Money and making money...seems easy but

Alex Yemenidjian, chairman of MGM, in a hallway at the company. His management style rankles some. "The process of making decisions by building consensus is for Washington," he said.

http://www.nytimes.com/2004/09/26/business/yourmoney/26mgm.html?_r=3&pagewanted=1

The Vault Guide to Finance Interviews

Vault Guide to Finance Interviews, 2005

Vault cooks them like Christmas panettone...apparently every year they have a new edition of the book to charge us for our pursuit to charge other people . They call themselves the leader in career intelligence...so let's pick up some intelligence in a way as it should be, free.... of charge.

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http://ifile.it/p12il8/financeint_2005_complete.pdf

audio article about financial crisis

'A Race to the Bottom': Assigning Responsibility for the Financial Crisis

Published: December 09, 2009 in Knowledge@Wharton

The global financial meltdown has been marked by shortages -- of oversight, due diligence, moral fortitude and common sense. Today, approximately two years after the housing bubble burst and world stock markets collapsed, possibly the only surplus left from the crisis is that of finger pointing and blame.

"The question of blame has been one that's been on a lot of people's minds," said Wharton Dean Thomas S. Robertson, introducing a panel discussion this week titled, "Responsibility and the Financial Crisis of 2008." Attempts to pinpoint who or what caused the global financial crisis usually results in a long list of suspects: The Federal Reserve, government regulators, credit rating agencies, the Securities and Exchange Commission, subprime lenders and borrowers, and even business schools have found themselves at the end of an accusing finger. "Whether they bear some responsibility or not," Robertson said, "We have an obligation to immerse ourselves in the question, 'Where do we go from here?'"

The panel of professors from Wharton and the University of Pennsylvania spread the responsibility around. The possible culprits they identified ranged from global capital imbalances to outdated regulatory structures. Some found fault with the private sector and greed on Wall Street, while others argued that the government had not been held fully accountable for its failures. Perhaps the only common ground was a belief that there are no simple solutions. Oversimplification of complex problems is dangerous, some warned, and in itself might have contributed to the crisis.

According to Wharton finance professor Franklin Allen, there hasn't been enough focus on the real causes of the financial crisis, which he traces to loose monetary policy and global capital imbalances. "The public sector has done a very successful job of pushing blame to the private sector," he said. "So for example, there's a lot of debate about consumer protection, but not the Federal Reserve.... There is little talk of reform of the global financial system.",

The immediate cause of the crisis was clearly the housing bubble, Allen said. From 1890 to 1996, real housing prices rose 27%, whereas between 1996 and 2006, they rose 92%. "That's more than three times as much. And that's the problem." The more important question is what caused the bubble. In Allen's view, subprime mortgages were not to blame, because other countries without subprime mortgages also suffered housing bubbles. Rather, the problem was that the Fed kept interest rates too low for too long, and imbalances in global capital flows allowed people to borrow large amounts at low rates. "It became a very attractive arbitrage to borrow and buy houses," Allen said.

He traces the global imbalances back to the Bretton Woods Agreement of 1944 and the Asian financial crisis of 1997. Since Bretton Woods smoothed financial conflict after World War II, the world's financial system has been dominated by the United States and Europe. As a result, Asia had little representation at the International Monetary Fund when its financial crisis unfolded in 1997. Unable to get the loans they needed during the crisis, Asian countries subsequently piled up safety stashes of $4 trillion in foreign reserves, money that ended up being invested in U.S. debt and contributing to the housing disaster.

The U.S. now borrows more money than any other country in the world, noted Wharton management professor Mauro F. Guillén, who also saw global capital imbalances as one root of the crisis. Guillén argued that the crisis "should be seen in the wider context of what is going on in the world." For example, from a regulatory standpoint, one crisis contributor was the fierce competition between London and New York about who would have the lowest financial regulations -- what Guillén called a "race to the bottom" in regulatory terms. London began to compete aggressively in the 1980s to woo financial firms back to England. The U.S. responded by easing financial regulations in the 1990s, eventually repealing the Glass-Steagall Act -- a Depression-era law that barred commercial banks from engaging in investment-bank activities, and vice versa -- in 1999. But the easing of regulations in the U.S. included no reform of its regulatory structure, which remained a hodge-podge of agencies inherited from The Great Depression. The result was "regulatory fragmentation," Guillén said. "No agency had a 360 degree view."

