Credit Rating Companies Favoring Borrowers Paying Most - Businessweek

Credit Rating Companies Favoring Borrowers Paying Most - Businessweek:

Not surprising, but not good.

"Credit-rating companies routinely award higher rankings to debt issued by banks and corporations that pay them the most, a conflict of interest that may escape Congressional efforts to change the way they do business.

Bonds from countries and cities that pay about half as much as issuers of less creditworthy debt are “rated more harshly,”

and later:

"The report, titled “Credit Ratings Across Asset Classes: A=A?,” was co-written by Jess Cornaggia, assistant finance professor at Indiana University’s Kelley School of Business, with his wife, Kimberly J. Cornaggia, an associate professor at American University’s Kogod School of Business and John E. Hund, an assistant finance professor at Rice University’s Jones Graduate School of Business.

“We disagree with the study’s methods and findings,” said Michael Adler, a spokesman for Moody’s."

Kahneman: Bias, Blindness and How We Truly Think - Bloomberg

Image via WikipediaNobel laureate Daniel Kahneman writing for Bloomberg:

Kahneman: Bias, Blindness and How We Truly Think - Bloomberg:

The evidence suggests that an optimistic bias plays a role -- sometimes the dominant role -- whenever people or institutions voluntarily take on significant risks. More often than not, risk-takers underestimate the odds they face and, because they misread the risks, optimistic entrepreneurs often believe they are prudent, even when they are not. Their confidence sustains a positive mood that helps them obtain resources from others, raise the morale of their employees and enhance their prospects of prevailing. When action is needed, optimism, even of the mildly delusional variety, may be a good thing.

But optimism, like many things, is best in moderation:

"In the market, of course, belief in one’s superiority has significant consequences. Leaders of large businesses sometimes make huge bets in expensive mergers and acquisitions, acting on the mistaken belief that they can manage the assets of another company better than its current owners do. The stock market commonly responds by downgrading the value of the acquiring firm, because experience has shown that such efforts fail more often than they succeed. Misguided acquisitions have been explained by a “hubris hypothesis”: The executives of the acquiring firm are simply less competent than they think they are.
The economists Ulrike Malmendier and Geoffrey Tate identified optimistic chief executive officers by the amount of company stock that they owned personally and observed that highly optimistic leaders took excessive risks. They assumed debt rather than issue equity and were more likely to “overpay for target companies and undertake value-destroying mergers.” Remarkably, the stock of the acquiring company suffered substantially more in mergers if the CEO was overly optimistic by the authors’ measure. The market is apparently able to identify overconfident CEOs."

Read the full article here. Especially if you are in my behavioral class! :)

Related articles

• Don't Blink! The Hazards of Confidence - Daniel Kahneman (underpaidgenius.com)
• The science of irrationality. (mindblog.dericbownds.net)
• The Science of Irrationality (online.wsj.com)
• Nobel Prize Winner: Stock Advisors are Worthless (forbes.com)

Treasury Eyes Floating Notes as First New Debt Since TIPS - Bloomberg

Treasury Eyes Floating Notes as First New Debt Since TIPS - Bloomberg:

"A floating-rate note whose coupon is reset at a rate that matches that of the six-month Treasury bill twice a year “would be a ‘convenient’ product” for which “demand will likely increase if rates are expected to rise,” TBAC wrote in its February presentation to the Treasury."

and later some more details:

"The notes “would very likely be snapped up by investors, as many now buy fixed-rate Treasuries and use the swaps market to convert them into floating-rate debt anyway, to hedge the risk exposure to changing interest rates,” Moorad Choudhry, the head of business treasury, global banking and markets at Royal Bank of Scotland Plc in London, said in an Oct. 18 interview.

Capital and liquidity requirements from the 2010 overhaul of financial regulation in the Dodd-Frank Act, and from the Basel III global rules have increased demand for short-term, high-quality debt at a time when supply has diminished."

Back from the FMA conference in Denver. 

I hope to have short recaps of many of the papers I saw there.  It was a good conference and I learned a great deal.

