Tag: finance

Operational risk can have a crippling effect on a company if not managed properly. This is especially true in the financial services industry. Banks and investment firms must pay close attention to variables that have the potential to impact their operations, not only from the breakdown of technology and processes, but also from a personnel perspective. The responsibility of managing one’s money is great, and the inability to properly anticipate and manage potential risk factors can have a devastating effect, all the way up to the industry level. A case in point was the subprime mortgage crisis of the late 2000s, which led to a nationwide economic recession.

Mike Pinedo, the Julius Schlesinger Professor of Operations Management at New York University’s Stern School of Business, is an expert in risk management research, particularly in the context of the financial services industry. In his presentation at The Boeing Center’s 13th annual Meir Rosenblatt Memorial Lecture, he described the main types of primary risks in a financial services company: market risk, credit risk, and operational risk. Ops risk, which is the risk of a loss resulting from inadequate or failed internal processes, people, or external events, may be the most important factor, he claimed.

Pinedo goes on to describe various types of operational costs such as human resources, I.T. investments, and insurance costs, and how they impact corporate risk management. For example, rogue traders can pose a risk if they make inadvisable decisions, so some investment firms choose to take out insurance against that possibility. Other types of ops risk include transaction errors, loss of or damage to assets, theft, and fraud, all of which can pose a catastrophic risk at the industry level. Pinedo adeptly inserted anecdotes into his lecture to provide examples of these risk factors playing out in the real world.

The annual Meir J. Rosenblatt Memorial Lecture brings the “rock stars” of supply chain and operations to the Danforth Campus every fall. Each lecture gives prominent thinkers and practitioners alike the opportunity to hear an expert in the field highlight emerging trends.

This lecture series was established in 2003 to honor the memory of Meir J. Rosenblatt, who taught from 1987 to 2001 at Olin Business School as the Myron Northrop Distinguished Professor of Operations and Manufacturing Management. A leader among faculty, Rosenblatt often won the Teacher of the Year award at Olin and authored the book “Five Times and Still Kicking: A Life with Cancer,” having battled cancer multiple times throughout his life.


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Investors and analysts were surprised when Chipotle posted a 167 percent jump in earnings for the second quarter on July 25. The fast food burrito chain has been battling bad press and consumer fears after a several outbreaks of food-related illness linked to its franchises.

According to Chipotle’s corporate news release, second quarter diluted earnings per share increased 167%  ($2.32 per share), restaurant sales increased 8.1% and revenue growth jumped 17.1% compared to the same period last year. Revenue for the quarter was $1.17 billion, driven by new restaurant openings, according to the company.

U.S. News & World Report asked Todd Milbourn, Vice Dean and the Hubert C. & Dorothy R. Moog Professor of Finance at Olin, to comment on the beleaguered company’s unexpected earnings rebound:

Milbourn
©Photo by Jerry Naunheim Jr.

“Chipotle posted a second-quarter earnings figure that was apparently more than enough for investors to overcome any negative sentiment,” related to the outbreak, said Milbourn.

U.S. News & World Report claimed Wall Street analysts were expecting EPS of $2.18 on revenue of $1.19 billion.

Chipotle reported that comparable restaurant sales improved primarily due to an increase in customer visits, along with an increase in average check as a result of a reduction in promotional activity. The company opened 50 new restaurants during the quarter, and closed two restaurants, bringing the total restaurant count to 2,339.

Link to U.S. News article

 




Rich Ryffel, Olin’s senior lecturer in finance is the co-founder and co-chair of the annual Municipal Finance Conference hosted by the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. This year’s conference will be held July 17-18 in Washington D.C. Olin is partnering with Brookings as well as the Rosenberg Institute of Global Finance at Brandeis International Business School and the Harris School of Public Policy at the University of Chicago to host the 6th annual conference.

Rich Ryffel

The event invites academics, practitioners, issuers and regulators to come together for panel discussions and paper presentations of the latest research in municipal finance. The conference does not charge an attendance fee, but must be attended in person.

To find out more about the muni fin meeting, we asked Rich Ryffel a few questions:

Q: What happens at the Brookings Municipal Finance Conference?

