BY Prince Mohan
There are articles and some great quality books on finance. It is once in
While you read some thing very extraordinary. For example a shakingly
Great book The Creature from the Jekyll Island.
Now there is super article by Maria Jeeves on The Alchemists of Finance
Carried by The Economist Print Edition .
The article interviews Henry Tricks and also considers a survey.
One thing more here is that J.PIERPONT MORGAN is credited with some other
bankers like Rothchilds as the Financiers of Governments in the World Wars.
The Creature from the Jekyll Island forcefully describes the way the Federal Reserve System of US was created by a very powerful group of the Morgans , Rockefellers ,
Warburg Pincus , three or four more and a high powered Senator in the closed doors
secret meetings where the competitors became associates . This was the beginning of
the Donning of Cartelization .
These gentlemen have been the greatest Money Scientists the world has seen .
They have been creatively innovating and using proprietary structured technologies in
The world of banking and finance like new financial instruments or the LBOs .
Global Investment Bankers are becoming more risk taking and are spreading it with
New sophisticated ways.
The world is some how managed by the cyclical financial laws of the universe .
For reference it is to mention that in the eighties one Economist of Indian Origin in
America Dr. Ravi Batra had predicted correctly the fall of the wall street against the opinions
Of the best Academicians and practicing Economists of that time .
He had also predicted the rise of Asian Economies much before it was thought by the world’s
Financial leaders. He had blended his spiritual up bringing with his Economics education and study .
The anxieties in the following article are of great concern.
We must also remember Nostradomus The man who saw tomorrow. The best thing he said was that “Today’s actions can change even the predicted future “
What we think NOW is the next moment .
We must think and act positive NOW NOW NOW as we can not allow the Global Financial System to collapse.
The replacement of Gold by the faith and the trust of the people of America behind the Dollar
Has infact brought great progress and innovations in the Financial World though there might have been some flaws and critics too .
The bankers at Kekyll Island Stratgegised the Donning of the Cartelization in the world. Rockefeller the senior is quoted as having said “Competition is Sin “. The competitors at Jekyll Island retreat became friends and associates and created the Great FED which allows them to create money out of thin air.
For more visit http://www.mindbodynsoul.com/Mind/Financially_Leverged_Buyouts.html
Creature from the Jekyll Island at www.amazon.mindbodynsoul.com
Secrets of the Temple at www.amazon.mindbodynsoul.com
Like we say save the Planet Mother Earth from the Global warming
We should also say protect the Global Financial and Banking System as it
Is the power of money and innovations which can help do wonders?
Are you listening our ALCHEMISTS OF UNIVERSAL FINANCE?
The larger responsibility lies on you NOW to have a secured
Abundant and Affluent tomorrow’s Human Generations of ours .
Finance is the oldest profession on the Earth. It has existed from
the barter trade times to today’s times and will keep on existing as long as the Universal light glows, Sun shines and Moon illuminates in the Cosmos.
Maria Jeeves
Global investment banks are taking ever more risk, and are devising
ever more sophisticated ways of spreading it, says Henry Tricks
Is that reassuring or worrying ?
Since 1823, when Byron’s Don Juan described “Jew
Rothschild, and his fellow Christian Baring” as the “true Lords of
Europe”, investment bankers have inspired awe, envy and, rightly or
wrongly, a measure of disdain. Exactly 100 years ago the undisputed
patriarch of the modern industry, J. Pierpont Morgan, stemmed the
Panic of 1907, a financial crisis caused by unregulated trusts (the
hedge funds of their day). Acting, in effect, as lender of last
resort from his Wall Street office, he was briefly feted before
Americans realised the danger of having such power vested in one
man. Cartoonists then mercilessly mocked him. After his death in
1913 the Federal Reserve was set up.
The investment-banking industry was further constrained during the
Depression of the 1930s, when Wall Street firms such as that founded
by Morgan were split into commercial banks and securities houses.
