Blog Week in Risk (ending Sept 4th)

[David Harper CFA FRM]

International

• Apple Ordered by EU to Repay $14.5 Billion in Irish Tax Breaks http://www.wsj.com/articles/apple-r...-illegal-tax-benefits-from-ireland-1472551598 Explainer by Financial Times https://www.ft.com/content/3e0172a0-6e1b-11e6-9ac1-1055824ca907
  
• World’s Riskiest & Most Dangerous Countries for Business https://www.pinkerton.com/blog/dangerous-risky-countries/ "The PRW [Pinkerton Risk Wheel] is divided into four distinct quadrants that summarize the different types of risks faced by businesses around the world. Those four primary categories include: Hazard & Event Risk; Operational & Physical Risk; Technology & Information Risk; Market & Economic Risk” The report is here http://trtl.bz/2cuc1wg

Case Studies

• Why They Did It: Madoff and Enron’s Fastow Explain the Biggest Frauds in U.S. History http://www.bloomberg.com/news/artic...tow-explain-the-biggest-frauds-in-u-s-history “More compelling than his analytical efforts, the author's unusual research method ought to draw a large audience to his book. With an admirably naive eagerness, Soltes wrote letters to some four dozen convicted criminals, ranging from Ponzi scheme legend Bernard Madoff to Andrew Fastow, late of Enron Corp., to Dennis Kozlowski, once the chief executive of Tyco International Ltd. Lo and behold, many of them wrote back.”
• Prosecution of Financial Crisis Fraud Ends With a Whimper http://www.nytimes.com/2016/08/30/b...nancial-crisis-fraud-ends-with-a-whimper.html
• SEC and Revolving Doors: Q&A with Eric Ben-Artzi, the Deutsche Bank Whistleblower Who Rejected a Multimillion Dollar Award https://promarket.org/sec-revolving...tzi-12-billion-dollar-deutsche-whistleblower/
• Revisiting Lehman http://twentycentparadigms.blogspot.com/2016/09/revisiting-lehman.html “The eighth anniversary of the bankruptcy of the Lehman Brothers investment bank is coming up later this month. It marked a point where the financial crisis, which had been simmering since summer 2007, seemed to go from bad to catastrophic. One indicator of financial stress that we were all watching closely at the time was the TED Spread" Also: The Fed and Lehman Brothers: A new narrative http://voxeu.org/article/fed-and-lehman-brothers
• Behind the 1MDB Scandal: Banks That Missed Clues and Bowed to Pressure (Suspected ringleaders allegedly cultivated finance executives, pressed compliance officers and obsessed about secrecy) http://www.wsj.com/articles/behind-...missed-clues-and-bowed-to-pressure-1473109548

Banks and Banking

• U.S. Defends Its Curbs on Money Laundering http://www.wsj.com/articles/u-s-ban...ths-on-anti-money-laundering-rules-1472583839 “For banks, the risk has grown particularly prominent given multibillion-dollar penalties levied in recent years on several banks that failed to keep dirty money out of the U.S. financial system or didn’t appropriately alert authorities to suspicious transactions.” Here is the four-page fact sheet issued by the US Treasury Department http://trtl.bz/us-treasury-aml-fact-sheet
• Falling revenues put pressure on investment banks https://www.ft.com/content/57dde0f8-712e-11e6-a0c9-1365ce54b926 “A 10 per cent ROE has long been considered a rough-and-ready benchmark for a company making good use of shareholders’ money. But the average for the Coalition group this year is expected to be 5.4 per cent, ticking up only slightly to 6.6 per cent in 2017.”
• Coco bonds stage summer revival (Yield, dollar demand and regulation bolster strong sales of new bonds, but liquidity concerns remain) https://www.ft.com/content/cd2c04a8-6ecb-11e6-a0c9-1365ce54b926 “Cocos are designed to transfer the risk of a bank failing from governments to bondholders, avoiding a repeat of the bailouts that scarred taxpayers during the financial crisis. For this reason, they offer high levels of return to compensate buyers.”

