IE officially inaugurated this month the Saudi-Spanish Center for Islamic Economics and Finance. Some of the guest speakers share their views on the role and influence of Islamic Finance in the current global financial turmoil : Mr. Abdulrazak Elkheraji, Executive VP and Head of the Islamic Banking Group: Dr. Rja Bin Mnahi Al-Marzooqi, of the…Details
The Master in Advanced Finance class 2012 has already started! This year the class welcomes students from 13 countries of 5 continents, with an average age of 29, ranging from 24 to 36 years old, 23% women, and an average full time working experience of 5 years. The countries represented are: Brazil, Canada, China,…Details
In recent years the need to close the gap between developed and developing countries has become increasingly urgent, particularly in the shadow of the current economic crisis. The corporate world is aware of its growing role in socio-economic development and increasingly the Corporate Social Responsibility (CSR) movement enables it to assume this role in a…Details
Luis de Guindos, an economist at IE Business School and director of the PwC and IE Business School Center for the Finance Sector, has been appointed Spain’s new Minister of Finance and Competitiveness. “IE Business School is very proud that one of our prominent experts has been appointed Finance Minister for Spain’s new government”, says…Details
By Fernando Fernandez, professor at IE Business School
Forget about short cuts and soft measures: Europe’s problem is that it has lost the market’s confidence, and in order to get it back it will have to take some hard measures.It’s a well worn phrase which is why I have permitted myself a certain amount of poetic license, because it seems to go perfectly with the confusion that is rife among markets and analysts following recent events. The feeling of insecurity is such that we are desperately seeking a lifeline to cling to. Someone is always up for the job of throwing said lifeline and public opinion seems to have honed in on two specific groups: governments comprised of technocrats and the European Central Bank (ECB). The former are expected to bring the required level of sanity and the ECB is supposed to start buying up debt with no thought for expenses. But once again it’s the wrong diagnosis.
The European Commission, according to its vice president Olli Rehn, has decided that the key lies in restoring confidence in fiscal sustainability and the financial system, and in speeding up reforms that stimulate growth potential. Hence we have to change our tune or we have to take notice of the Commission, but either way we should not be looking for short cuts.
The European problem is a simple one. Investors have lost confidence in the Euro, not just in Italy. Let’s not confuse the symptoms of this particular illness. They have done it for a series of institutional reasons – the well-known design faults of the Monetary Union – and mistakes made in the way the crisis has been managed. In my opinion they include two particularly big mistakes. The first was to declare that European sovereign debt is restructurable – albeit only Greek debt, but who on earth believes that at this stage – without having the necessary financial resources or legal instruments to effect an immediate exchange, and the second was to punish banks for their sovereign debt holdings without having the necessary resources to fill the hole created. Both decisions have had consequences that were impossible to recover from in the short-term: they have made sovereign debt a credit asset, a financial instrument that competes with emerging debt, and have eroded the credibility of the European banking system, which has been forced to divest its sovereign debt.Details
By Ignacio de la Torre, professor at IE Business School
Investment banking has once again shown us the way to address the world’s enormous and recurring debt problem. It is, of course, by cheating.Although it may not have been noticed, investment banking has shown us the way solve the world’s enormous and recurring debt problem. What did the last entry in Lehman Brothers profit and loss statement show? Enormous profit. Let’s see why. The results of the third quarter of 2011 for Lehman Brothers produced “profits” as a consequence of the fall in value of the debt market of the banks themselves. In other words, if the risk of bankruptcy of, for instance, Morgan Stanley, increases, the price of its bonds falls, which means its “profits” will rise. Intuitive? That’s why the last entry in Lehman’s books was actually an enormous profit. The five main investment banks have posted “profits” totaling 15,000 million dollars obtained this way in the third quarter, which means that the position of the bank’s “own” funds is skewed by an equivalent amount, as is its solvency, measured in relative terms (value at risk) or absolute terms (leverage). In short, over 80% of the profits posted by investment banks in the third quarter of 2011 is a result of this fantasy.