Wall Street's 'Self-selected Group'

Larry Zicklin, clinical professor of business ethics at New York University's Stern School and a senior fellow at Wharton, took a different view of the crisis, placing blame squarely on Wall Street and the private sector. "I would argue that greed overcame due diligence," said Zicklin, who noted that incentive systems got out of control. "We're a self-selected group in Wall Street. Who goes to Wall Street? People who want to be rich." As long as there was money to be made in the housing market, leverage was allowed to increase. Homes were sold to people who could not afford them because the assumption was made that prices would continue to go up. "Compensation was an issue; risk was not an issue," Zicklin said. "Big firms like Lehman forgot who they were and what they were supposed to do."

Greed may have played a role in the crisis, but focusing too much on compensation of "greedy executives" just takes attention away from more serious issues, argued Wharton legal studies and business ethics professor Diana C. Robertson, "Do we have sufficient consistent empirical evidence to suggest that executive pay packages led to excessive risk-taking, as has been alleged? Would we still have a financial crisis if the pay schemes had been different? It is difficult to say. Wouldn't it be of greater benefit to focus on risk itself, on leverage, on the models used and on accountability? If we change the compensation without changing these, it seems likely that we could end up with another financial meltdown.".

In terms of the public-private sector debate, "the financial crisis reveals a curious asymmetry in our responses to Wall Street and government," said Wharton legal studies and business ethics professor Amy Sepinwall "Both are reported to have failed spectacularly but, in the case of Wall Street, the failure is seen as an expected lapse, while in the case of government, it is seen as a calamitous disappointment.".

Sepinwall suggested that individual investors share as much responsibility as Wall Street for the crisis. "Wall Street is in the business of courting risk, and it is in the business of courting risk because the investing public has given it that mandate," she said. "Individuals prefer to spend rather than save, and, as a result, demand the kind of financial alchemy that can transform one's house into a virtual ATM, or one's exceedingly modest savings into a fiscal cushion that can sustain a long, comfortable retirement. Fund managers are willing to oblige.... Risk, then, is the inevitable price of our preferences for leisure over toil and consumption over savings."

Wharton legal studies and business ethics professor David Zaring sees the crisis as "a failure of institutions. In a global world, you would think that there would be a global response" to such a crisis, but most of the world's financial networks failed. For example, the Basel Committee on Banking Supervision, a global forum established to improve cooperation and banking supervision worldwide, "had literally nothing to say in response to the financial crisis. To any extent we've seen a global response, it has come from the politicians."

Both the public and private sector share blame for the crisis, suggested William W. Bratton a visiting professor from Georgetown University Law Center at Penn Law School. "This was not the unforeseeable perfect storm," said Bratton, who argued that both Federal Reserve chairman Alan Greenspan as well as the banks that made risky loans could have seen the crisis coming. "In the years leading up to the crisis, more and more smart people on both sides of the public/private divide were looking harder and harder at systematic risk. Why didn't anybody look at the markets and connect the dots?" Bratton asked. "It was partly because the core dots were financial products that were supposed to make the system safe, diffusing rather than concentrating risk; and it was partly because nobody had a complete set of information gathered for the purpose of dot connection. And I think it was also because those responsible were very content to operate in a political economy built on the idea that markets control business better than government does.",

Such simplistic beliefs themselves may have contributed to the financial crisis, suggested Wharton management professor Witold Henisz ."The responsibility for the current crisis and its predecessors lies in an oversimplified dogma or political doctrine that -- while once necessary to achieve political support to undertake reforms needed to emerge from a crisis -- continued forward in self-purification and extension in a manner that ultimately sowed the seeds of its own demise. Simple policy answers -- e.g., 'markets work,' or 'markets need to be controlled or regulated by government' -- ... lose sight of the complexity, contingencies and uncertainty that characterize reality. Eventually, hubris sets in as policymakers, academics and those listening believe the simple answers. In short, policy proponents begin to drink their own Kool-Aid.".

