Argentina and Elliott – was it really a bond play?

Pablo Triana, Professor at the ESADE Business School and all round derivatives expert, thinks that the role of CDS deserves consideration in the fight between Argentina and a hedge fund. In this post he explores possible motives for litigation. Elliott Management declined to comment.

Hedge fund NML Capital, a subsidiary of Elliott Management Corporation, has won crucial legal victories in its long search for rightful compensation from the Republic of Argentina. Courts in the United States sided with NML in finding a “creative” way to finally gain some leverage over the South American nation, which had long refused to make good on defaulted debt owned by the fund (along with other so-called vulture investors).

Argentina was found to have discriminated de jure against NML et al, breaching the now famous “pari passu” clause that entitled those creditors to equal rank with similar creditors. As per the remedy ordered by the judge, Argentina can´t pay a dime to those who accepted new bonds in the 2005 and 2010 debt restructurings unless it also pays NML et al in a ratable fashion. Read more

Why capital gain-like revenues are driving financial profits

This is a guest post by Iren Levina, Economist at Kingston University, in which she argues that the rise in financial profits can be explained by capital-gain like revenues which represent very peculiar wealth transfers. Read more

The need for investment-led recovery for Europe

This is a guest post, co-authored by Giovanni Cozzi, economic advisor at the Foundation of Progressive European Studies (FEPS) and Stephany Griffith-Jones, financial markets director, Initiative Policy Dialogue (IPD), Columbia University, in which they are argue that more investment could lead to a significant decline in the government debt ratio of southern Europe.

There is growing consensus that it will prove impossible to restore growth on a sustained basis in the EU without stimulating investment.

The European Council of Heads of Government firmly asserted that the Union needs to take bold steps to increase investments and create jobs. They called for immediate mobilization of the right mix of private and public funding. Read more

How to forward a new golden age

This is a guest post by Carlota Perez, Centennial Professor of International Development at the London School of Economics (LSE) and author of Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages in which she responds to arguments set out by Bank of England chief economist Andrew Haldane at the launch of the Mission-Oriented Finance this week.

Andy Haldane is one of the most brilliant and original minds in analysing the complexity of today’s finance and the policies that could shape it. It is an honour to be his discussant and indeed a challenge. Read more

Patient capital is a virtue

This guest post, part of FT Alphaville’s Mission Finance series, is by William Lazonick, Professor of Economics at the University of Massachusetts Lowell where he directs the Center for Industrial Competitiveness. He argues that stock buybacks and dividends are the mechanism by which financial interests, including top executives, reap gains that should be going to taxpayers and workers.

Whenever financial markets get hyperactive (the norm rather than exception over the past three decades), we hear calls for “patient capital” that can fund long-term investment in the productive capabilities that are essential for a prosperous economy. Read more

‘The Age of Asset Management’ — less risk, not more

This guest post, from Brian Reid, chief economist of the Investment Company Institute, is a response to this speech in April by the Bank of England’s chief economist, Andrew Haldane…

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As banks learn to live under tighter post-crisis constraints, central bankers around the world are worrying about financial risks that could move from banks to capital markets and perhaps trigger the next great crisis. After the experience of 2007–08, regulators rightly should be on guard for sources of weakness in the financial system.

Unfortunately, in their vigour, many regulators are seeing ‘systemic risk’—threats to the stability of the financial system—when the issue at hand is investment risk. Investment risk is a necessary part of a well-functioning economy, attracting investors willing to take known risks in hopes of gaining a reward. Systemic risk occurs when the financial system itself breaks down and is unable to perform its normal functions of matching savings to investment opportunities or facilitating economic activity. Read more

Safeguarding the future with public endowments​ for research

We routinely use our smart phones without realizing the research and development that produced it: the transistor, integrated circuits, wireless communication, the laser and optical communication, the internet, the Unix operating system, and so on. None of these existed during World War II. But four decades of post-war research created the foundation for today’s products (as Mariana Mazzucato has shown in her book The Entrepreneurial State).