I feel bad about the paucity of posts in recent months.  I need to both get remotivated as well as to find a few more hours in the day.  I will say that I will try to be better.  :) 

here is the program for the FMA conference. 

The Real Lessons of Moneyball - Businessweek

Image via Wikipedia

The Real Lessons of Moneyball - Businessweek:

They absolutely nail why sports examples are do great for class:

"...baseball possesses two characteristics that in business exist only in the abstract: a level playing field (except for the pitcher’s mound) and truly reliable performance metrics. As a result, cause and effect are clearer. You can isolate successful behaviors and counterproductive ones"

and also why MoneyBall is such a great book for a finance class:

"The concept at the heart of Moneyball is the efficient market hypothesis. ...

In recent years, scholars have poked lots of holes in the belief that real-world financial markets approach this ideal. Emotion and shortsightedness can prevail for long periods. Arbitrageurs who are correct in their assessment of fundamental values can still lose all their money if they get the timing wrong. Goofballs sometimes get rich.

In sports, unlike finance, the fundamentals are there for everyone to see. Earnings per share can be manipulated; earned run average cannot. So you might think it would be harder for inefficiencies to persist. Yet they do."

Related articles

• Moneyball (gregmankiw.blogspot.com)
• 6 Real-Life Things You Might Not Have Known About 'Moneyball' (moviefone.com)
• The 6th Floor Blog: "Too Much Moneyball": The Story of the New York Yankees (6thfloor.blogs.nytimes.com)
• 'Moneyball' Lessons - Listen to Your Front-Line Staff (leanblog.org)

Dropbox: The Inside Story Of Tech's Hottest Startup - Forbes

Dropbox: The Inside Story Of Tech's Hottest Startup - Forbes:

"Dropbox’s ascent has been just as stunning. The 50-million-user figure is up threefold from a year ago, and it has solved the “freemium” riddle, with revenue on track to hit $240 million in 2011 despite the fact that 96% of those users pay nothing. With only 70 staffers, mostly engineers, Dropbox grosses nearly three times more per employee than even the darling of business models, Google. Houston claims it’s already profitable but won’t reveal margins."

I should likely disclose that I LOVE Dropbox as a product, just love it.

Nassim Taleb on Wall Street Protest, Banking - Video - Bloomberg

Nassim Taleb on Wall Street Protest, Banking - Video - Bloomberg:

While he is talking about Occupy Wall Street, he focuses mainly about the asymmetry of returns when taxpayers bailed banks out, but bankers have since received large bonuses. Short version: if you ever get a bailout, you are paid as a utility. Bankers get special treatment and he is not sure.

" Oct. 18 (Bloomberg) -- Nassim Taleb, author of "The Black Swan" and a New York University professor, discusses the "Occupy Wall Street" protest and his view of the global banking system."

He ends by tying things back to OccupyWallStreet and his fear of class warfare.

(I will have a further comment soon)

HT to Prieur Du Plessis.

Related articles

• Nassim Taleb On #OccupyWallStreet And His Updated Views On The Global Banking System (zerohedge.com)
• Lemony Snicket Explains Occupy Wall Street Protest To Children (inquisitr.com)
• Anti-Wall Street protesters march against New York police - Reuters (news.google.com)
• PHOTO: New Yorker's Hilarious Occupy Wall Street Cover (huffingtonpost.com)

S&P cuts Spain’s sovereign debt rating - FT.com

Sovereign debt downgrades were a hot topic this week in our SIMM (student run portfolio) class, so this one should be no surprise to those in the class:

S&P cuts Spain’s sovereign debt rating - FT.com:


Three points from the article:


* "S&P lowered the Spanish rating by one notch from double A to double A minus, its fourth highest investment grade level, bringing it in line with Fitch which cut its rating to the same level earlier this month...."

* "S&P did note that Spain’s 70 per cent debt to GDP ratio compared favourably with other troubled nations, such as Greece and Italy, whose ratios are above 100 per cent."

