 | BBC |
| | Business Week |
| | CFO |
| | CNN |
| | Forbes |
| | Fox |
| | FT |
| | The Economist |
| | The Wall Street Journal |
| | Time |
Wednesday, December 31, 2008
Tuesday, December 30, 2008
Links to Financial resources in Switzerland
Swiss Banking and Finance Regulatory Organisations | ||
| Autorité fédérale de surveillance des marchés financiers (FINMA) | ||
| Banque Nationale Suisse (BNS) | ||
| Administration Fédérale des Finances (AFF) | ||
| Ombudsman des Banques Suisses, Zurich | ||
| SIX Swiss Exchange | ||
| SIX Interbank Clearing | ||
| SIX Telekurs | ||
National Banking and Financial Associations | ||
| Association Suisse des Banquiers (ASB), Bâle | ||
| Association des Banques Etrangères en Suisse (ABES), Zurich | ||
| Association des Banquiers Privés Suisses (ABPS), Genève | ||
| Associations de Banques Suisses Commerciales et de Gestion (BCG), Zurich | www.vhv-bcg.ch | |
| Association Suisse d'Assurances (ASA), Zurich | ||
| Association Suisse d'Audit Interne (ASAI), Zurich | ||
| Association Suisse des Banques de Crédit et Etablissements de Financement (VSKF), Zurich | ||
| Association Suisse des Fonds de Placement (SFA), Bâle | ||
| Association Suisse des Gérants de Fortune (VSG/ASG), Zurich | ||
| Association suisse des Institutions de prévoyance (ASIP), Zurich | www.asip.ch | |
| Association Suisse des Négociants Indépendants en Valeurs Mobilières, Zurich | ||
| Association Suisse des employés de banque (ASEB) | www.sbpv.ch | |
| Association suisse des sociétés holding et financières | www.holdingverband.ch | |
| Association Suisse Produits Structurés (ASPS), Zurich | www.svsp-verband.ch | |
| Association of Futures Markets (AFM) | ||
| The Financial Markets Association (ACI Suisse), Zurich | ||
| Centrale des Banques Régionales (RBA), Berne | ||
| Convention of Independent Financial Advisors (CIFA), Genève | ||
| Groupement des Réviseurs Bancaires (GRB), Genève | ||
| Groupement Suisse des Conseils en Gestion Indépendants (GSCGI), Genève | ||
| International Capital Market Association (ICMA), Zurich | www.icma-group.org | |
| International Financial Risk Institute (IFCI), Genève | ||
| Association Suisse des Analystes Financiers et Gestionnaires de Fortunes (ASAG), Zurich | ||
| SIS Swiss Financial Services Group AG, Zurich | ||
| Swiss Association of Market Technicians (SAMT), Genève | ||
| Swiss Association of Trust Companies (SATC), Zoug | www.satc.ch | |
| Swiss Futures and Options Association (SFOA), Genève | ||
| Swiss Insurance Brokers Association (SIBA) | www.siba.ch | |
| Swiss CFA Society (SCFAS), Zug | ||
| Union des Banques Cantonales Suisses (UBCS), Bâle | ||
| Union Suisse des Banques Raiffeisen, Saint-Gall | ||
Regional Banking and Financial Associations | ||
| Fondation Genève Place Financière (FGPF) | ||
| Groupement des Banquiers Privés Genevois (GBPG) | ||
| Lausanne – Vaud Région Financière | ||
| Associazione Bancaria Ticinese | ||
| Association pour le Développement des Compétences Bancaires (ADCB) | ||
| Association genevoise de droit des affaires (AGDA) | www.agda.ch | |
| International Financial Management Association (IFMA) | ||
| Association Romande des Intermédiaires Financiers (ARIF) | ||
| Society of Trust and Estate Practitioners, Suisse-Romande branch | ||
| OAR-G - Organisme d'Autorégulation | www.oarg.ch | |
| Place financière de Zurich | www.place-financiere-zurich.ch | |
| Place financière de Bâle | ||
| Observatoire de la Finance | www.obsfin.ch | |
Financial Support Organisations | ||
| Alliance pour une Suisse Forte | ||
| Forum Place Financière Suisse (FPFS) | ||
| Union des Intérêts de la Place Financière lémanique (UIPF) | ||
Banking and Financial Academic Institutions | ||
| Swiss Finance Institute | ||
| Institut de lutte contre la criminalité économique (ILCE), Neuchâtel | www.ilce.ch | |
| Centre de Droit bancaire et financier de l'Université de Genève | ||
| Centre International d'Etudes Monétaires et Bancaires, Genève | ||
| Swiss Banking Institute, Université de Zürich | ||
| NCCR-FINRISK, Université de Zürich | ||
| Swiss Institute of Banking and Finance of the University of St. Gallen | ||
| Swiss Financial Center Watch | ||
| Fund-Academy AG | ||
Banking and Finance Events in Geneva and Switzerland | ||
| CIFA, Genève | ||
| Shorex, Genève | ||
| Journées des Solutions Bancaires - Unicore, Genève | ||
