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  • More Choices, Fewer Decisions: Sheena Iyengar on the Choice Overload Problem

    Sheena Iyengar believes the choice overload problem is "one of the biggest modern day choosing problems that we have." The more options we have, the less likely we are to choose any one of the options. Iyengar says this is true for buying jam, and for putting money away for retirement. She discussed some techniques for handling the choice overload problem in a recent talk at TEDSalon NY2011 :
  • The Importance of Collateral, or the Difference Between Secured and Unsecured Bonds

    In the latest edition of the Marketplace Whiteboard , Paddy Hirsch explains the difference between secured and unsecured bonds. It is a lesson that may be coming a little too late to Irish taxpayers :
  • Private Equity Explained

    There is a lot of political talk about the good and bad of private equity firms these days, but Paddy Hirsch steps away from the fray in this Marketplace Whiteboard to explain just what it is that private equity firms do: Private equity explained from Marketplace on Vimeo .
  • A Call for Reconstructing a More Stable Global Finance Supply Chain

    In the spring of 2011, the world woke up to the vulnerabilities of global supply chains following the Fukushima nuclear accidents. Andrew Sheng , President of the Hong Kong-based think tank Fung Global Institute , says there are lessons to be learned about the global finance supply chain. At Project Syndicate , Sheng writes: Like manufacturing supply chains in the wake of the Japanese disruption, financial supply chains face formidable pressures to re-engineer and adapt as the global economic balance shifts towards emerging markets. As that happens, billions of consumers will enter these countries’ middle classes, new social networks will evolve, and climate change will become a growing factor in global commerce. In addition, major regulatory reforms will impose new and higher costs on the financial sector. Banks and other institutions are also under pressure to devise new financial products that can help the real sector to manage more complex risks and enable investment in areas such as green technology and infrastructure for developing economies. Moreover, global financial stability now depends upon greater cooperation at the international level, with tighter enforcement of rules at the national level. It is also clear that emerging markets are searching for alternative growth models that are green and sustainable. Their financial sectors will have to operate very differently from the current model, which is driven by consumption. In a world in which both consumption and finance must grow more slowly to cope with global resource and environmental constraints, what role can finance play in reducing addictive consumption, funded by unsustainable leverage? And, given that financial institutions will have to monitor and manage risk in a radically different manner, both for themselves and their customers, what is the role of distribution in a world where consumption, savings, and investment will accelerate in volatility? Read Global Finance’s Supply-Chain Revolution here .
  • Marketplace Whiteboard: Re-hypothecation Explained

    At the Marketplace Whiteboard , Paddy Hirsch explains re-hypothecation . The term found its way into the news with coverage of the MF Global Holdings bankruptcy. Hirsch warns us not to be fooled into thinking that it is some sort of special, magical tool, just because some traders came up with a strange name for the practice: Re-hypothecation from Marketplace on Vimeo . Meanwhile, the bankruptcy of MF Global Holdings could have a lasting impact on commodities markets. And that is hitting some American farmers, according to Jeremy Bernfeld and Eric Durban of Harvest Public Media . Read MF Global case leaves cloud over commodities markets here .
  • Satayajit Das: A Call for Cooperation Among Key Finance Ministers

    Satyajit Das --global banking expert and author of several books on banking and trading, including Extreme Money: The Masters of the Universe and the Cult of Risk --says that the global economy is in for a lot of pain this year if policymakers don't start working together. In an interview with the Institute for New Economic Thinking 's Robert Johnson , Das argues that we need to return to the approach that finance ministers took in 2008-2009, when the consequence were clear and the need for cooperation was better understood. Here is an excerpt from that interview: Watch the full interview here .
  • Marketplace Whiteboard: What Makes a Junk Bond Junky?

    If junk bonds have become so popular-- beating out equities for the last five years , for example--are they still "junk"? Marketplace 's Paddy Hirsch says that while the moniker isn't quite accurate, these bonds do have a certain "trash or treasure" way about them: What is a junk bond? from Marketplace on Vimeo .
  • Biggest Market Moments of 2011, from The Reformed Broker

