His Story

The story goes a long way back, probably all the way back to the day that I first laid eyes on her as she worked in the dispatch office at Hopkins. There was just something about her that intrigued me and I had to get to know more about this girl…and I did, but in the interest of time, I might as well skip the story a bit ahead. A more suitable starting point would perhaps be the last two weeks of my spring semester at Penn, right as I was getting ready for the last of my finals.

At this point, I had already made the decision that I would propose and I was eternally committed, especially given that the engagement ring sat on my desk as I prepped for my last finals. We had now been away from each other for a full year but the bond that held us together never faded even through the distance and the time zone difference. Through the trips back and forth and the late night Skype calls, we affirmed that we were going to go through this together, come what may. As I sat at my desk, I contemplated how I was going to plan the proposal. The first idea that popped into my head was that I would have to call her closest friends and share the news with them. I did warn them that I wanted to keep the proposal a secret but I wanted them to be available to answer her phone call in order to bask in her happiness after the proposal – or whatever it is girls do with each other after one of them becomes engaged.

After I shared the news with her friends, and also my friends since I could not keep it too well a secret, I started to envision what I wanted the proposal to resemble. Since I still had to fly to California for the proposal, I knew that maintaining specifics was impossible as I was still a bit unfamiliar with the area. One thing was certain – Daris and I were both traditional in our mannerism and I had to involve her family in the proposal if I wanted a hint of tradition. Plus, there had to be steak involved; Daris and I both love steak.

After the last of my finals, I flew to Florida to meet up with Daris. We had both flown to Florida to attend my friend’s wedding (Congrats Cuyler & Amanda), and we were flying back to California together where I would spend my vacation. During my time in California, we should celebrate the three-year anniversary of the day when we came together and this was the day that I would propose to her. While in California, I informed her mother of the news and set about planning the day. We (Daris’ mother and I) spent the day walking about Old Town in Pasadena until we found the perfect restaurant, the perfect location, and even brainstormed about the perfect way to include her family in the proposal, all very perfect.

The 14^th of May fell on a Thursday and Daris had already taken the day off from all her prior scheduled activities. I had asked to spend the day with her under the guise of our three-year anniversary. We were to spend the whole day together doing numerous activities but life got in the way and Daris was pulled into handling some personal and trying family matters. I tried to console her during this time because I knew that I wanted her, no, needed her to be in the best of spirits before we headed out for the restaurant that night. By the time she resolved all the day’s issues, we were running a bit late and I started to panic, as I did not want to fall behind our schedule. The tardiness, coupled with a bit of anxiety on my part, got me skittish and Daris now endeavored to get me to relax, a stark reversal from earlier in the day.

The restaurant was a perfect as when I saw it the first time. We had arrived at the Arroyo Chop House and Daris started to notice the little extras the restaurant did to better accommodate us. The atmosphere was amazing and the food was delectable, yet even better than all that was the company. Daris and I were happy to be together celebrating three years since we met each other. Those were some arduous years filled with their crests and troughs but we made it and we knew that more was still to come. We were going to enjoy being in each other’s presence and forget the world for one night.

Following a scrumptious dinner, I informed Daris that we were to have dessert at a different location and we set off on the new adventure. As soon as we arrived and were nearer to the prearranged spot, I asked Daris if she would do everything I asked from this point herein, and not ask any questions. She replied in the affirmative, and then I asked her to close her eyes. As soon as they were closed, I started to recite the lines I had written as I carefully escorted her down the pathway to where her family stood waiting.

“Sweetie, I just want to tell you how lucky I am to have met you and to have you in my life. I know that there have been a lot of ups and downs in our lives (mostly ups though) but I know that you are nothing short of my everything. I have found my true love and I never want to be apart from you. God has put us together for a reason and I will live everyday for that reason.”

At this point, I ask her to open her eyes and she sees her family standing in front of her and she immediately becomes hysterical. She immediately rushes to close her eyes as I say,

“Sweetie, your family is here for the same reason that I am, to hear your answer to a very important question.”

I get down on one knee, and I ask,

“Daris, Will You Marry Me?”

