Chapter 10
The Alchemists of Finance
Exercises
1. Questions on the text
1) What’s the main difference between commercial banks and investment banks?
In today's business environment, the main business of commercial banks is to collect deposits and make loans, while that of investment banks is to underwrite stocks and bonds and advise companies on mergers and acquisitions.
2) Why do investment banks try to keep quiet about their big profits?
Investment banks try to keep quiet about their big profits for two major reasons: first, they are under more scrutiny by regulators and investors; second, private equity and hedge funds have overtaken them in raising money and making excessive bets.
3) What changes have taken place in the financial markets since the 1980s?
The main changes since 1980s have been the rapid growth of financial instruments with unprecedented breadth, depth and richness, brought out by
technology and innovation. Examples of those financial instruments are public and private debt securities and derivatives.
4) Why do bankers and regulators worry about a possible collapse of an investment bank?
They worry about a possible collapse of an investment bank because such an event will have serious implications for the whole financial system, and it is vital to know how such institutions evolve, how they handle risks and how well those risks are spread around the financial system.
5) Which three factors can explain the huge profit for investment banks?
Those factors are: first, the alchemist's trick of turning debt (mostly leaden) into derivatives (mostly liquid); second, the emergence of a new class of leveraged client (hedge funds and private equity); third, seeking out new capital markets and clients around the world. Meanwhile, in all these pursuits the banks are now using their own money, to differing degrees.
6) What does the expression “the wild east” refer to?
That expression refers to the new markets emerging in Europe and Asia. The introduction of the euro in 1999 and the rapid growth of economies in those regions have attracted investment banks.
7) What makes London an impressive rival to New York as a global financial center?
London has become an impressive rival to New York as a global financial center because: first, London trades a wide range of assets and is regulated on the spot; second, London is a hub for Europe and continent European countries can raise capital there; third, London is also regarded as a springboard for emerging markets such as China and Russia.
8) How do investment banks manage the risks?
Investment banks try to find the most talented people to handle the intricate assets; they measure the correlations between different financial instruments in an attempt to spread risk; they invest hundreds of millions of dollars a year in technologies to measure and stress-test risks; they also try to boost their risk-weighted capital.
9) According to the text, what’s the relationship between revenue and risk in finance?
The relationship between revenue and risk is fundamental in finance. Risk-taking is awarded by possible high revenue. Low risk often means less revenue. However, in order to gain more revenue, you need to take more risks. You should carefully calculate the risk and balance it against revenue beforehand, or you will pay a high price for foolish investment bet.
10) Which one is more important to the growth of the finance industry, innovation or regulation?
Based on the text, both innovation and regulation are vital to the healthy growth of the finance industry. Without innovation, investors have fewer places to gain returns on their money and those seeking money would have much more difficulties in obtaining it. Thus innovation boosts the rapid growth of finance industry and brings benefits to more people both in developed countries and developing countries. However, innovation without proper regulation, such as the securities that no one knows how to exactly measure their risk, could lead the growth of the finance industry to a disastrous end.
2. Fill in each blank of the following sentences with one of the phrases in the list given below:
1) The government has taken many measures to bring down the prices of oil.
2) Employees are asked to keep quiet about their year-end bonus.
3) Regulators demand the monopoly company to split into smaller entities.
4) It’s reported that China Telecom plans to spin off its network services unit in HK.
5) The traffic had seized up for miles because of the accident.
6) According to those representatives, new forces are at work in the refining industry.
7) We shall never know how she managed to acquire her promotion; there is no way to account for it. 8) A nationwide law aimed at stamping out passive smoking in public spaces in Switzerland came into force on Saturday. 9) Innovations will bring about dramatic changes in this industrial sector.
10) I would say that, on balance, it hasn't been a bad year.
