Tuesday, 12 May 2009

What's hard and pink in the morning?

The Financial times crossword!
Forget the crossword, how about the workings of the entire financial world, which the class were asked to get their heads round in an ambitious two hours. Nevertheless, with the help of Horrie's metaphors and the recurring exchange of a ten pound note between him and Josh, I found myself grasping many ideas that previously had seemed alien to me. Maths and finances has never been my forte, I'm a student with a taste for shoes and dining out. I've simply never had a head for numbers but here I was, mouth agape(proof of concentration) , fathoming the concept of hedge funds and credit creation ratio. And it's affect was long lasting. Yesterday whilst watching television with my cricket obsessed boyfriend, I became (shock horror) quite interested. We were watching, (not yet another test match) but Panorama, which was looking into the life of Sir Allen Stanford, owner of Stanford International Bank, business mogul and large sponsor of the English Cricket team.
Standford is awaiting criminal charges whilst a fully fledged investigation is carried out into fraud claims. A Venezuelan financial analyst, Alexis Dalmandy is claimed to have discovered the fraud whilst looking over SIB's banking history.
He explains: “I was stunned. First, it looked so simple, so unsophisticated. The language used was not quite right. I downloaded the financial statements and to my surprise the “business model” jumped out at me: investing in Stocks, Bonds, Hedge Funds and the like. That’s OK if you’re managing a fund, but not a bank.”
No matter how hard he tried, he could see no way in which SIB’s business model could produce the returns it claimed to or fund the dividends it was continuing to pay its investors.

The Securities and Exchange Commission's complaint alleges that SIB has sold approximately $8 billion of so-called "certificates of deposit" to investors by promising improbable and unsubstantiated high interest rates. These rates were supposedly earned through SIB's unique investment strategy, which allowed the bank to achieve double-digit returns on its investments.

How did I understand all this? Simple. The credit creation ratio, by establishing a respectable looking bank in Antigua, by (as Horrie says) building a fountain in the lobby, flitting around in a few private SIB jets, buying up lots of land and sitting on the laps of the Antiguan government, people put their faith, but more importantly their money in SIB.
Only when, Dalmandy published his article revealing his suspicions that Stanford was acting fraudulently, did it's customers rush to withdraw their funds. As we learnt in last week's lecture, the cash is there on the basis that all account holders will only ever withdraw a certain percentage of their balance at any one time. The fact that everyone enveloped SIB looking for final withdrawals meant that the equilibrium that kept the bank afloat, fell and the bank drowned. Leaving investors with shortfalls or losses and Stanford with world of trouble.

1 comment:

  1. good work - can you please link to http://winchester.journalism.co.uk. Please embed this link as a post. Many thanks - Chris