Saturday, March 17, 2012

And this is Goldman Sachs answer to Greg Smith: The other side of the bell...

Now I'm presenting Goldam Sachs' answer to Greg Smith words.

Till My next post!

Best Regards

Prof. Lic. Fernando Julio Silva, MSc.
March 2012

Text:

Goldman Sachs letter Lloyd Blankfein responds
www.guardian.co.uk,

Wednesday 14 March 2012 17.40 GMT

By now, many of you have read the submission in today's New York Times by a former employee of the firm. Needless to say, we were disappointed to read the assertions made by this individual that do not reflect our values, our culture and how the vast majority of people at Goldman Sachs think about the firm and the work it does on behalf of our clients.

In a company of our size, it is not shocking that some people could feel disgruntled. But that does not and should not represent our firm of more than 30,000 people. Everyone is entitled to his or her opinion. But, it is unfortunate that an individual opinion about Goldman Sachs is amplified in a newspaper and speaks louder than the regular, detailed and intensive feedback you have provided the firm and independent, public surveys of workplace environments.

While I expect you find the words you read today foreign from your own day-to-day experiences, we wanted to remind you what we, as a firm – individually and collectively – think about Goldman Sachs and our client-driven culture.

First, 85 percent of the firm responded to our recent People Survey, which provides the most detailed and comprehensive review to determine how our people feel about Goldman Sachs and the work they do.

And, what do our people think about how we interact with our clients? Across the firm at all levels, 89 percent of you said that that the firm provides exceptional service to them. For the group of nearly 12,000 vice presidents, of which the author of today's commentary was, that number was similarly high.

Anyone who feels otherwise has available to him or her a mechanism for anonymously expressing their concerns. We are not aware that the writer of the opinion piece expressed misgivings through this avenue, however, if an individual expresses issues, we examine them carefully and we will be doing so in this case.

Our firm has had its share of challenges during and after the financial crisis, but your pride in Goldman Sachs is clear. You've not only told us, you have told external surveys.

Just two weeks ago, Goldman Sachs was named one of the best places to work in the United Kingdom, where this employee resides. The firm was the highest placed financial services company for the third consecutive year and was the only one in its peer group to make the top 25.

We are far from perfect, but where the firm has seen a problem, we've responded to it seriously and substantively. And we have demonstrated that fact.

It is unfortunate that all of you who worked so hard through a difficult environment over the last few years now have to respond to this. But, our response is best demonstrated in how we really work with and help our clients through our commitment to their long-term interests. That priority has distinguished us in the past, through the financial crisis and today.

Thank you.

Lloyd C. Blankfein and Gary D. Cohn
http://www.guardian.co.uk/business/2012/mar/14/goldman-sachs-letter-lloyd-blankfein?intcmp=239

Greg Smith's resignation letter

I want to share with you Mr. Greg Smith's resignation letter to Goldam Sachs. Is something to be read and then to make our own conlusions.

Till my next post!

Best regards

Prof. Lic. Fernando Julio Silva, MSc.
March 2012

Text:


Why I Am Leaving Goldman Sachs

By GREG SMITH

Published: March 14, 2012

Op-Ed Contributor

TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.

I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.

When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.

Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.

How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.

It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.

These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.

When I was a first-year analyst I didn’t know where the bathroom was, or how to tie my shoelaces. I was taught to be concerned with learning the ropes, finding out what a derivative was, understanding finance, getting to know our clients and what motivated them, learning how they defined success and what we could do to help them get there.

My proudest moments in life — getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics — have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn’t feel right to me anymore.

I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer.

Greg Smith is resigning today as a Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa.

A version of this op-ed appeared in print on March 14, 2012, on page A27 of the New York edition with the headline: Why I Am Leaving Goldman Sachs.

Tuesday, March 06, 2012

Higher protectionism policies: are you in favor or against?


We know that protectionism policies are used by countries for different reasons, one of them is said to protect local industries, and this is a good measure as far as carefully used.

But what happens when the local companies you are trying to protect start to be negatively affected? What happens when raw materials or imported elements that are needed in order to develop local products are also affected by these policies? What happens when local buyers can’t afford paying for the extra costs that the increase on prices represent due to protectionism (and not talking about luxury but yes about normal products)?

