Tonycurzonprice's Favorite Links on finance from Diigo

FT.com / Comment & analysis / Comment - Bankers’ pay is deeply flawed

Wed, 09 Jan 2008 09:35:47 -0000

For example, an investment manager who bought AAA-rated tranches of collateralised debt obligations (CDO) in the past generated a return of 50 to 60 basis points higher than a similar AAA-rated corporate bond. That “excess” return was in fact compensation for the “tail” risk that the CDO would default, a risk that was no doubt perceived as small when the housing market was rollicking along, but which was not zero. If all the manager had disclosed was the high rating of his investment portfolio he would have looked like a genius, making money without additional risk, even more so if he multiplied his “excess” return by leverage. Similarly, the management of Northern Rock followed the old strategy of taking on tail risk, borrowing short and lending long and praying that the unlikely event of a liquidity shortage never materialised. All these strategies essentially earn the manager a premium in normal times for taking on beta risk that materialises only infrequently. These premiums are not alpha, since they are wiped out when the risk materialises.

True alpha can be measured only in the long run and with the benefit of hindsight – in the same way as the acumen of someone writing earthquake insurance can be measured only over a period long enough for earthquakes to have occurred. Compensation structures that reward managers annually for profits, but do not claw these rewards back when losses materialise, encourage the creation of fake alpha. Significant portions of compensation should be held in escrow to be paid only long after the activities that generated that compensation occur.

Tags: compensation economics finance

Posted by: tonycurzonprice

FT.com / Comment & analysis / Editorial comment - Bankers are fallible but not replaceable

Thu, 03 Jan 2008 10:59:41 -0000

Bankers are fallible but not replaceable

Comments:

FT leader on the political response to the finance crisis. "Bad boys, detention but no rustication" is the limp message. And why not, especially since we pay for their main work-asset of liquidity guarantee? posted by tonycurzonprice

Highlights and Sticky Notes:

FT leader on the political response to the finance crisis - how should the banker be punished? "Bad boys, detention but no rustication" is the limp message. Apparently, we need the service sector they have built now that we have no manufacturing. But actually, why not be firmer than this? especially since we pay for their main work-asset of liquidity guarantee. posted by tonycurzonprice

Tags: economics finance

Posted by: tonycurzonprice

Plus ça change: Subprime crisis and historical lessons | vox - Research-based policy analysis and commentary from Europe's leading economists

Tue, 18 Dec 2007 15:08:23 -0000

In many of these cases financial innovation which increased leverage and was often devised to circumvent regulations was an integral part of the story of the boom. Examples include Penn Central in 1970 with innovation in the commercial paper market; the savings and loan crisis of the 1980s with junk bonds; LTCM with derivatives and hedge funds and today with the securitization of subprime mortgages. In this episode risk has been shifted from the originating bank into mortgage-backed securities which bundles shaky risk with the creditworthy. Asset backed securities were absorbed by hedge funds, offshore banks and commercial paper. The shifting of risk from the banks to the financial markets as banks tried to avoid regulated capital requirements did not reduce systemic risk and increased the risk of a more widespread meltdown. Indeed the exposure of the non bank financial sector has ultimately put pressure on the banking system.

Tags: economics finance

Posted by: tonycurzonprice

FT.com / Columnists / Martin Wolf - Why the credit squeeze is a turning point for the world

Mon, 17 Dec 2007 21:45:59 -0000

Second, these events have called into question the workability of securitised lending, at least in its current form. The argument for this change – one, I admit, I accepted – was that it would shift the risk of term-transformation (borrowing short to lend long) out of the fragile banking system on to the shoulders of those best able to bear it. What happened, instead, was the shifting of the risk on to the shoulders of those least able to understand it.

