• Cyberattacks and the Age of Electronic Banking

    In 2003, the Check Clearing for the 21st Century (Check 21) Act became the law. Its purpose was to reduce the time required for a check to clear by allowing for electronic "substitute" checks. Back then, one of the questions raised was about online security:

    From the Fed's FAQ page related to Check 21:

    Is electronic check processing secure?
    Electronic check processing is not new to the financial industry and is a safe and reliable way of processing payments. It uses technology that has been developed and tested to process your check information securely.

    Today, electronic security is fresh on our minds once again due to the recent cyberattacks experienced by JP Morgan and other large institutions.

    From Bloomberg (Robertson and Riley, 29 Aug 2014):

    The hackers unleashed malicious programs that had been designed to penetrate the corporate network of JPMorgan -- the largest U.S. bank, which had vowed two months before the attack began to spend a quarter-billion dollars a year on cybersecurity. With sophisticated tools, the intruders reached deep into the bank’s infrastructure, silently siphoning off gigabytes of information, including customer-account data, until mid-August.


    For discussion:

    What are the consequences of cyber disruptions to our financial system? What can banks and regulators do to manage this risk?

  • SEC Votes To Require More Disclosure on ABS

    Image: Mary Jo White, Chair of SEC


    The SEC voted this week to require more disclosure of asset-backed securities.

    From the NY Times (Alden, 27 August 2014):

    The Securities and Exchange Commission unanimously approved rules on Wednesday that would require issuers of asset-backed securities — complex investments based on mortgages, auto loans or other types of debt — to disclose more information about the underlying loans. The rules are meant to help investors better judge the quality of such securities.

    At the same time, the S.E.C. tightened controls on credit rating agencies, whose overly optimistic ratings helped inflate the housing bubble in the years before the crisis. With two of the five commissioners casting dissenting votes, the agency adopted rules to help guard against conflicts of interest in the ratings business as well as to increase disclosure of the rating process.

    From the SEC press release:

    “This expansive package of reforms will strengthen the overall quality of credit ratings, enhance the transparency of credit rating agencies and increase their accountability,” said SEC Chair Mary Jo White. “Today’s reforms will help protect investors and markets against a repeat of the conduct and practices that were central to the financial crisis.”

    For discussion:

    Why was rating agency reform needed following the credit crisis?

  • High-Frequency Trading Firms Now Dominate NYSE

    This week marks the takeover of Goldman Sachs' designated market maker unit on the New York Stock Exchange by high-frequency trading (HFT) firm, IMC Chicago,LLC. HFT firms now comprise some of the largest market makers on the NYSE, signaling a shift in the traditional business of market making.

    According to Bloomberg (Mamudi and Detrixe, 28 Aug 2014):

    The ascent of automated market makers on the NYSE floor represents the latest leg of an evolution that began about a decade ago, when investment banks such as Goldman Sachs began to supplant smaller specialist firms. As advances in technology and rule changes narrowed profits and transformed stock trading into a volume business, computers took over.

    For discussion:

    How is the NYSE structured? What is a designated market maker?


  • Wall Street Competes for Young Talent


    The prestige of a Wall Street job used to attract the brightest and the best, but the grueling hours and high-stress environments often drive them out after a few years. Today, the glamorous jobs belong to the high-tech industry with the allure of a California lifestyle.

    From CNN Money (Egan, 22 Aug 2014):

    Young people are enticed by the impact that tech companies aspire to make. Google is designing driverless cars, Twitter (TWTR, Tech30) and Facebook (FB, Tech30) are enabling revolutions in the Middle East, and Amazon.com (AMZN, Tech30) is devising ways to deliver packages by drone.

    To compete, the big investment banks are doing what they can to make their jobs more attractive to young talent. Some may raise starting salaries by as much as 20% while others are doing what they can about the long hours and quality of life.

    For discussion:

    What makes a Wall Street job attractive or unattractive to you? What other careers can finance graduates qualify for?


    Photo of "Wall Street Sign (1-9)" by Vlad Lazarenko - Own work. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons - http://commons.wikimedia.org/wiki/File:Wall_Street_Sign_(1-9).jpg#mediaviewer/File:Wall_Street_Sign_(1-9).jpg

  • Is Stock Picking Dead?

    In a recent interview, renowned investor and author Charles Ellis told Wall Street Journal's Jason Zweig that "Stock picking 'has seen its day."