| FONDS'10, Zürich | ||
| International Private Banking and Wealth Management Retreat | www.swissfinanceinstitute.ch | |
| Invest'09, Genève | www.invest09.ch | |
| Salon Romand de la Finance, Genève | www.salonfinance.ch | |
| Finance Summit, Genève | www.finance-summit.ch | |
| Strukturierte Produkte Messe, Zurich | www.stp-messe.ch | |
Banking and Financial Resources | ||
| Reuters | ||
| Bloomberg | ||
| Thomson Financial | www.thomson.com/solutions/... | |
| Glossaire de l'ASB | www.swissbanking.org | |
| Glossaire de la BNS | ||
| Lexique bancaire UBS | www.ubs.com | |
Friday, December 12, 2008
How to make money on currency trading
 Holidaymakers will find their pound does not go so far in Europe |
The pound has touched an all-time low against the euro - meaning that the eurozone currency is now worth just under 88 pence. Read original article.
Euro notes and coins were physically introduced in 2002, although the currencies of the initial 11 member countries were first joined in 1999 when their value was fixed in euro terms.
There are now 15 eurozone countries, with a total of 320 million inhabitants.
But why is the currency so strong now and what does it mean?
Why is the pound struggling?
Investors have been losing faith in the UK economy which now seems to be moving rapidly towards recession.
The trouble in the credit markets seems to have hit the UK harder than other countries, especially as the financial sector accounts for a bigger part of the UK economy.
And with consumers having borrowed heavily in the good times, and the government now facing a huge budget deficit, currency traders were in no doubt that the UK economy was in trouble and the time to start selling sterling had arrived.
Another reason is that the Bank of England has cut interest rates in the UK from 5% to 2% in the space of just three months.
Rate cuts generally encourage investors to switch to other currencies which have a higher rate of return.
Why is the euro doing so well?
Given the weakness of the pound, there has been a flow of money into the euro.
The euro is an increasingly attractive currency for investors compared with its rivals - not only the pound, but also the US dollar.
And the European economy, while showing undeniable signs of being gripped by slowdown, is less burdened by debt than the United States or the UK.
The lower size of government deficits, the lower expectations for inflation, and the higher interest rates paid by the European Central Bank have also made holding the euro more attractive.
What will the impact be people taking holidays in Europe?
Well, your pound will not buy as many euros, making things more expensive for you.
And this week, some outlets were only offering 110 euros for every £100 you wanted to exchange.
However as regular travellers between the UK and the continent will attest, the euro has been edging higher for some time.
But the price of a baguette at the boulangerie, an espresso on a Milan pavement cafe or a beer in a Spanish bar may come as a shock for anyone who has not been to Europe for a while.
While a euro is worth about 88p now, it was worth 71p at its physical launch in 2002 (and 57p on foreign currency markets during its all-time low in 2000).
But how about the broader economy? What will the impact be?
Overall, a strong euro is good for the UK economy.
It makes imports from the eurozone more expensive, while UK exports become cheaper to those paying for them in euros.
This is clearly a boost to the UK manufacturing sector in these difficult times.
The eurozone accounts for about 60% of UK exports.
However, if the pound was to fall too sharply, it could lead to imported inflation, as the price of goods from abroad would rise.
Can we expect parity between the euro and the pound soon?
Some currency analysts are speculating that by the end of this year or early next year, we may be headed for parity, where one pound buys just one euro.
However, with the downturn set to grip continental Europe, others expect the euro will weaken.
One key factor is whether the Bank of England continues to cut interest rates more quickly than the European Central Bank.
Does the strength of the euro bolster the case for the UK to join the currency?
This argument is shrouded in politics and patriotism, as well as economics.
