Blackburn Finance And The Fourth Dimension Pdf
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- Financialization and information technology: A multi-paradigmatic view of IT and finance – Part II
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Darmadi, Salim : Board diversity and firm performance: the Indonesian evidence.
F inancialization now runs the gamut from corporate strategy to personal finance. It permeates everyday life, with more products that arise from the increasing commodification of the life course, such as student debt or personal pensions, as well as with the marketing of credit cards or the arrangement of mortgages. The individual is encouraged to think of himself or herself as a two-legged cost and profit centre, with financial concerns anxious to help them manage their income and outgoings, their debts and credit, by supplying their services and selling them their products.
Financialization and information technology: A multi-paradigmatic view of IT and finance – Part II
F inancialization now runs the gamut from corporate strategy to personal finance. It permeates everyday life, with more products that arise from the increasing commodification of the life course, such as student debt or personal pensions, as well as with the marketing of credit cards or the arrangement of mortgages.
The individual is encouraged to think of himself or herself as a two-legged cost and profit centre, with financial concerns anxious to help them manage their income and outgoings, their debts and credit, by supplying their services and selling them their products. The entrepreneur who commits capital to a project is looking for a return tomorrow, and the market will not know whether they have achieved alpha, that is outperformance, until all the returns have been counted up.
Exploitation is longitudinal. It takes time. Financialization can most simply be defined as the growing and systemic power of finance and financial engineering. As such it is not an entirely novel phenomenon. As a percentage of total us corporate profits, financial-sector profits rose from 14 per cent in to 39 per cent in It is the growing exposure of all institutions and arrangements to the opportunities of financialization, as well as to the more familiar pressures of globalization, which has made the distribution of power within corporations and financial networks so fluctuating and unpredictable in recent decades.
The granting of stock options to top executives gave them a direct incentive to use loans to ramp up share price, by taking out bank loans and then using most of the proceeds to buy back shares.
The financial elite and the corporate elite need one another and financialized techniques have helped to cement the pact between them. However, we should also take into account two dimensions internal to finance itself: firstly, the cost of generating finance functions and products; and secondly, efficiency gains in anticipating risk. The financial revolution of the last two decades has registered large potential gains in dealing with risk; but most of this gain has been swallowed by the rising costs of financial intermediation, made possible by monopoly and asymmetric information resources, and generated by escalating marketing and trading expenditures as well as extravagant remuneration.
In what follows I will examine aspects of financialization at the level of the corporation, and explore some of the fourth-dimensional operations of hedge funds, private equity, investment banks and pension funds, as well as some of the shadier aspects of financial practice, citing examples of profits which answer to one or another of the sources of financial gain and loss mentioned above. Temporality is once again central here. The characteristic instruments of financialization are derivatives which are bound to wax or wane in exact relationship to an underlying asset or liability, futures contracts, or options rights to buy or sell at some future date at a specified price.
As a recent survey pointed out, Goldman or an associated concern is involved in one third of all trades made in us equities. The investment banks have great skill, a strategic location in information networks and massive computing power.
They can adopt positions that enable them to gain from changes in relative prices whether or not a deal goes ahead. Once they know the lie of the land, they can devise a hedge for their client and also commit their own resources. As the Economist report pointedly enquires:. Would General Motors be better off if Goldman had merely sought out a buyer for the property arm of its financing operation, instead of itself joining the buyout group, as it recently did? The bank cites numerous times when it advised on a deal and then provided a hedge of some sort that immunized the buyer from risk.
Is this bad? It is a matter of judgement. In terms of its investment banking Goldman now finds itself on so many sides of a deal simultaneously that the mind boggles. Finance has a double impact on corporations: on the one hand constraining their investment strategies, on the other helping them to find customers and realize profits.
They are not quite the free agents sometimes portrayed by their critics. The latter often focus on the exorbitant powers of corporations in relation to communities, regulators, consumers and their own workforce.
