>THE FLAWS OF FINANCE: Bad Models, or, Why We Need a Hippocratic Oath in Finance

As a child, watching my parents write postcards whilst we were all on holiday was an instructive experience. My mother would meticulously write out the card, scattering a few interesting holiday tidbits within the text. My father, whose sum total of postcards sent was invariably just one (to his office), opted for a considerably more efficient approach. His method is shown at the left in Exhibit 1.

I think we can construct a similar diagram to explain the Global Financial Crisis (GFC), represented at the right in  Exhibit 1. In essence, the GFC seems to have sprung from the interaction of the following four “bads”: bad models, bad behaviour, bad policies (which is really just bad behaviour on the part of central banks and regulators), and bad incentives. 

In an effort to rethink finance, I want to examine each of these factors in turn, beginning with bad models.

Bad Models, or, Why We Need a Hippocratic Oath in Finance
The National Rifle Association is well-known for its slogan “Guns don’t kill people; people kill people.” This sentiment has a long history and echoes the words of Seneca the Younger that “A sword never kills anybody; it is a tool in the killer's hand".

 I have often heard fans of financial modelling use a similar line of defence. However, one of my favourite comedians, Eddie Izzard, has a rebuttal that I find most compelling.  He points out that "Guns don’t kill people; people kill people, but so do monkeys if you give them guns.” This is akin to my view of  financial models. Give a monkey a value at risk (VaR) model or the capital asset pricing model (CAPM) and you’ve got a potential financial disaster on your hands.

The intelligent supporters of models are always quick to point out that financial models are, of course, an abstraction from reality. Just as physicists can study worlds without frictions, financial modelers should not be attacked for trying to reduce the complexity of the “real world” into tractable forms. Finance is often said to suffer from Physics Envy. This is generally held to mean that we in finance would love to write out complex equations and models as do those working in the field of Physics. There are certainly a large number of  market participants who would love this outcome.

To read paper in detail: THE FLAWS OF FINANCE

>CAVEAT EMPTOR: CAPITAL RULES AND DELEVERAGING CAN MAKE "BARGAIN" BANKS EXPENSIVE

The stress test of the European Banking Authority last year led to the conclusion that numerous banks, including major listed banks, would need additional capital to support the continuation of existing activities. Official estimates started low, but eventually converged on over 100 billion euros for the banks; even these numbers seem low compared to the real needs if banks were to maintain their former book of business, as enumerated in my earlier study. The numbers seemed much larger that what the markets or the banks' home countries could provide and the price of bank stocks tanked at the end of 2011.


To read paper in detail: CAVEAT EMPTOR
RISH TRADER

>INDIAN HOTELS: Hotel Room Supply, Capital Investment and Manpower Requirement by 2021; Impact of tourism

The Impact of Tourism
Tourism is a difficult phenomenon to define, simply because it involves inter-related activities belonging to different industries. An industry typically has a “number of firms that produce similar goods and services and therefore are in competition with one another”1. Tourism then is not necessarily an industry as it constitutes airlines, hotels, restaurants, travel agencies and other attractions that do not compete with one another. Rather, they complement each other in forming a unified system of activities. A culmination of these activities interacting is what defines tourism. This is supported by the World Tourism Organization (WTO) which defines it as “the activities of persons travelling to and staying in places outside their usual environment for not more than one consecutive year for leisure, business and other purposes not related to the exercise of an activity remunerated from within the place visited.”


While tourism has its positive and negative impacts, it is unarguably a catalyst for the socio-economic progress of a country. More so, for a developing nation, tourism acts as a key driver for the creation of jobs, enterprises, infrastructure development and foreign exchange earnings. The earnings from tourism make it one of the biggest sectors in the world. The sector’s total contribution to the worldwide gross domestic product (GDP) is estimated to be US$5,991.9 billion or 9.1% of global GDP in 2011. In India, travel and tourism contributed `3,680.4 billion or 4.5% of the country’s GDP in 20113. In addition to tourism’s revenue contribution, it also accounted for 7.5%4 of the total employment in the country in 2011. India has been a late starter as far as tourism is concerned. Post the country’s independence, the government of India focused on developing other industries, such as agriculture, irrigation, power and infrastructure. It was only in 1982, three decades ago, that the first Tourism Policy was drafted and presented in the country. However, it is only over the past two decades that tourism in India has really taken form. Table 1-1 presents the foreign exchange earnings from tourism and the sector’s total contribution to GDP from 1991 to 2011. As highlighted in the table, foreign exchange earnings and total contribution to GDP has grown by a compounded annual growth rate (CAGR) of 15.5% and 10.5% respectively over the past two decades.


