Foreign Finance Friday: Kiev Update - UniCredit Ukraine

After a long day here in Kiev full of testing and paperwork and orientation, I have more updates about my internship placement and class schedule for the next 10 weeks.

As I mentioned in my last post, I will be working with UniCredit Bank Ukraine, also known as PJSC Ukrsotsbank (PJS Укрсоцьанк in Ukrainian, PJSC Укрсоцьанк in Russian). The naming of banks and companies in general can be very confusing in Ukraine and Russia (see my previous post about Russian stock companies), so from now on I'll simply refer to the bank as UniCredit Ukraine.

Ukrsotsbank, now part of UniCredit.

UniCredit Ukraine is one of the largest and strongest universal banks in the country, and is part of the larger Italian bank UniCredit. The bank was first started in Ukraine in 1990, and since its inception has been one of the leading financial institutions in Eastern Europe. In early 2008, UniCredit Group acquired roughly 94% of the total share capital and former Ukrsotsbank joined the UniCredit Group of banks, which covers 22 countries in Europe alone, and a total of 49 different nations.

UniCredit Ukraine is one of the few banks in Ukraine that seems to have weathered the 2008-2009 global recession fairly well, probably due in large part to its acquisition by UniCredit, and also thanks to a large amount of government support. While the Ukrainian and American banking systems may seem radically different, the concept of "bailouts" or at the very least overt government support of the banking system is very similar. Boris Tymonkin, head of UniCredit Ukraine, recently stated that Ukraine's banking system "came out of recession with honor," as total external debt has been reduced by almost a half and continues to decline; and the fact that "there were no foreign payment defaults" was significant. However, in 2011 UniCredit had to write down almost all of the goodwill on UniCredit Ukraine, part of the reason why the bank posted significant losses that year.

UniCredit Ukraine (photo Kyiv Post)

Some key financial indices for UniCredit Ukraine, as of 01/01/13 (Q4 2012) with USD approximations:

Loan Portfolio: 23,688 billion UAH ($2,906 billion USD)

Assets - 38,829 bln UAH ($4,763 bln)

Funds of legal entities deposited on thrift and current accounts - 6,725 bln UAH ($823 bln)

Funds of individuals -11,644 bln UAH ($1,428 bln)

Capital - 7,657 billion UAH ($939 bln)

Net profit of the bank - 1,873 million UAH ($230 bln)

I will specifically be working in the Corporate Identity and Communication Department. It's not investment banking (UniCredit doesn't really have any IB offices in Ukraine), so I probably won't learn many hardcore financial valuation or accounting skills, but I was planning on studying those during the summer anyway. I'm very excited though--I think it will be a great opportunity to "officially" start my career in finance, giving me the opportunity to work for a very large and well-known bank, improve my understanding of international finance and business in Ukraine, and sharpen my PR and critical thinking skills--all while improving my professional Russian proficiency. Should make for one awesome summer.

In Kyiv!

The last week has been hectic to say the least, but I am happy to report that I am finally in Kyiv, Ukraine. After three flights in 19 hours I am finally settled in with my host family, who are very nice and helpful. I also found out earlier today that I have finally been placed in an internship and will be spending the summer working for UniCredit Ukraine (Urksotsbank), a major international Italian bank that is currently one of the strongest and most profitable banks in Ukraine. I should find out more about the internship and my specific placement after my orientation tomorrow morning, so more details to come soon!

Bookshelf: Medici Money and Renaissance Currency Exchange

Medici Money: Banking, Metaphysics, and Art in Fifteenth-Century Florence by Tim Parks is the third financial history book I've read so far this summer, and easily the most historical thus far. A relatively short book at around 250 pages of text, Medici Money chronicles the rise and fall of the famous Medici family and their elaborate banking system in 15th century Florence.

Image from Google Image search.