It is not difficult to see how giant retail chains shape patterns of production and consumption or how famous brands insinuate themselves into the texture of everyday life. Yet even the most powerful corporations need the financial world to assess their own progress, to plan for the future and, often, to reach new customers.
It is not household names like Nike or Coca-Cola that are the capstones of contemporary capitalism, but finance houses, hedge funds and private equity concerns, many of which are unknown to the general public. In the end even the largest and most famous of corporations have only a precarious and provisional autonomy within the new world of business—ultimately they are playthings of the capital markets.
Corporate credit-worthiness is determined by banks and ratings agencies. They may be able to finance all the investments they wish to undertake from their own resources, but this will not mean that they are free from the pressures of financialization. Making a good profit is no longer enough; a triple A rating is also needed. The corporation and its workforce are, in principle, disposable. The famous companies of the s, let alone the s, have, with a few exceptions, disappeared or become shadows of their former selves.
In the years —03 about three million jobs were lost in the United States. Many of the most powerful corporations today do their best to avoid having a workforce; instead they out-source and sub-contract. One of the impulses to financialization is that companies which have difficulty selling goods find that it can be easier if they offer finance too, from the humblest consumer credit network to complex deals where a company sells its product to a subsidiary, which then leases it to the customer.
Not infrequently the transaction passes through a tax haven or involves the shedding of a tax obligation e. In the same year gm and Ford registered nearly all their profit from consumer leasing arrangements, with sales revenue barely breaking even. When these two auto giants encountered real difficulties in —06, they came under pressure to sell their profitable leasing divisions as a way of raising badly needed resources. Citigroup acquired Associates First Capital, and hsbc bought Household Finance, blazing a trail others were to follow.
Finance houses have teamed up with retailers to shower so-called gold and platinum cards on all and sundry with the hope of ratcheting up consumer debt—running at per cent of personal annual disposable incomes in the us in , rising to nearly per cent by the end of —and subsequently charging an annual 18 or 20 per cent on money for which the banks were paying 3 or 4 per cent.
It is the hot rates of return that attract the banks to seamy lending. They believe that they can repackage the debts in ways that allow them to slough off the risk while retaining most of the high return that was supposedly the risk premium.
The lessons learnt from the repackaging of corporate bonds as cdo s collateralized debt obligations are applied to personal debt. With direct access to sub-prime mortgages, the banks and hedge funds could thus bundle together and divide up the debt into ten tranches, each of which represents a claim over the underlying securities but with the lowest tranche representing the first tenth to default, the next tranche the second poorest-paying, and so on up to the top tenth.
Borrowers who can only negotiate a sub-prime mortgage have either poor collateral or poor income prospects, or both, and so are required to pay over the odds.
Of course the bottom tranche—designated the equity—has very weak prospects but can still be sold cheaply to someone as a bargain. The top tranches, and even many of the medium ones, will be far more secure yet will pay a good return.
If the investment bank packages the securities bonds for sale, including the deeply subordinated risk tranches, it can, in effect, lock in a guaranteed return with little or no capital exposure. Helped by the practices of financialization, the banks achieved remarkably good profits right through the post-bubble trough and well into the subsequent recovery. However, indebted consumers were not so good for non-financial corporations in the post-bubble era as demand was dampened.
By , 18 per cent of the disposable income of us consumers was required to service debt, and only a housing price boom and re-mortgaging maintained consumer purchasing power. The unbridled spirit of financialization is most famously embodied in the hedge funds, which are nimble enough to outwit the large institutional investors. The hedge funds started out as the preserve of the really wealthy investor, although eventually several pension funds gave them a small slither of their holdings.
In the bear market of —02 the hedge funds often made positive returns when most conventional funds, especially index funds, made heavy losses. Institutional investors, who loaned stock that loomed large in their portfolios, were often on the wrong end of these trades.