3. Match the terms in column A with the explanations in column B:
A B
1) liquidity crisis a) a bank that provides checking accounts,
savings accounts, and money market accounts
and that accepts time deposits. 6
2) leveraged buy-out to
b) a company issues common stock or shares
the public for the first time. 5
3) credit crunch experiences a
c) the situation in which a business
lack of cash required to grow the business, pay
for day-to-day operations, or meet its debt
obligations when they are due, causing it to
default. 1
4) over-the-counter securities d) the acquisition of another company using
a significant amount of borrowed money
(bonds or loans) to meet the cost of acquisition. 2
5) initial public offering e) a financial institution that assists individuals,
corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities. 8
6) commercial bank f) an aggressively managed portfolio of
investments that uses advanced investment
strategies such as leveraged, long, short and
derivative positions in both domestic and
international markets with the goal of
generating high returns. 9
7) stress test g) a sharp increase in the interest rates and a
strong decrease in allocated credits. 3
8) investment bank h) a process that measures whether one
institution has adequate capital and/or assets
to respond effectively to various, adverse
scenarios usually presented by a computer
program. 7
9) hedge fund on
i) securities traded in some context other than
a formal exchange such as the NYSE, etc. 4
10) risk management j) the identification, assessment, and
prioritization of risks followed by coordinated
and economical application of resources to
minimize, monitor, and control the probability
and/or impact of unfortunate events or to
maximize the realization of opportunities. 10
4. Translate the following into Chinese：
在去年信贷危机爆发的时候，联邦的监管者们向国内的各主要金融机构注入了数以百亿计美元，而他们这么做的原因在于这些银行是如此之大以至于官员们担心它们的破产将会拖垮整个金融体系。
如今，这些银行中最大的几家甚至变得更大了。这场危机对控制着美国金融的不少巨头们而言很可能是件好事。由联邦政府安排的一系列兼并行动将陷入困境的银行平安地并入了更为安全稳定的企业中。这场危机还让幸存者们得以乱中重生，市场地位得到巩固，对消费者信贷拥有更大的控制权，并获得更多的盈利空间。
如今，这个国家每十美元的储蓄中就有超过一美元是由摩根大通银行（J.P. Morgan
Chase）掌控的，该银行则由华尔街的一些老字号机构组成。美国银行（Bank of America）和西海岸最大的银行------富国银行（Wells Fargo）的情况也是如此，而前者在收购美林证券（Merrill Lynch）时遭受重大损失，又因金融危机被政府部分收购。联邦政府数据显示，现在每两笔抵押贷款中就有一笔和每三张信用卡中就有两张是由以下银行发放的：上述三家银行，再加上由政府救助并拥有的花旗银行（Citigroup）。
在去年九月金融体系几乎完全崩溃一年后，联邦政府的应对措施重新界定了美国人获得抵押贷款、学生贷款和其他信贷的方式，并高调主导了一场关于高管薪酬的全国性讨论。不过，在这场危机带来的所有后果中最让高层监管者们不安的是那些超大型银行却变得更大，而且它们之间的联系更为紧密。
监管者们有两方面的担忧：一是消费者对服务的选择余地最终会越来越小，二是银行会认为如果事情弄砸了它们总会得到政府的支持。这一假设的保证意味着如果大公司认为联邦官员总会替它们收拾烂摊子的话，它们就会重操旧业，再次从事那些曾引起此次危机的高风险行为。
这个名为“道德风险”的问题可以在一定程度上说明政府官员为何要严密监控那些获得了救助的银行------监督其高管的薪酬并审查其重要部门或分支机构的出售。除此外，此问题还促使奥巴马政府采取措施建立新的监管体系以防新危机的再现。此项计划还对大型金融机构设置了更高的资本标准，并授权政府可以接管各类陷入困境的金融机构以便逐步而有序地停止其业务。
5. Fill in each of the following gaps with one of the sentences given below:
1) Yet investment banks have recently changed out of all recognition.
2) If they decided the property was a bargain.
3) In short, investment banking has migrated from an agency model towards a principal one.
4) It is making bigger bets with its own capital, too.
5) The main engine of transformation has been competition.
6) Others have gone for niche markets.
Supplementary Reading
The Secret's Out: Can Swiss Banking Adapt to Scrutiny?
1. According to the article, what’s the key to the success of Swiss banks？
A. Long history.
B. Good locations.
C. Reputation for discretion. ∨
D. Service to reduce tax.
2. Which one of the following statements about Bradley Birkenfeld is NOT
true?
A. He has worked in Geneva.
B. He is jailed for his wrongdoing.
C. He was forced to give some confidential documents to U.S. officials. ∨
D. He was a former banker of UBS.
3. According to the article, it is mainly __________ that built Switzerland’s wealth.
A. special local food
B. well-developed tourism industries
C. strict government administration and management
D. the banking industry ∨
4. All of the following statements are features of Swiss banks except _________.
A. Most of them are private banks.
B. They try to gain as many regular clients as possible. ∨
C. They prefer wealthy people.
D. They usually have many foreign clients.
5. After a change in Swiss law permitted UBS to give U.S. officials details of 4,450 American-held accounts, _________.
A. U.S. officials stopped their investigation.
B. no actions have been taken against UBS.
C. many Swiss felt that they were offended. ∨
D. UBS closed its U.S. unit.
6. According to the article, all of the following countries have initiated tax investigations based on information from Swiss banks or banks located in Switzerland except __________.
A. Russia ∨
B. France
C. Italy
D. Germany
7. Why did Birkenfeld went to places like Centre Court at Wimbledon and the film festivals at Cannes and Bangkok?
A. He like sports games.
B. He like good food and traveling.
C. He is a fan of film stars.
D. He went there to look for wealthy people. ∨
8. After the tax scandal, UBS has taken the following actions except __________.
A. closing one of its unit
B. expanding in new markets
C. denying any wrongdoing ∨
D. developing partnership with Formula One
9. The attitude of Switzerland toward actions taken by other countries with regard to its banks can be described as __________.
A. indifferent
B. cooperative ∨
C. evasive
D. negative
10. From the article, it can be inferred that Swiss banks are likely to __________.
A. adapt themselves to more public scrutiny ∨
B. keep their tradition of secrecy unchanged
C. pull out of the U.S. market
D. completely lose their competition advantage over other European banks
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