Thus the profits of 6,200 million dollars posted by Bank of America contain a bonus dividend of 3,600 and a “profit” due to a fall of 1,700 million dollars in the amount of debt. Citigroup’s profits have risen by 74% to 3,800 million dollars thanks to the recognition of a “profit” derived from the drop of 1,900 million in its debt level. Morgan Stanley posted a profit of 2,150 million dollars, of which 3,400 were the result of a fall in the value of its debt, and JP Morgan posted a profit of 1,900 million dollars using the same system, beating the market with a profit of 1.02 dollars instead of the expected 91 cents (its shares fell by 4.8% – the market is not quite as simple as it looks). Unfortunately, this practice is also being employed in Europe, where UBS has posted a profit of 1,800 million Francs as a result of the fall in value of its debts. Its total profit was 1,000 million Francs, which means that if it hadn’t used the trick it would have posted losses, not profits, as a result of its trading scandal (2,300 million dollar loss).Details
This week IE has inaugurated its Trading Room to better address market related assignments such as Portfolio Management, Investment Game, Fixed Income, Derivatives, Equity/Asset Valuation, Financial Programming, Equity Research, FX Markets. Equipped with Bloomberg, FactSet, WONDA, EVA Dimensions, Thompson, Matlab, Reuteurs, TTR & Zoologic and other technologies, this facility has one of the top collection of analytical tools…Details
José García Cantera, IE alumnus and now CEO of Banesto (one of the world’s safest banks) visited IE as part of a new speaker series. Before the event, he sat down with Fernando Barnuevo, Managing Director of Kleinwort Benson Advisers AG and President of the IE Alumni Association for a personal chat.
On December 1st IE Business School and the Saudi-Spanish Center for Islamic Economics and Finance will host the conference “Islamic Finance in the 21st Century” to be held in Madrid. We are delighted to have on this occasion the presence of H.E. Dr. Ahmad M. Ali, President of the Islamic Development Bank, in Jeddah, Saudi…Details
Jem Bendell, visiting professor at IE Business School recently participated in TEDx Transmedia and talked about the money myth. Interesting thoughts… a little frightening though.
The IE Masters in Finance portfolio is expanding adding the Executive Master in Finance bi-weekly and the Global Master in Finance. Both programs enable the possibility to combine the professional development with the educational experience. As a immediate benefit, the learning can be applied on a daily basis in the job. The Master in Finance…Details
IE Focus | By Fernando Fernandez, professor at IE Business School
The IMF’s absurd proposal to buy debt from threatened European countries like Spain or Italy would have made it into a hedge fund, and it would have been developing countries that paid the price.Ever since the Mexico peso crisis resulted in the so called tequila effect in the early nineties, the International Monetary Fund has been trying to find the formula to prevent financial contagion. To be more specific, it has been searching for the way to stop financial market dynamics from unfairly impacting countries that have no serious solvency problems, but which will end up having them if they fall out of favor with investors, who then pull out en masse causing spiraling debt differentials coupled with a credit crunch. But what it has not done so far is to suggest that it should serve as a highly speculative investment fund that would intervene directly in the debt market, stockpiling the currencies of countries under threat. This is exactly what Portugal’s Antonio Borges, the inexperienced head of the European Department, proposed. The suggestion was only on the table for the space of a few hours, because it was such a ridiculous idea, so out of synch with the nature and functions of the IMF, that he had to withdraw it before the end of the day.Details
Luis Isasi, President of Morgan Stanley in Spain and Vice President of Morgan Stanley Europe took part in the IE Finance day held at IE Business School on September 22, where he examined the role of education in the finance sector. Participants in the event included Ignacio de la Torre, Director of IE Business School…Details
The current crisis has once again shown how wrong economic forecasts often are. So why is it such a deeply flawed profession? John Galbraith once said that “The only function of economic forecasting is to make astrology look respectable.” Although many of us are avid readers of economic forecasts issued by the OECD, the IMF, and the EU (the government’s forecasts tend to suffer from a general lack of creditability), it is questionable if our confidence in them is well founded. In my opinion, which is based on my experience, it is not.
Firstly, a large number of economic models try to predict the future by extrapolating the past. The current crisis, like so many others, has highlighted the folly of this method. Such models also predicted in the 1950s that the USSR would become the world’s most powerful economy (its economic growth rate was three times that of the west at the time), and the same was said about Japan (remember the best seller Japan as Number 1, by Harvard Professor Ezra Vogel?), the Asian dragons in the 90s, and now it’s China’s turn. The logic of projecting past growth rates onto the future is an intellectual and economic fallacy, as stated by Paul Krugman in his excellent paper “The Myths of Asia’s Miracle”.Details