IE Focus || Is this the solution to all debt problems?

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).


IE Focus || The Legacy of Steve Jobs

By Enrique Dans, professor at IE Business School

Jobs has left us a legacy that goes way beyond technology. He has left us with an approach to life and business management based on innovation, commitment and a capacity for work.The way in which Steve Jobs’ legacy has impacted products and industries is seriously impressive. The first personal computers, the organization of windows and desktop on the computer screen, new life breathed into animation films, the revolution of the music industry with a market that everyone said could not exist, a revolution in the mobile phone industry that practically destroyed the previous leader… And more recently the reinvention of computers with the iPad, generating thousands of millions in sales, creating and destroying entire industries, while multiplying the value of the firm by a couple of thousand. And yet I believe that his greatest legacy is the way we now see business organizations, innovation, and the kind of commitment and capacity this involves.

In times when it seems that imitating, repeating, and spending your life doing as little as possible are in fashion, Jobs is the most salient example of what it means to dare, to fight, to do things better than expected. He wasn’t a technology genius. He didn’t need to be. His strength lay in understanding trends, or creating them. His products were always enormous commitments with an element of risk. But they were also born of passion, entering sectors to which he brought the values that his vision of Apple stood for: a focus on the user and ease of use, the design, the total integration between hardware and software that brings life to a device, not stopping at good, going for excellent. He entered industries where there had always been a disconnection between client and technology. In the music industry nobody had been capable of giving the customer a simple and solid means of managing his/her music. 


IE launches Trading Room for Finance assignments

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…