As Parks explains in the opening pages, "This book is a brief reflection on the Medici of the fifteenth century--their bank; their politics; their marriages, slaves, and mistresses; the conspiracies they survived; the houses they built and the artists they patronized. The attempt throughout will be to suggest how much their story has to tell us about the way we experience the relationship between high culture and credit cards today, how far it informs our continuing suspicions with regard to international finance and its dealings with religion and politics." A sweeping goal, to be sure, but an important one as well--few historians have endeavored to connect the Medici and their banking with modern-day finance.

The book begins with a well-written look at the historical environment of the Medici, focusing on how the metaphysics and morality--or lack thereof--of the Catholic Renaissance era affected the exchange of money. After spending some time investigating the important topic of usury, Parks moves into a broad examination of Renaissance finance, noting how the central financial and religious importance of Rome created a steep economic imbalance in Renaissance Europe. Much of the flow of expensive goods was from the south (Italy) to the north (England, Germany, Belgium), but the return flow of currency back to Italy was often slower and more difficult. The result was a massive financial imbalance within Europe in favor of Italy, while at the same time huge trading deficits in the countries of northern Europe, who were often deep in debt to the local branches of Italian banks.

Despite this complex and inefficient environment, Italian bankers such as the Medici still found plenty of ways to make a profit, mainly from international currency exchange. While the Medici were merchants as well as bankers, and made some money by speculating on and selling various commodities and consumer goods, they amassed most of their wealth through currency exchange. A merchant would come to a Medici bank and asks for 1,000 florins, offering in return an exchange deal in London, where he will be exchanging florins into pounds sterling. In return for the loan, the merchant would write out a cambiale, or bill of exchange, instructing the Medici be paid 1,000 florins at 40 pence to the florin, as is the custom. While the "how" of the repayment has been clearly defined, this last phrase was very important, since it defined the "when," or the length of validity of the bill of exchange. "As is the custom" meant the standard length of the journey from Florence to London, which at the time was 90 days or three months.

Since currency values and exchange rates fluctuated daily then just as they do now, yet modern communication and financial data systems hadn't yet been invented, one may wonder how on earth the Medici were able to consistently profit from international currency exchange. The answer is that, at the time, currencies were always worth more in their country of issues, due to the complex and inefficient exchange market of the time. As a result, the florin was always worth 4 pence more in Florence than it was in London. So returning to the aforementioned transaction: our merchant would take his 1,000 florins and convert them to 40,000 pence in London, three months after departing Florence. He then sought out a local client or fellow merchant who wanted to pay him back in florins--perhaps someone speculating on English wool who thinks it will be worth more in Italy. Thus a second bill of exchange would be written, stating a payment of 40,000 pence at a rate of 36 pence to the florin. If all went well and the bill made it back to Italy in time, the Medici bank then collected 40,000/36, or 1,111 florins, resulting in a profit of 111 florins and an annualized interest rate of 22%. Not a bad rate of return.

Italian Renaissance bill of exchange, 1398. From http://arttattler.com/archivemoneyandbeauty.html.

By making hundreds of these deals, the Medici were able to augment their income from commercial merchant activity and ecclesiastical incomes from church bishops and cardinals. Thus, they built a diversified and global financial base upon which to expand their banking system and, over time, their power and influence within Florence. The downfall of the Medici banking system, and thus their family, came when they began ignoring the fundamentals of finance to spend enormous sums on ensuring political prestige. This led to bankruptcy, liquidity crises, the breakdown of cooperation between their various European bank branches, and, ultimately, the closing of the entire bank and the expulsion of the Medici from Florence. Yet not before the Medici family had been able to create a glorious, if rather brief, "golden age" that forever linked Florence with the pinnacle of Renaissance art, architecture, and culture. And it was all of it--from the sculptures of Donatello to the political theory of Machiavelli--paid for with Medici money. After all, as Cosimo de Medici once said, "The poor man is never able to do good works."