Can we learn any principles about research and how it should be funded as a result of this example? Read more

Development banks good in crises, even better all other times

This is a guest post by Luciano Coutinho, CEO, BNDES, Brazilian Development Bank for the FT Alphaville Mission Finance series, in which he argues that development banks act as system stabilisers for the real economy.

The 2008-2009 crisis revealed to the world what was known at a national level: qualified public financial institutions are of extreme importance when private credit slows down. Delicate financial situations require immediate and efficient actions and the recent countercyclical success of development banks (DBs) shows to what extent these institutions behave as system stabilisers in times of credit contraction. Read more

De-financialising the real economy

Mariana Mazzucato organiser of this week’s Mission-Oriented Finance conference in London and RM Phillips Professor in the Economics of Innovation, SPRU, University of Sussex, is attempting to rescue the idea of The Entrepreneurial State, debunking myths about private and public sector innovation. Here is her latest contribution to the Mission Finance series at FT Alphaville.

Today our mission-oriented finance for innovation conference begins at the Houses of Parliament. Vince Cable, UK secretary of state for business, innovation and skills will be kicking off this evening arguing that a serious commitment to funding innovation means doubling innovation spend. Read more

Fighting poverty: how the wealthy can help

This guest post is from Mark Haefele, global chief investment officer at UBS Wealth Management and also chairman of the UBS Global Investment Committee.

Note that Mark will be fielding questions on the topic of poverty during Markets Live at 11am on Tuesday. A UBS white paper on fighting poverty is available here.

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Global economic growth, the rise of China, and the fall of communism have all contributed to lifting hundreds of millions out of poverty in the past 25 years. Unfortunately, the ‘easy gains’ have been made. The aforementioned factors are either one-off in nature, or likely to be less supportive in the future. As a result, private individuals, particularly wealthy investors, have a potentially significant role to play in reducing poverty, through a combination of sustainable and impact investing, and philanthropy. Read more

Mission Finance: why money matters – Randall Wray

The second guest post in this series comes from L Randall Wray, professor of economics at the University of Missouri-Kansas City. If the first was a call to arms for role of the state as entrepreneur, this is another big idea: we need to rethink the role of money in order to recognise the true challenge for finance.

Our Mission Oriented Finance conference explores how to direct funding toward what Hyman Minsky called “the capital development of the economy”, broadly defined to include private investment, public infrastructure, and human development.

But to understand how, we need to understand what money is and why it matters. After all, finance is the process of getting money into the hands of those who will spend it. Read more

Mission Finance: starting to think big again – Mariana Mazzucato

This is the first guest post in a series to coincide with the Mission Oriented Finance Conference starting in London on Tuesday. Mariana Mazzucato organiser of the get together and RM Phillips Professor in the Economics of Innovation, SPRU, University of Sussex, is attempting to rescue the idea of The Entrepreneurial State, debunking myths about private and public sector innovation. It is time, she writes, for big ideas. To think them will require loosening some intellectual chains.

Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. …I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.

Keynes – The General Theory of Employment Interest and Money, 1936 (p. 383) Read more

Guest post: RRP and the rusting of the financial plumbing

An earlier guest post by Manmohan Singh, senior economist at the IMF, argued that it is not likely that the market will be allowed to bid for the entire Fed balance sheet, as repo rates need to be contained before lift-off. In this follow-up he suggests that the Fed’s RRP (reverse repo program), if done in size, will rust the market plumbing. Views expressed are his own and not that of the IMF or IMF policy.

Think of the bilateral repo market via the analogy for old clothing trade: Typically, merchants in developed countries shrink wrap old clothes in shipping container sized bundles (under pressure) and send the plastic wrapped block to poor countries. There, a clothing broker buys it, and resells it by weight to jobbers. So if the block weighs 500 pounds and they sell it in 10 pound lots, all 50 people gather around. But some people pay slightly more to be at the front of the crowd, and some pay slightly less to be at back. Then the jobber pops the bundle open with a big knife and the shrink wraps literally explodes; everyone gathered around jumps for the best pieces. Read more

Guest post: Does the VIX really measure volatility?