The latter—today’ s investment banks—underwrite stocks and bonds and
advise companies on mergers and acquisitions, rather than collect
deposits and make loans. In the 1980s and 1990s they developed a
reputation for gluttonous excess. But a lot has changed since then.
Intensely private partnerships have become publicly traded
companies. Commercial banks such as Citigroup and JPMorgan Chase
have muscled back into investment banking. And European warhorses
such as Deutsche Bank, UBS and Credit Suisse have joined the race
for global supremacy. The bets, and the profits, have got bigger,
though investment banks are trying to keep quiet about that, for
several reasons.
First, they are under more scrutiny. Wall Street firms had their
wings clipped by Eliot Spitzer, New York’s former attorney-general,
for plugging worthless shares during the dotcom era. Being publicly
traded companies has tamed some egos, too. Star traders do not enjoy
the same headroom on salaries (albeit very large salaries) as they
did when they were partners in the business. At UBS, a Swiss bank
which in 2000 moved into the American equity markets by merging with
PaineWebber, a brokerage, “fiefs” are explicitly banned. Richard
Fuld, boss of Lehman Brothers, a fast-growing Wall Street firm,
imposed a “one-firm culture” when it was spun off from American
Express in 1994. Now, says Scott Freidheim, a top executive, Mr Fuld
uses “culture” in speeches more often than any other word
except “the”.
Meanwhile another group has overtaken the investment banks in the
excess stakes: their money-spinning clients in the private-equity
and hedge-fund industries. Already they throw the biggest parties,
do the boldest deals and launch the most celebrated initial public
offerings. The IPO of part of Blackstone, a private-equity group,
might well raise more money than Goldman Sachs’s did in 1999, when
even the company’s doormen and drivers became extremely rich.
Yet when investment bankers discuss the fabulous fortunes accruing
to these firms’ founders, they do so without envy. “Theirs is a
truly pioneering role,” says Anshu Jain, head of global markets at
Deutsche Bank, one of the world’s top trading banks. “Pioneers in
any industry get a disproportionate share of the spoils.”
Even if they are no longer the pioneers, the investment banks have
played a crucial part in bringing about the extraordinary changes
seen in the financial markets, starting in the 1980s and
accelerating dramatically in the past five years. Technology and
innovation have brought unprecedented breadth, depth and richness to
financial instruments. According to McKinsey, a consultancy, the
stock of shares and public and private debt securities held in
America grew from 2.4 times GDP in 1995 to 3.3 times in 2004. In
Europe the increase was even more dramatic, albeit from a lower
base. These figures do not include derivatives, notional amounts of
which traded privately, or “over-the-counter” securities, which had
soared to $370 trillion by last June, from $258 trillion less than
two years earlier, according to the Bank for International
Settlements (BIS). Given such torrid growth, the markets are
becoming increasingly vital to global financial stability.
There have been thrills and spills along the way. The stock market
crash of 1987 and the seizing up of credit markets after Russia
defaulted in 1998 both exposed huge flaws in the industry, forcing
central banks to step in to prevent what they feared might be
lasting damage to the real economy. Even so, regulators reckon that
on balance the growth of markets has been a good thing, making the
financial system safer than more traditional forms of bank lending.
The trouble is that given the complexity of the new instruments and
the range of clients and countries involved, they can never be
absolutely sure that a monumental crisis is not brewing somewhere.
What worries both bankers and regulators is not so much the threat
from hedge funds or private-equity groups but the implications for
the financial system of a possible collapse of an investment bank
(or large complex financial institution, as they clumsily call it).
At a time when America’s housing market has exposed the danger of
overexcitement on Wall Street, it is worth exploring how these
institutions are evolving, how they handle the risks attached to
what they do, and how well those risks are spread around the
financial system. That is what this survey sets out to do.
Risk-takers Anonymous
Investment banking is in a state of evolution rather than
revolution. The essence of the business has always been taking
calculated (and sometimes miscalculated) risks. But now traders
place bets in more places, with more clients and using more
complicated gambling devices than ever before.
