Todayâ€™s complex economic and financial landscape requires a radically new way of thinking and making decisions on the part of executives, financial professionals, regulators, policy makers, and investors. Global systemic financial crises, astonishing losses, and ruin of once-venerable institutions serve as convincing evidence on what happens otherwise. Financial Darwinism is a road map to the new financial order and an essential guide to adapting and succeeding in it.
Financial Darwinism analyzes the dominant global forces behind the tectonic financial shift that has taken place in finance of the past quarter century and then comprehensively explores the challenges facing financial institutions as well as the universe of their potential responses. Conceptually, it consists of two highly intertwined parts.
The first one is the evolutionary thesis called Dynamic Finance. This thesis explains the origins and drivers of the profound changes in the global financial landscape. Tilman proposes that the basic key to understanding the behavior of modern financial institutions and capital markets lies in the recognition of the fact that the process of economic value creation in finance has undergone a fundamental transformation. More specifically, due to significant margin pressures on basic financial businesses, active risk taking has begun to play an increasingly dominant role how financial institutions create (and destroy) shareholder value. In order to demonstrate this, the book introduces the so-called risk-based economic performance equation that helps depart from the outdated accounting-earnings-inspired mental paradigm. Throughout, the dynamism of risk-taking and business decisions is emphasized as a distinguishing characteristic of the dynamic new world vis-Ă -vis the old financial regime.
Managing modern financial institutions is a task of enormous uncertainty, scope and complexity. Thus, the second part of this book uses the evolutionary perspective of Dynamic Finance to introduce an actionable decision-making framework (Financial Darwinism) designed to help financial executives respond the modern-day challenges. Together, the decision-making framework, the evolutionary thesis, and the risk-based economic performance equation filter out the complexity of the financial world and give financial executives a menu of broad choices on how to create or enhance economic value. They help define financial institutionsâ€™ strategic vision that properly integrates customer-related and risk-taking decisions, thus unifying business strategy, corporate finance, investment analysis, and risk management. Lastly, they help determine an â€śoptimalâ€ť way to implement the strategic vision using the entire arsenal of advanced financial tools. In the process, risk management naturally becomes the very language of strategic decisions.
Financial Darwinism helps financial institutions and investors worldwide face modern-day challenges and deliver sustainable economic performance amidst complex, uncertain, and constantly evolving business and market environments.
Beginning of Chapter 1
â€śThe world of modern finance is beset with complexity, dynamism, and risk. On a path of ever-intensifying evolution, it presents a landscape of significant uncertainty but also of rapid innovation and opportunity. More so than ever before, success rests on the ability to make sense of the evolutionary changes, link up seemingly unrelated phenomena, and understand the global forces at play. There is a lot to absorb indeed. Once-comfortable financial businesses are confronted with the increased competition and lower margins. Time-tested strategies are being threatened by disruptive technologies and globalization. Financial crises that are deemed â€śonce-in-a-lifetimeâ€ť by financial models seem to be occurring with an alarming regularity. Sensationalist news headlines and prognostications of financial pundits are obscuring, rather than illuminating, the reality. Worse yet, there is no coherent paradigm to help financial executives, investors, practitioners, and regulators around the world wrestle with these universal challenges and navigate the ongoing tectonic financial shift.â€ť
Praise for Financial Darwinism
â€śThe best business management tool is common sense. While such a timeless truth remains indispensable, it takes new thinking to navigate the astonishingly complex and rapidly changing world of finance. Over the years, I have personally witnessed leading organizationsâ€™ reliance on Leo Tilman’s advice and insights to deliver consistent profits and manage risk. I hope the readers of this smart, original, and practical book will benefit in kind.â€ť
Alan C. â€śAceâ€ť Greenberg
Vice Chairman Emeritus, J.P. Morgan
â€śResponding to earnings pressures with outdated concepts and tools or, worse yet, blind risk-taking has an unhappy ending in every case. Get your organizationâ€™s costs under control and staff it with highly competent professionals. Then use Financial Darwinism to prosper in the world of globalization and deregulation.â€ť
Jamie B. Stewart, Jr.
President and CEO, Federal Farm Credit Banks Funding Corporation
Past Acting President & COO, The Federal Reserve Bank of New York
â€śA masterful treatise on piloting complex financial institutions through the newer and tougher challenges imposed on them by the evolving marketplace. Tilman presents a unified conceptual framework that not only resonates with one’s intuition, but also offers specific structural approaches to the decisions made by financial executives. This book is a must for anyone interested in improved strategies for risk management and economic performance.â€ť
Dr. Darrell Duffie
Dean Witter Distinguished Professor of Finance,
The Graduate School of Business, Stanford University
“Tilman has distilled the larger pattern from the seemingly endless reorganizations of financial institutions, some strategic and others quite foolish. Financial Darwinism articulates a framework for understanding and, for financial executives and practitioners, initiating strategic choices.”
Dr. Bennett W. Golub
Vice Chairman, BlackRock, Inc.
â€śFinancial Darwinism explains the tectonic shifts now underway in the investment world far better than any book I have seen to date. Those who are interested in really understanding how financial markets have dramatically changed in the past few years – and how they are likely to change again in the next few years – would do well to read and absorb this important work by Leo Tilman.â€ť
David M. Rubenstein
Co-Founder and Managing Director, The Carlyle Group
â€śThe worldâ€™s political and economic uncertainties, exacerbated by a serious lack of financial transparency, can lead business leaders to feel like they may be virtually flying blind in a rapidly changing global economy. Leo Tilman offers some important tools to address the clear imperative of better strategic and systemic risk management.â€ť
William E. Brock
former United States Senator, United States Trade Representative, and United States Secretary of Labor
â€śHistory is littered with the wrecks of financial institutions. Some failed to change their strategies. Others pursued tantalizing returns while paying insufficient attention to the risks. Judging from recent financial crises, many financial institutions still have not learned how to avoid crippling, perhaps even life-threatening, wrecks. Leo Tilman’s timely book is a navigator’s manual for managers of 21st-century financial institutions. To prosper, even to survive, Tilman clearly and forcefully shows that they must abandon outmoded strategies, adopt new ones, and pay much more attention to the trade-off between risk and return. He blends theory with experience to show how this can be done, and even how it has been done.â€ť
Dr. Richard Sylla
Henry Kaufman Professor of The History of Financial Institutions and Markets
Professor of Economics
Leonard N. Stern School of Business, New York University