It is increasingly accepted that "some of the fundamental assumptions used to craft our market models do not accurately represent the actions of individuals," Henisz said. "Perhaps we could previously ignore the role of guile, framing, envy, herding, fear, loss aversion, fairness and reciprocity -- as well as procedural justice -- but in thinking through the ... financial crisis, I would argue these known behavioral traits must be moved from the shadows of electives, final weeks of courses and final minutes of classes to the forefront of managerial education and research."

Guillén agreed. There is no simple solution to the crisis and no single scapegoat, he said. "You are deluding yourselves if you think you can find a solution to prevent this from ever happening again. We have to learn how to lead with uncertainty."

Links to free University papers

Department of Economics, UCB
www.papers.ssrn.com
Göteborg University: Master theses and essays
http://repositories.cdlib.org/escholarship/
Econometric Lab software archive, papers and tutorials
MIT's online institutional repository
Essays and theses for general undergraduate and professional degrees from several departments at Lund University
Master's Theses from University of Helsinki

Spreadsheet Programs & Toolkit for M&A

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Harvard site
Free Harvard OnPoint article Growth Strategies That Work—Again and Again

How to calculate discounted cash flow (DCF)

Suppose I offered to give you either $1000 in June 2006 or $150 every June for the next 10 years, starting in 2007. Which offer is worth more? How would you figure this out? The answer is: by calculating discounted cash flows.

Discounted Cash Flow or DCF analysis is one of the first things taught in finance class in an MBA program. It’s a natural consequence of the time value of money, which states essentially that a dollar today is not worth the same as a dollar in the future. Discounted Cash Flow analysis is most commonly used to value a project or company (or lottery payout, as in the simple example above) using a discount rate or weighted average cost of capital, also abbreviated as WACC. (Did I forget to mention finance is big on acronyms?)


Determining an appropriate discount rate or WACC can get complicated, so for now, we’ll just simplify it and call it a percentage rate that we use to “discount” future cash flows to the present. For example, if you earned $100 every year, you can imagine that the $100 you earn 10 years from now won’t be worth the same as the $100 you earn this year. Inflation, the return you could be getting on the $100 during that time, risk, all sorts of aspects can play into evaluating what $100 in 2016 is worth in 2006.

If you’re working in corporate finance, chances are Treasury or some other official department has dictated an “official” cost of capital to use in your analysis. On this site, when I calculate Experiments in Finance’s NPV each month, I choose to use an annual rate of 5% as my discount rate, remembering to change this to its the monthly equivalent rate since I’m calculating monthly cash flows. My reasoning is that the cash flows for this project aren’t large, and a comparable activity of similar risk might be to put the money in a saving’s account instead. This is one of those situations where finance is more like art than science. You could argue ’til you were blue in the face about what the “right” cost of capital to use should be, but in the end it may not matter too much, especially if you conduct a sensitivity analysis using different rates.

Let’s get back to talking about DCFs. Discounted cash flow analysis essentially takes the cash flows for each period and discounts them back to the current moment. So, suppose we have cash flows of $100 starting next year for the next 10 years, and our discount rate is 8%. Then what we’re calculating looks like the following: DCF = $100/(1+0.08) + $100/(1+0.08)² + $100/(1+0.08)³ + … + $100/(1+0.08)¹⁰

(In this particular case, we’ve set a constant $100 per year as our cash flow. If we were receiving different amounts each year instead, say, $100 every year, except for $150 in year 2 and $1000 in year 10, then we’d simply plug in those amounts instead in their respective years.)

What you’re doing is essentially “bringing back” the future cash flow to the present time, using the discount rate of 8%. This means that the value of receiving $100 every year for 10 years isn’t $1000 but $671. In fact, receiving $100 at the end of this year isn’t the same as having the cash in your at the beginning of the year. It’s worth $100 less the amount you would have earned in interest had you had it at the beginning of the year. And the $100 you earn two years from now is worth $100 less the amount you would have earned in compound interest over the two years. And so on. This is why wise articles about how much you need to save for retirement often result in seemingly large amounts.

Getting back to our original example, it turns out that if you assume a discount rate (which might represent the constant interest rate you can earn on your money) of 8%, then having $1000 in your pocket now versus having $150 for the next 10 years is the same. But if you assume that you can only earn 5%, then the stream of income is a better deal ($130 per year is the breakeven).