Brokerage used to be described as a haulage business, lugging money,
as a member of the Rothschild dynasty once put it, “from point A,
where it is, to point B, where it is needed”. The idea of describing
themselves as glorified delivery men may well still appeal to the
cynics on the trading floor who work with shirtsleeves rolled up and
hail each other loudly in Brooklyn or mock cockney accents. But any
haulage firm would be flabbergasted by the trading profits and
returns on equity seen in investment banking in recent years,
especially among Wall Street’s big “bulge-bracket” firms. Svilen
Ivanov, head of capital markets at Boston Consulting Group, notes
that earnings from capital-market- related activities at the top ten
global investment banks have risen by almost two-thirds in two
years, from $55 billion in 2004 to $90 billion last year. That sort
of profit increase is comparable with Apple’s rewards for inventing
the iPod, he points out. Yet in investment banking there is nothing
nearly so tangible to which to ascribe the gains.
Bankers themselves are fuzzy about explaining their trading profits,
bandying about phrases such as “deploying our intellectual capital”.
But it is clear that three powerful forces are at work, all of them
overlapping and mutually reinforcing, and all fundamental to the
gushing liquidity the world is currently enjoying.
The first is the alchemist’s trick of turning debt (mostly leaden)
into derivatives (mostly liquid); the second is the emergence of a
new class of leveraged client (hedge funds and private equity); and
the third is seeking out new capital markets, and clients, around
the world. Moreover, in all these pursuits the firms are now using
not just their clients’ money but, to differing degrees, their own
too.
Joseph Perella, an industry veteran who last year struck out
independently with an advisory boutique, Perella Weinberg, observes
that putting a firm’s own capital into mergers, acquisitions and
other transactions is one of the biggest changes in investment
banking since the 1980s. “It’s not just one firm sticking its neck
out. It’s across the board.”
But using the banks’ own capital creates potential conflict. Not
only do they risk putting their own interests before those of their
clients; they are also increasingly exposing themselves to the
dangers of an abrupt turn in the credit cycle. They are arranging
ever bigger debt issues for private-equity firms and hedge funds and
so are encouraging a borrowing binge that could breed financial
instability. For the time being all this is hugely profitable. But
it is also making the banks far too complacent for their own good.
The driving force behind all this has been an unusually benign
economic climate. The global economy is at its least volatile since
the 1960s, real interest rates are low and companies are generating
huge profits. What some call “the great moderation” has been a boon
to financial markets around the world, particularly those trading in
the multifarious debt instruments concocted in the laboratories of
Wall Street and the City of London. The opening up of Asian
economies has brought down the price of traded goods, helping to
fight inflation. Meanwhile, high savings rates in that part of the
world, combined with ageing populations in the West, have helped to
push up demand for long-term investment instruments such as bonds.
At the same time the search for yield, as investors seek to
compensate for low returns in high-quality markets such as
government bonds, has increased demand for instruments of greater
complexity, such as credit-default swaps (CDSs), collateralized debt
obligations (CDOs) and other derivatives. That has pushed down
implied volatilities to multi-year lows, arguably making the assets
appear more reassuring than they actually are.
Regulation has helped, too. Under the Basel 2 banking accord, whose
trickier provisions are due to come into force in the European Union
next January and in America starting a year later, capital will be
allocated according to the riskiness of assets. That has encouraged
banks to make more use of credit derivatives to diversify their
credit portfolios, and to sell more assets into the capital markets
to be repackaged into debt securities.
All of which means that investment banks have generated many of
their trading profits from derivative trades—with each other, with
their banking clients or with hedge funds which increasingly use the
instruments as speculative tools. The demand for loans to repackage
into securities, such as CDOs, has helped fuel the generous credit
conditions that have underpinned private equity’s leveraged buy-out
(LBO) boom as well.