Tags: economics finance wolf

Posted by: tonycurzonprice

FT.com / Columnists / Martin Wolf - Why banking is an accident waiting to happen

Mon, 17 Dec 2007 21:44:24 -0000

banks free-loading on subsidy

Highlights and Sticky Notes:

What seems increasingly clear is that the combination of generous government guarantees with rampant profit-making in inadequately capitalised institutions is an accident waiting to happen – again and again and again. Either the banking industry should be treated as a utility, with regulated returns, or it should be viewed as a profit-seeking industry that operates in accordance with the laws of the market, including, if necessary, mass bankruptcies.

Tags: banking finance regulation

Posted by: tonycurzonprice

FT.com / Comment & analysis / Analysis - Does not compute: How misfiring quant funds are distorting the markets

Mon, 10 Dec 2007 09:00:38 -0000

Does not compute: How misfiring quant funds are distorting the markets

Tags: economics finance

Posted by: tonycurzonprice

FT.com / World - Slow take-up of Islamic loans

Thu, 29 Nov 2007 12:12:08 -0000

Highlights and Sticky Notes:

The FSA stressed Britain was at the forefront of developing this market both on the high street with retail products and in the capital markets with the growth of Islamic-compliant bonds or sukuk, which are structured to pay investors profits from an underlying business rather than interest.

Tags: economics finance islam

Posted by: tonycurzonprice

FT.com / Comment & analysis / Comment - Central banks should prick asset bubbles

Sat, 03 Nov 2007 18:01:04 -0000

Highlights and Sticky Notes:

There is a second reason that the hands-off approach has been shown to be wanting. During the past few years, a significant part of liquidity and credit creation has occurred outside the banking system. Hedge funds and special conduits have been borrowing short and lending long and, as a result, have created credit and liquidity on a massive scale. As long as this liquidity creation was not affecting banks, it was not a source of concern for the central bank. However, banks were heavily implicated. Thus, the central bank was implicitly extending its liquidity insurance to institutions outside the regulatory framework. It is unreasonable for a central bank to insure activities of agents over which it has no supervision, just as it would be unreasonable for an insurance company selling fire insurance not to check whether the insured persons take sufficient precautions against the outbreak of fire.

Tags: economics finance

Posted by: tonycurzonprice

Islamic Banking: Is It Really Kosher? — AMERICAN.COM: A Magazine of Ideas, Online

Sat, 31 Mar 2007 03:50:17 -0000

Highlights and Sticky Notes:

Aaron MacLean lives in Cairo. From 2003 to 2006 he was a Marshall Scholar at Oxford University, where he researched medieval Arabic thought.

But here’s the catch: most Muslim scholars agree that there is no minimum time interval for the bank to own the property before selling it to you at the markup. According to Timur Kuran, the typical interval is “under a millisecond.” The bank transfers ownership of the asset to its client right away. The client still pays a fixed markup at a later date, a payment that is usually secured by some sort of collateral or by other forms of contractual coercion. Thus, in practice, murabaha is a normal loan.

The chief loophole was murabaha. Let’s say that you, a small businessman, wish to go into business selling cars. A conventional bank would examine your credit history and, if all was acceptable, grant you a cash loan. You would incur an obligation to return the funds on a specific maturity date, paying interest each month along the way. When you signed the note and made the promise, you would use the proceeds to buy the cars—and meet your other expenses—yourself. But in a murabaha transaction, instead of just cutting you the check, the bank itself would buy the cars. You promise to buy them from the bank at a higher price on a future date—like a futures contract in the commodities market. The markup is justified by the fact that, for a period, the bank owns the property, thus assuming liability. At no point in the transaction is money treated as a commodity, as it is in a normal loan.

But the post-capitalist utopia that reliance on these instruments was meant to inaugurate was dead on arrival. Those involved in the first wave of Islamic banks realized that equity financing does not make for a stable banking sector, and, after a series of shocks and bad investments, they became very conservative. It was a race to the loopholes—a search for means of sharia compliance less risky than straight-out equity investing.

Tags: author finance interest islam

Posted by: tonycurzonprice