Fintech

• Digital Banking Manifesto: The End of Banks? (Massachusetts Institute of Technology) http://trtl.bz/mit-digital-bank-manifesto
• Blockchain Unchained: Bitcoin Was Just the Beginning https://blog.protiviti.com/2016/08/29/blockchain-unchained-bitcoin-was-just-the-beginning/ “In essence, blockchain serves the same function as the current system of clearinghouses and transaction networks that handle most electronic payments and money transfers, including ATM transactions, correspondent banking, credit card purchases and electronic funds transfers. And that’s just one application.” Here is the primer to which he refers http://trtl.bz/preview-vol3-issue2
• The Latest In Financial Advisor #FinTech (August 2016) https://www.kitces.com/blog/the-latest-in-financial-advisor-fintech-august-2016/ “New Product Watch: a Risk Tolerance Software Bonanza … the world of risk tolerance software was a quiet and sleepy space since the 1990s, with FinaMetrica as the only major player for years, and little demand for alternatives as most advisors just use whatever (often overly simplified) questionnaire their home office provides. That all changed when Riskalyze arrived on the scene in 2011, with its meteoric rise over the past 5 years, as the company now shows upwards of 100 employees via LinkedIn, and last year opened an Atlanta office to complement its headquarters in northern California near Sacramento. And now, risk tolerance software is a hot space for technology companies. Recent entrants include Tolerisk, PocketRisk, RiskPro, and Totum Wealth is pivoting towards risk discovery analytics as well.”

Markets, valuation and investing (alpha)

• Uncertain Alpha https://blog.thinknewfound.com/2016/08/uncertain-alpha/ This is really good! “From the regression equation [Y = 0.0178 + 1.06662*X] , you can see that the strategy has a beta that is slightly over the market at 1.06, but monthly alpha of 1.78%. That’s the three year track record; what more could you want?”
• Good vs. Lucky: Assessing Portfolio Manager Performance http://cfainstitute.tumblr.com/post/149654130736/good-vs-lucky-assessing-portfolio-manager
• Asset Class Valuations: The Perceived Price of Certainty http://blog.pimco.com/2016/08/03/asset-class-valuations-the-perceived-price-of-certainty/ “What is clear is that the value placed on certainty has rocketed. U.S. Treasuries now trade at a P/E ratio of close to 70x, while uncertainty, in the form of equities, trades at a multiple of 20x. Credit, with its intermediate risk profile, comes in at 35x.”
• Currency Traders Can’t Lose as Strategies Reap Big Gains http://www.bloomberg.com/news/artic...n-t-lose-as-trusted-strategies-reap-big-gains
• The 5,000-Year Government Debt Bubble (Should investors buy the most expensive bonds in recorded history?) http://www.wsj.com/articles/the-5-000-year-government-debt-bubble-1472685194
• Speed Bumps Are the Hot New Thing for Exchanges https://www.bloomberg.com/view/articles/2016-08-31/speed-bumps-are-the-hot-new-thing-for-exchanges “It was widely predicted that the approval of IEX as an exchange would create more complexity in market structure, and those predictions are coming delightfully true. Speed bumps will now be a competitive tool for exchanges, but each exchange can build its speed bump to target a different audience. Chicago's speed bump will advantage market makers who provide displayed liquidity. IEX's speed bump advantages investors who place hidden discretionary peg orders, as well as investors who want to buy all the shares on all the exchanges before the displayed liquidity can change.”
• Is There a Bond Market Bubble? https://blogs.cfainstitute.org/investor/2016/08/25/is-there-a-bond-market-bubble/ “All of this bond buying by central banks has been intentional, of course. By providing a bid under bonds, they have lifted bond prices and reduced interest rates. In many cases, like in Europe and Japan, this has created negative interest rates.”
• Finding a Better Way to Value Companies in the Digital World http://knowledge.wharton.upenn.edu/article/better-way-value-companies-digital-world/

