I include wealth management in Part IV since, at its core, it is simply the use of an agent to ma... more I include wealth management in Part IV since, at its core, it is simply the use of an agent to manage risk for an individual or a family. Wealth managers make use of collective investment funds, as described in the previous chapter, to achieve the risk management objectives of their clients; or they may create their own portfolios in-house.
Global bank and sovereign debt together comprise by far the largest sector of the investment mark... more Global bank and sovereign debt together comprise by far the largest sector of the investment market. By comparison the global equity market is smaller. The relative importance of each sector can be seen Figure 1.1. Sovereign debt has also, the eurozone excepted, been the asset class which has given by far the highest return to investors since 2000. In contrast equities have been a great disappointment to almost all investors over that period as has bank debt. Any investor, therefore, has to consider these two large asset classes — sovereign debt and bank debt — as potentially important components of any portfolio. Though I have noted that sovereign debt has been the best performing asset class, within that class clearly urozone debt has proved to be very risky, quite the opposite of what traditional finance assumes about developed market sovereign debt, i.e. being the riskless asset. Equally, bank debt or at least senior debt, has been assumed to be almost riskless due to the ‘too l...
Commercial and Investment Banking and the International Credit and Capital Markets, 2012
A director of a company owes the company a duty of care and a duty of loyaty. In general, under t... more A director of a company owes the company a duty of care and a duty of loyaty. In general, under the ‘business judgement rule’, if a board of directors exercises these duties appropriately, the members of the board will be protected from liability (to shareholders) for their actions. In effect, there is a presumption that, in making business decisions, directors act on an informed basis. However, this presumption can be overcome by showing that the board was grossly negligent in its decision-making. The directors and officers of a bank thus have the responsibility of, amongst other things, minimising the chance of their company failing due to liquidity or solvency problems which they could have anticipated. This responsibility arises from general company law. However, because of the importance of banks to the economic stability and growth of an economy, governments generally do not just rely on company law. Instead they have set up a regulatory framework which banks must follow. This framework is designed not only to minimise the risk of a bank collapsing and the cost of rescue should it collapse, but also to try to ensure that it does not act against the interests of its customers. That banks may do this, even with regulation, is emphasised in a statement by the Governor of the Bank of England in an interview in 2011: Since ‘Big Bang’ in financial services in the 1980s, Mr King goes on, too many in financial services have thought if it's possible to make money out of gullible or unsuspecting customers, particularly institutional customers, that is perfectly acceptable. Interview with Charles Moore, The Daily Telegraph, 5 March 2011.
Part I of this book covered the credit and ‘external‘ capital markets. The governance mechanism f... more Part I of this book covered the credit and ‘external‘ capital markets. The governance mechanism for the external capital market revolves around the need for the company to persuade potential investors in an IPO that they will, in fact, earn not less than the required market return for a project or company in its particular risk class. However, the main source of financing for new investment projects in companies subsequent to an IPO is not the external capital markets but the so-called internal capital market. The reason is that after undertaking an IPO on the primary capital market most companies never again raise equity on the public markets. Secondary offerings, i.e. an offering of additional shares sometime after the initial offering (meaning a second, primary offering and nothing to do with the secondary market), are relatively rare. In fact, most equity financing for new projects or expansion of existing ones comes from retained profits. Only banks which have eaten through the...
The word fund is used with two meanings: Investment institution funds, or simply the institutions... more The word fund is used with two meanings: Investment institution funds, or simply the institutions, all have the word ‘fund’ in their name — pension fund, insurance fund, endowment fund (including charities) and sovereign wealth fund. They hold a wide range of asset classes, often through the use of collective investment funds to achieve their diversification aims. Collective investment funds, also known as pooled funds, offer units or shares to investors. Examples include mutual funds, hedge funds, private equity funds, real estate funds, commodity funds, foreign exchange funds and exchange traded funds. These are generally funds which specialise in one asset class only and thus would comprise only a part of a retail or institutional portfolio.
