On Dentists and Delusions

State Street and Merrill Lynch Losses Show the Lack of Transparency
Posted by Leo M. Tilman, February 15th, 2009, 12:48pm

Some Wall Street executives have long likened their jobs to those of dentists who “tap” and “poke” at complex trades or esoteric holdings. Such outdated risk management tools tend to perpetuate delusions, leading to inevitable sad endings. State Street and Merrill Lynch are cases in point.

Back to the Basics

Morgan Stanley Seizes the Opportunity Amid the Crisis
Posted by Leo M. Tilman, January 19th, 2009, 12:56pm

Having weathered the brush with financial ruin last year, Morgan Stanley appears to be actually gaining from the current financial crisis. The firm is doing so by radically transforming its business model — very much in the spirit of Financial Darwinism.

The Good ‘Ole’ Carry Trades

Iceland’s Role in the 2007-2008 Financial Crisis
Posted by Leo M. Tilman, December 29th, 2008, 8:16pm

What do subprime mortgages, structured investment vehicles, CDOs, and the country of Iceland have in common? In the prelude to the ongoing financial crisis, they all served as powerful agents that helped wind up the worldwide spring of leverage to an unprecedented extent. Moreover, their respective roles in that vicious circle of risk-taking were surprisingly similar, all related to one of the most notorious investment construct and pieces of the Wall Street jargon – the carry trade.

Seeking to Adapt

Goldman Sachs & Morgan Stanley Take Alternative Routes to Retail Banking
Posted by Leo M. Tilman, December 27th, 2008, 5:14pm

The recent conversion of Goldman Sachs and Morgan Stanley into bank holding companies was more than just a necessary means of getting access to Federal funding. It was an acknowledgement that the business model of independent investment banks was no longer viable. Now, both companies are focusing on retail deposits – and taking very different routes to the destination, very much in the spirit of Financial Darwinism.

The Risk of Abandoning Mark-To-Market Accounting

Blackstone Joins the “Pro-Abolishment” Camp
Posted by Leo M. Tilman, November 13th, 2008, 11:31am

Last Thursday, Blackstone Group – the world’s largest private equity firm – reported a loss of over $500 million, or 44 cents per share. In a now-familiar pattern, this loss posed a stark contract to its profit of 21 cents a year earlier and was significantly underestimated by equity analysts’ forecasts. Interestingly, in the prelude to the earnings announcement, Blackstone’s CEO proposed remedies for the ongoing financial crisis, including the abolishment of mark-to-market accounting.

Commercial Banks 1; Investment Banks 0

Lessons from the Goldman Sachs and Morgan Stanley Conversions
Posted by Herb Addison, Jon Leaf, Leo M. Tilman, November 5th, 2008, 6:17pm

In American cinema, media, and popular opinion, the job of an investment banker has always been viewed as incomparably more glamorous than that of a commercial banker. Investment banks were portrayed to be on the forefront of innovation, complexity, and risk-taking. Commercial banks, on the other hand, projected a much more subdued and routine-driven image. The GS and MS conversions into bank holding companies shed new light on the long-standing debate.

Curbs on Executive Pay Won’t Pay Off

The Evolutionary Angle Is Not Acknowledged
Posted by Leo M. Tilman, October 29th, 2008, 9:37am

Compensation of Wall Street executives has been raising eyebrows for some time. So, when Dick Fuld, Lehman Brothers’ CEO, had to defend the fairness of his payouts in a painful congressional testimony, he seemed well-positioned to become a poster child of the excesses of the Golden Age. Unfortunately, attempts to prevent “unnecessary and excessive risks” by curbing executive pay are unlikely to succeed: many executives whose institutions suffered catastrophic losses or ruin in 2007-2008 were victims of financial natural selection, not greed.

The Fannie and Freddie Debacle

The Government (& the Media) Got It Wrong
Posted by Leo M. Tilman, October 29th, 2008, 9:14am

There is little doubt that the nationalization of government sponsored enterprises, Fannie Mae and Freddie Mac, in September was a major contributor to the escalation of the credit crisis to its most violent stage yet. While their debt holders appeased, investors in their preferred and common stocks did not fare nearly as well. The damage resulting from the nationalization could be seen on multiple fronts, yet the mainstream media’s focus was misdirected throughout.

Financial Darwinism explores the origins, drivers, and implications of the ongoing tectonic financial shift. It then equips executives and investors with actionable approaches to creating lasting economic value amidst complexity and uncertainty.

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