Foreign Finance Fridays (New Column)

In addition to my semi-regular "Bookshelf" columns discussing and reviewing various books I've read, I am also going to start a "Foreign Finance Friday" column that will investigate a particular aspect of international finance. While much of this blog already deals with cross-border business, I thought I'd establish a regular Friday feature on the topic.

In preparation for my upcoming study abroad and internship program in Kiev, Ukraine, I checked out the "New English-Russian Banking and Economic Dictionary" back in April, which merited its own post. The reference work contains over 15,000 terms related to banking and finance, of which I chose what I deemed to be the most relevant and important 120 entries to study. Many are cognates (meaning they look/sound just like their English equivalent); some are not.

So for the first Foreign Finance Friday, I thought I'd share one of my favorite Russian finance terms:

акционерный капитал корпорации

This three-word phrase is the Russian expression for the single English word, "stock." Translated, the phrase literally means "joint-stock capital of a corporation." In Russia, "joint-stock" refers to all non-partnership business entities that issue shares, whether publicly or privately traded. Founders of a joint-stock company sign a written agreement for its formation, which establishes the size of authorized capital, types and categories of shares, cost of shares, etc.

Image from http://www.bridgewest.eu/public/redesign20/images/box-flags/original/Russia.png

Joint-stock companies must also register with the Russian Federal Securities Market Commission as either a publicly traded or open joint-stock company (Russian: Открытое акционерное общество - abbreviated OAO), or a privately traded or closed joint-stock company (Russian: Закрытое акционерное общество - abbreviated ZAO), with a maximum of 50 shareholders. As is often the case in finance, understanding the meaning behind seemingly odd acronyms is important, regardless of what country you might be in.

More info on Russian business entities at this link.

Bookshelf: What I'm Reading Links

While I eventually want to create a true "Links" sidebar section for this blog, for now I thought I'd just create a "Bookshelf" list with links to the various books I'm currently reading. Right now, my list consists of:

- Money and Power: How Goldman Sachs Came to Rule the World, by William D. Cohan

- House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, also by William D. Cohan

- Medici Money: Banking, Metaphysics, and Art in Fifteenth-Century Florence, by Tim Parks

- Ukraine: Other Places Guide, by Ashley Hardaway

- Dirty Russian, by Erin Coyne and Igor Fisun

You can find links to all of these books in the "Bookshelf" sidebar. And as an inveterate reader, I am always in search of new books to add to my never-ending list, so you have any suggestions please leave a comment!

Goldman Sachs to Overhaul Russian Business Image

Russia, despite all of the improvements that have taken place since the collapse of communism, is not exactly considered an outstanding place to do business. Growing socio-political unrest, excessive government involvement in the markets, and an economic over-reliance on commodities--particularly oil--have caused international investors to be wary. On a broader scale, slowing growth and disappointing performances by all of the BRICS countries have led to deflated expectations for emerging markets in general. All of these financial and economic trends have been combined with an overwhelmingly negative perception of Russian international relations, especially Putin's continued support for Bashar-al-Assad's regime in the Syrian civil war, and the recent fiasco surrounding alleged CIA spy Ryan Fogle, who was outed by the Russian FSB (Федеральная служба безопасности Российской Федерации, successor to the KGB).

Image from Bloomberg.

Yet many Russians have continually insisted that perceptions of the Russian business environment do not reflect reality. German Gref, current head of Sberbank, Russia's largest bank, responded to a recent international business ranking that placed Russia behind Albania by stating, “We have to improve our image because we are really better than what people think of us.” (Video and full text of his comments available here in Russian; I have yet to translate all of it myself).

Enter Wall Street--more specifically, Goldman Sachs, arguably the leading American investment bank. Earlier this spring, it was announced that Goldman Sachs has been tasked with improving Russia's international business image. According to The Wild East, Goldman has been hired by a special working group formed by the Ministry for Economic Development, and composed of Sberbank, VTB, and, most importantly, the Russia Direct Investment Fund--headed by Kyrill Dmitriev, a former Goldman Sachs man.

