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Dimon's $23 Million Payday Isn't the Problem

By
Laura Shanley
on May 21, 2012 11:06 AM | | Comments (0) | TrackBacks (0)
In a new op-ed, NYU Stern Professors Ingo Walter and Jennifer Carpenter address risk exposure and incentive systems in financial institutions. They argue that the root of the problem is the underpriced government guarantees that incentivize risk taking, not executive compensation policies.

Excerpt from CNN:

The more risk a bank takes, the greater the value of government guarantees and potential bailouts. This value gets passed on to the bank's stock price. If employees are paid in deferred stock, the risk incentives are then passed on to them, encouraging them to speculate.

Rules that mandate more pay in the form of stock miss the point. It helps align the interests of employees and shareholders, but it fails to align their interests with those of taxpayers.

Ultimately, it's the taxpayers who are held hostage. They care about the size of bailout necessitated by excessive risk-taking taken by banks, and about economic growth, but not about how bank profits are divided per se, since they don't get a cut in any case.

Regulators are aware that bank stockholders have an overriding desire to take more risk than is good for society because chronic under-pricing of government guarantees makes it profitable for banks to seek risky assets and lever them as much as possible. This is the reason for capital requirements and the Volcker Rule,which tries to restrict risk-taking.


Read the full article here

How Did the Original J.P. Morgan Do It?

By
Laura Shanley
on May 16, 2012 9:47 AM | | Comments (0) | TrackBacks (0)
Professor Thomas Philippon's research is highlighted in a new Bloomberg Businessweek article. His research suggests that despite substantial innovations in finance since the 1900s, only limited evidence exists to support the theory that market prices are more efficient today. He believes that the financial industry has too large a share of US GDP, which "would represent an annual misallocation of resources of about $280 billion for the U.S. alone."

Excerpt from Bloomberg Businessweek:

The role of finance in the economy includes matching savers with borrowers, pooling risks, and producing information through price changes. Total compensation for these services is the sum of profits, wages, and bonuses. Compensation reached an all-time high of around 9 percent of gross domestic product in 2010, up from up from 5 percent in 1980 and 4 percent in 1900. The economic value of finance is debt issuance, mutual-fund money management, financial derivatives, and the like. (Phillippon's calculations try to exclude real estate from his 130-year data series; he also focuses on non-war related GDP.) Phillippon can then estimate the unit cost of the financial middleman, which was 1.3 percent of all financial assets percent in the early 1900s and amounts to some 2.3 percent currently, with much of the rise having occurred since the 1970s.


Read the full article here

Desperately Seeking a Bailout for Spain and its Banks

By
Laura Shanley
on May 14, 2012 4:34 PM | | Comments (0) | TrackBacks (0)
Nouriel Roubini, Professor at NYU Stern and Megan Greene, Senior Economist at Roubini Global Economics address solutions for Spain's insolvency in "Desperately Seeking a Bailout for Spain and its Banks," a new op-ed in the Financial Times. They stress that bailout measures should be used to revitalize economic growth.

Excerpt from the Financial Times:

In order to stabilise its public debt levels after a bank recapitalisation, Spain would have to generate a swing in its public finances that is not only unrealistic, but also self-defeating. The tax rises and spending cuts required would make the recession deeper and cause the primary balance to deteriorate.

In order to put itself on a path towards external debt sustainability, Spain would need a huge adjustment in its trade balance. In the short run, a fall in domestic demand could quickly improve the trade balance. However, in the medium term, Spain can only service its foreign debt if it finds balanced and sustainable growth, which requires a real-terms depreciation that will not occur unless the value of the euro falls sharply.

Read the full article here

Continue reading Desperately Seeking a Bailout for Spain and its Banks.

The Eurozone's Austerity-Growth Debate

By
Laura Shanley
on May 7, 2012 1:27 PM | | Comments (0) | TrackBacks (0)
The Council on Foreign Relations interviewed Professor Thomas Philippon on German-mandated austerity measures and the effect on Eurozone growth. The interview spans the political and economic environment of the whole Eurozone as well as the specific cases of France, Italy, Spain and the Netherlands.

Excerpt from CFR:

The center-right Dutch government collapsed late last month because of its inability to agree on the austerity measures. How do you read that situation and its implications for the eurozone-wide debate over austerity?

That's the one I think is the most important new element. It's very clear that Germany, in any scenario you can imagine for the eurozone, needs the full support of the Netherlands. So the fact that even in the Netherlands, there was enough backlash that the government collapsed because of austerity measures, this means that we've hit the wall, that we cannot go further [with the German-engineered austerity push]. Immediately after that, [German Chancellor Angela] Merkel started talking about growth, as well. That is a very important signal.