    We've reached that point in the year where we have get to read through scores of best of the year lists. Some are instructive or illuminating. Others, not so much. We don't track market news closely at the watch--for that you should be reading Nivine Richie at our KnowNOW Finance blog. But we found The Ten Biggest Market Moments of 2011 list from Joshua Brown -- The Reformed Broker --to provide one succinct summary of the year's big business events. For example, #5: Bank of America in Free Fall - Of all the spectacular crashing and burning of 2011, nothing even comes close to the destruction in shares of Bank of America, a company that lost almost two thirds of its market capitalization over the last 12 months. Every effort was made by management to please the investor base, from asset sales to mass layoff announcements (40,000!) to open conference calls hosted by mutual fund managers who were in disbelief at how low the stock was sinking with every passing day. BAC dropped from a January high of 15 to 10 by August - but it was just getting warmed up; from August to November it was cut in half again, trading to as low as 5.08 by Thanksgiving and wrecking the funds of John Paulson as well as the careers of several boldfaced mutual fund managers like Bill Miller and Bruce Berkowitz. And #1: Steve Jobs Resigns as CEO of Apple - We knew that one day, the cancer in Steve Jobs’s liver would force him out, but we were never truly prepared for theannouncement to come. After fourteen years at the helm of Apple and one of the most miraculous corporate turnarounds in history, on August 24th Jobs told Apple that he could no longer serve the company in his condition. The stock sold off that night on the news but quickly recovered, Steve would live to see Apple trade at a new all-time high and eventually become the most valuable company in America. On October 5th, Steve Jobs passes away and the world both mourns his passing and celebrates the amazing revolution he’s sparked from a garage in Los Altos, California. Read the full list here . (Hat tip Barry Ritholtz )
  • The IMF and Europe's Need for Capital

    The next few weeks are crucial for the state of the European Union economy. A lot needs to happen, and just about all of it requires an influx of euros, says University of Chicago Booth Business School professor of finance Raghuram Rajan . But where will the money come from? It is hard to see Germany or other solid economies putting up enough euros given the current political climate. So Rajan urges us to look toward his former employer, the IMF. From Ragan's commentary at Project Syndicate : Indeed, the eurozone’s problems might soon become too big for its members to address. The world has a stake in their resolution. And it has an institution that can channel help: the International Monetary Fund. The IMF could set up a special vehicle along the lines of its New Arrangements to Borrow (NAB), which would be capitalized by a first-loss layer from the EFSF with the IMF’s own capital comprising a second layer. This NAB-like vehicle could borrow as needed from countries, including the United States and China, as well as tap financial markets. It would offer large lines of credit to illiquid countries like Italy, with conditionality intended to help such countries resume borrowing from markets at reasonable cost. A special vehicle is required because the amounts that must be made available far exceed what IMF members can usually access, and it is only right that if the eurozone seeks such amounts for its members, it should bear a significant portion of any potential losses. At the same time, the Fund’s capital resources would back the vehicle if the first-loss buffer provided by the eurozone were eroded; that way, the market would understand that strength from outside the eurozone can be brought to bear. Read A Standby Program for the Eurozone here .
  • NY Fed Case Study: When an Internet Blooper Rocked Airline Stocks

    The New York Fed 's Liberty Street blog is featuring an interesting exercise in the power of breaking news headlines and "financial markets process news of unexpected events." NY Fed researchers went back to 2008, when a "news" story about United Airlines' 2002 bankruptcy story mistakenly was re-posted on the Internet. United stock took an immediate hit. It did recover, but not for some time. Here's a look at a chart from the post that shows the lag in United stock recovery: From Liberty Street: In short, we find that even in a situation where noise could be clearly singled out, it took markets about a week to fully process the signal component of news. Of course, in most circumstances, signal and noise arise simultaneously and cannot be separated so easily. Thus, normal delays may be longer than what we detect here. Is a week a long time or not? It certainly is when the delay pertains to the reaction of asset prices to a piece of news. Most likely it isn’t when it comes to investment decisions of companies or industries. The key question is whether normal information delays are long and pervasive enough to affect those investment decisions. If they are, such delays could be costly for the economy. Why did it take so long for the information to be processed? Our staff report investigates several potential explanations, but fails to find empirical evidence supporting any of them. In particular, explanations based on poor trading liquidity after the false news event, potential links to the financial market turmoil in September 2008, and uncertainty aversion by investors do not appear to be supported by the data. We therefore have to leave this question unanswered. So even as the question remains unanswered, this exercise seems a good one, as we see news reports sending waves through the markets on a weekly basis, or even a daily basis. In the 24 hour news cycle, more mistakes are likely to happen. But even beyond mistakes, exaggerated headlines or misleading reports likely will have some impact. Will that impact be lasting or temporary? Read How Well Do Financial Markets Separate News from Noise? Evidence from an Internet Blooper here .
  • Feldstein on Europe's Reluctance to Let Greece Default

    Martin Feldstein calls Greece's mix of overwhelming government debt and a free-falling economy an "otherwise impossible situation." Greece will default, as Feldstein argues that is the only way out. But after it defaults, will it leave the euro zone? Having its own currency just might open more options. Feldstein argues there are two reasons that the key influencers in the Euro zone (Germany and France) do not want Greece to leave. At least not just yet. From Project Syndicate : First, the banks and other financial institutions in Germany and France have large exposures to Greek government debt, both directly and through the credit that they have extended to Greek and other eurozone banks. Postponing a default gives the French and German financial institutions time to build up their capital, reduce their exposure to Greek banks by not renewing credit when loans come due, and sell Greek bonds to the European Central Bank. The second, and more important, reason for the Franco-German struggle to postpone a Greek default is the risk that a Greek default would induce sovereign defaults in other countries and runs on other banking systems, particularly in Spain and Italy. This risk was highlighted by the recent downgrade of Italy’s credit rating by Standard & Poor’s. A default by either of those large countries would have disastrous implications for the banks and other financial institutions in France and Germany. The European Financial Stability Fund is large enough to cover Greece’s financing needs but not large enough to finance Italy and Spain if they lose access to private markets. So European politicians hope that by showing that even Greece can avoid default, private markets will gain enough confidence in the viability of Italy and Spain to continue lending to their governments at reasonable rates and financing their banks. Read Europe’s High-Risk Gamble here .
  • Breaking Down Barclays Success in Lehman Deal