Ecstatically, she screams, “Yes, Yes, Yes”… We hug and kiss and she slowly whispers in my ear “I love you”.

A year is over; I made it

I am tempted to start with the cliché – it seems like only yesterday that … – but I will not for the sake of avoiding ad nauseam. Still the reality is that an academic year has now passed and I am actually one year closer to whatever awaits at the finish line. Now that the year is finally over, I’m now enjoying a vacation in California before I return to Philadelphia, hopefully to work in a lab over the summer. Before that, there is one important thing that must be completed and …

Human Decision Making

As I struggle to finish my philosophy paper on freewill, my mind starts to wander off on its many tangents and leaves me to suffer the ill effects of my weeklong procrastination. Rather than focus on the task at hand so I can leave this despicable library that only brings forth misanthropic thoughts, my mind prefers to ponder on the nature of uncertainty and human decision-making.

I have come to the realization that there is nothing in this world that the human knowledge can ascertain to be absolutely certain, except for the truly trivial which is so trivial as to be irrelevant. Human nature and human intelligence is limited and not quite capable of achieving or coming to grasps with certainties and those among us that claim the ability of achieving certainty in their knowledge are nothing but modern day fraudsters (at best). All we are ever capable of is achieving a close enough probabilistic chance that allows us to just get-by in the stochastic world that we inhabit. None of the decisions we make are completed with any absolute certainty, but only with the knowledge that it is more likely than not that we are correct.

Forgive me if it sounds too philosophical (I am in that current state of mind), but do not throw the argument into the grave where other philosophical thoughts have been left. I say this because ever since I had this idea, I cannot help but see numerous examples where people, who should clearly see the stochastic process in their scenarios, instead disregard the uncertain (and the random) and pretend they possess 100% of the information and no other scenario is plausible.

We make predictions and forecasts that reject the unforeseen and the uncertain and we live by the predictions of these models. We make decisions believing them to be absolutely accurate only to shortly see errors in our decision, but in all these, we keep making the same heuristical errors in our judgments. We leave no room for uncertainty and act naïve in the presence of these unpredictable outcomes. We are not predisposed to believe that we are human, but maybe we need to start realizing our limitations before we can even start to attempt to surpass them (if at all possible).

Anyway, enough tangential thinking for me; it is back to the contemplation on the nature of freewill. Hooray (and yes, that was sarcasm).

Whatever you do, do not nationalize the banks*.

I was sitting in Spanish class learning the use of the conditional tense: the tense used to express what you would have done in place of another. The prompt was how we would have fixed the financial markets when a girl chimes in, “If I were the President, I would nationalize the banks.” Normally I am very receptive to the opinions of others, but today was a black swan day. Without hesitation, I replied, “And what would that solve? Have we not learnt enough from historical precedent set in the Soviet Union and other cases of failed and still failing practices of government overtaking and planning of private capital to finally throw this solution by the wayside.” No matter the amount of bs coverage and garbage opinions the press can conjure up, nationalizing the banks can never be the answer.

It is rather difficult, at least to me, not to see the apparent conflict of interest inherent in the nationalization of a banking institution by the federal government. Imagine a situation wherein the nationalized bank is completing an M&A deal but the deal is currently facing FTC antitrust approval, does the FTC consider the trickle down benefits of the completed deal on the national economy or does it stay wholly focused on antitrust regulation? Who is the FTC ultimately responsible to in this scenario, the government, the people, or the economy? Can these goals even be separated in this event? Even another scenario is quite apparent. Imagine that the nationalized bank had been overstaffed, does the bank, which needs to trim headcount, continue with the mass firing? Will there be any chance of retribution when election season rolls around? It’s imperative to ask if the federal government is comfortable with a profit motive or will the motive of maximizing the happiness of their constituents get in the way? Whose constituents would a nationalized bank try to appease anyway?

