unfit to survive wall streets darwinian lessons new america foundation washington, dc. december 17,...
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Unfit to Survive
Wall Street’s Darwinian Lessons
New America Foundation
Washington, DC. December 17, 2008
Leo M. TilmanPresident, L.M.Tilman & Co.
Adjunct Faculty, Columbia University
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The Challenge
Macroeconomic Forces
Low Return Environment Bretton Woods II Imbalances
US Housing & DeficitsMonetary Policies
Financial Instruments
DerivativesCDOs
ABCP & SIVsSubprime MBS
Financial Institutions
Investment BanksCommercial Banks
Hedge FundsSWFs & Pension Plans
Intellectual Paradigm
Accounting EarningsFinancial Disclosures
Credit RatingsEquity Market Valuations
The Challenge: Complexity + Risk + Deficient Lens
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Secular forces (globalization, disintermediation, informational availability, greater market efficiency, alternative investments, deregulation, financial convergence, derivatives and increasingly complex financial products)
Period-specific forces (Bretton Woods II, global savings glut, disinflation exporting)
Cyclical factors (monetary policies, interest rates, yield curves, default rates)
Source: Mitchell (2003), OECD, Oliver Wyman analysis
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
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70
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81
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86
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01
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GDP Growth Inflation Rate Returns on Gov't Bonds
The Great Moderation
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FeesCompress
SecularForces
Funding Advantages Decrease
SecularForces
Greater Liquidity &Funding Risks
More Complex &Opaque Investments
Risk Exposures Increase
Compensation forRisk Declines
Vicious Circle
CyclicalForces
Period-SpecificForces
Static Business Models
AlternativeInvestments
More Leverage & Risk
The Culmination: 2007-2008 Financial Crisis
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Risk Aversionand
Deleveraging
ExogenousCatalyst
Illiquidity:
Prices Decline On Thin Trading
Margin Callsand
Forced Liquidations
Contagion:Other Assets Are Sold
Across Markets
Inability to Borrow:
Haircuts Increase,
Lenders Shrink Balance Sheets
More Price Declines and
Margin Calls
Deleveraging of Modern Financial Crises
Vicious Circle
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The “Greed and Complacency” Narrative
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The “Greed and Complacency” Narrative
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The “Greed and Complacency” Narrative
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“Greed and Complacency” Financial Darwinism
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“Greed and Complacency” Financial Darwinism
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Strategic Vision and Systemic Knowledge (or lack thereof)
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The Blue Ocean Strategy
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Financial Industry– Acquire new kind of strategic vision– Redesign their business models– Make risk management the framework for executive decisions– Position for sustainable and real value creation that benefits all stakeholders
Risk-Based Transparency– Business model- and risk-focused regulation
What is a breakdown of economic performance by revenue sources? What are the risks taken on in the process – by revenue sources and in total?
– Systemic effects and fair value accounting
Economic Dynamism – A system conducive of discovery, development, financing and production of viable
commercial innovations
Economic Policy
A Unique Opportunity
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