To read full report: INDIAN HOTELS
RISH TRADER

>COLLATERAL DAMAGE: What next? Where next? (BOSTON CONSULTING GROUP)

What to expect and How to prepare?


A world with too much debt


Total debt-to-GDP levels in the 18 core countries of the Organisation for Economic Co-operation and Development (OECD) rose from 160 percent in 1980 to 321 percent in 2010. Disaggregated and adjusted for inflation, these numbers mean that the debt of nonfinancial corporations increased by 300 percent, the debt of governments increased by 425 percent, and the debt of private households increased by 600%. But the costs of the West's aging populations are hidden in the official reporting. If we included the mounting costs of providing for the elderly, the debt level of most governments would be significantly higher. (See Exhibit 1 below)

To read the full report: COLLATERAL DAMAGE

RISH TRADER

>$29,000,000,000,000: A Detailed Look at the Fed’s Bailout by Funding Facility and Recipient

There have been a number of estimates of the total amount of funding provided by the Federal
Reserve to bail out the financial system. For example, Bloomberg recently claimed that the cumulative commitment by the Fed (this includes asset purchases plus lending) was $7.77 trillion. As part of the Ford Foundation project “A Research and Policy Dialogue Project on Improving Governance of the Government Safety Net in Financial Crisis,” Nicola Matthews and
James Felkerson have undertaken an examination of the data on the Fed’s bailout of the financial system—the most comprehensive investigation of the raw data to date. This working paper is the first in a series that will report the results of this investigation.


The extraordinary scope and magnitude of the recent financial crisis of 2007–09 required an extraordinary response by the Fed in the fulfillment of its lender-of-last-resort function. The purpose of this paper is to provide a descriptive account of the Fed’s response to the recent financial crisis. It begins with a brief summary of the methodology, then outlines the unconventional facilities and programs aimed at stabilizing the existing financial structure. The paper concludes with a summary of the scope and magnitude of the Fed’s crisis response. The line: a Federal Reserve bailout commitment in excess of $29 trillion.





INTRODUCTION


There have been a number of estimates of the total amount of funding provided by the Federal Reserve to bail out the financial system. While the Fed at first refused to provide data on its bailout, the Congress—led by Senator Bernie Sanders—ordered the Fed to provide an accounting of its actions. Further, Bloomberg successfully pursued a Freedom of Information Act suit for release of detailed data. That resulted in a “dump” of 25,000 pages of raw data. Bloomberg has recently claimed that the cumulative “spending” by the Fed (this includes asset purchases plus lending) was $7.77 trillion. However, the reports have not been sufficiently detailed to determine exactly what was included in that total.


We have conducted the most comprehensive investigation of the raw data to date. We find that the total spending is actually over $29 trillion. This is the first of a series of working papers in which we will present our results. We hope that other researchers will compare these results with their own, and are providing detailed break-downs to aid in such comparisons.


The extraordinary scope and magnitude of the recent financial crisis of 2007-2009\ required an extraordinary response by the Fed in the fulfillment of its lender of last resort function (LOLR). The Fed’s response did not disappoint; it was truly extraordinary. The purpose of this paper is to provide a descriptive account of the Fed’s response to the recent financial crisis. In an attempt to stabilize financial markets during the worst financial crisis since the Great Crash of 1929, the Fed engaged in loans, guarantees, and outright purchases of financial assets that were not only unprecedented (and of questionable legality), but cumulatively amounted to over twice current U.S. gross domestic product. The purpose of this paper is to delineate the essential characteristics and logistical specifics of the veritable “alphabet soup” of LOLR machinery rolled out to save the world financial system. We begin by making a brief statement regarding the methodology adopted in developing a suitable method with which to measure the scope and magnitude of the Fed’s crisis response. The core of the paper will follow, outlining the unconventional facilities and programs aimed at stabilizing (or “saving”) the existing financial structure. Only facilities in which transactions were conducted are considered in the discussion (some facilities were created but never used). The paper will conclude with a summary of the scope and magnitude of the Fed’s crisis response. In later working papers we will continue to provide more detailed analysis of the spending.


To read the full report: Federal Reserve bailout commitment
RISH TRADER

>You Can Bank on it: European Banks Need Tons of Money

The global economy has been one victim of the recent crisis of European sovereign debt, but Europe's banking sector and the investors who have financed it will be the next. A great deal of pushing and shoving has forced European authorities to accept that there is a problem in their banking sector, Some are working hard to understand the problems and others see themselves as immune, though they probably are not; but all have been tempted to let political factors influence decisions that need to be based on sound economic and regulatory footings.


To read full report: EUROPEAN BANKS


RISH TRADER