Roubini: Nationalizing Banks Is the Best Way to Go: Tech Ticker, Yahoo! Finance

Roubini : Nationalizing Banks Is the Best Way to Go: Tech Ticker, Yahoo! Finance:

"...paradoxically nationalization may be a more market friendly solution of a banking crisis: it creates the biggest hit for common and preferred shareholders of clearly insolvent institutions and...it provides a fair upside to the tax-payer. It can also resolve the problem of avoiding having the government manage the bad assets: if you selling back all of the assets and deposits of the bank to new private shareholders after a clean-up of the bank together with a partial government guarantee of the bad assets (as it was done in the resolution of the Indy Mac bank failure) you avoid having the government managing the bad assets.

Good point later as well:

"...also resolves the too-big-too-fail problem of banks that are systemically important and that thus need to be rescued by the government at a high cost to the taxpayer. This too-big-to-fail problem has now become an even-bigger-to-fail problem as the current approach has lead weak banks to take over even weaker banks."

This is largely consistent with what we discussed a few weeks ago in class.

Cows and the financial crisis

How random is it that I just happened to post some cow pictures to my flickr account this week? and then Clusterstock posts the following description (using cows) to explain the AIG collapse. LOL...

From Clusterstock:

"You have two cows.

John Paulson borrows one cow so he can sell it for $100. He gives you $10 as collateral.

You buy your neighbors cow for $100, which you finance by taking out a $90 loan from the bank and use John's $10 to make up the rest."

Read the rest of it here. Pretty funny!

Financial quote of the day

Today is Lincoln's Birthday:

"The government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the government and the buying power of consumers. By adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity."

As quoted at from Liberty-Tree.ca

Is he calling for monetizing the debt? Might not want him as out next Fed Chair.

How the Crash Will Reshape America - The Atlantic (March 2009)

The current recession will have lasting impacts. That much is certain. No one knows for sure what that impact will be. We have seen what happens when all scenarios are not considered (remember "Real Estate prices can only go up"?), so the following by Richard Florida from the Atlantic is worth considering.

How the Crash Will Reshape America - The Atlantic (March 2009):

A bunch of look-ins, not in the same order as the article, but retaining the same message:

History teaches us:

"..most big economic shocks ultimately leave the economic landscape transformed..."

"Big international economic crises—the crash of 1873, the Great Depression—have a way of upending the geopolitical order, and hastening the fall of old powers and the rise of new ones."

Ouch, that hurts...

"“One thing seems probable to me,” said Peer Steinbrück, the German finance minister, in September 2008....“the United States will lose its status as the superpower of the global financial system.” You don’t have to strain too hard to see the financial crisis as the death knell for a debt-ridden, overconsuming, and underproducing American empire—"

NY City will be hurt, but it could be worse...

"All in all, most places in Asia and the Middle East are still not as inviting to foreign professionals as New York or London. Tokyo is a wonderful city, but Japan remains among the least open of the advanced economies, and admits fewer immigrants than any other member of the Organization for Economic Cooperation and Development, a group of 30 market-oriented democracies. Singapore remains for the time being a top-down, socially engineered society. Dubai placed 44th in a recent ranking of global financial centers, near Edinburgh, Bangkok, Lisbon, and Prague. New York’s openness to talent and its critical mass of it—in and outside of finance and banking—will ensure that it remains a global financial center....

The crash's impact on the financial sector:

"Thomas Philippon, a finance professor at New York University, reckons that nationally, the share of GDP coming from finance will probably be reduced from its recent peak of 8.3 percent to perhaps 7 percent..."

And domestically:

"It is possible that the United States will enter a period of accelerating relative decline in the coming years, though that’s hardly a foregone conclusion—a subject I’ll return to later. What’s more certain is that the recession, particularly if it turns out to be as long and deep as many now fear, will accelerate the rise and fall of specific places within the U.S.—and reverse the fortunes of other cities and regions."

How much of this will come true? Will any of this come true? Only time will tell.

Financial Quote of the day

"Let Wall Street get a nightmare, and the whole country has to help get them to bed again"

Will Rogers (1879-1935) as quoted in Dean LeBaron's Book of Investment Quotations .

