Risky Business

2008 saw a global recession resulting in the Irish banks being bailed out by their Government (and later by the IMF and ECB). The Irish banks had lent money to property developers who used it to build housing estates with the idea that the houses would be sold at a huge profit and the loans would be paid back with interest. The banks had done these types of loans since the housing market boom, it had a great interest payback and was considered 'as safe as houses'.
Risk assessment for property development must have been calculated during the housing market boom. The risk has been calculated on the assumption that this boom would be a perpetual moving market, or at least not ready to fail so soon.
Merrilll Lynch conducted research months prior to the crash and commented;
"(the) lending practices of several big Irish banks are the riskiest and most reckless in Europe".
Had this research been commissioned by the Government the whole scenario could have been avoided, as it was the research had to be removed due to complaints by their clients (the banks they had analysed).
The paradox of this statement is that it prewarns of a cataclysmic financial event but it also creates anxiety in the markets and can create no confidence in the banks which is equally damaging.
Christensen, Kaufman and Shih argue that the chance of innovation is reduced if the main driver for shareholder wealth is the earnings per share. This is true in the case of the Irish banks. Less risky investment projects could have been chosen but this would not MSW and were not used. The loans given to the developers were relatively short term for high yield. The NPV would have been the highest on these projects and these are the ones that have been approved. Calculating risk in this way does not allow for fluctuations in the economic environment as David Grundy stated in Lecture 9 that expected NPV 'assumes constant states'.

The Credit Crunch

The credit crunch all started in the USA in the subprime market. Subprime is the riskier end of mortgages. These loans started to be defaulted on and a whisper of recession was heard and panic spread all over the globe.


Northern Rock, a UK bank asked the Bank of Englad for a loan, soon after this was reported they had a run on the bank, people were queueing to get their money out. In February 2008 the bank was nationalised after two failed takeover bids refused to guarantee people's money. House prices began to fall in the UK in response to over inflated prices previously, the housing market bubble had well and truly burst.


Two US banks went bust, Bear Stearns and Lehman Brothers. This was declared the start of the financial crisis. I would debate this as I think the start of the financial crisis happened when Gordon Brown gave banks the licence to print money and let them regulate themselves. Think Lord of the Flies with Saville Row suits.


It wasn't all doom and gloom during this period China and India were thriving in this low competition environment, this did further compound our problems though as their high demand for oil was driving costs up resulting in higher food, energy and living costs.


The British Government went about trying to salvage the situation by spending taxpayers money on nationalising banks. I questioned at the time why shouldn't banks be allowed to fail?
Peoples money, savings, investments, houses, jobs......oh right, that's why. Then Gordon Brown should never have let the banks off their leads, he created a monster. *he didn't actually create the monster he just turned a blind eye (no pun intended) to the havoc they were causing.
Well in that case why aren't the bankers being sacked? Why are they still received bile inducing bonuses? Now they know they are too big to fail, they've got a confirmation sticker. Who regulates for greed?
And no Gordon Gekko, this amount of greed is not good, nor sustainable.


In summary the credit crunch was caused by an idea that we could have it all, the banks supported this idea and encouraged us to take on more and more debt. The credit bubble didn't just burst for the banks, it burst for the consumer as well. The financial hardships that we suffer now are a direct result of us paying back for what we shouldn't have had in the first place. It wasn't just the banks that are to blame, just because a loan is offered we don't have to take it, our responsible selves should have spoken up and said no, you just cannot afford it.

Mergers and Acquisitions; impossible dream?

This week’s lecture was about mergers and acquisitions. Having previously read that 70% of mergers go badly (Forbes.com) leading to a potential destruction of shareholder wealth; why would any CEO decide a merger or acquisition was better than an alternative investment?

The Guardian (British M+A dealmaking at four-year high) shows that during the first period in 2011 the demand for mergers and acquisitions was there, especially in the energy markets with BP’s investment in the oil fields owned by India’s Reliance Industries and Ensco’s takeover of Pride International.

BP’s interest in an investment in India is prudent due to the current economic growth rate of India (www.bbc.co.uk India growth rate rises to 8.8%) which increases demand for oil production. This merger will maximise shareholder wealth by moving into a high demand market increasing market share.

This merger decreases BP’s reliance on the oil fields in the uncertain Arab nations due to the recent uprisings and the possibility of the contagion spreading to other oil rich dictatorships. BP’s merger hasn’t yet been finalised but it would be an example of a horizontal merger as it deals in oil refinery.

The tutor gave us a challenge to find a successful vertical merger. My example would be the merger between Alliance and Boots Plc in 2006. Alliance produces pharmaceuticals and through merging with Boots Plc it reduced its reliance on outlets for it’s products therefore reducing costs and maximised shareholder wealth to both Boots and Alliance now known Alliance Boots Plc and trading at 1986p per share an increase of nearly 1300p per share.