Even if it is at all possible for the government to navigate these conflicts of interest (and I assign a very minuscule probability to that event), it is still possible that by nationalizing a bank, the federal government will have to do everything to prevent that bank from failing, even when it clearly deserves to fail. With a governmental backstop, private monetary capital would flow from other institutions and markets into this nationalized bank due to the relative safety of the governmental guarantee (it is safe to assume for the time being that the US will not default on its debt obligation). At the same time, it is fair to assume that there will be a flight of human capital away from nationalized bank. Apart from the stringent rules that the federal government imposes on banks receiving capital injections at the current moment (for which I agree with and think it should be more stringent), I can only assume the number of rules and governmental red tape that will exist at these new institutions will grow exponential. This would cause most people to either switch firms, or to create new ones. So as there is an inflow of monetary capital into a nationalized bank, there is also an outflow of human capital. Soon the bank would lack the personnel to function properly but it now cannot fail because of the governmental backstop. The very banks that the government is trying to assist will become weaker compared to their competitors due to internal maladies.

Then again, how does the federal government go about deciding which banks it would nationalize? Some banks are staying afloat, even in this economy (or at least the banks are giving us the impression that they are) and others are not. Does the federal government nationalize the ones with exposure to CDOs or the ones unable to raise capital in the private market? The solution to this question is a bit difficult because once a list is created of which banks the government believes to be insolvent, the bank is instantaneously blacklisted. Basically, designating the banks as insolvents instantly makes so^‡ and wipes out the last remaining equity that is still being traded on the exchange and sends their trading partners (or potential partners) into hiding. For some banks, this probably is not a huge problem as the government already owns the majority of shares (albeit preferred shares), but not every firm that could be insolvent currently has a high federal ownership stake. So the decision basically has to be an all-or-nothing response, but somehow punishing the banks (and their private owners) that have escaped the CDO debacle by nationalizing them does not seem the better option either.

Of course, it’s easy to criticize and complain about bad policy yet not offer any solution to the problem. Rather than shirk that responsibility, I’m going to offer a suggestion. Warren Buffett said it best when he uttered the phrase; “Capitalism without failure is like [Christianity] without hell.” Plainly put, the government needs to stop creating a safety net for these companies that are potentially insolvent. I don’t believe there continues to exist a global risk to the markets from the failure of these institutions. The market will suffer soon after, but the US has been there before and survived. Once the federal backstop is removed, we can finally shed some light onto the balance sheet of all these institutions. The weaker banks, or those with too great an exposure to CDOs will either seek to restructure, fade out of existence or be merged into their stronger and well-to-do competitors. Either way, once we swallow the bitter pill, we can finally get better and move on.

* I should note that in the examples I used, I make no distinction between investment banks and commercial banks. While it does allow me leeway to create scenarios in which nationalization is clearly the wrong choice, it should also be noted that neither the federal government, nor the press itself, take care to make the distinction. After all, they are all as concerned about nationalizing Bank of America and Citigroup as they are about Goldman Sachs and Morgan Stanley.

‡ As soon as the government announces which banks it would nationalize (and eliminate the bank’s private equity), those whose equity remain in the institution would immediate seek to recover the equity before the nationalization. The bank would not have sufficient capital to meet the demand of its equity holder and the increasing flight of equity will return the institution back into a position where it is over-levered (debt significantly higher than equity) and would lack the equity to meet its financial and regulation obligation to balance its debt, hence insolvency.

Ideologies

There is no greater complaint about economics among laymen than the sheer amount of disagreements between the so-called leaders in the field, that is assuming that said laymen do not first consider economics to be too boring and esoteric. Economists are always split between ideological lines: Should the government central plan the economy, or should markets be left to reign? Should central banks target economic stability through monetary policies (inflation and interest rate controls) or through fiscal policies (stimulating aggregate demand)? Are people rational creatures, or can they benefit from a nudge?

The current credit crisis has laid wreckage to numerous financial institutions and destroyed the value of many others. Yet in trying to devise solutions to the crisis, economists are still split across ideological lines and politicians all too blindly follow along these divides. With the release of the preliminary GDP for 4Q 2008 showing that GDP had contracted during that quarter at a rate of 6.2%, the Obama administration is quick on its heels to counter the recession. Conforming to the Democratic Party’s ideologies, the administration is utilizing the Keynesian approach to resolve the economic slowdown: stimulate aggregate demand and all else will follow through.

