Thief, Liar, Cheater! Do bad guys really finish last?

May 15th, 2013

by Jenna Moore

In late 2012 Lance Armstrong ceased denying doping rumours. The seven-time Tour de France winner went from hero to zero faster than the news could be put to print around the world. Though some had always been dubious about his seemingly superhuman performance, there is no doubt Oprah’s extra long (and extra lucrative) expose would have left many die-hard Armstrong fans lost and troubled by the relentless and self-righteous deceit spanning more than a decade. Armstrong cemented himself as a cycling legend; a cancer survivor; a philanthropist, and he sure knew how to sell the sizzle without the steak. Lance Armstrong’s business was Lance Armstrong. His reputation was his capital and not only has he forfeit a large part of his future reputational nest-egg, he stands to be disrobed of the ‘unjust’ riches he was awarded by the US Federal Government through sponsorship deals amounting to US$40m. But even still, despite the seemingly rigorous international anti-doping measures in place, Armstrong proved the reward was worth the risk and is estimated to have accumulated a net worth of over $125m. Do bad guys really finish last?

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Hot Tips to get you to the Top! – Keep the Big Picture in Mind

March 26th, 2013

On the night of Wednesday 20 March 2013, QUT’s School of Economics and Finance held its very own ‘Town and Gown’ event, which brings together economics and finance students to network with Brisbane-based professionals from these two discipline areas.

The presenters were asked, “What is your best piece of advice for job-seekers?” Their answers were insightful and we thought worth sharing. If you have some further tips you’d like to share, please join the discussion.

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And you thought Frankenstein was scary: The rise of credit derivatives

November 22nd, 2012

by Shane Murray
The monster Frankenstein was scary; there are no two ways about it. Regardless, the creature was created with all good intents, but confused and conflicted he desired nothing more than to see the life of his creator ended. Comparably, it seems credit derivatives are not too dissimilar. Created by the financial sector as a credit risk mitigant some 15 years ago, misunderstanding around their fair value coupled with their exponential growth has left the finance sector in a state of near ruin! Now you might ask, how did something as simple as a collection of swaps prompt the Global Financial Crisis (GFC)? Well it seems these humble swaps are more intricate than their name suggests. While the cash flows between counterparties can be assimilated to those of a tradition swap, the real payday comes after a credit event when the ‘swap’ more so resembles an insurance product. But don’t tell the regulator! In a market where the lenders are reaping the rewards of highly-leveraged seemingly de-risked positions, and the protection-sellers are happily watching the premiums accumulate, why concede to restrictive governance? Particularly, when considering the genius of the creator. But it seems the smarts are not all there, as the coming together of deficient credit modelling; moral hazards; and the unravelling of the sub-prime market, generated the very bolt of lightning needed to awaken the sleeping monster, which brought the thriving financial sector to its knees.

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Can Nature-based Tourism Help Conservation?

October 9th, 2012

Concern has been expressed worldwide about the continuing global loss of biodiversity and socially acceptable policies are being sought to slow its rate of loss. Nature-based tourism adds economic value to the stock of wild biodiversity and is seen by many (especially when it involves ecotourism) as being an effective contributor to nature conservation. The fact that tourism is the world’s largest industry and that nature-based tourism is its most rapidly growing component suggests that it has a major impact on the state of natural environments. However, nature-based tourism (depending on its attributes) can be supportive or destructive of biodiversity, or may even have little impact on it, as Clem Tisdell and Clevo Wilson have discovered.

In our book ‘Nature-based Tourism and Conservation’, we identify and explore the type of factors that enable tourism to make a positive contribution to nature conservation, and also discuss its limits as a means for conserving biodiversity in the wild and possible negative environmental consequences.

The complete blog can be obtained from the Edward Elgar Blog site.

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Eyes wide shut: Are finance managers looking but don’t see?

October 9th, 2012

By Shane Murray

In the wake of poor returns or worse, substantial loss of wealth, Financial Managers wear the blame. Like a phoenix born from the ashes of ruin, the angry mob emerges and sprays charge at the financial sector, labelling their behaviour as reckless, their knowledge of financial markets absent and their understanding of risk as infantile. In my opinion this is a justified resolve as from inception, Financial Managers have been monitoring risk with their eyes wide shut. The inherent flaws of contemporary risk models used by Financial Institutions are well known, as too are the means of manipulating portfolios to accumulate risk not captured by their estimates. Such behaviour is reckless and wholly undermines why risk is quantified in the first place. But what choice do Traders have? Year after year shareholders demand bigger and better returns and Financial Managers find themselves in a precarious situation. Should they be reducing the exposures when the mutters of disaster begin to surface, or do they turn a blind eye and rely on their risk metrics as an appropriate scapegoat? After all, taking the safer approach, reducing risk and yielding a lesser return spell certain crucifixion at the hands of the same angry mob. So it seems the problem is twofold. Thankfully, with so much on the line, a collaborative approach to risk supervision is emerging through the Basel accords which aim to dispel such irresponsible behaviour. Unfortunately such endeavours are yet to curb the insatiable desires of the mob, which Financial Managers seem more than willing to oblige.