If you start losing the support of countries like the Netherlands, then you know you've gone too far already. We are clearly going to see a change in emphasis--from austerity to growth. Also because we have agreed on much of the austerity, in a sense, and now we just need to implement it and pass the laws. There's no question that we are going to see a shift in emphasis. But what are they going to agree on? We are going to have to find policies that are acceptable in all of these countries. Right now, they agree that we need some growth--even Germany--but they are not yet at the point where they agree on the specific measures. So that's going to be the next bargaining.

Read the full interview here

Financial Architecture, Systemic Risk and Universal Banking

By
Laura Shanley
on May 4, 2012 9:16 AM | | Comments (0) | TrackBacks (0)
NYU Stern Finance Professors Anthony Saunders and Ingo Walter published an article in the January 2012 edition of Financial Markets and Portfolio Management. "Financial Architecture, Systemic Risk and Universal Banking" explores sources of risk in the financial services sector and regulatory options available for systemically important financial institutions.

Full Abstract:

Consolidation has been a fact of life in the wholesale financial services sector, resulting in fundamental change in the financial architecture and public exposure to systemic risk. The underlying drivers include advances in transactions and information technologies, regulatory changes, geographic shifts in growth opportunities, and the rapid evolution of client requirements, which in combination have obliged financial firms to rethink their roles as intermediaries. Moreover, financial sector reconfiguration has accelerated as a result of the global market turbulence that began in 2007, with governments either forcing or encouraging combinations of stronger and weaker financial firms in an effort to stem the crisis and improve systemic robustness. In the process, financial firms that are "systemic" in nature and had a major role in creating the crisis have come out of it with even larger market shares and greater systemic importance. Given the episodic socialization of risk in the form of widespread use of public guarantees to firms judged too big or too interconnected to be allowed to fail, the role of systemically important financial institutions (SIFIs) is central to the financial architecture and the public interest going forward. This survey paper considers the sources of systemic gains, losses and risks associated with SIFIs in historical context, in the theoretical and empirical literature, and in public policy discussions--i.e., what is gained and what is lost as a result of the available policy options to deal the dominant role of SIFIs in the financial architecture?

Read the full paper here

Robert Engle Discusses Volatility Models on Bloomberg Radio

By
Laura Shanley
on May 1, 2012 3:08 PM | | Comments (0) | TrackBacks (0)
Professor Robert Engle is interviewed in a Bloomberg audio segment on the nature of assessing risk. When asked if there is a new humility in modeling and quantitative finance since the financial crisis, Professor Engle responded: "We talk about which models broke and which models didn't- and actually, these volatility models didn't break. They continued to work right through the financial crisis, telling you how risky things were."

Listen to the full interview (running time: 08:24) here

MSRM Alum Juan Humberto Young Presents at TEDxCiudad Del Saber

By
Laura Shanley
on May 1, 2012 9:34 AM | | Comments (0) | TrackBacks (0)
MS in Risk Management alum Juan Humberto Young presented at TEDxCiudadDelSaber in March 2012.

Description: Considered one of the pioneers in designing and implementing services for the application of positive psychology in business strategy, financial administration and risk control, Dr Juan Humberto Young makes his case for the impact of happiness at a personal, institutional and national level.

Please note that this talk is in Spanish.

New Research Paper Calls For "Repo Resolution Authority"

By
Laura Shanley
on April 30, 2012 9:06 AM | | Comments (0) | TrackBacks (0)
A paper exploring the risks of the repo market by Viral Acharya and T. Sabri Öncü is referenced in a Nasdaq article.

Excerpt from Nasdaq.com:

The paper, presented last month at the Federal Reserve Board's conference on central banking and the financial crisis, takes aim at overhauling the tri-party repo, or repurchase, market, one of the pillars of the so-called shadow banking system.

The authors propose a "bottom up" stabilization approach that works at the level of what they call systemically important assets and liabilities rather than at the level of the systemically important financial institution that owns them.

"The advantage of the bottom up approach is that it assigns responsibility and a management of an asset class to a clearing house that over time will develop expertise--not just in bad times on how to resolve them--but in good times over how to manage risk of the assets" like repos and derivatives, Viral V. Acharya, an economics professor at New York University's Stern School of Business, said in an interview Friday.

Read the full article at Nasdaq.com here

Read the referenced paper here

NYU Stern Launches MS in Business Analytics Program

By
Laura Shanley
on April 23, 2012 4:07 PM | | Comments (0) | TrackBacks (0)
Press Release

New York University Stern School of Business today announced a new Master of Science in Business Analytics that will be offered in Shanghai and at the School's Washington Square campus beginning in May 2013. The MS in Business Analytics will be the first degree program to be offered at NYU's downtown Shanghai campus, effectively launching the University's granting of degrees in China. Moreover, the MS in Business Analytics is the first accredited graduate level program in Business Analytics to be offered by a leading business school. The new discipline, which stands at the intersection of business and technology, leverages the use of data as a strategic business asset and decision-making tool.