The re-entry of Goldman Sachs into the Russian market is an important international move for the firm, considering they left Russia twice during the 1990s and only returned in 2006. While many Western firms have left Russia indefinitely due to the uncompetitive and government-dominated banking environment there, Goldman has been able to grow profits at its Moscow operation and remain an active player in the deal-making and advisory scene. Goldman Sachs assisted Russian giant VTB with its 2011 secondary debt placement of $5.2 billion, and has advised on the listing for Russia's national MICEX exchange.

One of the biggest challenges Goldman will face moving forward is how to help Russia in its efforts to improve its current credit rating of BBB, the second-lowest investment grade. Goldman certainly has the firepower and clout to make an impact, but it will have to contend not only with the specific challenges facing Russia's national economy, but also with the broader economic currents outlined above. Goldman has also already been attacked by some activist groups such as Human Rights Foundation, which has argued the bank shouldn't work for Russia due to the country's alleged human rights abuses. However, given Goldman's signature resilience and continued rebound following the 2007-2008 American financial crisis--and the current dearth of Western bulge-bracket finance in Russia--expanding its international involvement and deepening its presence in the "Wild East" of Russia might prove a very profitable move.

Image from Fox Business.

International Banking: Regulation, A Capital Idea?

As soon as I saw the cover of last week's print edition of The Economist, I knew it was going to be an especially interesting read (moreso than usual). The special focus of the May 11th issue is on the current state of international banking--in particular the future of investment banking in the wake of the 2007-2008 collapse and the ongoing recovery.

While the "Leaders" piece on the resurgence of American investment banks vis-a-vis their European cousins/competitors is fascinating, as is this "Twilight of the Gods" piece on the leaner future of investment banking, it is the article on new banking regulations and their impact on the dynamics of international finance that has most intrigued me.

Entitled "Regulation: The bite is worse than the bark," the article starts by summarizing the atmosphere surrounding new and proposed banking regulations, using a quote from the current chairman of UBS, Axel Weber. In an interview, Mr. Weber stated, "The mood among investment banks that I talk to...is such that they expect that the regulation is over, they expect that they will be able to keep growing their balance-sheets, that they will be growing bigger than ever. The mood among the regulators I talk with is more like 'we haven’t even started.'"

While Swiss banks such as UBS and Credit Suisse have been hit particularly hard by newer, stricter regulations, Mr. Weber is uniquely qualified to comment upon the sentiment on both sides of the regulatory divide. And his comments are particularly troubling for international banks operating in America--not just the Swiss, but British and Germany firms as well.

But first, an overview of the three primary options available to regulators:
1) Higher capital and liquidity requirements;
2) Restrictions on bank activities such as trading for their own profit;
3) Structural changes such as forcing banks to “ring-fence” their retail banks from their trading businesses or to reorganise global businesses into national subsidiaries.

All banks are set to be subject to at least one of the three forms of corrective medicine, but the bigger and more complex banks likely face at least two if not all three forms of regulations in the near future.
I'll save the technicalities and complexities of Basel 3 and the Volcker Rule for a future blog post; but suffice it to say that while the new rules will likely create a more stable financial system, they are also having unintended consequences for international investment banks.

While none of the above regulations pose a deep, mortal threat to the future of America's biggest investment banking firms, The Economist reports that two further sets of rules being discussed "could dash the hopes of Europe’s remaining big investment-banking contenders, Barclays and Deutsche Bank, of being able to go on challenging the dominance of America’s biggest banks."

The first is "a proposal to separate investment banking from retail banking," which in Britain could mean the construction of a Chinese Wall of sorts between the retail-banking arm and the investment-banking division of a bank. Continental Europe, meanwhile, "is debating variations of a plan by Erkki Liikanen, the governor of Finland’s central bank, to separate banks’ trading operations." Both potential rules would mean an increase in funding and operation costs for Europe's banks, and would deter big global banks from operating in Britain or Europe.