One drawback is that the European Central Bank's interest rate applies equally across all 15 eurozone countries, whether their economic growth levels are sluggish or breakneck.
But the euro has many things in its favour, especially when it is at such highs, by helping to keep inflation under control.
And while the dollar is gaining strength right now, even the former head of the US Federal Reserve, Alan Greenspan, has said that it is conceivable that it will one day "replace the dollar as reserve currency or will be traded as an equally important reserve currency".
There is also a strong argument that joining the euro would help lure more foreign investment.
And while many eurozone residents also expressed opposition to the euro when it was introduced, it is proving popular with citizens as well as business, especially those involved in cross-border trade. THE SQUEEZE ILLUSTRATED
IN DEPTH
Top 10 searches of 2008
What do Sarah Palin, Facebook and Euro 2008 have in common?
They are all on the list of the top 10 fastest-rising queries on Google during 2008.
The search engine has Google Zeitgeist 2008 , the tool which reveals what internet users are searching for.
The most searched term for Google users in the UK was Facebook while the BBC came second and its iPlayer service was the fastest rising query.
The list also reveals what global preoccupations are and this year the US election candidates and the Beijing Olympics figure high.
The things people around the globe have in common are a strong interest in socialising and politics, according to Marissa Mayer, vice-president of search at Google.
"Social networks comprised four out of the top 10 global fastest-rising queries while the US election held everyone's interest around the globe," she wrote on Google's official blog.
Popular politicians
| FASTEST RISING GLOBAL QUERIES
|
The economic crisis has made an impact on UK searchers with "money saving expert" and "hot uk deals" making the top 10 finance-related searches.
Gordon Brown will be pleased to hear that he beat David Cameron into second place on the list of most popular politicians among UK searchers.
Barack Obama made it into third place with rival John McCain coming in seventh.
Foodies were interested in recipes for cupcakes, meatballs, lemon posset and pork belly, while the hottest tickets in the UK went to Oasis and Leonard Cohen (first and second respectively).
Popular music
| MOST SEARCHED UK TERMS
|
While news and weather tend to be the most searched for terms globally there are still plenty of country-specific quirks, according to Ms Mayer.
"Russians elected Dmitri Medvedev as their president but a couple of popular music acts got more attention from Google searchers," she wrote.
In Poland the fifth fastest-rising term was Jozin z Bazin, the title of a 1978 Czech song which has been popular on YouTube.
Unemployment rate in Geneva
Le taux de chômage a continué à progresser à Genève en décembre. Il a augmenté de 0,2 point pour atteindre 5,9%. Ce chiffre ramène l'effectif genevois de sans-emploi au même niveau qu'en décembre 2007. Read original article here.
Avec une hausse mensuelle de 2,9% du nombre de chômeurs, le canton s'en tire plutôt bien, puisque l'augmentation atteint plus de 10% en moyenne nationale, observe l'Office cantonal de l'emploi jeudi. Le taux helvétique passe ainsi de 2,7 à 3%.
Le nombre de chômeurs à Genève frise désormais les 13 000. Si l'on ajoute les personnes en emploi temporaire, en gain intermédiaire ou en formation, le total des demandeurs d'emploi se monte à 18 300.
En comparaison annuelle, les secteurs qui ont enregistré les hausses les plus importantes sont l'industrie métallurgique, les banques, le bâtiment et le génie civil.
Did poor management fail Wall Street?
VIEWPOINT
By Bill Baker
When the global financial crisis hit, many Wall Street bosses said they didn't know that trouble was brewing.
There is a good chance that they were speaking the truth. Studies show that 58% of workers with "bully" bosses don't speak openly and candidly with their boss, as opposed to 19% of those with "kind" bosses.
 Mr Baker says management style didn't help Wall Street |
Similarly 64% of those managed by "bully" bosses report that their bosses do not listen to what they say, as opposed to a tiny 7% with "kind" bosses.
Might this give you some idea as to how so-called smart leaders drove their Wall Street firms off the proverbial cliff, creating the biggest economic crisis the world has seen since the Great Depression?
Superior results
Our research at the American Management Association has shown us some significant results: "kind" bosses get truly superior results. This has been documented time and time again in industrial psychological theory, and more importantly in practice.
Such companies often have superior results reflected in high productivity, happy employees, more creative problem solving and better bottom lines. Witness companies like Google, Eileen Fisher, Pitney Bowes, Smuckers, Rodale and hundreds of others.