This example shows that when a merger goes well it maximises shareholder wealth by double and this is what all CEO’s should be trying to attain.

Foreign Direct Investment; is it a case of The Good, The Bad or The Ugly?

Having grown up with Kellogg’s less than two miles from my home I understand the importance of having FDI in a local economy. Many friends parents were employed by Kellogg’s and the company were very prevalent in the local community, arranging parades with Tony the Tiger and the Coco Pops monkey throwing variety packs into the crowds and often sponsoring local fairs and fetes, not forgetting the amazing Christmas tree and decorations that could be viewed from space no doubt.  You would almost think that Mr Kellogg’s was a born and bred Stretfordian!

Ah my rose tinted glasses strike again.

The simple truth was that a profit was to be had by having a Kellogg’s plant abroad thus maximising shareholder wealth.

Having a plant in the UK provides employment for the host country in many a form; growing the raw materials for the products, logistical solutions for finished and raw products, packaging materials. So while Kellogg’s take natural resources from the host country they pay for them putting money into a local economy. Also the owning company is liable to pay the host countries corporation tax.

FDI encourages employment in the host country. Employees pay tax on wages and NI contributions increasing the country’s economy. Employees will spend the wages and put back into the country’s economy helping it grow via VAT expenses and increasing population spending.

FDI is a great way to reduce a company’s carbon footprint therefore reducing the Climate Change Levy. Companies need to be finding a way to incorporate new cleaner energies into their business, or using less carbon emitting fuels. One way of doing this is to open a plant where you want to sell your products. Instead of shipping completed products overseas, make it entirely overseas thus maximising share holder wealth and improving your company’s image as a greener more efficient company.

FDI can be seen as a bad thing as the profit from such a venture is more often that not repatriated to the owning country. There is a limit on the amount of money one company will put into the local economy year on year, they are not there to develop or invest further into the host economy. They are there to maximise their shareholders wealth and to do that they must take out more than they put in.

FDI employment can be viewed as exploitive to the local community. It is no coincidence that huge companies such as Nike and Primark choose “lesser developed countries” to produce their range. Cheaper labour, young labour and longer hours are entirely legal in the regions although by western standards are known as sweat shops and are the subject of many a Panorama. Although from reading the leadership members of the Kellogg’s structure many of them are from the country that they manage, for example Carlos Mejia was born in Mexico City and holds the position of President of Kellogg Latin America. The President and CEO of Kellogg’s was born and raised in Brisbane, Australia. The company I work for are made up almost entirely from the indigenous population, we are an American Company.

The general experience of the employee structure of FDI is that the ex patriots hold the jobs of expertise where the local employees do the lower skilled set jobs with no chance of development. A “glass ceiling” environment can be developed where the information to complete the whole package is not shared with the local employees. This prevents the local employees leaving the company and starting a new identical company.

FDI can lead to a decline in local skill sets. If the choice came between digging for diamonds and digging for potatoes, which would you choose?

The highest paid is my answer so I’d probably join the others digging for diamonds.

This will mean a lack of agriculture knowledge and the trade could be lost over a generation. This may not be a bad thing, it could encourage a developing economy to further their skill set and add ‘more strings to their bow’.  

So is FDI good bad or ugly??

FDI can be ugly but necessary. FDI can work incredibly well for both the host country and the owners, additional taxes, increase in employment and this has a knock on effect with the entire global economy. The ugly side is the exploitation of local employees especially with the lack of willingness to train them further than menial tasks. On the side of the company, they’re all about maximising shareholder wealth, and FDI is a terrific opportunity to succeed in this.

Corporate Risk Management

I couldn't attend this lecture due to family commitments. I read the lecture notes and my understanding of it is;
Currency risk is the risk that a business operations will be changed or damaged with fluctuations in the exchange rates. Exchange rates are sensitive to political and economic factors.
George Soros ("the man who broke the bank of England") speculated on the British Government devaluing the pound after being thrown out of the European Exchange Rate Mechanism after the pound fell below the agreed rate. He made a reported $1 billion from the deal which he gave to Romanian Orphanages. That's ok then.

Fundamentals of raising finance......errrrmmmm

This is the lecture I didn't understand due to the inclusion of graphs called WACC and hurdle rates.
In short I was a passive attendee.
The bits I did get were;
Investment comes from either debt or equity.
Debt is cheaper than equity due to the way it's treated in the financial accounts.
Debt is less risky than equity because the company doesn't have to pay out to shareholders on debt.
Companies need to raise finances to re invest and therefore msw.
And then the graphs happened and I don't remember much more after this....

I'm a blog artist.....or will be.

This is my first blog and it's about my first blog. Hardly original I'll grant you but every assignment of 3000 words begins with a hello world blog. I hope to gain and share opinions regarding subjects I believe I study on a Thursday evening; I'm present in body but in mind I'm actually at home watching Emmerdale. I hope my concentration improves.....

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