The wild east
To cap it all, over the past few years markets around the world have
opened up in a way unmatched since before the first world war, and
investment banks have seized the opportunity to expand
internationally. Since the start of the 20th century, when America
first emerged as an economic power, the world’s financial-market
activity had increasingly gravitated towards American share and bond
markets. The introduction of the euro in 1999, and the rapid growth
of economies in Europe and Asia, lured investment bankers in the
other direction. The share of investment-banking fees earned from
Europe was growing long before America’s regulators woke up to the
damage caused to American markets by aspects of the Sarbanes-Oxley
act and other red tape. Last year, by some estimates, revenues from
Europe and Asia overtook those from America for the first time (see
chart 2).
In the meantime London has become an impressive rival to New York as
a global financial centre. Michael Klein, the boss of corporate and
investment banking at Citigroup, describes Britain’s capital as New
York, Chicago, Houston and Washington, DC, rolled into one, because
it trades all the assets of the first three and is regulated on the
spot as well. Instead of Greenwich, Connecticut, it has Mayfair for
hedge funds. London, moreover, is a hub for Europe, and stronger
economies on the continent mean growing markets for capital;
typically, such markets increase at double the rate of GDP when
economies expand.
London’s position as a springboard for emerging markets vastly
increases its allure. America and Europe between them may still
account for almost four-fifths of all investment-banking revenues,
but fees are growing fastest in the developing world. That reflects
the might of companies such as Gazprom, Russia’s energy behemoth,
and the recently listed Industrial and Commercial Bank of China,
which Mr Klein admits are both vying with Citigroup in size. He
notes that 140 of Citigroup’s top 1,000 clients are from emerging
markets, whereas 15 years ago the number was only 40. Russia and
China are among the world’s biggest IPO markets. And many developing
countries are seeking to strengthen their domestic capital markets,
which means that the biggest global investment banks—such as Citi—
hope eventually to deploy enormous resources there: trading desks of
perhaps 1,000 people, not 25.
Given the markets’ increasing complexity, how do investment banks
manage the growing risks they face? There are lots of things they
need to do, from finding enough brainboxes capable of handling the
intricate assets being created to measuring the correlations between
instruments that are supposed to spread risk but may do the opposite
if liquidity dries up. It is mildly reassuring that hardly a week
goes by without regulators in the world’s main markets pressing the
industry to improve its risk-management techniques—but rather
worrying that the same regulators pay considerably less attention to
where the risk may end up.
Maria Jeeves
Investment bankers themselves have a vested interest in not blowing
up their firms. The biggest banks are thought to be investing
hundreds of millions of dollars a year in technologies to measure
risk and stress-test it. Comfortingly, regulators who scrutinise the
banks’ risk-weighted capital say it is stronger than ever. But
capital is only one line of defence. The banks’ ability to cope with
liquidity crises and credit crunches is harder to gauge.
Financial markets send out mixed messages about the confidence of
investors in the institutions themselves. The investment banks’
share prices appear to reflect the belief that their equity will be
safeguarded rather than that earnings will be stable. As David
Viniar, chief financial officer of Goldman Sachs, puts it, the firm,
whose risk appetite is second to none, has increased revenues in 18
out of the past 21 years, but quarterly income has been more
volatile. “It’s a growth business and it’s not going to get more
stable,” he says.
Taking risks and managing them is an investment bank’s core
business. Bankers believe risk-taking is how their industry supports
entrepreneurs and hence economic growth. The trouble is that new
risks are almost invariably explored before there is a good way to
measure them.
Ultimately, business and credit cycles tend to reveal which risks
are excessive—and whatever junior traders may think, the business
cycle is far from dead. Richard Portes, professor of economics at
the London Business School, recalls first debating its possible
demise back in 1969. Since then he has discovered a comment by Leon
Fraser, an American banker, speaking after the great crash of 1929,
which convinced him that boom-bust cycles in finance will always be
with us. Mr Fraser’s immortal words were: “Better to have loaned and
lost than never to have loaned at all.”
Copyright © 2007 The Economist Newspaper and The Economist Group.
All rights reserved.
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