This generation is working in a non-factory America where knowledge workers provide the company a competitive advantage and information that keeps them afloat. This generation is not locked to one employer for life and is prepared to quickly move if they are not managed with respect and even kindness.
I'd argue that there is a sea change in US culture spurred by this millennial generation; something akin to what happened with the boomer generation during the 1960s. This generation will have an effect on everything that happens in the culture including business.
Most major business schools have detected a strong shift in the interests of current students: away from only making money to one questioning if there may be something more like values, helping others, doing good.
The new boss
Kind bosses are not doormats, nice guys/women who are walked over by their employees. Rather they conduct themselves like respectful, knowledgeable parents having qualities like compassion, integrity and clear boundaries.
In the current financial meltdown, although many of these kind bosses will be stressed to the maximum, their style will allow them to institute layoffs in a respectful and humane manner.
Some new cost reduction models may develop in America not previously seen on this side of the Atlantic, but operational in countries like Germany and Israel.
US companies have rarely cut salaries, choosing instead to terminate a worker under the belief that they will be so demotivated by a cut that they will be rendered useless. Other countries' experiences have shown that not to be the case.
Under correct leadership whole workforces can be made to feel like a family and willingly tighten their personal belts if top management does the same. So America should be watching what happens during this very difficult time.
Bill Baker, a professor at Fordham University and executive-in-residence at Columbia Business School, is the co-author of the book Leading With Kindness
All eyes now on India to save the world economy
JUST how worrying are the figures, published on Wednesday December 10th, showing that China’s exports and imports plunged in November? Exports fell by 2.2% last month from a year ago; imports plummeted by an astonishing 17.9%. One analyst sums up the news as “a shock figure”. Read original article.
The gloom is spread all over the place. Exports dropped across all big traded goods and all parts of the world. Exports to America fell by 6.1%; those to the ASEAN countries, which had grown by 21.5% in October, fell by 2.4%. The faster decline in imports meant that China’s monthly trade surplus reached a record $40.1 billion. Exports last fell in 2001.
Such numbers would be nasty enough for any big economy, but they are particularly shocking because China’s racing trade has been an engine of world trade, and thus global growth. During the 1990s China’s exports grew at an annual average of 12.9%; from 2000 to 2006 that growth nearly doubled to 21.1% each year, according to the World Bank. China's rapidly rising imports have also driven growth elsewhere. The chief economist of a Chinese bank calls the latest figures “horrifying”.
The rapidity of the decline is as striking as its extent. Trade growth in October was similar to preceeding months; exports grew by more than 19% from a year earlier. A sudden drop in just a month has surprised even the most pessimistic economists. Some analysts point out that a global shortage of trade finance in November may have exaggerated the decline, but the Chinese juggernaut is definitely stumbling.
The consequences for the Chinese economy, which has seen dizzying rates of growth since economic reforms began in 1978 (growth in the 1990s averaged 10.5%), could now be dire. Its growth is unusually driven by its exports, which have made it the world’s factory. According to the World Bank, 27% of world GDP in 2006 came from exports (up from 21% in 1990). The corresponding figures for China that year show it to be particularly dependent on exports: 40% of its GDP came from exports in 2006, compared with 11% for highly open America and 29% for Britain. Thus the potential for a drop in exports to drag down China’s growth is correspondingly greater.
The World Bank’s latest growth predictions were released on Tuesday. These predict that the Chinese economy will expand by 7.5% in 2009, well under its own calculation of 9.5% growth that it reckons China needs to keep unemployment stable. But even these calculations may prove to be overly optimistic. The Bank’s prediction rests in part on the expectation that China’s exports will rise by 4.2% next year. In fact many analysts expect the slump in trade to continue and possibly worsen; UBS, a Swiss bank, predicts that Chinese exports will not grow at all in 2009.
Chinese workers, who are already restive, may find the new year increasingly difficult. Labour disputes almost doubled in the first ten months of 2008 and sacked workers from closed toy factories rioted. If export growth ceases entirely, and jobs are threatened, social responses could be more severe. An estimated 130m people have moved from the countryside to the cities, many for jobs in factories that make goods for export. Zhang Ping, the country’s top planner, has given warning of the risk of social instability arising from massive unemployment.
