator Delcidio Amaral, police said. Esteves allegedly sought an agreement with Amaral to interfere with testimony from a jailed former executive of oil producer Petroleo Brasileiro SA, according to a court document.

Esteves made a splash on the international financial stage – and became Brazil’s youngest self-made billionaire – when he sold Pactual to UBS for $2.6 billion in 2006. He and partners bought it back three years later and set off on an expansion, snapping up businesses including the Swiss private-banking unit of Assicurazioni Generali SpA. The firm sold shares to the public in 2012.

What is it about banking and finance that most of its earlier priests end up being ostracised later? Prof Galbraith in his book on history of money pointed to several of such cases in the past which continues till date.


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