Regulation and systematic risk

• Echoes of 2008 as danger signs are ignored https://www.ft.com/content/9191d608-7023-11e6-9ac1-1055824ca907 “For after the financial crisis exploded in 2007, it become painfully clear to policymakers that finance sometimes can hurt the real economy. What was happening in those seemingly arcane derivatives markets in 2006, for example, was fueling a mortgage and corporate borrowing binge — and when that imploded it tipped the wider economy into recession. So after 2008, central bankers implemented reforms that are supposed to force them to try to understand how the finer details of financial markets might end up damaging the global economy again … And in the academic sphere, the study of finance is no longer relegated to business schools; it is creeping into high-status university economics departments too.”
• This Is How Leverage in the Financial System Lives On (Investors look to a bevy of derivatives to increase returns) http://www.bloomberg.com/news/artic...how-leverage-in-the-financial-system-lives-on “Investors seeking to boost returns at a time of abundant liquidity and unconventional monetary policy have also applied leverage to corporate credit, a market which has exploded in size thanks to low interest rates and yield-hungry investors who have enabled companies to sell more of their debt. While the use of single-name CDSs that offer insurance-like payouts to a single security, company, or government, has diminished in the wake of the financial crisis, trading tied to indexes comprised of multiple entities has jumped.” Here is the paper referenced (Asset managers, eurodollars and unconventional monetary policy) http://trtl.bz/2ceMJBT
• FSB publishes progress reports on implementation of reforms to the OTC derivatives market http://trtl.bz/2c7mgFZ Here is the report (ie, Eleventh Progress Report on Implementatio) http://trtl.bz/2c0viB7
• Bank Groups Weigh Legal Challenge to Fed Stress Tests http://www.wsj.com/articles/bank-groups-weigh-legal-challenge-to-fed-stress-tests-1472751110 “The exams arguably have made banks safer by forcing them to better measure risks they face. They also dictate the amount of capital banks can return to shareholders, in turn influencing returns on equity and share-price valuations. Given that, the tests in some ways have become a deciding factor in how banks run their businesses. A big point of contention among banks is the opacity of the tests, as well as the ability of regulators to block capital returns for subjective reasons.”
• What will be the cause of the next financial crash? https://www.quora.com/What-will-be-the-cause-of-the-next-financial-crash
• Housing in America, Comradely capitalism (How America accidentally nationalised its mortgage market) http://www.economist.com/news/brief...ised-its-mortgage-market-comradely-capitalism “At $26 trillion America’s housing stock is the largest asset class in the world, worth a little more than the country’s stockmarket. America’s mortgage-finance system, with $11 trillion of debt, is probably the biggest concentration of financial risk to be found anywhere.”

GARP

• Systemic Risk: The Continuing Quest for Models to Monitor and Manage the Ultimate Challenge to Financial Stability http://www.garp.org/#!/risk-intelligence/detail/a1Z40000003KC7IEAW Mentions https://vlab.stern.nyu.edu/ and http://www.systemicrisk.ac.uk/
• Managing Third-Party Risks: A Six-Pronged Approach (But what, exactly, are the best practices for vendor risk management, and should they be centralized?) http://www.garp.org/#!/risk-intelligence/detail/a1Z40000003K7GhEAK

Quantitative Methods

• Excel 2016: Financial Functions in Depth https://www.lynda.com/Excel-tutorials/Excel-2016-Financial-Functions-Depth/504663-2.html “In this course, I'll show you how to use all of the financial functions in Excel 2016 to analyze your data. To start, I'll show you how to calculate a loan payment, calculate interest paid during a specific period, and calculate the number of periods in an investment. Next, I'll tackle depreciation, showing you how to calculate it using the straight line, and declining balance methods, plus many more. I'll then move on to analyzing cash flows by calculating the future value, net present value, and internal rate of return of your investments. Next I'll show you how to analyze coupon bonds, discount securities and treasury bills. Finally, I'll show you how to analyze bonds with unusual payment structures.”
• Statistics Fundamentals - Part 1: Beginning https://www.lynda.com/course-tutorials/Statistics-Fundamentals-Part-1-Beginning/427473-2.html “In this course we'll discuss basic terms like mean, median and standard deviation. We'll look at many different forms of probability. We'll explore the power of the bell shaped normal distribution curve. We'll discuss issues like false positives, and expected monetary value …”
• The Math Myth http://econlog.econlib.org/archives/2016/09/the_math_myth.html “The math myth is the myth that the future of the American economy is dependent upon the masses having higher mathematics skills.”
• A Math Nerd Wants to Stop the Big Data Monster http://www.bloomberg.com/news/articles/2016-08-24/a-math-nerd-wants-to-stop-the-big-data-monster Cathy O’Neil’s book (Weapons of Math Destruction: How Big Data Increases Inequality and Threatens Democracy) is here http://amzn.to/2bSIpqO (but I can’t decide if I want to read it because I respect Aaron Brown’s opinions and he is not kind to this book)