The road ahead for the administration is quite an arduous one. The administration needs to stimulate confidence in the stock markets to allow capital to flow back once again. GDP needs to grow in order to allow unemployment to reverse its current trends. After solving these issues, the administration can look forward to also attempting to resolve other issues in the financial, healthcare and energy sectors. The quandary is that there is no consensus on the solutions required to resolve these issues and no matter what approach the administration embarks, there will always be opponents. The test of this administration will be how they stand up and act (or react) amidst the onslaught of criticism that is sure to follow. Now, if only the administration can vet a little faster so that Geithner can complete his staff and begin working on getting out of this mess.

I’m not quite dead

Dead Collector: Bring out yer dead.

Man: Here’s one.

Dead Collector: That’ll be ninepence.

Dead Body: I’m not dead.

Dead Collector: ‘Ere, he says he’s not dead.

Man: Yes he is.

Dead Body: I’m not.

Dead Collector: He isn’t.

Man: Well, he will be soon, he’s very ill.

Dead Body: I’m getting better.

Man: No you’re not, you’ll be stone dead in a moment.

Dead Collector: Well, I can’t take him like that. It’s against regulations.

Dead Body: I don’t want to go on the cart

Man: Oh, don’t be such a baby

- Monty Python and the Holy Grail

I just wanted to inform everyone that I haven’t abandoned the blog and I am quite alive (I was far away from the meningococcal meningitis scare). I have been busy juggling a few tasks the last couple of weeks that have left me without the necessary hours I require to think and compose a post for the blog. For the last couple of weeks, not only had I been trying to keep up with the blistering pace of the schoolwork (it seems all my professors had conferred and decided to include as much material before the spring break vacation) but I also had to contend with splitting my time between my search for an activity to occupy my summer and attempting to coordinate a research project (or at least a start to one). Coupled with the general winter malaise (why is there snow outside my window?), I just seemed to be too busy with my daily tasks.

Don’t fret, that all changes in a few days. Spring break for Penn starts this Friday (Thank God!) and with the much-needed break, I can actually complete some of the items of my agenda. I will be updating the blog with new content within the next few days and over the break. Taking a look at the economy and the stock market since my last post on February 12th, there is much to discuss.

Till then…

Recruiting In A Down Market

I was a bit shocked when I received the e-mail informing me of the seminar at Wharton given by Brian of Mergers & Inquisitions and Kevin of Management Consulted. I frequent their blogs to gain an insider’s insight into the investment banking and management consulting careers, and so when this opportunity presented itself, I knew I had to be present at this seminar.

After attending the seminar, Recruiting In A Down Market, I highly recommend it to anyone currently seeking employment in this market. Using a combination of anecdotal tales and tried-and-true methods, Brian and Kevin conveyed the excellent yet overlooked strategies for obtaining a job in the financial industry during this tumultuous time. The basic takeaway – do not rest on your laurels (or your school’s laurels for that matter) and instead, proactively pursue that job.

For anyone, and everyone, currently looking to obtain an internship or a full time position in the financial industry in this current economy, I would suggest you reach out to either gentleman, as they would provide insights that you might find pivotal.

Maybe A Silver Lining

When I stop by for a brief visit with my friends and family, the questions as to what I am currently doing always arise. While I usually attempt to feign interest towards unnecessary drivels like this, I have somewhat developed a disdain for this question in particular. Since almost everyone I know is either apathetic or ignorant of investment banking, this conversation usually ends in frustration on my part as the conversations usually follow the below sequence:

F&F: I haven’t seen you in a while, what are you up to now?

Shane: I am completing a bachelors program at Penn and hopefully after that, I can secure a great job on Wall Street working for a bank.

F&F: You want to be a teller at a bank?

Shane: No, this is not for a teller. This is for a position at the bank headquarters, usually on Wall Street, where the actual profits are being generated for the bank.

F&F: So you want to be a loan officer?

Shane: No, those are examples of job opportunities in commercial banks. I am aiming for an investment bank.