    Three years ago, as we were wondering whether we were witnessing the complete meltdown of the financial services industry, Bank of America bought Merrill Lynch and Barclays took over the bankrupt Lehman Brothers. Steven Davidoff --professor at the Michael E. Moritz College of Law at The Ohio State University--looks back at those deals, and he argues Barclays won, and Bank of America did not. And the primary reason, Davidoff writes at the New York Times DealBook blog, is because Barclays was more patient: Things would have been different had Bank of America waited. It would at a minimum have paid a bargain basement price for Merrill, one that was tens of billions lower at least. There is still some talk of spinning off Merrill Lynch. The operations of Merrill have already been combined with Bank of America, so a real separation would be complicated. And the recent reorganization of the bank’s management — which puts Merrill Lynch’s wealth management business under David Darnell, the co-chief operating officer, but Bank of America-Merrill Lynch under the other chief operating officer, Tom Montag — also makes a split more difficult. Ultimately, Barclays made a better deal by doing what should be done in an acquisition, carefully assessing the future liabilities and limiting them as much as possible. But let’s be clear. Barclays did this only because it was forced to by the regulator. The first lesson of Bank of America and Merrill Lynch is that impatience and a chief executive’s hubris can lead to some very bad decisions. And regulators can sometimes stop these heady moves. Read The Merrill Lynch and Lehman Deals, 3 Years Later here .
  • SF Fed Economic Letter: Boomer Retirement and the Equity Markets

    The oldest members of the baby boomer generation are turning 65 this year--the official retirement age. Not exactly the best time for a lot of new retirees to start selling off equities. In a new Economic Letter , Zheng Liu and Mark Spiegel of the San Francisco Fed 's Economic Research Department point out that "U.S. equity values have been closely related to demographic trends in the past half century." And that is cause for a little worry: Since an individual’s financial needs and attitudes toward risk change over the life cycle, the aging of the baby boomers and the broader shift of age distribution in the population should have implications for capital markets (Abel 2001, 2003; Brooks 2002). Indeed, some studies attribute the sustained asset market booms in the 1980s and 1990s to the fact that baby boomers were entering their middle ages, the prime period for accumulating financial assets (Bakshi and Chen 1994). However, several factors may mitigate the effects of this demographic shift. First, demographic trends are predictable and rational agents should anticipate the impact of these changes on asset demand. Consequently, current asset prices should reflect the anticipated effects of demographic changes. In addition, retired individuals may continue to hold equities to leave to their heirs and as a source of wealth to finance consumption in case they live longer than expected (e.g., Poterba 2001). Foreign demand for U.S. equities might also reduce the downward pressure on asset prices. However, the effect is probably limited for two reasons. First, other developed nations have populations that are aging even more rapidly than the U.S. population (Krueger and Ludwig, 2007). Second, there is substantial evidence of home bias in equity holdings. Individual investors typically hold disproportionate shares of domestic assets in their portfolios. For example, in 2009, the foreign equity holdings of U.S. investors were only 27.2% of the share of foreign equities in global market capitalization. While the low level of international equity diversification is still not well understood (Obstfeld and Rogoff 2001), it suggests that foreign demand for U.S. equities is unlikely to offset price declines resulting from a sell-off by U.S. nationals. Read Boomer Retirement: Headwinds for U.S. Equity Markets? here .
  • Learning to Love Algorithms

    Could it be that the financial services industry is really just one ongoing game of hide and seek? Kevin Slavin says much of the stock market is essentially made up of algorithms. Some of them are trying to hide. The others are trying to find the ones that are hiding. Slavin, founder of cross-platform game maker Area/Code , goes a long way in explaining the importance of algorithms in business, and in life in general, in this TedTalk :
  • Marc Andreesen on Investing in Groupon and LinkedIn

    There has been a fair bit of skepticism about the quick rise of value investors have put on the stocks for LinkedIn and Groupon . The phrase "tech bubble" has even come back into the parlance. But Marc Andreesen , who knows a thing or two about big public offerings from his days as founder of Netscape, is not buying it. All he's buying is the stocks of these two high tech companies. And he explained why in this interview with Kevin Delaney of the Wall Street Journal :
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