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Showing posts from February, 2013

Ulster Bank's Woes

In previous posts, I have highlighted the problems faced by Ulster Bank as a result of the financial crisis. Once again, Ulster Bank (and its parent company RBS) has announced losses in excess of £1 billion (click here). At the root its problems are defaults on the property loans it made at the height of the housing boom. The big question for me is whether there are even more dramatic losses to come.  Only time will tell!  

Hedge Funds and Corporate Governance

Does having a hedge fund as a substantial shareholder improve corporate governance? Unlike other institutional investors, hedge funds are not afraid to (a) take large stakes in companies and (b) be activist in their ownership i.e., they attempt to exert influence on CEOs.  A recent court case brought against Apple by one of its shareholders, Greenlight Capital, a hedge fund run by David Einhorn, nicely illustrates the way in which hedge funds try to influence companies in which they have stakes. Greenlight Capital is trying to get Apple to return some of its $137 billion cash pile (two-thirds of its balance sheet) to shareholders. Apple has been hoarding cash since 1995 and in 2012 paid its first dividend in 17 years.  Apple has by far the largest cash pile of any corporation in the world - click here

AAA Rating and the Pound

In the past, Kings debased their currencies by adding base metal into gold and silver coins. Today, governments and sovereigns can debase their currency by simply monetizing the government debt. The UK is a very indebted nation and has been monetizing huge amounts of its debts through the process of quantitative easing, whereby the Bank of England 'creates' money and buys huge amounts of UK government debt with newly-created money.

The Moody's downgrade of UK government debt from AAA, the first cut since the 1970s, reflects the fears of higher UK inflation (and lower economic growth), which can largely be traced to the Bank of England's quantitative easing policy. However, the foreign exchange markets have already been reflecting this change in sentiment about the prospects for UK economy in terms of inflation and growth, with sterling weakening against major currencies since the start of the year - see video below from Financial Times on this.

Perpetual Bonds

Click here to read a short article by Matthew Yglesias, which recommends that the US Treasury should issue perpetual bonds.  In other words, governments simply pay an annual coupon but never have to redeem the bond i.e., pay back the principal. This is not a new idea. Britain, from the 18th century onward, issued Consols, which were perpetual bonds paying a low coupon rate.

Armen Alchian

Armen Alchian passed away two days ago aged 98.  Obituaries are available here and here. Below is a short video clip of Alchian talking about property rights.
Alchian was a brilliant economist who inspired several generations of economists, including Nobel prize winners. His papers are amongst some of the most cited in economics. Alchian should have won the Nobel prize in economics as his insights into property rights, inflation, money, economic organisation, the theory of the firm, and the biological approach to economics were all path-breaking. Alchian did the first event study analysis in corporate finance, but it remained a secret for four decades as it pertained to matters of national security - click here to read more. If you read Alchian's papers, you will see that he had the knack of making the dismal science interesting, and his stress was on economic intuition rather than mathematical elegance. His book, Economic Forces at Work, is a must read for all serious thinkers a…

Measuring Inequality

Click here to really a fascinating post on the history and usefulness of the Gini coefficient, which is the standard way to measure income inequality (hat tip - Graham Brownlow). There is a really good map in the post which allows you to click on a country and find out its current Gini score as calculated by the CIA.

Social Mobility

In last week's Economist, the Free Exchange column explored the issue of social mobility across generations. In other words, how much are differences in income in one generation attributable to the previous generation and earlier generations? In other words, how much of the income of the readers of this blog is determined by the income of their parents, grandparents etc.? Greg Clark and Neil Cummins have used rare surnames to measure social mobility rates over the long run (i.e., 200 years plus). They find that social mobility is low in the long run as 70-80% of economic advantage appears to be transmitted from one generation to the next. Click here for an overview of this fascinating research. However, the ultimate question is how much of this economic advantage is down to nature and how much is down to nurture?    

Ownership Structure and Facebook

Last week, my Corporate Finance lectures looked at the relationship between ownership structure and firm performance. Which would you rather invest in: a diffusely-owned company managed by a CEO or a firm with a large shareholder who controls a majority of the firm's voting stock such as Facebook? Click here to read an interesting piece in Slate on why you may not want to invest in Facebook.

FT's 125th Anniversary

The Financial Times is celebrating its 125th Anniversary today. The story of the FT can be viewed in the short video below and you can read about it here.
How important is the press for financial markets? Paul Tetlock suggests that the financial press captures and informs investor sentiment. Joel Peress, on the other hand, argues that the press provides information to investors, particularly in the case of small public companies.
Does the press play a role in financial bubbles?  In a recent paper with Gareth Campbell and Clive Walker, I find that the press did not contribute to the hyping of railway stocks during the famous railway mania. Similarly, a study looking at the role of the press during the dotcom bubble found that the it did not contribute to the asset price reversal.   

Bonuses and Barclays

It has not been a good couple of days for Barclays. 
First, the BBC's Panorama programme alleged that the bank misled its shareholders about the huge capital investment it received during the midst of the 2008 financial crisis. Unlike other UK banks, Barclays did not take a taxpayer-funded capital injection. Instead, it obtained capital from the Abu Dhabi government. According to the Panorama programme, the sole reason Barclays went down this route was to preserve their bonus culture. You can read about this here and UK residents can watch the Panorama programme here
Second, Barclays announced profits today of £246m for 2012, down from £5.88bn in 2011. It is also going to get rid of 3,700 jobs. However, despite reduced profitability and job losses, the bonus pool for employees in 2012 was a staggering £1.85bn!  

Chinese New Year and Liquidity

In the runup to Chinese New Year, large amounts of money are withdrawn from Chinese banks to buy gifts or to be put into red envelopes. In anticipation of this year's withdrawal, the People's Bank of China pumped 450 billion yuan (about £45bn) into money markets via open market purchases in order to make sure there were enough reserves in the banking system and to hold down the interbank lending rate. This action was the biggest one-day liquidity injection ever made by a central bank!  Click here to read more.  Happy Chinese New Year or Xīn Nián Kuài Lè!

Alex Ferguson at HBS

What makes a great manager? What are the components that go to make a great leader? Academics at business schools around the globe have expended great effort in trying to answer these questions. A recent case study undertaken at Harvard Business School looks at the most successful football manager in history - Sir Alex Ferguson. Much as it pains me to admit this, but Ferguson is a great manager. You can read what the HBS case study found here. Ferguson also gave a class at HBS, which was apparently very compelling (click here). Thankfully none of the MBA students received the infamous 'hairdryer' treatment from Fergie! My hope is that there will be a similar HBS case study on Brendan Rogers in 2038. I can but dream!

Large Denomination Notes and Coins

You can read an interesting article here on the £1m and £100m banknotes created by the Bank of England. In an earlier post, I explained how these 'giants' and 'titans' form the backing assets for Northern Irish and Scottish banknotes. Notably, the US flirted with the idea of a $1 trillion dollar platinum coin to help the Obama administration circumvent its debt-ceiling commitment.  Click here to read more.      

Financial Market Theory and Soros

George Soros, in a speech at Davos, stated that we know very little about how financial markets work(click here).  61 years after Harry Markowitz's famous paper, and 50 years since Samuelson and Fama developed the efficient markets hypothesis, and 40 years after the Black-Scholes-Merton model, we are still no further forward in understanding financial markets according to Soros! What are we to do? Some scholars think that behavioural finance is the way to go. The application of psychology to financial markets is certainly interesting and potentially fruitful. However, my own hunch is that we need to understand better the role of government in manipulating and influencing financial markets.