Other people's money : the real business of finance by John Kay

By John Kay

A monetary occasions’ ebook of the yr, 2015
An Economist top e-book of the 12 months, 2015

The finance zone of Western economies is just too huge and draws too a few of the smartest university graduates. Financialization over the last 3 a long time has created a constitution that lacks resilience and helps absurd volumes of buying and selling. The finance quarter devotes too little cognizance to the quest for brand new funding possibilities and the stewardship of present ones, and much an excessive amount of to secondary-market dealing in present resources. law has contributed extra to the issues than the solutions.

Why? what's finance for? John Kay, with huge sensible and educational event on this planet of finance, is familiar with the operation of the monetary zone higher than such a lot. He believes in sturdy banks and powerful asset managers, yet reliable banks and powerful asset managers usually are not what he sees.

In a stunning and revelatory journey of the monetary international because it has emerged from the wreckage of the 2008 trouble, Kay doesn't balk in his feedback: we do desire a few of the issues that Citigroup and Goldman Sachs do, yet we don't desire Citigroup and Goldman to do them. and lots of of the issues performed by way of Citigroup and Goldman do not have to be performed in any respect. The finance zone should be reminded of its basic objective: to control different people’s cash for the advantage of companies and families. it truly is an aberration while the a few of the most interesting mathematical and clinical minds are tasked with devising algorithms for the only real objective of exploiting the weak point of different algorithms for automatic buying and selling in securities. To trip extra down that highway ends up in ruin.

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Even a pause in the upward progression of US house prices would be sufficient to collapse this house of cards. In 2008 concerns about the value of securities on the balance sheets of banks had reached a level that cast doubt on the value of the liabilities of the banks themselves. A complete meltdown of the global financial system was averted only by public intervention on an unprecedented scale. indd 39 7/1/15 12:37 PM 40 OTHER PEOPLE’S MONEY provide liquidity support for the banking system and directly recapitalise failed or failing institutions.

Neither retail nor investment bankers had the capacity to manage financial conglomerates that combined the two activities. Probably no one does. Some of this expansion was rapidly disastrous. 16 Germany’s regional Landesbanken have, as I shall describe in Chapter 5, played a positive role in Germany’s domestic financial system; but they have repeatedly failed in their international diversification. Crédit Lyonnais, bailed out in 1993 by the French state (which already owned a majority of the shares), was the first global diversified bank to fail in the modern era, after a farcical expansion in which the bank actually became owner of the Hollywood film studio MGM.

Regulation Q was one of the many reforms introduced as a result of the Wall Street Crash. But the most important was the establishment of a Securities and Exchange Commission (SEC) with broad regulatory oversight of the activities of financial institutions and listed companies. The agency’s title is revealing. indd 19 7/1/15 12:37 PM 20 OTHER PEOPLE’S MONEY and exchange. The new commission would be performing its task well if it facilitated the issue of securities and promoted exchange. As the agency increased the scope of its activity, if not necessarily its effectiveness or authority, that philosophy permeated the regulation of finance.

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