Person: An investor?

Shane: No, not an investor. These banks work with stocks and are more concerned with asset valuations of various companies. They provide services to corporation on numerous activities such as mergers and acquisitions, helping firms raise cash to conduct business, selling corporate securities to the public and advising on financial strategies.

Person: So a stockbroker?

Shane (in frustration): Yes, a stockbroker…that is exactly what I am hoping to do.

 

Now with the current credit crisis and the press that these banks are receiving, my latest conversation departed from the standard convention. It seems there is no more layman confusion (or at least reduced confusion – at least they’re in the ballpark now) as what constitutes an investment bank.

 

F&F: I haven’t seen you in a while, what are you up to now?

Shane: I am completing a bachelors program at Penn and hopefully after that, I can secure a great job on Wall Street working for a bank.

Person: Oh, you want to be like those assholes that ruined our economy.

Shane (in relief): Thank you, you saved me from seven minutes of excruciating and agonizing explanation.

Person: Of what?

Shane: Just be happy we skipped it, I am.

 

Maybe a silver lining indeed.

The Subprime Credit Crisis Explained

In case you needed another explanation of the credit crisis, I stumbled across this hilarious homemade clip and I thought it was only appropriate to share.

See it here

The Rise and Fall of Oil Prices: OPEC’s practical example of Game Theory

Over the summer, the price of oil hit a high of $147 a barrel driving the price of gas at the pump to a near high of $4.00 a gallon in some markets. Prices were rising due to the increased demand for oil over the summer months and the geopolitical conflict occurring in the Middle East. Due to the high price of a barrel, there were numerous calls for increased production of oil along with calls for a reduction in the demand of oil and increased investment in alternate forms of energy.

The high price of oil did correlate with a decrease in the market demand for oil as consumers started to fear the damage of $4.00 a gallon gas price on their income. As market demand for oil fell, the price of oil started to drop at an alarming rate. To counter the falling price of oil, the Organization of Petroleum Exporting Countries, OPEC, decided to cut back on the production of oil. Since OPEC operates as a cartel of twelve countries, all the countries must agree to cut back on their individual production.

For many of the countries in OPEC, the revenue from oil accounts for a substantial portion of their GDP and these countries’ government depend on the oil revenue as a necessary source of income. With the drop in oil prices, these countries experienced a broad constraint on their governmental expenditure. For all the OPEC countries, especially the ones described above, the necessity to increase the revenue from their oil exportation is essential.

If all the OPEC countries were to cut their oil production, the available supply of oil in the global market would decrease causing an upward pressure on the price of oil. Yet each individual OPEC country faces a different equilibrium than that of acting in the best interest of the group. If the said country chooses to cheat and produce at a higher level than the OPEC mandate, it stands to earn greater revenue. Each country lacks power to substantial influence the price with increased supply (market supply would still drop), but the increased supply by the country would contribute to overall revenue and profit. The problem inherent in this logic reasoning is that all the countries actually face the same incentives and are quite aware that other countries face this equilibrium as well. The below results are then possible:

	Individual Cheat	Individual Don’t Cheat
OPEC Cheat	Market – High supply, low price, low profit Individual – High supply, low price, low profit	Market – High supply, low price, low profit Individual – Low supply, low price, lower profits
OPEC Don’t Cheat	Market – Low supply, high price, high profit Individual – High supply, high price, higher profit	Market – Low supply, high price, high profits Individual – Low supply, high price, high profits

 

 

 

 

 

 

 

 

 

Although the fourth quadrant is the efficient equilibrium in that it benefits all OPEC countries if everyone cooperates, the incentives would lead to actions in the first quadrant. So, when OPEC announces its intention to cut supply, the news is widely ignored because it is now assumed that OPEC lacks the power to enforce the countries to produce in the fourth quadrant. So even with OPEC’s announcement, oil prices continued to decline. It seems the only thing today that can increase the price of oil is the increased demand of oil by consumers and a threat (or assumed threat) of increased geopolitical conflicts in OPEC countries that could potential disrupt oil production.