How do you put together a high-powered team, with members from different companies, who have complementary expertise and can blue-sky an innovative plan designed to boost Africa’s emerging economy? A group of seven students in NYU Stern’s Master’s in Risk Management (MSRM) program joined forces to develop the plan for their capstone project.
The group members spanned multiple countries and time zones and averaged about 15 years of multinational work experience in risk management, corporate and investment banking, corporate finance, financial and industry consulting, and compliance: Aliyu Ahmed, a Bank of America assistant vice-president from Nigeria, based in Los Angeles; Eneni Oduwole, a veteran risk management executive from Nigeria; Gerald Mudzamiri, a Zimbabwean working in Toronto and Dubai as an independent consultant in business transformation and risk management; William Adjovu, a Ghanaian native who is currently CEO of the Liberty Group of Companies in Ghana; Omoatama Isenalumhe, a Nigerian operations and compliance manager based in New York; Mokgadi Magoro, a South African treasury analyst responsible for asset and liability management at the Barclays Africa Group in Johannesburg; and Augustine Emeka Uzoh, a Nigerian credit risk manager with Diamond Bank plc in Nigeria.
Aliyu persuaded the team to pursue a project on sovereign wealth funds (SWF) that would work for African countries. Gerald explains, “It was easy for us to believe in this project because we had a common heritage and experience of the African continent. Our confidence in pursuing it despite all odds stemmed from the fact that we had varied and rich careers, work experiences and contacts.”
The latest tightening of the US and EU sanctions on Russian business and finance will provide an interesting lesson in international political, economic and military affairs. Here are some key issues to think about:
These Financial Sanctions Can Be Very Potent
They deny Russian access to capital markets in the US and Europe, which is to say global capital markets. Asian markets are not included but they are not significant enough to matter much. This is the most important sanction imposed on Russia so far, since Russian banks and businesses have been obtaining about half of their total funding requirements from these markets over the past three years, according to the FT.
Between them, Russian non-financial state-controlled companies ($41 billion), state banks ($33 billion), private banks ($20 billion) and non-financial private companies ($67 billion) will have $161 billion of foreign debt maturing in the next 12 months. The sanctions prohibit these borrowers from rolling-over this debt.
Housing policy in the United States strongly favors homeownership, and it does so by subsidizing mortgage debt. Programs like the mortgage interest rate deduction and guarantees on mortgages bought and securitized by Fannie Mae, Freddie Mac and Ginnie Mae cost the taxpayer about $200 billion in lost tax revenues each year. These policies are highly regressive, benefiting the rich with expensive houses much more than those with average homes, and amplifying inequality in society. The financial crisis illustrated the risks of policies subsidizing mortgage debt, with many households taking on mortgages they could only service as long as house prices continued to go up and they stayed employed.
Surely there are benefits to home ownership. Some proponents cite the “forced savings” aspect that comes with building wealth in a home. That is not only a paternalistic perspective, but also one that is belied by historical price appreciation rates on homes far lower than those on other risky assets, and by the 31.7 percent collapse between 2007 and 2012 in American repeat home sale prices during the Great Recession. Others cite social benefits such as more civic engagement found in areas with higher home ownership. But correlation is not causation. The problem with studying the relationship between home ownership and, say, school quality is that most areas with good schools not only have high homeownership rates but also residents with better education and higher income. This makes it impossible to infer whether it is ownership rather than high income or parental education that causes the better school quality.
The following is and excerpt from an interview with Professor Robert Engle and the CFA Institute:
“I sat down with Nobel laureate Robert Engle in Tokyo last month to discuss an amazingly wide range of applications that he and industry practitioners have found for ARCH (autoregressive conditional heteroscedasticity) models and related research. Engle is a professor at the NYU Stern School of Business and his work is widely cited in academic journals and referenced by practitioners from hedge fund managers to risk management professionals.
This is the first part of a two-part series. In this installment, we will cover the development of the ARCH model, the global financial crisis, systemic risk, and forecasting liquidity with ARCH models.”
Professor Viral Acharya and his co-author, Sascha Steffen of ESMT European School of Management and Technology, show that eurozone bank risks during 2007-2013 can be understood as “carry trade” behavior. They find that banks used short-term unsecured funding in wholesale markets to take long peripheral sovereign bond positions. On the upside, the bank would pocket the “carry,” that is the spread between long-term peripheral sovereign bonds and banks’ short-term funding costs. Bank equity returns loaded positively on peripheral (Greece, Italy, Ireland, Portugal, Spain, or GIIPS) bond returns and negatively on German government bond returns, generating the “carry” until the deteriorating GIIPS bond returns adversely affected bank balance sheets. The researchers find support for risk-shifting and regulatory arbitrage motives at banks in that carry trade behavior is stronger for large banks and banks with low capital ratios and high risk-weighted assets. They also find evidence for home bias and moral suasion in the subsample of GIIPS banks.
BNP Paribas is expected any day to admit to criminal *violations of U.S. sanctions against Iran and Sudan. This is likely to mean that the giant French bank will pay a fine of between $8 billion and $10 billion to the U.S. government, dismiss several executives, and temporarily cease its dollar-clearing business. The case has dramatically elevated the liability of global banks to the regulatory enforcement of U.S. law.
Trade and financial sanctions have long had a place in international affairs—from the high-profile sanctions applied to South Africa under apartheid to their increasing use as a substitute for military intervention in countries including Iraq, Libya, Iran, Cuba, Sudan and most recently Russia, where they are pending. They’ve attempted to discourage countries from building nuclear weapons, abusing human rights or invading their neighbors. Such sanctions, however, have been controversial because they have appeared to lack the cohesion and determination of allies to make them work effectively.
The U.S. prosecution of a major international bank for evading sanctions has changed the game. BNP allegedly stripped out identifying information from wire transfers to disguise sanctioned countries as origins or destinations of international payments. By raising the cost of violating the rules to significant levels, the Justice Department has ensured that U.S. sanctions will be complied with and effective.
The following is an excerpt from Banks and Markets of an article titled “Are Major Banks Really Too Big to Jail?” by NYU Stern Professor and MS in Risk Management Academic Director, Ingo Walter:
It used to be that financial institutions indicted on a criminal charge went out of business long before they had their day in court in a proper jury trial, which is their right. Instead, clients and employees would flee and regulators would be forced to withdraw their operating licenses. Unlike individuals convicted on a criminal charge, this is as close as things ever came to jailing an institution. Not anymore.
By sowing fear and intimidation among its regulators and law enforcement officials – based entirely on its own vulnerability to punishment – the Credit Suisse pleaded guilty to a criminal offense and emerged as a convicted felon clean as a whistle, with no apparent effect on its business, its management or its shareholders.
Having confessed to one count of criminal fraud, CEO Brady Dougan told a press conference on May 20th he didn’t think there would be any effects on the bank – no “material impact on our operations or capabilities.” There was the small matter of $2.6 billion in fines and penalties, but he said that could be earned back by the end of the year and wouldn’t affect the bank’s regulatory capital. No serious changes in strategy. No senior management changes. No discernible boardroom reaction. No client defections. No investor flight. Just business as usual. Credit Suisse stock in Zurich was up 2% on the day in an otherwise flat market.
Chambers opened the Symposium with a discussion on sovereign risk with Stern Professor and MS in Risk Management Program (MSRM) Academic Director Ingo Walter. Chambers discussed sovereign government ratings methodology and emphasized that, “Both ability and willingness of governments to pay their debt in full and on time is critical.”