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Tag Archives: Wall St.

Rome could not be conquered. It destroyed itself from inside. The afterglow of Rome’s strength remained for about another 200 years, and kept the barbarians at bay.

Wall St., the New Rome, had reached the power and stature of old Rome, but on a much grander scale. And in 2008 New Rome fell from grace. Here are 3 inferences why.

Abuse of Strategy: Up to 2007, we thought of Wall St. firms as excellent well managed companies, the crème de la crème of American Capitalism, but as of 2008 we know that their management teams had bled their future sustainability by maximizing profits today at any expense. With hind sight, Wall St. firms chased mortgage products in the “mistaken” belief that they had securitized away all risk. Really? What happened to the risk-return relationship? I suppose that was conveniently forgotten?

In the strategy world this is known as harvesting. Harvesting is a correct corporate strategy in a mature dying industry, but not as a management game at shareholders long term expense.

Misuse of the Term Strategy: A few years ago, a very senior financial executive in the mortgage industry came up to me and said “you cannot use frequencies to estimate probabilities”! Makes you wonder if any of these finance types really had any understanding of the risks they were taking? History suggests that they did not.

The unfortunate reality in financial services, is that strategy is mistaken for a new formula (see Recipe for Disaster: The Formula That Killed Wall Street) or worse still a new IT system. Worse because without a design document and proper records and audits it is difficult to figure out what went into this IT system. These are not strategies.

At best they are tactics, more often they are business necessities. In the world of finance, understanding your formulae, your systems, and your risk methodologies are a pre-requisites of the business. These are not strategies. If anyone tells you otherwise they really don’t understand what they are doing. 

Finally, the really bad news, is that if a formula or an IT system is your company’s strategy, chances are somebody else on the other side of the market or the world has probably also figured it out and is using it against you.

Incorrect Strategic Implementation: Looking at Wall St., (not to blame them but they are rich with examples of how not to do it) many Wall St. firms had very high powered Market Risk, Credit Risk, and Operational Risk committees, and they still failed. This is like LTCM, with their two Nobel Laureates, all over again.

Lets not just point a finger at these committees. Wall St. collapsed in spite of Sarbanes Oxley Act of 2002. Wall St., collapsed 5-6 years after Sarbanes Oxley came into effect.

The point here is that implementation failed.

For Corporate Strategy advice, please contact Ben Solomon at QuantumRisk LLC. (Note fix email address)

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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In his article Why Governments Can’t Run a Business Gordon raises many good issues, but Mr. Gordon here is a reminder and rebuttal to each of your points:

1. Governments are run by politicians, not businessmen.
Quite obviously I do not know how you would define businessmen. Remember, Worldcom, Enron, Arthur Andersen, Merrill Lynch, Morgan Stanley, AIG…

2. Politicians need headlines.
Using the examples above I can understand why businessmen don’t like headlines.

3. Governments use other people’s money.
How do banks get their funds?

4. Government does not tolerate competition.
Have you forgotten Standard Oil?

5. Government enterprises are almost always monopolies and thus do not face competition at all.
Oh wow, if cutting cost is alien to the culture of all bureaucracies, then private medical insurance must be free by now, right?

6. Successful corperations are run by benevelont despots.
Sorry, I forgot GM had over-looked 50 years of losing market share.

7. Government is regulated by government.
Have you forgotten what happened to Wall St in 2008 with minimal regulation?

 

My point is, blaming the other side either overtly or covertly, is not going to help America.

Benjamin T Solomon
Managing Principal
QuantumRisk LLC

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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If you had studied finance in Europe in the early 1990s you would be aware of two raging topics in academia. First, was the how much regulation was required for efficient markets? Second, was dividends paid from profits or from cashflow?

Today, we know the answer to the second question, i.e. from cashflow, but only have a partial answer for the first question. The partial answer is that the 2008 Wall St. ‘mess’ clearly shows us that no regulation or little regulation is definitely a bad thing. That was an expensive lesson, not just for Wall Streeters, but for the investing American public, too.

In today’s New York Times editorial Starting the Regulatory Framework, the following paragraph caught my attention:

“In addition to explicit regulation of derivatives, those rules must include limits on the amount of money that financial institutions can borrow in order to boost returns — and higher requirements for the amount of capital they must hold to support their activities and cushion their losses.”

A friend of mine told me that here in the US regulation tends to be short but in Scandinavia it tends to be long. I think we miss the point when we focus on ‘explicit’ regulation or even the length of a regulation as a measure of ‘explicitness’.

I do believe that good regulation must have three properties.
1. Instill Clarity. It should be clear from the wording of the regulation what the spirit of the regulation is, even to dissenting stakeholders. Clarity discourages people from gaming the system.
2. Promote Transparency. Regulations should promote open and full disclosure of what a company is doing. For example if something is outside the books, for example off balance sheet, regulation should require that this be made visible (amount, timing, penalites, exposures, and historical trends) even if auditors, accountants and internal parties believe otherwise.  This would include trading and derivative exposures, in a manner that would facilitate public scrutiny because markets are only as efficient as the information they have available to them.
3. No Exceptions. Everyone lives by the same spirit of the regulations. This ensures that market players do not arbitrage off an unregulated segment of the market when a regulated segment would not allow them to make similar profits.

Benjamin T Solomon
QuantumRisk LLC

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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