Category: Finance

Junk bonds, subprime and the pepper crises: Investor behavior follows pattern

In his classic book on economic history, Charles Kindleberger argued that asset bubbles follow a predictable pattern. A new opportunity or technology sparks investor euphoria. Asset prices quickly rise to an unsustainable level. Then suddenly, people stop buying, and panic ensues. The more people who leave, the faster values plummet. So it is with real estate and subprime mortgages today, and so it was with junk bonds a generation ago.

The cost of capital: Goldman Sachs’ extreme makeover

In September 2008, the financial storms that had battered global markets since spring began to threaten the legendary investment bank Goldman Sachs. The 139-year-old financial titan had seen its stock plummet nearly 50 percent in a matter of weeks. Three other big investment banks had either gone bankrupt or been shuffled off to larger firms in rushed sales, and many Wall Street observers wondered if Goldman would be next. But nine months later, Goldman is very much back from the brink. Its stock price has rebounded, recovering nearly 50 percent in the first four months of 2009. On June 17, it repaid a $10 billion emergency capital infusion the U.S. government had provided at the height of the crisis. And with several of its biggest competitors gone, Goldman Sachs is again a dominant player in global finance. Goldman’s experience in the financial crisis of 2008 demonstrates how calculations and strategies surrounding the cost of capital are critical to a firm’s success, according to L. Wendell Licon, W. P. Carey clinical assistant professor of finance.

Your career, our economy: Stakes are high when finance professionals let ethics slide

Bernie Madoff. AIG. Allen Stanford. When Marianne Jennings talks to her undergraduate students about business ethics these days, those are the subjects they want to talk about. Not surprisingly, Jennings says, the students often take a somewhat black-and-white view of things: Madoff was a crook; Stanford was a swindler; those execs at AIG were reckless, irresponsible, and had absolutely no right to take those big bonuses — not after the carnage they caused. Blame it on the executives, the students say. It’s the guys in the executive suite who can’t be trusted. Not so fast, says Jennings. The lesson to be learned, she says, isn’t that executives have to act more ethically. Instead, it’s that everyone must act more ethically.

The Economic Minute: Mark-to-market accounting

The Financial Accounting Standards Board (FASB) recently came out with new rules governing "mark-to-market accounting." Entities employing mark-to-market adjust the value of financial assets up or down, according to fair market value. The practice has been the subject of controversy during the current financial crisis. In this edition of The Economic Minute, John Sizer, a partner at Deloitte & Touche, tells Economic Club of Phoenix members that mark-to-market is not the problem. "It is my personal opinion that the new FASB positions are helpful, that accounting standards are not the underlying cause of the write-down of financial assets but rather reflect the underlying problem with those assets," Sizer said. "Mark-to-market is not perfect, it requires significant professional judgment, but I believe it is the most accurate and reasonable portrayal of a company’s financial condition."  

The Economic Minute: The changing state of banking

Hope Berman Levin, the regional president for U.S. Bank in Arizona, recently touched on some of the rapid-fire changes that are happening in banking, during a talk at the W. P. Carey School’s 26th Annual  Dean’s Council of 100 Executive of the Year Luncheon. Levin commented on new policies at the FDIC, interest rates, bank failures and the future of the industry. The Economic Minute, presented at Economic Club of Phoenix luncheons, brings you the insights of the school’s economists and the business leaders who are members of the Economic Club of Phoenix and the Dean’s Council of 100.

Podcast: Markets await detail of rescue, stimulus plans

Treasury Secretary Timothy Geithner announced the Obama administration’s plan to rescue financial markets yesterday. The plan was long on promise and short on details, however, which sent markets spinning. Later in the day, the Federal Reserve stated it was ready to add $100 billion the TALF program, a move designed to increase consumer lending and invigorate the mortgage market. And, the Senate enacted its own version of the stimulus bill. Finance Professor and banking expert Herbert Kaufman sat down with Knowledge@W. P. Carey to discuss the events, starting with his reaction to Secretary Geithner’s speech.