Vault Intelligence

Thought leadership in financial services



January 2014



Too Big To Fail: Not Too Big to Harass

Written by , Posted in Opinion

The Cambridge Globalist






In the recovery from the financial crisis, banks have grown larger and more complex than ever. What shall we do to prevent these behemoths from derailing the economic train again?

Everything we can.

Late last year I had the privilege of acting as co-host for the Cambridge Globalist’s weekly editorial meeting.  Imagine, if you will, terrifyingly bright undergraduate and masters students from the University of Cambridge, crammed into the Junior Common Room at Trinity College (amazing!) debating what the world should do about banks that are considered too big to fail.

Although more than half the participants had walked in with very little knowledge about banking systems or regulatory policy, their comments and suggestions were full of common sense and wisdom.  After an hour and a half of hot debate, the conversation was summed up in an editorial (by yours truly) and posted to the Globalist website.  It’s a great read and gives a fast impression of what well-educated individuals with no formal training in finance think about the banks at the top of the food chain.




November 2013



A Dollar Does What?!?

Written by , Posted in Masters in Finance

Geek Humour Button



November 2013



Inconsistent Magic

Written by , Posted in Masters in Finance

Unless you know what volatility means, read before watching.

Why is it so hard to make money in the stock market?  There’s a massive industry of smart-as-sin geeks working day and night, and no one can consistently make better than average returns on the stock market. 

It comes down to a pretty simple idea.  The price of a stock is based on a calculation of how much money the company will make, from now until forever.  There is some fancy math and a bunch of assumptions that go into making these predictions, but here’s the catch: everyone is using the same math and predictions, so everyone gets the same numbers.

The difference between the predictions is called the volatility.  If everybody has pretty much the same value for the company the volatility is small.  If people are making wildly different assumptions then the volatility is high. The video shows you how volatility changed from 1990 to 2012, and it gets off the chart crazy. It also rocks with great music and sweet historical moments.

Why does this happen? (The volatility, not the music.)  Why do people’s guesses about the value of companies go from almost the same to crazy different? It has to do with massive uncertainty about the future.  In 2012 no one knew if all the money we were printing at our central banks was enough to keep us out of deflation (falling values for everything – think of your house being worth less every year), or so much that it would push us into hyperinflation (prices go skyrocketing crazy and money loses its value – think of paying $375 for a latte).  Nobody knew which way it would go. Everybody was making different assumptions, so the value for stocks was all over the map.  That is usually the sign of  impending disaster: when the spell-book of finance makes inconsistent magic.

Yes, the presentation and video are a year old (prehistoric to an investment banker), but it’s interesting and cool.  If you have a stomach for trader terminology, you can read their report.  I give them D for readability (forewarned), but an A for originality. It’s the first time I’ve seen both illustrated pirate ships and a tarot card in a company’s Letter to Investors.  Very fresh.



October 2013



Passion in the Strangest Places

Written by , Posted in Opinion

Passion PhotoDr Simon Taylor, Director of the Masters in Finance at Cambridge University’s Judge School of Business, recently posted about the Power of Passion on his blog.  

As the student who was quoted as saying she has a “passion for human development” (human progress, actually, and specifically through the development of stable financial systems), I would like to argue that the word passion was not merely a mis-placed noun. Everyone, I believe, has some underlying value, some core and central belief, that makes their life “worth living”. It could be family or children, a shot at fame or power, the ability to build or make something, the freedom of travel or adventure. It is the driver at the centre of that person – the thing that makes them tick. It’s not the same as ambition, although they may be entwined. It is rather a pervasive, incessant theme that makes every day worth tackling.

What then, should we call this? It is more than enthusiasm.  I think there’s a good case to be made for calling it passion. And if it happens to extend to what a person does for a living, instead of to their hobby, does it make it any less than passion?

Of course, as Dr Taylor pointed out, passion seldom aligns with an individual’s career, and it might be quite suitable in that case just to strive for something you’re good at. But if a man gets his sense of meaning from “improving logistic efficiency in the supermarket supply chain” (admittedly a rare bird), shouldn’t he call it a passion?

As Dr. Taylor did, I might give similar advice to my fellow students: that they shouldn’t expect to find their passion in their work.  If they do, that’s great.  But contrary to the current public fashion of finding your passion at work, it’s no more worthy than finding  your passion in caring for your family or building your collection of rare and ancient coins.  I would argue however that passion, above all, is what makes a life worth living, and if you’ve found it you know what your life is about.  So instead of giving this colourful noun to a career that you merely enjoy, save it for the thing that moves you.

And if it so happens that you find your raison-d’être in human progress, particularly through the development of stable financial systems, well…some find passion in the strangest places.



October 2013



Rise of the Fallen Angels

Written by , Posted in Masters in Finance

Fallen Angel

When angels fall from grace it’s a one way ticket to hell.  When companies fall they hold a shot at redemption, and while fallen they may make a better investment.  Thus, we find the rise of the Fallen Angel bonds.

Bonds are a form of debt issued by corporations.  You can think of it as a loan sliced up into many small pieces, and each piece is called a bond. Bonds are issued by governments or corporations, and  you or I or anyone could lend an organization some money and earn interest on the investment.

Lending is a risky business, and bonds are no exception.   Before an investor lends money, they want to have some certainty that they will get their money back.  How can you know if the investment is safe or not?  A quick way is to look at bond ratings.  The three primary ratings agencies, Standard & Poor’s (S&P), Moody’s, and Fitch Group, each have their own rating system, with fine gradients to show the relative investment worthiness, but there is one hard line that defines a bond as high risk or low, and that is the line between “investment grade bond” and “junk bonds” (more formally known as high-yield bonds).

If a bond has an investment-grade rating, that’s an indication that you are making a loan to a strong company, and you’ll likely get your money back.  If your bond has a junk-rating, it means there’s some serious uncertainty about whether your loan will be repaid.  Of course, you get a higher return for a junk bond because you take more risk. But many institutions have a policy of taking on investment-grade bonds, so you would assume that many companies would aim to keep their investment-grade rating.

When a company’s (or government’s) situation changes, bond ratings can change too.  When an investment grade bond gets downgraded to a junk bond it is called a Fallen Angel.   You know Fallen Angels; they include companies like Ford, JC Penny, or the New York Times.  These are not your average junk-bond issuers.  These are companies with some depth and a future.

That means that a Fallen Angel, although junk in title, could be a great investment.  Last year Market Vectors launched an upstart fund called ANGL, comprised entirely of Fallen Angels.  Here was their rationale:

Historically, Fallen Angels have been concentrated mostly at the higher end of the high yield credit spectrum, and according to Moody’s, are considered more likely to be upgraded in the future than original issue high yield bonds in some instances. – Market Vectors Press Release 2012

If you look at it this way, their fall from grace isn’t permanent.  These Angels are hanging out in the human world, paying from some infraction, before re-ascention into the heavenly realms of the investment-grades.  Market Vectors is betting that as a group they are a winning team even having fallen because, really, they have strength that their competition doesn’t have.

In fact, in the classroom, we learned that “falling” is sometimes a strategic decision.  If a company is top-rated it is likely both economically sound, and playing it safe.  Shareholders want returns, and that involves some risk.  Companies who are growing are taking risks: taking on more debt, stretching its resources, and that often creates a lower rating.  A company might fall from grace when it reaches for higher growth, and that is not something to disparage.

Strategic or not, there’s something to be gained from the giants who fall into junk status.  While I would never place my money on the outcast from God; on the outcasts of S&P, Moody’s and Fitch’s, hell, why not?


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