Are all these measures really accomplishing what they were used for?

Let see – for example, the Argentinean case – where the government decided to apply protectionism policies over almost everything that is imported into the country, as a consequence local producers and consumers are affected in a negative way. Some elements become scarce and their prices rise in a fast way.

Now, what happens when this measure affects products that are not even locally produced? The results are even worse.

On the other hand countries face the “answer” of the foreign communities that start taxing your local products when it comes the time to export them

So and coming back to my original question:  Higher protectionism policies: are you in favor or against?

Till my next post!

Best regards

Prof. Lic. Fernando Julio Silva
March 2012

Can investments make you lose Money, even when winning it?


That is a good question, what happens when you are “winning” money but really you are losing it?

Let see if I can clarify a bit mi idea, suppose you invest $ 1,000 in January and it generates you – at the end of the year - $ 250 extra. This shows that you’ve increased your capital in $ 250 and now you hold an amount of $ 1,250. You can be happy, expressed as a percentage your capital grew 25%. This shows a good result!

Now, can this not be really a good result? The answer is “yes”. Now, let think that you leave in a country that deals with a high level of inflation – for example – 26%, then your original investment “produced” you a loss of 1%!

So, in countries like the one of the example you’ll be winning – really winning – as far as your earnings are tied – at least – to the country’s level of inflation.

Be aware of this at the moment of taking your investment decisions!

Till my next post!

Best regards

Prof. Lic. Fernando Julio Silva, MSc.
March 2012

Thursday, February 02, 2012

When fear acts as a counselor on investments decisions


I wrote this short piece as a consequence of what could happen when we don't stop to analyze our decisions in a clear way and we just act without been rational

When we think about investing money we usually assume that our decisions will be consequence of a clear study of the environment and how our saving could be affected

But, as humans we don’t include rationality in every act that we perform and when this turns to appear in money decisions it will turn into something dangerous.

An example down in Argentina, Y.P.F. was the national petroleum company till it was privatized some time ago, during the last days a rumor appeared saying that the company was going to be nationalized again.

The result of this “information”? The value of YPF stocks dropped more than 10% in one day and it continued it’s moving down on the following ones

Can we think about rational decisions been made? Probably the answer is NO.

I don’t want to include the political analysis to investors decisions but the “human’s” one was, lets run out of here; that was probably followed too by less experience people that thought if the ones that are supposed to know about the topic are doing this, lets follow them!   

Till my next post!

Prof. Lic. Fernando Julio Silva, MSc.
February 2012

Saturday, June 11, 2011

Is the Euro good for all the members of the Eurozone?

After almost ten years of the appearance of the Euro as the official currency in the Eurozone we find different opinions about it. Some of the Europeans citizens say it improved their countries conditions, other ones just say the opposite!

Let's try to make a technical analysis. The introduction of the common currency - seen after such a long time - helped countries that are part of eastern Europe as their weak economies were improved due to the appreciation that the Euro produce in those countries, giving their citizens a huge purchasing power that was not even dreamed before; on the other hand, developed countries don't see big differences and now are suffering the consequences (We only have to read the newspapers! Greece, Portugal, Spain, etc.) Or like Germany that doesn`t want to be the "bank of Europe" that will support a big number of the other countries' situations.

Let me use an example to show what I'm saying:

Suppose a developed country is suffering a deficit on their Balance of Payment due to a deficit on the Current Account, a viable solution could be to depreciate its currency but as a country member of the zone this is not possible as they can´t introduce individual policies.

So, what was "easy" in the old days turns to be a big "headache" in our days.

See you in my next post!

Prof. Lic. Fernando Julio Silva, MSc.
June 2011

Friday, April 24, 2009

Externalities: What are and how we can get affected by them (A bit of theory!)

When we talk about a company that is throwing their wastes into the river - polluting the area - because it is cheaper for them and as a consequence their total costs can be reduced, we are dealing with an example of an externality.

When we see a person that smokes inside a closed room, we are dealing with an externality too.

When someone decides to get a vaccine, yes, again an externality appears.

So, what are externalities then?

