Tuesday, May 22, 2012

Financial Food for Thought

Here is some financial food for thought based on terms I've never heard before this week:

1) Syriza: Coalition of the Radical Left. A coalition of leftist political parties in Greece. They quadrupled their number of Parliamentary seats in the last election in May at the expense of the two central parties which had negotiated the Greek bailouts (which in a nutshell requires Greece to reign in out of control spending in exchange for money from the rest of the euro zone; i.e. Germany). But, because Syriza refuses to form a governing coalition with other parties, new elections are being held in June.

Their platform? Hold Europe hostage. That is, cancel planned reductions in spending while still demanding the bailout money. Why do so many Greeks think this is a real solution? The longer fundamental structural problems are ignored, the worse the outcome is at the end. And the outcome is already looking to be pretty bad.

2) Bank Jog: What a pundit calls a bank run that he hopes ends quickly and with minimum damage. (I think. A definition is hard to come by.)

I know bank runs are disastrous, but isn't it even worse to not admit one is happening? If one acknowledges it is happening, then isn't there a better chance of stopping it by solving the problems causing the bank run? By the way, how much money has to be withdrawn from banks (and how quickly does it have to be withdrawn?) in order to be considered a bank jog, sprint, or run? Are only "runs" bad?

3) Empty Voting: When agents with negative economic interests in a corporation have voting control. May lead to controlling agents voting against the interests of the company and other stock holders. 

Evidently, empty voting is becoming a big concern in some circles because voting rights and financial positions in the company have become increasingly decoupled leading to situations where incentives may be misaligned. How does this happen? An agent buys voting stock in a company then perfectly hedges. This has become easier to do with the plethora of new types of markets available. By perfectly hedging, the agent has voting power in the company, but is not impacted financially at all. Perfectly hedging is not quite as simple as it sounds, though. JPMorgan lost several billion dollars in the last few weeks due to a miscalculation in their attempt to hedge.

But, is empty voting necessarily bad? Is it possible for empty voting to be efficient? On Monday in the Applications Seminar, Scott Kominers argued empty voting may be efficient because it is possible for empty voting to be in the core. (He constructed an example to show this is the case.) The bigger picture seemed to be that the core and not competitive equilibrium is the correct solution concept for thinking about financial markets.

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