The latest trade figures also worsen the already gloomy outlook for the rest of the world. Some were counting on China to prop up the global economy, as much of the rich world falls into recession. Merrill Lynch had expected China to contribute 60% of global growth in 2009. But the dramatic fall in imports suggest that the Chinese can not be relied on to be the consumer of last resort.
Analysts at Goldman Sachs expect several more months of shrinking exports. Speculation that China will devalue its currency is rife, but this would have little effect if world demand is simply collapsing. The experience of South Korea is instructive: its currency has fallen by a third against the dollar this year, but this did not prevent its exports from dropping by 18.3% in November, compared with a year ago. Unfortunately, this may not be enough to deter the Chinese government from trying to push down the yuan, which has appreciated significantly on a trade-weighted basis.
Fiscal stimulus is much more important; efforts to boost domestic demand would help both China and the world. Most analysts expect announcements about new measures on top of the $586 billion package already announced. Interest rates and taxes are likely to be cut further.
The gloom is spread all over the place. Exports dropped across all big traded goods and all parts of the world. Exports to America fell by 6.1%; those to the ASEAN countries, which had grown by 21.5% in October, fell by 2.4%. The faster decline in imports meant that China’s monthly trade surplus reached a record $40.1 billion. Exports last fell in 2001.
Such numbers would be nasty enough for any big economy, but they are particularly shocking because China’s racing trade has been an engine of world trade, and thus global growth. During the 1990s China’s exports grew at an annual average of 12.9%; from 2000 to 2006 that growth nearly doubled to 21.1% each year, according to the World Bank. China's rapidly rising imports have also driven growth elsewhere. The chief economist of a Chinese bank calls the latest figures “horrifying”.
The rapidity of the decline is as striking as its extent. Trade growth in October was similar to preceeding months; exports grew by more than 19% from a year earlier. A sudden drop in just a month has surprised even the most pessimistic economists. Some analysts point out that a global shortage of trade finance in November may have exaggerated the decline, but the Chinese juggernaut is definitely stumbling.
The consequences for the Chinese economy, which has seen dizzying rates of growth since economic reforms began in 1978 (growth in the 1990s averaged 10.5%), could now be dire. Its growth is unusually driven by its exports, which have made it the world’s factory. According to the World Bank, 27% of world GDP in 2006 came from exports (up from 21% in 1990). The corresponding figures for China that year show it to be particularly dependent on exports: 40% of its GDP came from exports in 2006, compared with 11% for highly open America and 29% for Britain. Thus the potential for a drop in exports to drag down China’s growth is correspondingly greater.
The World Bank’s latest growth predictions were released on Tuesday. These predict that the Chinese economy will expand by 7.5% in 2009, well under its own calculation of 9.5% growth that it reckons China needs to keep unemployment stable. But even these calculations may prove to be overly optimistic. The Bank’s prediction rests in part on the expectation that China’s exports will rise by 4.2% next year. In fact many analysts expect the slump in trade to continue and possibly worsen; UBS, a Swiss bank, predicts that Chinese exports will not grow at all in 2009.
Chinese workers, who are already restive, may find the new year increasingly difficult. Labour disputes almost doubled in the first ten months of 2008 and sacked workers from closed toy factories rioted. If export growth ceases entirely, and jobs are threatened, social responses could be more severe. An estimated 130m people have moved from the countryside to the cities, many for jobs in factories that make goods for export. Zhang Ping, the country’s top planner, has given warning of the risk of social instability arising from massive unemployment.
The latest trade figures also worsen the already gloomy outlook for the rest of the world. Some were counting on China to prop up the global economy, as much of the rich world falls into recession. Merrill Lynch had expected China to contribute 60% of global growth in 2009. But the dramatic fall in imports suggest that the Chinese can not be relied on to be the consumer of last resort.
Analysts at Goldman Sachs expect several more months of shrinking exports. Speculation that China will devalue its currency is rife, but this would have little effect if world demand is simply collapsing. The experience of South Korea is instructive: its currency has fallen by a third against the dollar this year, but this did not prevent its exports from dropping by 18.3% in November, compared with a year ago. Unfortunately, this may not be enough to deter the Chinese government from trying to push down the yuan, which has appreciated significantly on a trade-weighted basis.
Fiscal stimulus is much more important; efforts to boost domestic demand would help both China and the world. Most analysts expect announcements about new measures on top of the $586 billion package already announced. Interest rates and taxes are likely to be cut further.
Thursday, December 11, 2008
IASB proposes changes to IAS 24...