Sirius XM shares drop on reports of possible bankruptcy - MarketWatch

Real world example for yesterday's class...(ok so I was a few hours late ;) )

Sirius XM shares drop on reports of possible bankruptcy - MarketWatch:

"Shares of Sirius XM Satellite Radio Inc. dropped 31% in morning trading Wednesday on reports that the company could be close to filing for bankruptcy protection.
The shares were down 3 cents at 8 cents. The stock traded in the $4 range two years ago.
Sirius XM is working with bankruptcy lawyer Mark Thompson of Simpson, Thatcher & Bartlett, and Joseph Bondi, a restructuring expert, to set up a Chapter 11 filing that could come in the next few days

Bankruptcy costs (both the direct costs : lawyer fees etc. and the indirect (messed up incentives, loss of reputation, etc) are a subset of the larger financial distress costs. Which amazingly enough is exactly what we talked about in Finance 402 yesterday.

More videos

YouTube - bionicturtledotcom's Channel

Sometimes I am torn as to where to put material; should I post it to the main FinanceProfessorblog or to my FinanceClass blog (which is really just aimed at my own students). I had originally intended to use these only for the latter, but a recent comment about using videos being fun cued me to make it available to everyone. So if you are in my class I apologize for the cross posting.

From FinanceClass Blog:

"...people learn in different ways and maybe this is your way. Additionally some of them (especially the material from Bionic Turtle is flat out excellent) are very good.

Enjoy and have fun with them!

YouTube - savingandinvesting's Channel

And a little more technical lessons from Bionic Turtle.

The stuff from BionicTurtle is HIGHLY recommended. I just spent probably an hour just watching them myself. And while some or the "art" of finance is missing in that you still need to see the big picture etc (whole idea of not just using a model blindly), the material is really good!!

UCLA Anderson School of Management | Knowledge Assets | UCLA Anderson Faculty Highlights

WOW! Occasionally I am still blown away by how many amazingly good resources are available online. This is a great case in point. UCLA's Andersen School of Management has made many of their faculty available to us.

UCLA Anderson School of Management | Knowledge Assets | UCLA Anderson Faculty Highlights

I really don't know where to start, but here goes. I just watched these and a few others. All good. All Recommended. I am picking these since they fit my class the best, but by all means watch them all!

William Ouchi on Corporate Governance in the US.




Sanford Jacoby and Emily Nason on governance in Japan and the US.



John Hughes on information asymmetries and how to impact the cost of capital it must impact on systematic risk (which is based on his paper with Liu and Liu that is available here). Richard Roll on Real Estate prices and interest rates.

Wisdom of Crowds Videos

We are doing market efficiency in class and these are a great way to get exposed to some of the ideas we will be discussing.

From PBS:



An interview with James Suroweicki:

Ten questions the House Financial Services Committee could use from the NY Times

GREAT stuff here....Andrew Sorkin provides 10 questions that those receiving bail out money should answer. The questions are great, but even more than that, he sets the stage well with his lead in. Indeed, some of them might make the basis for some good essay test questions ;)


DealBook Column - Up Next for Big-Shot Bankers - A Public Flogging - NYTimes.com: "

"On Wednesday, eight chief executives of big banks will make their way to Washington...to appear at a Congressional hearing in front of ...the House Financial Services Committee. Here are 10 questions members of the committee might consider asking":

From question number 5:

"Much has been made of the subprime debacle. But few seem to be willing to talk about another looming crisis: credit card debt. People like Nouriel Roubini, the professor who has predicted much of this crisis, have estimated that you could have losses of as much as $3.6 trillion, which would bankrupt the industry. What do you make of that number? And since credit card defaults are correlated to employment, what happens if unemployment goes as high as 10 percent or more? What is the highest unemployment level that you’ve used in your forecasting models? And do you have adequate reserves for your worst-case situation? If your assumptions are wrong, what happens?"