Discounted cash flow analysis is the basis of many things in finance, including Net Present Value or NPV, bond prices, annuity pricing, and many more. NPV and DCF calculations are one of the most frequently used finance tools for valuation purposes. But, like everything else, they have their limitations and are simply tools. If your numbers aren’t accurate to begin with, adding and dividing them will only result in a worse answer. DCFs and NPVs are also pretty inflexible. If future earnings and cash flows are very uncertain, or management has the option of changing a project midway through, then this type of analysis may not be the best way to go. In those cases, Real options or Monte Carlo might be more complex but better tools to use. Taken from www.experiglot.com where you can find MORE

The three key questions in company valuation can all be answered using discounted cash flow methods.

Value:

How much is a company worth today, based on what it will earn in the future? The company's predicted cash flows (or earnings) are discounted to give a present value.

Rate of return:

What is an investor's expected rate of return, given the amount invested and the company's financial projections? Investors will calculate their rate of return by: discounting the cash flow and the value they will take out of the company; and comparing this amount to what they invested at the beginning.

Equity share:

How much equity will the investor receive for the investment? Dividing the investment by the value of the company will give the percentage of ownership shares the investor will get. But first you need to know the value.

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Cash Flow is

Analyze Cash Flow

We know that a company's profitability, as shown by its net income, is an important investment evaluator. It would be nice to be able to think of this net income figure as a quick and easy way to judge a company's overall performance. However, although accrual accounting provides a basis for matching revenues and expenses, this system does not actually reflect the amount the company has received from the profits illustrated in this system. This can be a vital distinction. In this article, we'll explain what the cash flow statement can tell you and show you where to look to find this information.
Difference Between Earnings and Cash
"at least as important as a company's profitability is its liquidity - whether or not it's taking in enough money to meet its obligations. Companies, after all, go bankrupt because they cannot pay their bills, not because they are unprofitable. Now, that's an obvious point. Even so, many investors routinely ignore it. How? By looking only at a firm's income statement and not the cash flow statement."
LOOK AT the number that appears in the cash flow statement as net cash provided by operating activities, or "net operating cash flow", - basically is a company cash flow.

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My hot blogs for interesting reading

Freakonomics establishes this unconventional premise: If morality represents how we would like the world to work, then economics represents how it actually does work. It is true that readers of this book will be armed with enough riddles and stories to last a thousand cocktail parties. But Freakonomics can provide more than that. It will literally redefine the way we view the modern world.
Economics is not widely considered to be one of the sexier sciences. The annual Nobel Prize winner in that field never receives as much publicity as his or her compatriots in peace, literature, or physics. But if such slights are based on the notion that economics is dull, or that economists are concerned only with finance itself, Steven D. Levitt will change some minds. In Freakonomics (written with Stephen J. Dubner), Levitt argues that many apparent mysteries of everyday life don't need to be so mysterious: they could be illuminated and made even more fascinating by asking the right questions and drawing connections. For example, Levitt traces the drop in violent crime rates to a drop in violent criminals and, digging further, to the Roe v. Wade decision that preempted the existence of some people who would be born to poverty and hardship. Elsewhere, by analyzing data gathered from inner-city Chicago drug-dealing gangs, Levitt outlines a corporate structure much like McDonald's, where the top bosses make great money while scores of underlings make something below minimum wage. And in a section that may alarm or relieve worried parents, Levitt argues that parenting methods don't really matter much and that a backyard swimming pool is much more dangerous than a gun. These enlightening chapters are separated by effusive passages from Dubner's 2003 profile of Levitt in The New York Times Magazine, which led to the book being written. In a book filled with bold logic, such back-patting veers Freakonomics, however briefly, away from what Levitt actually has to say. Although maybe there's a good economic reason for that too, and we're just not getting it yet. Read Freakonomics For Free

Freakonomics blog on NYT
Why Are Women So Unhappy?
In addition, Stevenson and Wolfers released a new study, “The Paradox of Declining Female Happiness,” that is bound to generate a great deal of controversy. By almost any economic or social indicator, the last 35 years have been great for women.Hmm controversy issue.
One more interesting view on Gender and Authority - Opinion on NYT
Contrary to popular wisdom, China's rapid growth is not hugely dependent on exports