America, meanwhile "has made it clear it wants to be in the game," and it has been American banks that have led the aggressive resurgence of Wall Street and fueled overall banking sector recovery. But in Washington, DC, a second set of regulations is on the drawing board that could deal a severe blow to the American operations of European-based global banks, by forcing big foreign firms to establish local holding companies for their American subsidiary operations. This would most obviously and immediately impact Deutsche Bank and Barclays, two of the leading European banks which have both avoided the new capital requirements by moving assets and deregistering their American holding companies.

As The Economist explains, the proposed regulations on foreign banks make perfect sense to American regulators: "if a big European bank collapses on their doorstep, they do not want to have to ask its home country for money." However, an executive at Morgan Stanley has estimated that Deutsche Bank has a hidden capital deficit of $20 billion in its American business that would be exposed by the new regulations. Barclays is in a similar situation.

Image taken from blog Special FX for Wizards

The bottom line? "If other regulators were to follow its [America's] lead and force all foreign banks to hold capital and liquidity locally, the era of financial globalisation would be over." And the end of global finance is something I don't think even the most gung-ho regulator truly wants. Personally, as someone interested in a career in international finance and who is considering working at a firm such as Barclays or DB after graduation, financial globalization is certainly something I hope continues for a long, long time.


You can read the article in full at this link: Regulation: The bite is worse than the bark. Feel free to leave your thoughts and comments below.

From Russia, With Default: Russian Debt Crises and Global Finance

I finished reading The Ascent of Money while sitting in New York City's Bryant Park last Saturday, with the mammoth Bank of America Merrill Lynch tower as a backdrop, the Lord of War soundtrack as background music, and the occasional stray ping pong ball to bring me back to my surroundings. After three long days of investment banking networking and meetings with various IU alumni in the city, it was nice to sit and take in the somewhat paradoxical combination of parks & rec and metropolitan mayhem that New York has to offer, all while reading about the history of finance.

One of the themes throughout Niall Ferguson's book is the inherently international nature of finance and banking, and how seemingly unconnected transactions and events can have disastrous ripple effects leading to global crisis. This is something that became all too obvious between 2007 and 2009, when the U.S. subprime mortgage and CDO meltdown led to not only an American but also a global recession from which international markets are still struggling to recover. Indeed, while the cover of the current issue of The Economist announces "Wall Street is Back," the British newspaper doubts that investment banks will ever fully regain the levels of profit and success they attained prior to 2007.

Yet massive global crises caused by national-level defaults and instability, far from being a 21st century phenomenon, have been a variation on a theme for at least a century now. Two instances that I find particularly intriguing, given my interest in Russia and Eastern Europe, are the Russian defaults in 1918 and 1998. In both cases, national-level financial problems in Russia led to global financial pandemic.

The assassination of Archduke Franz Ferdinand, which led to the outbreak of hostilities in the Balkans and ultimately triggered World War I, did not cause any financial reaction until late July of 1914. Once investors and financiers realized the impending likelihood of global war, however, they were quick to react, and one of the first victims was the Russian economy. Although Russia had one of the largest standing armies in Europe at the time, its financial and political systems were not regarded as very stable, and a massive selloff of Russian securities ensued. This in turn led to a drastic drop in value for the ruble, followed by a similar slump in the dollar once American securities were unloaded by Europeans as well. 

Global meltdown quickly ensued, as British banks were flooded with sell orders. Soon most financial systems in Europe faced a mounting liquidity crisis, which the unfolding war did nothing to help. To staunch the financial bleeding, the world's major stock markets completely shut down for several months. It was an unprecedented event and one that has not been repeated since; but it succeeded in averting a full-blown global crash that likely would have been at last as bad as the one that kicked off the Great Depression in 1929.