    From the WSJ article (Zweig, 22 Aug 2014):

    In an article in the latest issue of the well-respected Financial Analysts Journal, Mr. Ellis argues that fund managers equipped with sophisticated analytical tools, electronic trading and instantaneous access to news are engaged in an arms race resulting in a kind of mutually assured destruction of outperformance.

    The faster and smarter each manager becomes, the more efficient the market gets and the harder it is for any manager to beat it. As a result, he writes, “the money game of outperformance after fees is, for clients, no longer a game worth playing.”

    That stock picking is a fruitless endeavor is an argument that has been made before, and it is called the  Grossman-Stiglitz Paradox. Here's a brief definition of the Grossman-Stiglitz paradox by Matt Levine in BloombergView (15 Apr 2014):

    The Grossman-Stiglitz paradox says that if asset prices perfectly reflected all information, then there would be no reason for anyone to collect information and trade assets, so asset prices couldn't perfectly reflect all information.

    If you want to learn more about the paradox, take a look at the original article by Grossman and Stiglitz (2003).

    For discussion:

    1. .What is the Efficient Market Hypothesis?

    2. How could the act of analyzing markets cause markets to become inefficient?



  • Bank of America Stock Following News of Lawsuit Settlement

    This week, Bank of America CEO Brian Moynihan announced that the bank agreed to a settlement of the firm's "last big fight over faulty home loans."

    According to Bloomberg (Son, 22 Aug 2014):

    The settlement with the U.S. Justice Department will cut third-quarter pretax profit by about $5.3 billion, or 43 cents a share after tax, the company said in a statement. Bank of America shares surged the most in more than a year and were the best performer yesterday in the 84-company Standard & Poor’s 500 Financials Index, climbing 4.1 percent to $16.16. The stock, which had dropped 0.3 percent this year through yesterday, is now up 3.8 percent for 2014.

    The deal resolves claims from U.S. authorities including the Justice Department, Securities and Exchange Commission and Federal Deposit Insurance Corp., and six states. Like many of the bank’s other mortgage-related settlements, most of the liability stems from the firm’s 2008 purchase of subprime lender Countrywide Financial Corp.

    For discussion:

    Why do you think that the stock price rose after news of B of A's settlement with the Justice Department?


    Image of Bank of America tower in NYC by By Image2012 (Own work) [CC-BY-SA-3.0-2.5-2.0-1.0 via Wikimedia Commons

  • Happy Employees = Happy Shareholders


    A recent CNN Money article reports that companies that treat their employees well experience higher stock returns. The finding is based on the research by Edmans, Li, and Zhang (2014) that examined abnormal stock returns for companies listed as "Best Companies to Work For."

    From the article:

    "Treating your people like assets does affect your performance," said Alex Edmans, one of the co-authors of the study.

    American firms that are good to their workers beat their peers in the stock market by 2 to 3% per year, according to an earlier study. To see how those results played out in other countries, so the authors of the latest study looked at "Best Companies" around the world.

    They found that the earlier study's results hold up especially well in nations where there's a lot of labor market flexibility -- meaning companies have a lot of leeway over hiring and firing.

    (Read the full article here)

    Treatment of employees falls within the broader scope of socially responsible investing, a branch of finance that historically offers mixed results. The question is not always whether an investor can do well by doing good; the question is sometime whether the investor will do badly by doing good.

    According to a recent Sustainable Investing panel at the 67th CFA Institute Annual Conference:

    The panelists’ collective message: By practicing sustainable investing, you don’t have to trade “values for value,” as Generation’s Blood put it. Sustainable investing is a best practice and just plain common sense. Furthermore, sustainable investing is consistent with the concept of fiduciary duty. In fact, if you don’t think sustainably as an investment manager you might not be meeting your fiduciary duties, Blood argued.


    For discussion:

    Would you buy shares of a company that sells a product you disagree with? Why or why not?



    photo credit: Alex E. Proimos via photopin cc

  • Betting Against the U.S. Stock Market

     George Soros, the billionaire investor is betting against the S&P 500. In this CNBC article (Kelly, 15 Aug 2014), we find that Soros Fund Management has increased its holdings of puts on the SPDR, the exchange traded fund that mimics the S&P 500 index.


    For discussion:

    What are calls and puts? How can an investor bet on the direction of the underlying asset by using these option contracts?

    The CNBC article states that Soros also owns call options. What kinds of strategies can be devised using a combination of calls and puts on the same underlying asset?

