December 15, 2015

Thoughts on pricing & fair valuation

The fair value of any financial security is driven by 3 critical factors:

1. What are you going to get from it? Coupon for fixed income, interest for currencies, dividend/earnings for equities.
2. When are you going to get it? Coupon - half-yearly/annually, interest - monthly, dividend/earnings - annually but not certain to be received
3. What is your desired rate of return from the investment? Yield for fixed income, Cost of equity for equities.

A rational investor would evaluate & determine each of the above 3 factors before deciding to invest. And then there are many who gamble in the name of investments.

Also adds another aspect to pricing - how would you price commodities that do not really 'earn' anything except possible capital gains. That strategy is defined by many as the "Bigger Fool Theory" - you will necessarily need someone to buy it from you at a much higher price than what you bought at!

September 06, 2015

Banks & their mischief!

Past few years post 2008 have been arguably the toughest phase for global banks. Crumbling credit opportunities, tougher regulations, ailing financial markets and the inevitable drying up of liquidity have all impacted the bottom-lines of some of the largest banks. These reasons, though not justified, may have perhaps motivated some of these financial powerhouses to get scandalous! Not sure whether the management and shareholders turned away after seeing what was happening.

The following chart explains the regulatory fines levied on the top banks since 2009.


If you are wondering how is BankAm still surviving that hit, some of their retail banking acquisitions were really value adding deals for their profits. And Merrill Lynch added up numbers too.

Many are also surprised to see Goldman Sachs sitting much lower in that list. Well, now you know!

October 09, 2014

Economic history in a single pic

Interesting chart that I stumbled upon via Economist.


December 16, 2013

Fed stimulus

If anyone thinks that the concerns over tapering of Fed's QE stimulus are merely 'psychological', this data will erase all such doubts. Come 2Q2014, we will see some serious implications of tapering.


March 14, 2012

The changing phase (face) of IB

Why I Am Leaving Goldman Sachs

TODAY is my last day at Goldman Sachs. After almost 12 years at the firm - first as a summer intern while at Stanford, then in New York for 10 years, and now in London - I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world's largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs's success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients' trust for 143 years. It wasn't just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.

I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.

When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm's culture on their watch. I truly believe that this decline in the firm's moral fiber represents the single most serious threat to its long-run survival.

Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.

How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

What are three quick ways to become a leader? a) Execute on the firm's "axes," which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) "Hunt Elephants." In English: get your clients - some of whom are sophisticated, and some of whom aren't - to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don't like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It's purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client's success or progress was not part of the thought process at all.

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as "muppets," sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God's work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don't know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client's goals? Absolutely. Every day, in fact.

It astounds me how little senior management gets a basic truth: If clients don't trust you they will eventually stop doing business with you. It doesn't matter how smart you are.

These days, the most common question I get from junior analysts about derivatives is, "How much money did we make off the client?" It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don't have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about "muppets," "ripping eyeballs out" and "getting paid" doesn't exactly turn into a model citizen.

When I was a first-year analyst I didn't know where the bathroom was, or how to tie my shoelaces. I was taught to be concerned with learning the ropes, finding out what a derivative was, understanding finance, getting to know our clients and what motivated them, learning how they defined success and what we could do to help them get there.

My proudest moments in life - getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics - have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn't feel right to me anymore.

I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm - or the trust of its clients - for very much longer.

Greg Smith (the writer )is resigning today as a Goldman Sachs executive director and head of the firm's United States equity derivatives business in Europe, the Middle East and Africa.

Source: NY Times

August 09, 2011

The global credit crisis

I stumbled upon this primer on the credit crisis. I love the way the animated file explains the concept in a very lucid way.

Must see for beginners!

August 08, 2011

Insightful readings on the US downgrade

Here are some links to good readings on the recent downgrade of US Sovereign rating by Standard & Poor's.

Happy Reading!

The Basics

US Treasury's response to the downgrade

A good presentation on the situation

The big ERROR!