"As the explosive growth of data fuels new business models and transforms the way business decisions are made, NYU Stern is leveraging its deep faculty expertise in quantitative methods, and the strength of its Information Systems, Operations and Management Sciences (IOMS) and Marketing departments, to offer this new MS in Business Analytics," said Peter Henry, Dean of NYU Stern School of Business. "Our newest degree contributes to the foundation NYU is building in Shanghai as the first American university with independent legal status approved by the Ministry of Education."

R. May Lee, Associate Vice Chancellor for Asia for New York University, added, "My conversations with business and government leaders in China and more broadly throughout Asia have reinforced the value of this program as a means to provide the talent their industries will need to sustain and expand long-term growth."

Designed for executives with at least 10 years' experience in such areas as manufacturing, technology, government, health care, energy, real estate and construction, the MS in Business Analytics will be taught in five modules spanning one year. While modular scheduling and English-language instruction will allow executives from around the globe to participate, the program is expected to appeal in particular to English-speaking Chinese executives as well as expatriates working in China. The burgeoning manufacturing sector and investment in infrastructure throughout Asia has created a tremendous demand for executives who can manage the complexities of this growth. Candidates will typically have college or equivalent degrees, with strong quantitative backgrounds.

The program will be taught at NYU Stern's Greenwich Village campus in New York and at the NYU Shanghai campus. Faculty will be drawn from NYU Stern's top-ranked Information Systems (or IOMS) and Marketing departments. Graduates will be able to harness the tools and thinking behind Business Analytics to turn vast streams of data into actionable knowledge and evidence-based decision making.

"This new MS in Business Analytics adds another innovative degree to NYU Stern's portfolio of global programs, one that responds to the increasing importance of data --its interpretation, modeling, and visualization -- to business decision making at all levels," said Eitan Zemel, NYU Stern's Vice Dean for Global Programs. NYU Stern also offers an MS in Risk Management, an MS in Global Finance with Hong Kong University of Science and Technology, and the TRIUM Global Executive MBA, a joint program with the London School of Economics and HEC Paris.

About New York University

New York University, which was established in 1831, is one of the largest and most prestigious private research universities in the U.S. It has an unequaled global presence, with research university campuses in New York, Abu Dhabi, and Shanghai, and a dozen other global academic sites.. Through its 18 schools and colleges, NYU conducts research and provides education in the arts and sciences, law, medicine, dentistry, education, nursing, business, social work, the cinematic and performing arts, public administration and policy, and continuing studies, among other areas.

About New York University Stern School of Business

New York University Stern School of Business, located in the heart of Greenwich Village, is one of the premier management education and research centers. NYU Stern offers a broad portfolio of academic programs at the graduate and undergraduate levels, all of them informed and enriched by the dynamism, energy, and deep resources of one of the world's business capitals. www.stern.nyu.edu

About NYU Shanghai

Located in China's financial capital, NYU Shanghai will be New York University's newest degree-granting portal campus. With rigorous academic standards, research centers, and access to one of the most vibrant business communities, NYU Shanghai will provide students with the opportunity to study and live in a city rich in culture, dynamic in finance, and pan-international in population. NYU Shanghai will welcome its first freshman class in the fall of 2013.

More coverage of the MS in Business Analytics Program is available at the Financial Times and Bloomberg Businessweek.

How Shape-Shifting Banks Foil Dodd-Frank Act

By
Laura Shanley
on April 18, 2012 8:38 AM | | Comments (0) | TrackBacks (0)
In a new Bloomberg op-ed, NYU Stern economists Thomas Cooley and Kim Schoenholtz criticize banks for spinning off their investment activities to avoid compliance with Dodd-Frank. They propose that regulations should target financial instruments and markets instead of just the institutions.

Excerpt from Bloomberg:

Deutsche Bank AG (DBK) recently separated its U.S. investment bank from its bank holding company, removing it from supervision by the Federal Reserve.

So far, U.S. regulators have reacted passively to such moves by foreign banks to avoid the heightened capital requirements mandated by the Dodd-Frank Act.

That's because Dodd-Frank failed to heed a fundamental law of architecture: Form must follow function. For financial regulation to be effective, it should focus on economic function, rather than legal form. If it doesn't, institutions will quickly find new forms that free them of regulatory constraints. What walks like a duck and quacks like a duck must be regulated as a duck, even if it is legally a goose.

All too often financial regulation misses this obvious point. The result is regulatory arbitrage, as intermediaries alter their legal form to minimize their costs.

Read the full article here
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