A definition can say that are decisions that would be affecting a third party that was not involved in the decision making. They can produce a positive or a negative effect over that party.

In the first case we have that the action taken by the company will be related with a negative externality of production. The solution to that problem will be that the firm will have to take care of the damage they are producing.
As a consequence their total costs (Marginal Private Cost) will probably be increased, followed by an inward shift of the supply curve (reaching now the Marginal Social Cost).

In the second example, the smoker affects other people inside the room (passive smokers) in a bad way. So The Marginal Private Benefit (directly related with the smoker) will be higher than the Marginal Social Benefit (the effect over the other persons).

By the way, the market will be in equilibrium when the Marginal Social Benefit is equal to the Marginal Social Cost.

M.S.B. = M.S.C.

Till my next post!

Prof. Fernando Julio Silva, MSc.
APRIL 2009

A higher income means a greater consumption?

WRONG! Even though if we just analyze this point from a pure microeconomic theory we can expect that an increase on income, if you are dealing with normal or luxury products, could be followed by an increase on demand. When we focus on real live we’ll see that this is not always true, due to the fact that decision making on humans is “almost unpredictable”.

When we decide to buy - or not - something a big number of factors get into the scenery, and those factors usually don’t follow economic theories!

What makes a person to buy a product “A” instead of “B”? What helps on the decision of buying now or wait a bit? How tell us the amount of units really needed? What makes us spend more money on a product that the one that we really were planning to use?

Rationality? I might say that usually the “lack of it” is our counselor.

We can use our credit cards feeling that “someone else” will be paying for that debt; but when the bill appears we crash against reality.

How many times we went to a supermarket just to buy a couple of things and we end up buying a lot of unneeded products?

On the other hand, how many times we were waiting to have some extra money to buy something that we liked a lot and when that time appears we just decide not to do so?

Or maybe we prefer to save - just in case - instead, so our level of consumption decreases.

Reasons? A big number of them. Why? Who really knows!

Till my next post!

Prof. Lic. Fernando Julio Silva, MSc.
APRIL 2009

Inflation: "with a little help from consumers".

Even though it sounds strange is true! Under an inflationary period consumers can help to increase the level of inflation, this is due to uncertainty.

People being afraid of a bigger increase on prices will start consuming more - stocking products - than what they regularly do, thus increasing prices even more.

Are consumers aware about this effect? Probably not but no one will like to be the one that will have to pay a higher price on the future or suffering cause of a lack of products in the market.

Now, try to imagine this situation under hyperinflation, prices will run out of control very fast and stock will disappear from the market.

Another reading can show us that speculation can appear from two different points of view:

a) Producers increasing their prices cause of knowing an excess of demand will be present.

b) Pure speculators that will buy now to sell when scarcity gets into the economy.

So, next time an interesting level of inflation gets into a country things could be think twice before the demand is increased and may be some type of government intervention would be welcomed!

Till my next post!

Prof. Lic. Fernando Julio Silva, MSc.
APRIL 2009

Friday, March 20, 2009

Excess Capacity Keeps Heat on Fed

Central Bank's Moves to Spur Demand Seek to Counter Slack in Economy, DeflationArticle
MARCH 20, 2009
By JON HILSENRATH - jon.hilsenrath@wsj.com

The Federal Reserve's decision this week to pump an extra $1.15 trillion into the financial system was driven in part by a worry that the U.S. economy has become plagued by increasing slack in the economic chain.

From empty hotel rooms to idle factory equipment to workers in part-time jobs, the economy is stuck with excess capacity.

This signals that even if the economy turns around tomorrow -- and there have been glimmers of stability in recent weeks, including higher stock prices -- the economy is likely to be operating well below its potential for many months, if not years, to come.

Fed officials worry about slack for another reason. When the economy has little of it, inflation becomes a problem because tight supplies allow businesses and workers to demand more money for their services. When there is too much slack, as now, inflation falls.

If the excess capacity becomes deep enough, or persists long enough, it could lead to outright declines in prices known as deflation, something Fed officials want to -- and believe they can -- avoid because it is difficult to unwind.

"In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued," the central bank's policy-making committee said Wednesday, when it announced it planned to pump additional money into the economy through purchases of government and mortgage securities.