Returning to Russia, however, the Tsar's government simply suspended the gold standard and any convertibility of rubles into gold, which led Russian bond prices to collapse, followed in short order by the Romanov dynasty itself. In 1918 the new Bolshevik regime defaulted on all of its bond debt, and by the 1920s Russian bonds were trading around 20% of face value. It was only through forced, Soviet economic management that the Russian financial system was brought back to a semblance of life and was able to grow during the subsequent depression era of the late 1920s and early 1930s.

Russian Freedom bond, 1917. Image courtesy of Wikipedia.

Russian default precipitated a similar global crisis in 1998, again due primarily to overarching economic and political reasons. Following the collapse of the Soviet Union and the "opening" and "freeing" of Russian markets to the rest of the world, Russia's supposed emerging economy entered a tumultuous period dominated by oligarchs and overly reliant on oil revenues. Overwhelmed with political turmoil and botched attempts at privatization, Russia defaulted on its foreign and even rouble-denominated domestic bond debt in August of 1998.

The shockwaves were immediate and devastating. While the limitations and weaknesses of the Russian economy were known at the time, the Russian default blew out bond spreads, caused equity volatility to spike, and crashed market indices. Perhaps the most damaging and most (in)famous results of the Russian default, however, was its central role in the collapse of hedge fund Long-Term Capital Management. Using complex and sterilized mathematical modeling, LTCM had bet big that the markets would never lose more than $45 million in a single day. The Russian default caused the markets to los $550 million on August 21, 1998 alone. The continued losses drove up LTCM's leverage and crashed its supposed infallible modeling, leading to the collapse of the hedge fund and a massive Wall Street bailout that would foreshadow the more recent bailouts following the 2008 financial crisis.

The 1918 and 1998 Russian defaults were separated by 90 years of supposed financial evolution and progress, yet history certainly seemed to repeat itself. In both instances, the supposed financial invincibility and hubris of investors (whether Western Europeans or LTCM) was reduced to panic due to events half a world away, in a country and financial system regarded even today as tangential. The lesson to be drawn--from these incidents and from Niall Ferguson's book in general--is that as integral as international finance has been to the interconnected ascent of man and money, the key to establishing a successful financial history of your own is knowing and understanding the history of finance. In the grand scheme of things, global dynamics and international events can often be far more important than technical valuations and mathematical models.

Russian Roundup: Azeri Oil Money & Armenian Petrochemicals

Two of the top Russian business stories from today, courtesy of the Moscow Times:

Last week I posted about the $3.3b stock offering by Russian mega-bank VTB. According to the WSJ's DealBook, one of the first investors was the Azerbaijan sovereign wealth fund, and now new details have been published about the Azeri investment. According to the Moscow Times, "Azerbaijan's state oil fund SOFAZ has agreed to invest around $500 million in a new share offering by VTB, Russia's second-largest bank, the fund said in e-mailed comments." The investment would give SOFAZ around a 3% stake in VTB. Check out the Moscow Times article for more information.

On the subject of oil, Russian oil giant Rosneft has reportedly entered into talks with Armenia to acquire Armenia's largest petrochemicals plant, Nairit. Rosneft, along with Russian gas company Itera, is seeking to acquire the plant for its production of chloroprene rubber. Nairit is currently jointly owned by British Rhinoville Property Limited and the Armenian goverment, which own 90% and 10% of the company, respectively. Rubber production at the plant stalled in 2010 when gas prices skyrocketed to $180/1,000 cubic meters, making operations unprofitable. A modernization of the plant would require several million dollars investment by the Russians. Read more at the full-length article here.

Kapitall and Basic Investing

If you've never heard of the online investing platform Kapitall, I'd highly recommend checking out the website and setting up an account. Kapitall may not necessarily be ideal for the highly experienced or extremely wealthy investor--after all, it's tagline is "Investing for the rest of us"--but it's nonetheless an extremely interactive experience that has much more of the look and feel of a Zynga game or similar social media app than an average trading platform. It's user-friendliness notwithstanding, the site still offers plenty of analytical and number-crunching tools to allow for in-depth analyses and comparisons of stocks, bonds, ETFs, and other investment options.

