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Unfit to Survive

Unfit to Survive. Wall Street’s Darwinian Lessons New America Foundation Washington, DC. December 17, 2008 Leo M. Tilman President, L.M.Tilman & Co. Adjunct Faculty, Columbia University. The Challenge: Complexity + Risk + Deficient Lens. The Challenge. Macroeconomic Forces

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Unfit to Survive

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  1. Unfit to Survive Wall Street’s Darwinian Lessons New America Foundation Washington, DC. December 17, 2008 Leo M. Tilman President, L.M.Tilman & Co. Adjunct Faculty, Columbia University

  2. The Challenge: Complexity + Risk + Deficient Lens The Challenge Macroeconomic Forces Low Return Environment Bretton Woods II Imbalances US Housing & Deficits Monetary Policies Financial Institutions Investment Banks Commercial Banks Hedge Funds SWFs & Pension Plans Financial Instruments Derivatives CDOs ABCP & SIVs Subprime MBS Intellectual Paradigm Accounting Earnings Financial Disclosures Credit Ratings Equity Market Valuations

  3. Secular forces (globalization, disintermediation, informational availability, greater market efficiency, alternative investments, deregulation, financial convergence, derivatives and increasingly complex financial products) Period-specific forces (Bretton Woods II, global savings glut, disinflation exporting) Cyclical factors (monetary policies, interest rates, yield curves, default rates) The Great Moderation

  4. The Culmination: 2007-2008 Financial Crisis Funding Advantages Decrease Fees Compress Secular Forces Secular Forces More Leverage & Risk Cyclical Forces Period-Specific Forces Alternative Investments Static Business Models More Complex & Opaque Investments Greater Liquidity & Funding Risks Risk Exposures Increase Vicious Circle Compensation for Risk Declines

  5. Deleveraging of Modern Financial Crises Exogenous Catalyst More Price Declines and Margin Calls Inability to Borrow: Haircuts Increase, Lenders Shrink Balance Sheets Risk Aversion and Deleveraging Vicious Circle Contagion: Other Assets Are Sold Across Markets Illiquidity: Prices Decline On Thin Trading Margin Calls and Forced Liquidations

  6. The “Greed and Complacency” Narrative

  7. The “Greed and Complacency” Narrative

  8. The “Greed and Complacency” Narrative

  9. “Greed and Complacency” Financial Darwinism

  10. “Greed and Complacency” Financial Darwinism

  11. Strategic Vision and Systemic Knowledge (or lack thereof)

  12. The Blue Ocean Strategy

  13. A Unique Opportunity • Financial Industry • Acquire new kind of strategic vision • Redesign their business models • Make risk management the framework for executive decisions • Position for sustainable and real value creation that benefits all stakeholders • Risk-Based Transparency • Business model- and risk-focused regulation • What is a breakdown of economic performance by revenue sources? • What are the risks taken on in the process – by revenue sources and in total? • Systemic effects and fair value accounting • Economic Dynamism • A system conducive of discovery, development, financing and production of viable commercial innovations • Economic Policy

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