This guest post is from Peter Cookson, founder of Perels, a consulting firm focused on emerging financial trends.
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The CBOE Vix volatility index fell 12 per cent, closing at its lowest level since February 2007 — FT, June 19th Read more

Guest post: No, you can’t have your risk-free returns back

From Tomas Hirst, editorial director of Pieria, commissioning editor at the World Economic Forum and sometime playwright…

Governor Mark Carney, author and champion of the Bank of England’s Forward Guidance policy, appeared to depart from the usual script in his speech at the Mansion House yesterday. Having downplayed the likelihood of a rate rise any time soon at the launch of the Inflation Report in May many were surprised to hear him caution:

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than markets currently expect.

The Monetary Policy Committee last voted to move the Base Rate in March 2009 when they agreed on a drop to 0.5 per cent. In the months that followed, however, inflation remained above the Bank’s 2 per cent target for 48 consecutive months: Read more

Smithers: Yellen and hindsight capital

This is an abridged version of a post by Andrew Smithers for his FT blog, one that lays out why using next year’s PE ratio to value the stock market is absurd. Taking the Fed Chair to task for her language, it is also ripost to the critique of long term valuation measures we have also featured.

Janet Yellen, the Fed’s head, rather bizarrely used the prospective price/earnings ratio, one of the weakest of all measures, to justify a statement that Wall Street was not overvalued. (This was doubly strange since her husband, George Akerlof, co-wrote a book with Robert Shiller, who has championed a much better measure…

I quote from a recent Buttonwood column in The Economist. Calling Ms Yellen’s comment “strange” seems very kind. Many people would rate the use of bad data in preference to better as irresponsible rather than strange, particularly when it carries with it the authority of the US Federal Reserve. Read more

Guest post: About that UK property bubble…

From Tomas Hirst, editorial director of Pieria, commissioning editor at the World Economic Forum and sometime playwright…

Commentators have been huffing and puffing themselves breathless with warnings of an imminent market correction in Britain’s property market. Even the European Commission has got in on the act warning policymakers of the risk of “excessive house price rises and increases in mortgage indebtedness”.

What there is no disagreement over is that prices have been rising strongly. According to the Nationwide House Price Index the average UK house price sold for a record £186,512 in May pushing annual pace of price growth up to 11.1 per cent:

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Fordham: Volatile public opinion – Vox Populi – is the new political risk

This is a guest post from Tina Fordham, chief global political analyst at Citi. The full report discussed below is available here.

People power is on the march, for better or worse. Read more

Guest post: When anyone can be a money issuer

By David GW Birch, a director of the secure electronic transactions consultancy, Consult Hyperion. Birch was recently named one of Wired magazine’s top 15 global sources of business information.

The Maltese thinker Edward de Bono is famous, to older readers, for having originated the concept of “lateral thinking” back in the 1960s. He has a long track record of trying to bring new thinking to old problems.

In 2000, de Bono advised a UK Foreign Office committee that the Arab–Israeli conflict might be due, in part, to low levels of zinc found in people who eat unleavened bread (e.g. pita flatbread), a known side-effect of which is aggression. He suggested shipping out jars of Marmite to compensate.

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Guest post: When float is bad in Portugal but good in Omaha

Professor Pablo Triana of the ESADE Business School is a derivatives expert whose work we have featured extensively in this series on the very large put options written by Warren Buffett’s Berkshire Hathaway. In this post he contrasts the fate of bets made by a Portuguese rail operator with those of the Sage of Omaha, where the main difference is the judgement of hindsight.