Screenshot of a comparison of various stocks on Kapitall

I've set up a very modest Kapitall Generation account myself and just executed my first two trades today. It was a quick and seamless process, even though one of my transactions involved an OTC trade and pink sheets. More on my investments to come in a future post...but I must say I am looking forward to the day when I have more money to invest and the trading fee isn't as much as 20-25% of my total transaction cost!

Here's the official, full-length description of Kapitall from the site's blog, Kapitall Wire:

"Kapitall is a revolutionary brokerage platform for researching and analyzing stocks, mutual funds and exchange traded funds. Inspired by video game design, the site combines a graphical user interface with drag and drop technology that makes it easy to build portfolios, share ideas and execute trades. Kapitall's lists break down complex concepts to their basics, offering education and investing ideas to novices that double as a refresher course for more seasoned investors."

Russian Billionaire Usmanov Invests $100m in Apple

Russian billionaire Alisher Usmanov has reportedly purchased $100m of Apple stock (AAPL, $460.71, +2.38%), according to the Moscow Times. Usmanov is quoted as saying that despite recent qualms over the tech company's future, Apple represents a "very promising investment," and Usmanov thinks that Apple's stock price and capitalization will rebound soon, and noted that the company has lost more than $100b of market value in less than a year. Perhaps the Russian knows something many American investors don't or refuse to acknowledge?

Alisher Usmanov has invested $100m in Apple stock

Usmanov, who made his first fortune selling plastic bags, is currently estimated by Forbes to be the 5th richest man in Russia and 35th in the world, with a net worth of around $17.7 billion. The Russian businessman is heavily involved in iron ore mining and media, with key stakes in Digital Sky Technologies (an early investor in Facebook), Mail.ru, Kommersant, and EPL soccer club Arsenal.

You can read a full bio of Usmanov here, also at the Moscow Times website.

Bookshelf: The Ascent of Money

A lot has happened since my last post. I have finished final exams (in effect becoming a senior in college); moved out of my fraternity house and back home; and lately have been preparing for my upcoming trip to NYC this week with the rest of the Investment Banking Seminar Class of 2014.

I've also begun reading the highly recommended and critically acclaimed book The Ascent of Money, by Niall Ferguson. More history than hardcore finance, the book has been fascinating thus far, and I'm only 30-odd pages in so far. I think I'll use the book as the first in a series of new blog posts entitled "Bookshelf," which will cover what I'm currently reading or books I'd recommend to my readers.

At the risk of over-quoting from the book, I'd like to share two of the main points from the introductory chapter: 1) poverty is not the result of rich financiers exploiting the poor; 2) modern finance amplifies the effects of human nature, human ignorance, and hard work.

"I myself have learned a great deal in writing this book, but three insights in particular stand out. The first is that poverty is not the result of rapacious financiers exploiting the poor. It has much more to do with the lack of financial institutions, with the absence of banks, not their presence. Only when borrowers have access to efficient credit networks can they escape from the clutches of loan sharks, and only when savers can deposit their money in reliable banks can it be channelled from the idle to the industrious or from the rich to the poor. ...

"My second great realization has to do with equality and its absence. If the financial system has a defect, it is that it reflects and magnifies what we human beings are like. As we are learning from a growing volume of research in the field of behavioural finance, money amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong. Booms and busts are products, at root, of our emotional volatility. But finance also exaggerates the differences between us, enriching the lucky and the smart, impoverishing the unlucky and no-so-smart. Financial globalization means that . . . The more integrated the world's financial markets become, the greater the opportunities for financially knowledgable people wherever they live--and the bigger the risk of downward mobility for the financially illiterate. It emphatically is not a flat world in terms of overall income distribution, simply because the returns on capital have soared relative to the returns on unskilled and semi-skilled labour. The rewards for 'getting it' have never been so immense. And the penalties for financial ignorance have never been so stiff" (pgs. 15-16; bold emphasis added).

Important thoughts to ponder.