Signs of slack are everywhere. The number of vacant homes dotting American neighborhoods was 19 million in the fourth quarter of 2008, up more than three million over three years. Hotel occupancy rates have fallen from 65.5% a year ago to 55.2% in early March, according to Smith Travel Research, a Tennessee firm that tracks the industry. Manufacturing plants ran in February at 67.4% of their capacity, the lowest utilization rate since the Fed began keeping records in 1948.

In normal times, the Fed would fight slack by reducing short-term interest rates to cut household and business borrowing costs. But the Fed has already cut its target rate -- the federal-funds rate -- to near zero.

That is why it announced Wednesday that it would ramp up purchases of mortgage-backed securities and long-term U.S. Treasury notes. By purchasing those securities, the central bank hopes to bring down borrowing on a broader array of bonds and loans to spur demand.

One example of the slack comes from Union Pacific Railroad, the nation's largest railroad. It has the capacity to run 200,000 carloads weekly, but is running only 150,000.

"As volumes remain soft, we are acting aggressively to right-size our resources, furloughing 3,600 employees, storing over 1,400 locomotives, and parking 53,000 freight cars," Rob Knight, the firm's chief financial officer, told investors in a conference call last week.

The clearest signs of slack are in the job market. On Thursday, the Labor Department reported that
new claims for unemployment benefits slid last week by a seasonally adjusted 12,000 to 646,000,
but the four-week average rose slightly to 654,750, a 26-year high. The total number of Americans
drawing weekly benefits jumped to nearly 5.5 million, a new high.

In all, the number of unemployed Americans has soared to a seasonally adjusted 12.5 million in the past 12 months, pushing the unemployment rate to 8.1%. An additional 8.6 million are working part time but would prefer to have full-time work. When accounting for these workers as well as those who wanted a job but hadn't looked lately, the "underemployment" rate -- a broader measure of job-market slack -- is 14.8%.

That doesn't hurt just the unemployed. It also hurts people who have jobs because it puts downward pressure on wages.

Irex Corp., a Lancaster, Pa., construction-services firm, has laid off about 1,000 workers in the past year, bringing its head count to roughly 1,500. The firm provides construction workers to manufacturers, hospitals, refineries and other companies building large new facilities.

Less than two years ago, Kirk Liddell, Idex's chief executive, had to subcontract work to competitors for some big projects because his company had a hard time finding qualified workers. Now, said Mr. Liddell, "if we put out a call for quality workers, we'd have thousands almost anywhere in the country."

One of the big surprises about this downturn, he said, is its breadth. He had expected work building hospitals to remain steady even as the manufacturing sector is crunched. But hospital work has been squeezed, as has education. The firm just lost a contract for a facility at Harvard University, which has been hit by losses in its endowment.

For U.S. officials, the key to unwinding the slack is boosting demand for goods, services, homes and labor. That is why the Fed is trying to bring down interest rates, and why some economists think Congress will need to pass a second economic-stimulus bill. President Barack Obama's $787 billion stimulus package, passed in February, is meant to aid the economy through spending programs and middle-class tax cuts.


Printed in The Wall Street Journal, page A2


http://online.wsj.com/article/SB123750668316690221.html

Sunday, November 16, 2008

ARE SOFT DRINKS PRICE ELASTIC OR INELASTIC?

Last week I gave my students a question related with this point. It was interesting to see that they made two groups, ones defending price elastic and the other ones saying it is price inelastic. I also invite a colleague to join the discussion.

Let see the arguments:

Price elastic: There are close substitutes, as for example water, so a small change (increase) on the price of soft drinks will produce a change (reduction) on the demand as people will now move to water.

Price inelastic: This group thought that as all the soft drinks were included, then even though prices were increased, there were no other chances to choose from – they didn’t see water as a close substitute, so people will accept this increase producing only small reductions on the quantity demanded when prices were increased.

What both groups didn’t include in their analysis were the determinants of demand, as for example taste, fashion, income, etc

These are two different points of view, what do you think, are there other possibilities or you subscribe to one of the previous ones?

I’ll like to listen your opinion.

Till my next post!

Prof. Lic. Fernando Julio Silva, MSc.
NOVEMBER 2008