  • Users of LIBOR May Soon Have to Pay For That Privilege

    After the LIBOR scandals in recent years where several market makers faced claims that they colluded in the rate-setting process, the task of establishing the London Inter Bank Offer Rate has handed over to the Intercontinental Exchange (ICE) as of February 1, 2014.

    (Read the BBA press release here)

    The latest surprise in this story is that the ICE will begin charging fees to users of LIBOR. From a recent Bloomberg article (Shenn and Leising, 14 Aug 2014):

    ICE introduced licensin agreements on July 1 for referencing the benchmark used to create more than $300 trillion of securities, loans and derivatives, including a usage license that ranges from $8,000 to $40,000 a year. Previously, Libor was free except for companies wanting to redistribute the rates, which paid an annual fee to the British Bankers’ Association.

    “There’ve been a number of banks saying they may stop using Libor,” Denyette DePierro, senior counsel at ABA, said in a phone interview. While it’s not clear how broadly ICE will apply the new fees, they appear to be triggered by essentially all uses of the benchmark -- from a bank having a single old loan on their books to them choosing to participate in syndications or signing derivatives agreements, she said.

    “Everybody’s kind of waiting to see what ICE is going to do, and, from a cost-benefit perspective, do you continue with Libor or not?” said DePierro, whose organization lobbies on behalf of the $14 trillion U.S. banking industry.

    For discussion:

    In your opinion, should the use of LIBOR as a benchmark for loans and other financial instruments remain free, or should ICE charge for use of the data?

  • Are You A Better Investor Than A Sixth Grader?

    The lesson from this video is a lesson we've heard from investment gurus before: invest in what you know. A group of sixth graders was able to compete with top business schools by choosing companies that they knew offered promise of higher future sales. 

    This article tells the same story (StreetAuthority, 8 Sept 2013):

    Sometimes the profound truths are the easiest to understand.

    This is particularly true when it comes to investing . Many investors make the process much more difficult than it needs to be. At its core, investing is a simple process governed by a few irrefutable axioms.

    Choosing investments based on what you already know is one of these simple yet profound truths. I first heard this rule articulated by Peter Lynch, the superstar manager of Fidelity's Magellan Fund. Lynch wrote one of the best books on the stock market , "One Up On Wall Street," in which he stresses this simple investing rule.

    Read more here 

    For discussion:

    What products do you use every day that you would consider a good investment?

  • Credit Scores Could Rise Based on New FICO Model

    (image by Pne [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons)

    Your credit score can prevent you from buying or renting a home, getting a new credit card, or may simply cost you more interest when you do qualify for a loan. So you want to do anything you can to safeguard a good score, or improve a bad one.

    For those who have suffered some setbacks in the credit department, FICO has announced good news (Barnard, 7 Aug 2014):

    The creator of one of the most widely used and influential credit scores, FICO, said on Thursday that the latest version of its score would no longer weigh medical debts — which account for about half of all unpaid collections on consumers’ credit reports — as heavily as it did in previous iterations.

    The newer FICO scores, available this fall, will also ignore any collections that have already been paid; previously, the scores factored paid and unpaid collections equally, though it ignored amounts under $100.

    (Read the full article here)

    Repairing bad credit takes time, and experts warn that you should beware any quick-fix schemes. According to myFICO.com, some ways to protect your score include;

    1. Check your credit report annually for free
    2. Set up payment reminders to keep you on track
    3. Reduce the amount of money you owe

    "Repairing bad credit is a bit like losing weight: It takes time and there is no quick way to fix a credit score" (www.myfico.com)

    For discussion:

    What are some other tips for protecting and improving your credit score?

  • Lease or Buy Your New Car?

    photo of Prius courtesy of Toyota

    We just bought a new Toyota Prius. Two in fact. We have four drivers but two cars in our home, and the sharing of cars was getting annoying. When we finally made the decision to jump into the car market, we were lured in by the great lease deals on the new Prius. With the savings in fuel cost, we could recover much of the payment. However, when the time finally came, we decided to buy rather than lease the two cars.

    Did we make the right decision?

    According to a recent article on CNBC (Eisenstein, 8 August 2014):

    A new study underscores the financial advantages of leasing over buying, but it also points to a potential alternative, a small but growing number of motorists opting to take over existing leases, something equivalent to buying a "nearly new" vehicle.