* "Spain’s borrowing costs for over ten years, which this year have risen to levels not seen since the country gave up the peseta, rose only slightly on the news.....As of Wednesday, the 10-year note was yielding 5.22 per cent."

In the Owners Box: Should You Buy Shares in Your Favorite Sports Team? - DailyFinance

In the Owners Box: Should You Buy Shares in Your Favorite Sports Team? - DailyFinance:

"The Super Bowl champion Green Bay Packers got the NFL's approval this week to sell more stock to the public, but even the Pack can't compete with the buzz of another anticipated "football" stock offering.

Manchester United, the English soccer club valued at $1.8 billion by Forbes and perhaps more by its rabid global fan base, is pondering an initial public offering. The club could reap $2.8 billion from wannabe "owners" if and when it begins to list on Singapore's stock exchange, according to reports."

The article goes on to discuss the drawbacks of a purchase and comes down on the side that while it is a novelty and nice to talk about, as an investment buying your favorite team is often not a very good investment. This is best summarized:

"One of the team's celebrity followers told DailyFinance he has no plans to become No. 111,508. Dominic Fumusa, a Wisconsin native who plays Edie Falco's husband on the Showtime series Nurse Jackie, said, "Nobody is a bigger Packer fan than me, but this makes as much sense to me as people who pay money to have a star in the sky named after a loved one.""

Galleon Chief Sentenced to 11-Year Term in Insider Case - NYTimes.com

Galleon Chief Sentenced to 11-Year Term in Insider Case - NYTimes.com:

"The fallen hedge fund billionaire Raj Rajaratnam received the longest prison sentence ever for insider trading on Thursday, capping an aggressive government campaign "

and later:

"“Insider trading is an assault on the free markets,” said Judge Holwell, who also imposed a $10 million fine and ordered Mr. Rajaratnam to forfeit $53.8 million in ill-gotten profits. “His crimes reflect a virus in our business culture that needs to be eradicated.”"

Related articles

• Interactive: Insider Trading at Galleon (dealbook.nytimes.com)
• Galleon manager Rajaratnam sentenced (money.cnn.com)

Asia Pacific Career Guide 2011

Asia Pacific Career Guide 2011
from CFA

"Like conventional finance, Islamic finance offers a comprehensive suite of products across the financial landscape, ranging from asset and wealth management to investment banking, commercial banking, and personal financial services. Providers that offer financial products and services must ensure they comply with core Islamic principles, also known as Shariah laws. The major differences between conventional and Islamic finance are the avoidance of interest-based (Riba) activities, the relationship between risk and profit, and the focus on ethical and social responsibilities of financial institutions. For example, Shariah laws prohibit investments in alcohol, gambling, pornography, tobacco, weapons, and pork products. Instead of paying interest, where the focus of a conventional bank is to manage its risk by looking at the repayment ability of a borrower and adequate cashable security in case of default, banks that provide loans under Islamic finance have a totally different mind-set."

We will be covering Islamic finance in coming weeks in 401. This is just a small taste to whet your appetite ;) want to see my new page on Islamic Finance thanks to Irfan Anwar

U.S. Stocks are ‘the Asset Class to be in’: Siegel - International Business Times

U.S. Stocks are ‘the Asset Class to be in’: Siegel - International Business Times:

"When one compares these metrics to the 10-year Treasury yield, which stands at about 2 percent, stocks look even cheaper.

Siegel said the last time dividend yields traded above stock yields for a prolonged period of time, which was the early 1950s, stocks went on to soar for the next 20 years while Treasuries performed poorly."

Interesting exercise for SIMM:


Recreate these findings. See how often the good of predictor the measures mentioned in the article HAVE BEEN.

Effective Federal Tax Rates by Filing Status and Demographics, Under Current Law, by Cash Income Percentile, 2012

Effective Federal Tax Rates by Filing Status and Demographics, Under Current Law, by Cash Income Percentile, 2012

Worth a look...

Top quintile pays 25+%, lowest 1.6%.

I won't copy the rest but definitely worth clicking through!