Plans to simplify reporting requirements for state-controlled entities have been issued.
The International Accounting Standards Board (IASB) proposes that such bodies should be exempt from International Accounting Standard (IAS) 24 Related Parties Disclosures.
Under the terms of IAS 24, reporting entities have to provide disclosures about transactions with related parties.
However, the IASB points out that for state-controlled entities this can be a difficult and costly process.
Under the proposed changes, such entities would be exempt from providing full details about their transactions with other state-controlled bodies.
Instead they would have to provide general disclosures about the types and extent of significant transactions.
Comments on the proposed amendment are being invited by the IASB.
The body is keen to hear from respondents as to whether they think the change would provide analysts and investors with the information they need without imposing too great a burden on the preparers of financial statements.
Recently, the IASB and US Financial Accounting Standards Board set up a task force aimed at improving financial reporting in light of the global economic crisis.
Tuesday, December 9, 2008
IFRS is the next SOX
Looking ahead, it’s easy to predict that International Financial Reporting Standards (IFRS) could become the next SOX – an area where the supply of accountants who know the subject falls short of the number of companies who need that expertise. Read original article by The fact that IFRS is coming to America is definitely sinking in. More than half of all CPAs nationwide say they’re getting ready to adopt IFRS, according to a survey released by the American Institute of Certified Public Accountants (AICPA).
"The Security and Exchange Commission’s proposed roadmap calling for U.S. adoption of international standards by 2014 is clearly getting people’s attention,” said Arleen Thomas, AICPA senior vice president for member competency and development. “What our tracking survey shows is that CPAs are increasingly aware that international standards are coming and are starting to feel a real need to get training and gain expertise in this new area.”
Fifty-five percent of about 1,500 CPA surveyed by AICPA said they were preparing in a variety of ways for adoption of IFRS. That’s up 14 percentage points from the 41 percent who were preparing for change according to an AICPA survey in April.
You’re going to have to learn IFRS anyway, so why not get a leap on the competition and pick up the knowledge ASAP. Start with the backgrounder on the International Accounting Standards Board (IASB) Web site .
Then take a class with your state CPA association or the AICPA (courses are typically open to non-members). The CPA review firms have also begun offering IFRS seminars.
Then, if there’s a committee preparing a set of test IFRS statements at your firm, get on it. If there isn’t, start one and viola, instant expert status.
Financial shared services 'delivering expected savings'...
Two thirds of firms which have set up financial shared services have made the savings they expected, a new survey shows.
Research conducted by CFO Europe on behalf of KPMG reveals that the benefits seen by firms implementing such measures include reduced costs, which allow businesses to focus on core revenue generating activities.
However, the study also found that it is vital that the views of clients are taken into account when it comes to shared services.
Daniel Rona, associate partner at KPMG, said: "Unsurprisingly, those organisations that invested in taking customer views seriously and responding appropriately were better placed to provide a high quality service."
The study also found that more than 70 per cent of businesses that already have a financial shared services plan want to expand the system to encompass more complex areas, such as management information and reporting.
Last week, research by IDC found that outsourcing deals in the UK are becoming smaller and more flexible.
It found that the total value of the biggest 100 deals in 2007 was only around a third of the total the previous year.
Sunday, December 7, 2008
The risks of risk management
Banks now employ thousands of highly-qualified mathematicians to quantify risk for them. So why did they not foresee the credit crunch? Quantitative finance lecturer Paul Wilmott explains how a failure to see beyond the numbers might be to blame. Read original article.
Do they appreciate the human side of finance, the herding behaviour of people, the unintended consequences - what I think of as all the fun stuff? 
We have learned the hard way how important it is to measure and manage risk.
Despite the thousands of mathematics and science PhDs working in risk management nowadays we seem to be at greater financial and economic risk than ever before.
To show you one important side of banking I would like you to follow me in an exercise with parallels in risk management.
You are in the audience at a small, intimate theatre, watching a magic show.
The magician hands a pack of cards to a random member of the audience, asks him to check that it is an ordinary pack, and to give it a shuffle.
The magician turns to another member of the audience and asks her to name a card at random. "Ace of Hearts," she says.
Pick a card, any card
The magician covers his eyes, reaches out to the pack of cards, and after some fumbling around he pulls out a card.
The question to you is what is the probability of the card being the Ace of Hearts?
Think about this question while I talk a bit about risk management.