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Credit risk: what we know, what we don’t know and what we should know

August 30th, 2012

By Mei Lin KER

With the deregulation of the financial markets, companies have progressed from traditional method of bank borrowing to the issuance of corporate bonds to seek capital from the general public. As a potential lender, how will you assess which company is a safer haven to park your money? Is there a way to allow you to gauge the default risk of each company so that you can make an informed choice? One of the solutions lies in credit rating agencies. The use of ratings is pervasive in today’s society. From movies to restaurants to even car safety, ratings are compiled to provide consumers a quick assessment and comparison of the desirability of the product or service. In the financial industry, credit risk ratings for corporate and sovereign debt instruments are provided by credit rating agencies (CRAs) with the current industry leaders being Moody’s, Standard & Poor’s (S&P), and Fitch.

The probe by the US Congress Committee uncovered the credit rating agencies as one of the main culprits fuelling the GFC calamity. Their failure in providing correct ratings to certain complex financial products led to the severity of the financial meltdown. Under Basel II, banks utilising the standardised approach to determine their regulatory capital are required to use external credit assessments to determine the weightings for calculation of the total risk-weighted assets. Elevated to the status of “nationally recognised statistical rating organisations” (NRSROs), Moody’s, S&P and Fitch provide such external credit statistics. Though more rating agencies have been added to the list as the years passed, the Big Three maintain their dominant positions, collectively representing 95% of the market. What do we actually know about such agencies to trust their competency in providing accurate and unbiased ratings? Let’s explore further.

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Making Sense of Nonsense: Enhancing Corporate Governance Through Compliance

July 20th, 2012

by Peita Lin

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” — Adam Smith

While not the first to make such an assertion, much of modern capitalism works under the assumption that the inherent vices that drive human behaviour, namely self-interest and the inordinate accumulation of wealth are thought to be in aggregate beneficial for society. As a certain fictional investor once so eloquently remarked ‘greed, for a lack of better word, is good’.

We’re all utility maximisers and corporate executives, as the fittest specimens of this criterion, serve to remind the rest of us why we’re not making seven digit salaries. The greedy tendencies that drives and motivates their success are often at times to the detriment of others; and therein lies the fundamental problem underpinning much of corporate governance. We expect them, the executives and managers, to act ruthlessly in competition but fairly in the allocation of accrued benefits to us, the faceless shareholders. The technical term is ‘agency conflict’ and a great deal of time has been spent detailing and proposing solutions to this problem with varying degrees of success. A quick definition for the uninformed: the separation between ownership and control in an incorporated firm creates tensions between the interests of the principal and agent thereby creating a position of moral hazard.

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Measuring market risk using historical data: Bogus or not?

May 17th, 2012

by Mei Lin Ker

Risk management has become the hottest topic ever in today’s turbulent economic climate. We are now still living in the shadows cast by the U.S. subprime crisis in 2008 which has shaken up the U.S. economy with its powerful negative aftershocks reverberating to the rest of the world. Till now, the U.S. economy is making baby steps in recovering from the economic devastation of the Global Financial Crisis (GFC). As big firms collapsed and mega bailouts ensued, people are asking the fundamental question: Why did this happen? Aren’t companies which use highly sophisticated risk management tools able to foresee the impending downfall and, with the information provided, aren’t their risk managers able to take preemptive measures accordingly? Is there then something wrong with these tools or the risk managers?

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The Clean Energy Finance Corporation and the Structure of Renewable Energy Project Subsidies

August 29th, 2011

by William Wild

The Gillard Government in Australia has introduced its carbon tax, and there is to be a Clean Energy Finance Corporation to subsidize renewal energy projects and technology. A few months ago I proposed a market driven structure under which such subsidies might be granted, and it is timely to revisit that now.

I am no free-market ideologue, but if there is one role to which government is least suited it is funding the development and commercialization of technology. Simply handing out large-scale research funding might easily create a bureaucracy that, far from enhancing development of the implementable technology, actually crowded out real commercially driven development.

The alternative is to directly subsidize individual renewable generation projects that might not otherwise, even with the effect of the carbon tax, be competitive with carbon-emitting generation. The capital subsidy would meet the difference between a project’s actual cost and the amount of capital it could raise on purely commercial terms to fund that cost.

The purpose of this note is to propose a general framework for capital subsidies that draws on the lessons of project finance to ensure that maximum societal benefit, in terms of increased renewable generating capacity, is gained from that investment by the government.

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Finance and Politics: The Invisible Lending Hand

September 15th, 2010

by Janice How

Was the sacking of Prime Minister Kevin Rudd, a manifestation of the cosy relationship between government and the Australian financial sector? QUT’s Professor of Finance, Janice How, believes that relationships like this can only impede the development of financial systems.

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