Monday, March 22, 2010

Hot Topics: Keeping Up, Catching Up

In financial circles, no matter the times--in periods of boom or the abyss of a crisis--hot issues and topics are constantly flung at us. Keeping up and catching up are always a challenge, since day-to-day routines command attention. Nonetheless, for students and experienced vice presidents alike, it's imperative to keep abreast if you want to shine among the pack.

For those who do banking, trading, investing, brokerage or analysis, hot topics of the moment can be complex, amusing, frustrating, or mind-boggling. Some topics (like impending financial regulation) linger for months. Some are hot one quarter and taken for granted the next (auto-industry restructure, e.g.). Some come and go (Lehman's collapse and the cause of it, TARP funding, capital adequacy of banks, e.g.).

What are some of the hot topics, hot buttons, or current issues for the moment? What are a few issues that cause a buzz just below the headlines that we ought to be familiar with?

1. Networking Etiquette. Disgusted with how he observed people networking in business circles, Black Enterprise magazine president Earl (Butch) Graves, Jr. wrote in his monthly letter to readerss about networking etiquette in its latest issue ( He says too many professionals practice what he called "drive-by networking," where in business or social settings, they introduce themselves, shake hands, slap a business card in his palm, and then move on. After such a swift "drive-by," he asks himself what he should do with the card; he mentioned how some men have approached him similarly while he's in the men's room.

Graves says too often when people attempt to "network" with him, they fail to follow up or don't follow up courteously or promptly. He says, too, that many professionals haven't learned how to maintain relationships outside the networking conferences they attend, nor do they see opportunities to network in certain social settings. In the issue, Graves makes suggestions on how people can be more effective, less callous, and perhaps more diplomatic the next time he's in a men's room.

2. On the Shelves. The flurry of books that try to chronicle or summarize lessons learned from the financial crisis continues. The latest flood includes "Too Big to Fail" (by New York Times writer Andrew Sorkin), "The Big Short" (from Michael Lewis, best known for "Liar's Poker" and "Blind Side"), "On the Brink" (by former Treasury Secretary Henry Paulson), "The Quants" (by Wall Street Journal reporter Scott Patterson). There are even more.

"Too Big to Fail" was published last fall, while the other books entered the marketplace within the past month. Lewis' book (featured also on CBS-TV's "Sixty Minutes") is already a New York Times best-seller, while Paulson's book will likely follow behind.

Many in financial circles are talking about the books. Some are actually reading them. Some deal-doers, bankers, traders, analysts, and researchers are probably sneaking peaks to see if they are mentioned, to see how colleagues or senior managers are portrayed, or to see if the authors were able to "get it right" in explaining the hodge-podge of CDO's, CMO's, CDS's, TARP, etc.

Sorkin's book "Too Big to Fail" is a long, day-by-day narrative of the events of late 2008, focusing on the collapse of Lehman, while changing the scenario occasionally to describe what happened at AIG, Wachovia, and Merrill Lynch. He handles adroitly the minutiae and gory detail of withering financial institutions and tells the story as if it's novel of suspense, although we know the ending.

What fascinates is not necessarily his command of all facets of the crisis, but his insider's knowledge of what happened behind closed doors, on cell-phone conversations, in car rides on FDR Drive, or on a walk over to the Federal Reserve building. How was that possible? And who are his sources? Once you get beyond that, it's an quick read of decision-making inside the doors.

If you examine the large cast of "characters"--Paulson, Geithner, Lewis, Barnanke, Willumstad, Mack, Kindler, Braunstein, and dozens of others--you notice that while the financial system was on the brink of collapse, few making decisions behind those doors were people of color or women. (Stan O'Neal from Merrill, Erin Callan of Lehman, and the FDIC's Sheila Bair have minor "roles" in the book).

3. Goldman and Greece. For many days in February, markets, market-watchers and analysts studied and reported on the debt crisis in Greece. Markets reacted and then bounced back when the rest of Europe promised to assist Greece.

Amidst the chaos, Goldman Sachs climbed into headlines after it was learned that the investment bank had advised the country on certain "currency swaps" that permitted Greece to borrow funds, but not report the transactions as debt. Once again, all eyes were on Goldman and many peer firms to determine whether the firm had intentionally (and illegally) helped its sovereign client to hide debt from outsiders. Yet the events forced finance types to revert back to texts to figure out how currency swaps can be funding transactions, to find out what the accounting rules permit, and to detect if these activities were properly described as off-balance-sheet activities in footnotes.

In recent weeks, in finance circles, fury around the topic has dwindled, partly because market-watchers have focused more carefully on Greece's plan to emerge from the crisis, the impact on other countries, and possible assistance by others in the European Union.

The topic has also receded partly because of the hot topic below.

4. Lehman and Repo 105. All across the globe, finance people learned from a bankruptcy investigative team that Lehman Brothers might have been hiding liabilities from its balance sheet. In the year or so below its collapse, the firm needed to show it was well capitalized, had ample cash to manage daily operations, and was not excessively leveraged.

It wanted to prove to creditors, counterparties and investors that it had a sturdy balance sheet. The team found out--to everybody's surprise--Lehman had engaged in transactions it called "Repo 105." This accounting maneuver permitted it to erase substantial amounts of assets and liabilities and show, therefore, lower leverage and a healthier balance sheet.

The transactions were typical broker/dealer "repo" loans ("repurchase agreements"). Financial institutions routinely borrow short-term funds in "repo" markets and pledge marketable securities as collateral. Lehman decided to interpret accounting rules to its favor by using "Repo 105" to avoid showing the borrowings on its balance sheet.

Accounting rules, in fact, permit some repo transactions to go off balance sheet. With the issue now a hot topic, many are asking questions; investors, counterparties, and creditors are considering taking action (whatever that could be toward a company in bankruptcy): Did others do the same thing? Did Lehman intentionally mislead outsiders? Is its accounting firm (Ernst & Young) responsible in any way? Who know what when at Lehman? (Lehman used "Repo 105" in the U.K., but not in the U.S.)

The topic, hot right now, will stay warm over the next few months, as investigators, counterparties, and investors figure out what is permissible, what is illegal and who is responsible.

5. Volcker Rule. A year later, after initial proposals by the Obama administration, financial institutions, markets and the public at large still await the impact of new financial regulation.

In one corner of Washington, an inquiry panel was formed to dissect the crisis, determine its specific causes and make recommendations in the way a team did so decades ago after the Great Depression. (Consortium alumnus Desi Duncker has been hired to work on the panel. The Dartmouth graduate previously worked at the Goldman Sachs and the U.S. Treasury.)

In other corners, the administration prepares to unveil details of regulation we've expected for some time. This includes the so-called Volcker Rule. The rule, still under review and contemplation, would prohibit deposit-taking insitutions from engaging in certain proprietary-trading, hedge-fund and private-equity activities--similar to the way banking had been before laws changed in the late 1990's to permit commercial banks and investment banks to do some of what the other does (trading, lending, underwriting, deposit-taking, etc.).

The rule, most say, will have most impact on firms such as Goldman Sachs and Morgan Stanley, who in 2008 became bank-holding companies (regulated by the Federal Reserve) and who, if the rule becomes law, may decide in the months ahead to revert back to becoming securities holding companies (under the auspices of the SEC).


It's late March now. Some of the above will continue to be hot items, the stuff which finance people in interviews, in boardrooms, in client meetings, in corporate presentations, in social settings, and in finance blogs are bantering about. By June, some of the topics will fade, as new issues will take a seat at the front, and where it's expected that everybody will need to be up to date on, if not an expert in.

Tracy Williams

Financial Regulation, Volcker rules

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