Issue: 4 Government as credit insurer of last resort Short selling restictions have had little impact Staying ethical in a downturn The impact of a lost decade on pension fund finances The 'Intelligent Exploiter' Recent finance conference Welcome Welcome to the fourth issue of Re:, the Cass Business School research e-newsletter. This issue brings you Cass Business School’s latest views and research on a number of hot issues in finance and management: Government as credit insurer of last resort; short selling; UK DB pension schemes finances; ethicability; and use of information technology. We additionally report on a recent conference on ‘Financial Engineering, Financial Econometrics, and the Current Stress’. Re: Government as Credit Insurer of Last Resort What caused the credit crisis? What will end the credit crisis? What will restore credit markets to normal functioning? In a question and answer session, Dr Alistair Milne, Cass banking expert, maintains that the underlying cause of the worldwide bank runs in September 2008 was the systemic liquidity problem in structured credit and not credit losses. Were it not for this systemic risk event in traded credit markets the current crisis would be much more easily contained. Milne suggests that this aspect of the credit crisis can be swiftly resolved by government stepping in as credit insurer of last resort, backing insurance of illiquid assets. Milne’s proposal, developed in collaboration with Perry Mehrling of Barnard College, Columbia University, is beginning to be implemented as evidenced by the November 2008 Citigroup rescue. Watch the Q&A Milne and Mehrling identify the absence of a credit insurer of last resort as the critical reason for the extent and global nature of the current credit crisis and argue that only government can do this job. It cannot be undertaken by any private sector insurer because they cannot guarantee their own solvency in the event of an extreme credit crisis. Details on how this proposal might operate, its advantages, and the economic rationale behind it are outlined in Milne and Mehrling’s paper 'Government's role as credit insurer of last resort and how it can be fulfilled'. Re: Short Selling Restrictions Have Had Little Impact Following sustained heavy stock market losses in 2008 regulatory agencies in many jurisdictions instigated restrictions on the short selling of stocks, primarily in the financial sector. Research from Professor Ian Marsh and Norman Niemer of Cass Business School, however, finds no strong evidence that these emergency short selling restrictions have changed the behaviour of stock returns. The researchers examined daily returns on UK, US, Italian, French and German shares before and after the introduction of restrictions on short selling, including shares which are subject to the restrictions, and those which are not. The research is supported by the International Securities Lending Association (ISLA) the Alternative Investment Management Association (AIMA) and the London Investment Banking Association (LIBA): these associations request that this research be considered carefully. They continue to offer their full support to all efforts in identifying appropriate and reasonable measures for the longer-term security and stability of the financial system. On the basis of this research, the associations see no case for continued bans on short selling as there is no strong evidence that these have been effective in reducing share price volatility or limiting share price falls. Read more Re: Staying Ethical in a Downturn Today’s society is faced with multiple downturns: environmental, social, financial. These downturns are all products of human behaviour, thinking (or lack thereof), greed, selfishness and fear. Such behaviours are forms of ‘moral infancy’ which can be catastrophic for humanity and the world. How can we change our thinking, make better decisions and do the right thing? Is it right to satisfy all our wants? Or should we build a new economy based on moral virtue? How do we navigate through the moral maze? Roger Steare, Visiting Professor of Organisational Ethics, tackles these questions in a talk at Cass Business School. His discussion includes the ethicability framework he has developed based on a moral DNA test completed by 20,738 people from 162 countries during July-August 2008. His framework comprises three types of moral conscience that helps us make moral decisions: rule compliance (obedience), social conscience (altruism) and principled conscience (virtue). Watch the talk Re: The Impact of a Lost Decade on Pension Fund Finances A recent press release from a firm of consulting actuaries reported ‘the largest monthly improvement in the history of pension schemes’, despite huge falls in equity markets. In an accounting context the "improvement" came about because the fall in asset values was more than offset by the fall in the PV of pension liabilities in large part because of the rise in the yield on AA-rated £ corporates used to discount these liabilities. But this rise in the discount rate is due to an increased probability that corporates – the scheme sponsors – may become bankrupt. In which case this is not good news. Professor Andrew Clare, asset management expert, has looked at the possible impact of a decade of low economic growth on the finances of UK DB pension schemes – similar in nature to the ‘lost decade’ of growth experienced by Japan in its period of deflation. The results are not as comforting as the ‘headline’ accounting improvement would suggest, in fact, quite the opposite. Read more Re: The Intelligent Exploiter: An Innovative Concept for Strategic IT Success Do organisations exploit the full potential of information technology? How can businesses make the most of what information technology has to offer? In a Q&A session, Clive Holtham, Professor of Information Management, discusses an innovative concept for strategic IT success developed after more than a decade of research at Cass: the 'Intelligent Exploiter'. The 'Intelligent Exploiter' comprises five components: the implementation of effective systems; the development of an ICT Strategy and an overall framework through which organisations can exploit IT; the development of roles and skills; the way information and knowledge are deployed by organisations, and mindset, the biggest barrier in getting value from IT. Professor Holtham elaborates on each one and maintains that the way information knowledge is managed is the key to successful exploitation of IT. Watch the Q&A Re: Recent Finance Conference An international cohort of finance experts gathered at Cass to discuss ‘What Went Wrong? Financial Engineering, Financial Econometrics, and the Current Stress’. The conference was organised by the Cass Centre for Econometric Analysis in collaboration with the International Centre for Futures and Derivatives (ICFD), Finance Department, University of Illinois at Chicago (UIC). The conference brought together a highly international mix of speakers from top academic institutions including the LSE, Oxford, Imperial Business School, and Warwick (UK); HEC (France); Florence (Italy); University of Namur (Belgium); Columbia, Graduate School of Business, University of Chicago, Kellogg Management School of Northwestern University (US). Leading financial institutions were also present including the Bank of England, the Federal Reserve Board of Washington, the Federal Reserve Bank of Chicago, and the Bank of Spain) to practitioners from Deutsche Bank and UBS. Highlights of the conference include policy talks by Forrest Capie, Professor of economic history at Cass (currently on secondment to the Bank of England) on ‘Financial Crises and Their Solutions from the Past’, and Professor Suresh Sundaresan (Columbia, USA) on ‘Credit Crunch, Actions of Central Banks and Treasury and Welfare Consequences’. Watch the talks Financial Crises and Their Solutions from the Past Credit Crunch Actions of Central Banks and Treasury and Welfare Consequences Re: Other Cass News Headlines Cass book: American sports fans exploited by monopolising owners How can third sector organisations and managers be more effective? Contact and Further Information Past issues of Re: can be found on our website. If you would like to find out more about Cass research, please contact Dimitra Koutsantoni.