    The study, by website Swapalease.com, takes an apples-to-apples approach, starting out with a generic, $30,000 vehicle and factoring in such things as maintenance, sales taxes, document fees and residuals—the latter being the amount a vehicle depreciates over a set period of time. The three alternatives were based on a motorist either purchasing a new vehicle and keeping it for six years while paying off the loan, leasing two vehicles during the same, 72-month period, or taking over four existing leases, each for 18 months.

    For someone buying their vehicle and hanging onto it for six years, the total cash outlay, according to the analysis, came to $42,445.09, according to Scott Hall, the executive vice president of operations at Swapalease. That figure included a $2,500 extended service contract to cover repairs after the vehicle's warranty ran out, a common and reasonable expense that lowered the forecast maintenance fees.

    The website calculated a $39,670.70 cash outlay over 72 months for someone who instead chose to lease two vehicles during the same period. The biggest difference? Lower depreciation, since leases cover only the actual decline in value during the period you are, in effect, renting the vehicle. That works out to a savings of $2,774.39, and the analysis is in line with other studies comparing buying versus leasing.

    What do you think?

    What other factors go into the decision to lease rather than buy a car?

    Under what circumstances would the decision to purchase be a better decision?

  • Is Neverland a Wise Real Estate Investment?

    Michael Jackson's Neverland estate is on the market. Colony Capital is the current owner and has made it clear that the estate is not zoned to be subdivided or converted into a tourist attraction. So who would buy this piece of real estate?

    According to a recent article in the Telegraph (Allen, 31 July 2014):

    The sprawling 2,800-acre ranch 130 miles north of Los Angeles, which has been   deserted for years, is owned by a private investment firm which bought it in   2008 for $23.5 million when the King of Pop was heavily in debt.

    The article goes on to say that the property could fetch as much as $50 million, but that the owner and the Jackson family hope that the new owners will "respect the historical importance and special nature of this wonderful property."


    For discussion:

    What factors must a real estate investor consider before making an offer on Neverland?

  • Economic News Matters

    One of the myths surrounding investing in stocks and bonds is that prices are random and investors cannot make money.

    Not true.

    If you are a student of finance, then you understand the efficient market hypothesis which says that prices reflect all available information. In other words, prices are not random; they are determined by the information that is available at that time. However, information arrives randomly, therefore the CHANGE in price is random and cannot be predicted, giving us the famous book by Malkiel entitled, "A Random Walk Down Wall Street."

    This CNBC video is a taste of the type of information that must be digested by investors. 


    Here are the typical questions and their answers based on our understanding of the Efficient Market Hypothesis (EMH)

    Question #1: can investors expect to make money investing in stocks and bonds?

    Answer: yes, investors can expect to earn a return by investing in stocks and bonds because they can expect to be compensated for the risk of parting with their money.


    Question #2: can investors "beat" the market by investing in stocks and bonds?

    Answer: probably not. Investors can expect to earn what  everyone else earns, and no more. If markets are truly efficient, then everyone has access to the same information and acts on it the same way causing prices to move to their fair value in equilibrium.


    Question #3: Is the EMH true?

    Answer: Maybe. It is a hypothesis, after all.



  • Did Argentina Trigger Credit Default Swaps?

    photo of Banco de la Nacion, Argentina, Buenos Aires by PhilipC, and available on Wikipedia by creative commons license


    When is a default a default? When the International Swaps & Derivatives Association (ISDA) says it is.

    Credit default swaps (CDS) are contracts that deliver a payoff to one counterparty in the event that the underlying borrower experiences an adverse credit event. CDS are effectively insurance contracts written between two counterparties, and the seller must pay the buyer if the underlying credit fails. The "credit event" is always specified in the contract, and it doesn't have to be a full-scale default. A simple missed payment may be enough to trigger the CDS payments.

    According to a recent Bloomberg article (Moses, 31 July 2014):

    The International Swaps & Derivatives Association said its determinations committee will rule on whether credit-default swaps linked to Argentina have been triggered by a failure-to-pay credit event.

    The committee will meet tomorrow at 11 a.m. in New York and a decision that an event has occurred would lead to payouts on all contracts, according to ISDA’s rules. A total of 2,652 contracts insuring a net $1 billion of Argentina’s debt were outstanding as of July 25, according to the Depository Trust & Clearing Corp.

    Swiss bank UBS AG asked for the ruling after the government missed a deadline yesterday to pay $539 million in bond interest payments. Argentina would be the first nation to trigger payouts on default swaps since Greece restructured its debt in 2012.

    For discussion:

    In what ways is a CDS contract similar to an insurance contract? In what ways is it different?