Spotting price discrepancies, hedge funds made money by arbitrage, rapid trading and the use of credit derivatives, which would repackage corporate debt. Investment banks and the treasury departments of large corporations also engage in large-scale hedging of currency and interest rates, but hedge funds have the greatest latitude. Banks and mutual funds are lightly regulated, but the hedge funds do not have to reveal their holdings at all, and effectively escape all regulation.
Their charging structure usually allows them to make a lot of money when they do well but not to forfeit these gains if the returns then collapse. The hedge funds do have higher costs than other fund managers because of heavy trading, but claim that this will enable them to outperform the market and to generate positive returns during a downturn.
Many have performed very well for particular clients, encouraging pension-fund managers to take a lively interest in them—an interest generally encouraged by regulators and consultants on both sides of the Atlantic. While hedge funds may deliver the consistent, double-digit returns that justify their fees for special clients, can they pull off the same trick for the entire class of pension funds, given that the latter constitute such a large component of the market?
A shorting operation can deliver excellent results to its practitioner, but it does not directly benefit all investors, unlike a rising market. A diversified stake in the sector may offer a little more security but also lowers the return, since it will include poor performers and perhaps even those that go bust.
Because of their modus operandi the hedge funds were to have a starring role in the mutual funds scandals, some of which I describe below. During the s, the large finance houses that sponsor mutual funds—Bank of America, Putnam, Morgan Stanley and others—discovered that they could earn extra fees from hyperactive traders, on top of the good fees they were already earning from the mass of their investors.
Furthermore, trades do not have to be in already existing shares. In the financialized world heart surgery is performed on capitalist property itself. A hedge fund that holds company stock in order to sell it short is looking to deflate shareholder value, not increase it. And a standard risk-arbitrage arrangement can be much more complicated than this. Daniel Buenza and David Stark write that:. Arbitrage hinges on the possibility of interpreting securities in multiple ways. In contrast to value investors who distil the bundled attributes of a company to a single number, arbitrageurs reject exposure to a whole company.
But in contrast to corporate raiders, who buy companies for the purpose of breaking them up to sell as separate properties, the work of the arbitrage trader is yet more radically deconstructionist.
For example they do not see Boeing Co. Ever more abstractionist, they attempt to isolate such qualities as the volatility of a security, or its liquidity, its convertibility, its indexability and so on. Thus whereas corporate raiders break up parts of a company, modern arbitrageurs carve up abstract qualities of a security.
Their strategy is to use the tools of financial engineering to shape a trade such that exposure is limited to those equivalency principles in which the trader has confidence.
Derivatives, such as swaps, options and other financial instruments play an important role. Traders use them to slice and dice their exposure. It might be supposed that this virtual dissection of the corporation is a kinder and gentler process than that meted out by the corporate raiders of the s, but this would be an error. The techniques of the financial revolution—derivatives, swaps, hedging, spe s, cdo s, etc—can be used simply to insure a corporation against hazard.
The cult of shareholder value and financial engineering could seem to conjure an immediate gain out of any merger or acquisition. Companies that perfected the art of growth by acquisition— ge , Vodafone, aol , WorldCom and so forth—became the darlings of Wall Street. Sometimes this corresponded to real growth and a more logical business. The willingness of the old-fashioned type of investor to accept the consequences of ownership vanishes in the hedge-fund world.
As a recent survey notes:. Hedge-fund managers use derivatives to unpack bundles of property rights or claims on flows of income, and to reassemble them in a supposedly more advantageous configuration. They may be guided by a hunch as to what will be the next big thing, but do not aim to take responsibility for running a business. They specialize in taking over under-capitalized and underperforming businesses, with the aim of reorganizing management and relaunching the business.
This may take three or five years, during which distractions and loss-makers are spun off and the core business overhauled. Investors—including pension funds—are invited to back these operations.
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The Accounting Review 1 March ; 95 2 : 31— We develop a dictionary of linguistic extremity in earnings conference calls, a setting where managers have considerable latitude in the language they use, to study the role of extreme language in corporate reporting.
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