Feel free to interrupt me as soon as you have an answer.
Oh, you already have an answer? What is that, one in 52, you say? On the grounds that there are 52 cards in an ordinary pack.
It certainly is one answer.
But aren't you missing something, possibly crucial, in the question?
Ponder a bit more.
 Risk managers employed by banks are often highly-qualified mathematicians |
One aspect of risk management is that of 'scenario analysis.' Risk managers in banks have to consider possible future scenarios and the effects they will have on their bank's portfolio.
Assign probabilities to each event and you can estimate the distribution of future profit and loss. Not unlike our exercise with the cards. Of course, this is only as useful as the number of scenarios you can think of.
You have another answer for me already?
You had forgotten that it was a magician pulling out the card.
Well, yes, I can see that might make a difference.
So your answer is now that it will be almost 100% that the card will be the Ace of Hearts - the magician is hardly going to get this trick wrong.
Are you right?
Think just a while longer while I tell you more about risk and its management.
The risks of probabilities
Sometimes the impact of a scenario is quite easy to estimate. For example, a bank might ask what will happen to the value of their assets if interest rates rise by 1%.
After some mathematical analysis they will come up with an answer - which will depend, for example, on how many bonds they hold.
But estimating the probability of that interest rate rise in the first case might be quite tricky. And more complex scenarios might not even be considered.
What about the effects of combining rising interest rates, rising mortgage defaults and falling house prices in America?
Hmm, it is rather looking like that scenario didn't get the appreciation it deserved.
Back to our magician friend.
Are those the only two possible answers? Either one in 52 or 100%? Suppose you had billions of dollars of hedge fund money riding on the outcome of this magic trick - would you feel so confident in your answers?
(A hedge fund betting on the outcome of a magic show, how unrealistic! But did you know that there is at least one hedge fund that 'invests' in poker players, funding their play and taking a cut of their winnings? So who knows what they will think of next?)
When I ask finance people this question, I usually get either the one in 52 answer or the 100% answer.
Some will completely ignore the word 'magician,' hence the first answer.
Some will say "I'm supposed to give the maths answer, aren't I? But because he's a magician he will certainly pick the Ace of Hearts."
Rather frighteningly, some people trained in the higher mathematics of risk management still don't see the second answer even after being told.
Human behaviour
This is really a question about whether modern risk managers are capable of thinking beyond maths and formulas.
 The human side of finance |
There is no correct answer to our magician problem.
The exercise is to think of as many possibilities as you can.
For example, when I first heard this question an obvious answer to me was zero.
There is no chance that the card is the Ace of Hearts.
This trick is too simple for any professional magician.
Maybe the trick is a small part of a larger effect - getting this part 'wrong' is designed to make a later feat more impressive...the Ace of Hearts is later found inside someone's pocket.
Or maybe on the card are the winning lottery numbers - which are drawn randomly 15 minutes later on live TV.
Or maybe the magician was Tommy Cooper.
When I ask non mathematicians, this is the sort of answer I get.
Once you start thinking outside the box of mathematical theories the possibilities are endless.
And although a knowledge of advanced mathematics is important in modern finance I do rather miss the days when banking was populated by managers with degrees in History, who had been leaders of the school debating team.
A lot of mathematics is no substitute for a little bit of commonsense and an open mind.
Friday, December 5, 2008
BBC Special Report - Downturn
TOOLS
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Should you worry about your debts? Take the BBC's Debt Test The BBC's Financial Healthcheck will give you tips how to cope with problems ranging from savings to pensions The Consumer Credit Counselling Service offers an in-depth Debt Remedy advice tool |
THE BASICS
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Find out how the downturn took shape Puzzled by the jargon? We explain The big numbers in context Why do we need economic growth? And find out what's actually a recession |
VIDEO REPORTS
Video stories: Coping with the downturn
Thursday, December 4, 2008
Paul Cherry to chair Standards Advisory Council
Paul Cherry is set for the top job at the Standards Advisory Council (SAC) of the International Accounting Standards Board, it has been revealed.
Mr Cherry will take over the role of chairman from Professor Nelson Carvalho, whose term expires at the end of this year.
Gerrit Zalm, chairman of the Trustees of the International Accounting Standards Committee, expressed his delight that Mr Cherry had agreed to fill the role.
"His enormous experience as a standard-setter heavily engaged in international activities, as a partner at a global accounting firm and a former regulator will be invaluable," he said.