From question number 7 which seems to call for the same type of partnerships that my colleague Mark Wilson has been saying are needed:

"Your compensation structure has been “heads I win, tails I win” for you and many of your employees, despite putting your firm and the nation’s fiscal health in jeopardy. What’s the right model? And how do you feel about forcing your employees to risk their own money, not just the firm’s, when they make a trade or participate in a transaction that puts shareholder capital at risk?"

I also really like questions 1,2,8 but find question number 4 is horribly scary and why I fear government bailouts/equity stakes etc.

What is finance for? - Columns - livemint.com

Sort of in light of the Adam Smith quote, the following article looks at the main roles of finance. It is generally something that we forget or take for granted (often rushed through on the first few days of an introductory finance class) but it serves us all well (myself included) to stop now and then and remember what finance is here for.


From Nirvikar Singh is a professor of economics at the University of California, Santa Cruz:

What is finance for? - Columns - livemint.com:

"Discussions on how to improve regulation of the financial sector often are limited by starting from current institutions, and thinking of adjustments to these institutions. Boundaries between institutional categories, determined by historical legacies, are often taken as given. A more productive approach to considering regulatory reform could be to first answer the question, “What are the economic roles of financial institutions?” (invariably some form of intermediaries)

What roles do financial intermediaries play? Here are seven examples."

• Economizing on the costs of completing and implementing transactions.

• Matching buyers and sellers.

• Economizing on search costs.

• Providing expertise.

• Smoothing the market.

• Providing reputation.

• Transforming products.

Singh expounds on each of the seven showing what are the strengths (bringing buyers and sellers together) and weaknesses (many assets to not trade, experts are blinded by pay etc), and discusses how regulatory changes should take these facts into account.

Good stuff! Well worth a read.

Financial Quote of the day

From Adam Smith whose most famous work, The Wealth of Nations, was published in 1776, but still resonates today.

Adam Smith Quotes:

"It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country"

Quoted is from BrainyQuote.com

Which in the language of class says that Financial Intermediaries exist to lower transaction costs.

Becker and Murphy Say the Short-Term Benefit of the Stimulus Package Will Be Less Than Expected - WSJ.com

The Wall Street Journal has an interesting look at what the impact of the stimulus package might actually be.

Becker and Murphy Say the Short-Term Benefit of the Stimulus Package Will Be Less Than Expected - WSJ.com:

"...our conclusion is that the net stimulus to short-term GDP will not be zero, and will be positive, but the stimulus is likely to be modest in magnitude. Some economists have assumed that every $1 billion spent by the government through the stimulus package would raise short-term GDP by $1.5 billion. Or, in economics jargon, that the multiplier is 1.5.

That seems too optimistic given the nature of the spending programs being proposed. We believe a multiplier well below one seems much more likely"

They list five other points as well including:

"The increased government spending in the stimulus package is supposed to be only temporary, until the economy returns to a full employment level, but probably won't be.

The evidence of past expansions of government programs is just the opposite. Once created they tend to survive and grow over time, even when the increases initially were said to be temporary. The underlying reason for this is that interest groups develop around new and expanded programs, and they lobby to keep and expand those programs."

Which is not to say the current stimulus plan should or should not be passed, but merely that the benefits may be less than hoped.

BTW As Becker is a Nobel Prize winner in economics. So his words carry some additional weight.

Muslim investors profit by adhering to faith

This past week in my Problems in Finance class we did a fast review of international finance (I miss teaching that class BTW). In it we did not get to speak about many of the differences based on religion, so I was pretty excited to see this article from the San Francisco Chronicle that will provide me an excuse to mention that strict adherence to the Quaran does not allow lending and borrowing.

Muslim investors profit by adhering to faith:

"Their renunciation of the interest-based economy kept them away from investments in financial services companies, whose stocks have collapsed, and out of traditional mortgages.....Dow Jones Islamic Market Indexes, which represent benchmarks for Islamically correct investment categories, have been outperforming their non-Islamically compliant counterparts by 3 to 4 percent in key indexes.

Of course one year does not mean that much, but it does show that at least last year forgoing debt, for whatever reason, was a good thing!

BTW If you are interested in this, here is a page of notes on Islamic Finance that I used back when I did teach International Finance. I have not touched it in a long time.