I include wealth management in Part IV since, at its core, it is simply the use of an agent to ma... more I include wealth management in Part IV since, at its core, it is simply the use of an agent to manage risk for an individual or a family. Wealth managers make use of collective investment funds, as described in the previous chapter, to achieve the risk management objectives of their clients; or they may create their own portfolios in-house.
Global bank and sovereign debt together comprise by far the largest sector of the investment mark... more Global bank and sovereign debt together comprise by far the largest sector of the investment market. By comparison the global equity market is smaller. The relative importance of each sector can be seen Figure 1.1. Sovereign debt has also, the eurozone excepted, been the asset class which has given by far the highest return to investors since 2000. In contrast equities have been a great disappointment to almost all investors over that period as has bank debt. Any investor, therefore, has to consider these two large asset classes — sovereign debt and bank debt — as potentially important components of any portfolio. Though I have noted that sovereign debt has been the best performing asset class, within that class clearly urozone debt has proved to be very risky, quite the opposite of what traditional finance assumes about developed market sovereign debt, i.e. being the riskless asset. Equally, bank debt or at least senior debt, has been assumed to be almost riskless due to the ‘too l...
Commercial and Investment Banking and the International Credit and Capital Markets, 2012
A director of a company owes the company a duty of care and a duty of loyaty. In general, under t... more A director of a company owes the company a duty of care and a duty of loyaty. In general, under the ‘business judgement rule’, if a board of directors exercises these duties appropriately, the members of the board will be protected from liability (to shareholders) for their actions. In effect, there is a presumption that, in making business decisions, directors act on an informed basis. However, this presumption can be overcome by showing that the board was grossly negligent in its decision-making. The directors and officers of a bank thus have the responsibility of, amongst other things, minimising the chance of their company failing due to liquidity or solvency problems which they could have anticipated. This responsibility arises from general company law. However, because of the importance of banks to the economic stability and growth of an economy, governments generally do not just rely on company law. Instead they have set up a regulatory framework which banks must follow. This framework is designed not only to minimise the risk of a bank collapsing and the cost of rescue should it collapse, but also to try to ensure that it does not act against the interests of its customers. That banks may do this, even with regulation, is emphasised in a statement by the Governor of the Bank of England in an interview in 2011: Since ‘Big Bang’ in financial services in the 1980s, Mr King goes on, too many in financial services have thought if it's possible to make money out of gullible or unsuspecting customers, particularly institutional customers, that is perfectly acceptable. Interview with Charles Moore, The Daily Telegraph, 5 March 2011.
Part I of this book covered the credit and ‘external‘ capital markets. The governance mechanism f... more Part I of this book covered the credit and ‘external‘ capital markets. The governance mechanism for the external capital market revolves around the need for the company to persuade potential investors in an IPO that they will, in fact, earn not less than the required market return for a project or company in its particular risk class. However, the main source of financing for new investment projects in companies subsequent to an IPO is not the external capital markets but the so-called internal capital market. The reason is that after undertaking an IPO on the primary capital market most companies never again raise equity on the public markets. Secondary offerings, i.e. an offering of additional shares sometime after the initial offering (meaning a second, primary offering and nothing to do with the secondary market), are relatively rare. In fact, most equity financing for new projects or expansion of existing ones comes from retained profits. Only banks which have eaten through the...
The word fund is used with two meanings: Investment institution funds, or simply the institutions... more The word fund is used with two meanings: Investment institution funds, or simply the institutions, all have the word ‘fund’ in their name — pension fund, insurance fund, endowment fund (including charities) and sovereign wealth fund. They hold a wide range of asset classes, often through the use of collective investment funds to achieve their diversification aims. Collective investment funds, also known as pooled funds, offer units or shares to investors. Examples include mutual funds, hedge funds, private equity funds, real estate funds, commodity funds, foreign exchange funds and exchange traded funds. These are generally funds which specialise in one asset class only and thus would comprise only a part of a retail or institutional portfolio.
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