Currently, Mr Cherry is the chairman of the Canadian Accounting Standards Board, a role which he will leave at the end of March 2009.
During his time in charge of the body, he has led Canadian efforts on the adoption of International Financial Reporting Standards (IFRS).
He will take up his new role at the SAC on January 1st 2009 and will serve for a period of three years.
Recently, the Canadian Accounting Standards Oversight Council announced that publicly accountable enterprises will have to follow IFRS by 2011.
Wednesday, December 3, 2008
FASB and ASBJ 'benefiting from ongoing talks'
Representatives of the US Financial Accounting Standards Board (FASB) and the Accounting Standards Board of Japan (ASBJ) have met to discuss the pursuit of the global convergence of accounting standards.
The two bodies agreed that their ongoing talks are useful in creating a mutual understanding between them.
Ikuo Nishikawa, chairman on the ASBJ, said: "The ASBJ will continue to work closely with the FASB, the International Accounting Standards Board (IASB), and other major standard-setters towards the development of a single set of high-quality global accounting standards."
This will include responding to the current financial crisis in order to improve confidence in accounting information, he added.
Robert H Herz, chairman of the FASB, added that sharing perspectives on global instability is vital to improve reporting standards across the world.
Tomorrow, the IASB, FASB, ASBJ and other stakeholders will attend a round-table discussion in Tokyo to talk about the impact of the financial crisis and how financial reporting can be used to improve investor confidence.
This will include responding to the current financial crisis in order to improve confidence in accounting information, he added.
Robert H Herz, chairman of the FASB, added that sharing perspectives on global instability is vital to improve reporting standards across the world.
Tomorrow, the IASB, FASB, ASBJ and other stakeholders will attend a round-table discussion in Tokyo to talk about the impact of the financial crisis and how financial reporting can be used to improve investor confidence.
Tuesday, December 2, 2008
Consolidation - Mergers and acquisitions could boom again next year
LIKE every other business activity nowadays (except bankruptcy-advisory work) merging and acquiring companies (M&A) is in a deep slump. Last week BHP Billiton, a mining giant, withdrew from its planned hostile acquisition of Rio Tinto. This is part of a trend of corporate grooms abandoning their would-be wives at the altar. According to Thomson Reuters, that takes the total value of cancelled mergers so far in this quarter to $322 billion, a two-year high and almost as much as the value of completed mergers in this quarter ($362 billion). Read original article.
Another study, by UBS, found that one-third of the deals announced in
Shares in Rio Tinto plunged by 37% after BHP withdrew its offer, which suggests it was a wise decision to pay whatever break-up fees it will incur. The general plunge in share prices will cause many bidders to rethink offers that seemed reasonably priced only a few months ago.
Although BHP had secured the necessary debt—a luxury available to few would-be bidders now—it was concerned that taking it on would worry its investors, especially given the uncertainty about when credit markets will be liquid enough to allow existing debt to be refinanced. Moreover, to please antitrust regulators, BHP would have had to sell off various bits of the combined business, and in the current climate it had no confidence that it would be able to find buyers (at least not at anything resembling a decent price). Since calling off the acquisition, the price of insuring BHP against default has fallen sharply.
There is now speculation that two other multi-billion dollar deals will be called off. The acquisition of BCE, a Canadian telecoms giant, by private-equity firms seems in extreme peril, following “preliminary” comments by its auditors that the amount of debt the buyers intended to impose on the firm would render it insolvent. Roche, a big drugs firm, insists it will complete its $43.7 billion acquisition of Genentech, but this claim is being met with increasing skepticism.
That is now. But what will happen when confidence returns to the financial markets and good deals can get funding? At current share prices, attractive targets abound. Industry troubles will likely make private-equity firms more enthusiastic sellers than buyers, creating a big opportunity for companies to do “strategic” M&A—buying their weaker rivals, cutting costs and so forth. This was much harder when private equity could borrow as much as it wanted and so pay often daft prices.
At the same time, the economic downturn will make weaker firms more willing to accept offers than they were in good times. Jumping into bed with a strong suitor is a more appealing prospect than lonely bankruptcy.
In short, when the M&A business re-opens, which, given the speed of mood changes in financial markets, may be sooner than the current gloomy consensus thinks, it will be a buyer’s market. Do not be surprised if many buyers are those firms that recently called off their proposals, only to find themselves delighted to rekindle an old flame.
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