What separates the greatest ever trade and the worst is, obviously, the outcome. But should the traders be viewed any differently for responding to the same motivation: money now for the risk of having to pay more back in the future? Read more

The currency question Alex Salmond cannot answer

This guest post on the issue of Scottish independence is from Paul Donovan, Global Economist at UBS in London…

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As the referendum on Scottish independence approaches, the rhetoric around the currency arrangements for an independent Scotland has escalated. An unnamed British cabinet minister has been cited as suggesting that currency union could be used as a bargaining chip (specifically in exchange for Trident bases). The casual assumption that a fundamental economic structure can be bargained for political capital is deeply troubling; it is just such approach that created the Euro with the flawed architecture that it has today. Read more

Guest post: The SEC could find new uses for an old law

It is probably too late to change the number of individuals charged in relation to the financial crisis, even if US regulators reconsider their treatment of offending corporations, but there may be a route to more aggressive enforcement by dusting off a little used part of a 1934 statute. Jordan Thomas, a former SEC Enforcement Director and chairman of the whistleblower representation practice at Labaton Sucharow, outlines a way the Commission could go after malign managers in the future.

Since the Financial Crisis, the Securities and Exchange Commission has been criticized for not holding senior executives accountable for corporate wrongdoing. But Wall Street’s top cop has now signaled that it will begin using a statute that has been off the radar for decades to pursue charges against parties who violate the securities laws “through or by means of any other person.” Read more

Guest post: Making a non-western payment card system, in Russia

Russia’s Duma is hearing the final version of a draft law to create a national system for payment cards on Friday — a direct response to US sanctions over the Ukraine crisis.

Natalia Kaurova, Associate Professor at the Financial University under the Government of the Russian Federation, and Anastasia Nesvetailova, Director of the City Political Economy Research Centre at City University London, discuss how the system could be built. Read more

Guest post: What if Putin had bought Crimea?

The prospect of selling any sovereign territory to resolve disputes may seem like a taboo — especially so when it comes to the conflicted territory of Crimea. However, Joseph Blocher and Mitu Gulati, both law professors at Duke University, argue that such a “market” should in future be considered in public international law.

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Guest post: The IMF approach to sovereign debt restructuring

This year’s IMF-World Bank Spring Meeting is likely to include discussion of proposals to change the fund’s policy on sovereign debt restructuring. Gabriel Sterne, senior economist at Exotix with IMF experience, and Charles Blitzer, Principal at Blitzer Consulting and a former IMF staff member, argue in favour of a case-by-case approach.

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Gnawing the bones in China

By Anne Stevenson-Yang of Beijing based J Capital Research and author of “China Alone” who argues against any misguided faith in the magical powers of China’s leadership.

Between mid January and late March, China’s renminbi depreciated by 2.8 per cent, before settling into a few days of small and shifting up-and-down movements. The official line painted the fall as an intentional move by regulators trying to reduce speculation in the currency. Belief in such intent, however, relies on a dangerous conviction that China’s policymakers want to stop that inbound flow of capital and are in complete control of the system.

Within China’s banks, the view is quite different: “No one will take our calls or meet with us,” said one investment banker about the regulators. Government officials are too afraid of political reprisals to take responsibility for policy moves which could expose them to reprisals and prefer to stay as inconspicuous as possible. Read more

Guest post: Bitcoin, derivatives, and the IRS

This guest post is by Tim Karpoff, a partner at Jenner & Block and formerly Director of the Treasury Department’s Office of Financial Institutions Policy and Counsel to CFTC Chairman Gary Gensler, and Israel Klein, a Principal at the Podesta Group and formerly a senior Capitol Hill staffer. The authors do not represent clients with interests related to Bitcoin.

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Guest post: Outtakes from the American Express informercumentary & the Andreessen Bitcoin circus

This is a guest post by Aaron Greenspan the founder of Think Computer and creator of the FaceCash mobile payment system.

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Crimeanomics favours the West

This guest post on the Ukraine crisis is from Jorge Mariscal and Alejo Czerwonko, emerging markets chief investment officer and emerging markets economist, respectively, at UBS Wealth Management.

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Guest post: Ukraine’s debt — now comes the interesting bit

When your creditor takes some of your territory — can you make that territory take some of your debt? Mitu Gulati, a law professor at Duke University, last wrote for us on Russia’s $3bn Ukrainian bond. With Russia reinforcing its annexation of Crimea, Mitu considers Ukraine’s options with its debt after the secession.

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