Climate and Weather

• Flooding of Coast, Caused by Global Warming, Has Already Begun http://www.nytimes.com/2016/09/04/s...used-by-global-warming-has-already-begun.html This is alarming in the short- and long-run: “The release of greenhouse gases from human activity is causing the planet to warm rapidly, perhaps faster than at any other time in the Earth’s history. The ice sheets in both Greenland and West Antarctica are beginning to melt into the sea at an accelerating pace. Scientists had long hoped that any disintegration of the ice sheets would take thousands of years, but recent research suggests the breakup of West Antarctica could occur much faster. In the worst-case scenario, this research suggests, the rate of sea-level rise could reach a foot per decade by the 22nd century, about 10 times faster than today.”
• Louisiana deals with flooding aftermath; begins long road to recovery http://trtl.bz/2bZboZ2

Other (ISO 31000, pension crisis, marking VC returns, food price deflation, CFA syllabus change methodolgy)

• Is ISO 31000 now obsolete? In the current era of advanced complexity and severe unpredictability? https://www.linkedin.com/pulse/iso-31000-now-obsolete-current-world-high-complexity-severe-black “In fact a new generation of complex risk thinkers appears to be emerging (a sub class if you will) which advocate that the manner in which risk is to be controlled in complex environments is noticeably different from the risk practices being advocated by the conventional industry standards. Complexity breeds all sorts of unique and interesting phenomena which simply cannot be covered by a one-size-fits-all" or a systematic step-by-step approach to risk management (such as that offered by ISO 31000).”
• Pension disappointment: National solutions to a global problem https://www.ft.com/content/9ad703a6-6e79-11e6-9ac1-1055824ca907
• Andreessen Horowitz’s Returns Trail Venture-Capital Elite http://www.wsj.com/articles/andreessen-horowitzs-returns-trail-venture-capital-elite-1472722381 There are several interesting commentaries about this article, for example https://bothsidesofthetable.com/what-to-make-of-andreessen-horowitzs-returns-cfbd562eeab9#.js0td5haw and a16z’s own reply is insightful because it illustrates the inherent challenge of private startup-type company valuation http://a16z.com/2016/09/01/marks-offmark/ For example, what is the correct "mark" for their return on $10.0 million invested in Slack? It could be 16x or 20x or even 38x.
  
• Food Price Deflation Cheers Consumers, Hurts Farmers, Grocers and Restaurants http://www.wsj.com/articles/food-pr...ts-farmers-grocers-and-restaurants-1472490823
• CFA Curriculum Updates: Maintaining the Gold Standard (Faced with such an evolving investment environment, how does CFA Institute determine which new topics, trends, and skills to add to the CFA Program?) Article is here http://trtl.bz/2c1h7Mv “Members of the Education Advisory Committee (EAC) of CFA Institute are discussing an array of new topics, including inadequate pension funding, the effects of negative interest rates, alternative investment vehicles, and multiple new risks.”
• More companies insure against employee harassment http://www.marketplace.org/2016/08/...ims-sexual-harassment-companies-are-buying-it “In practical terms, EPLI [Employment Practices Liability Insurance] works pretty much the same way as car insurance or any other liability insurance. Claims of discrimination and workplace harassment are treated as a risk, and the entity purchasing the insurance can increase or reduce the risk and possible costs.
• Introducing Compliance Insights: Protiviti’s Monthly Roundup http://trtl.bz/2bZ1BSz