RR: The goal of the conference is to bring researchers and practitioners together to both encourage better research in municipal finance and to encourage the adoption of more scientific policy and practices.

Q: What have been the changes in muni capital markets since the Great Recession?

RR: There have been significant changes in the municipal market since the Great Financial Crisis (GFC).  This includes the consolidation of intermediaries and reduced liquidity, more regulation, more disclosure and less innovation.

Q: Are there ever any surprising revelations from research shared at the conference?

RR: Lots of surprises – practitioners are often surprised to see how the data can reveal conclusions that are not obvious from anecdotal experience. Likewise, researchers are surprised to see how subtleties in the market can be masked when simply crunching large data sets. Thus, the reason to put the two groups together.

Q: Why should people involved in municipal finance attend the conference?

RR: Opportunities abound for education and improvement to better understand market behavior and use that knowledge to create better policy and more efficient government.

Link to more information on the 6th annual Municipal Finance Conference.




Performance-based pay plans for corporate executives are becoming more popular as stockholder activists and board members demand more accountability. Gopalan, tells Nicklaus,”that’s a big step forward from the days when insider-dominated boards often handed out discretionary bonuses based on little more than a desire to keep the big boss happy.” Gopalan also notes that the executive labor market has become more competitive.

Link to article: “It was a good year for St. Louis CEOs, but not for all of them”

In another column, Nicklaus predicts executive pay could become a hot political issue in 2018. A new rule under the Dodd-Frank Act goes into effect next year that requires “companies to compare their chief executive’s pay to that of an average worker.”

Professor Gopalan says the ratio doesn’t have much merit. “It will give political fodder to politicians who don’t like corporations, but I don’t think it’s an economically meaningful number to focus on,” he says.

Link to article: “Pay ratio will be hot political issue next year”




With pension payouts skyrocketing, tax credits expiring and the inability to pay operating expenses, Puerto Rico filed for bankruptcy protection May 3. The U.S. territory owes an estimated $73 billion to assorted creditors, including Wall Street firms. This makes the bankruptcy the largest-ever American municipal debt restructuring in history.

A senior lecturer in finance at Washington University in St. Louis’s Olin Business School says the situation should serve as a dire wake-up call to the municipal bond market.

Ryffel

“Earlier this year, when the bankruptcy of the fictitious town of Sanidcott became the subject of the hit Showtime series ‘Billions’, I knew we had reached a new low point in the municipal bond market,” said Rich Ryffel, who advised governments, corporations and more about financing and capital structure in his 30-year career in investment banking and asset management. “So common had the once-unheard of notion of municipal bankruptcy become, that it would now be understandable to the television audience and fodder worthy of acting out on the small screen. Well, now the folks in Puerto Rico have given us an even better subject.  Reminiscent of CSI Las Vegas, CSI Miami, CSI Whatever, we now have – Municipal Bankruptcy: Puerto Rico.

“Puerto Rico has become the U.S. municipal bond market’s own little Greece, seeking from the courts what it could not find the will nor the way to do on its own; change its profligate ways and pay its creditors.  Its move to the courts lowers the recovery floor in its negotiations with creditors and gives it remedies heretofore unavailable… . Years of preferential tax and trade treatment failed to create an island economic paradise, so after seeking new assistance from Congress last year, Puerto Rico is now adding itself to the list of those expecting others to suffer the hangover after they they enjoy the bender; think Greece, Argentina, Wall Street.  Where does this end?”

Ryffel says the long-held assumption that governments could repay their debt has eroded, and that’s changed the playing field for lenders.

“Not that long ago, the municipal bond market used two standards when considering whether to open the lending tap to borrowers — one’s ability to pay and one’s willingness to pay,” Ryffel said. “The first threshold was fairly easy to assess. The second was always more difficult to gauge — being more qualitative in nature — but it was assumed that governments would only borrow what was needed to provide essential public services and would take all necessary means to repay its obligations. Default, let alone bankruptcy, was a remote thought.

“Now, however, we see with growing and concerning frequency borrowers treating repayment as optional, as the redemption provision in their bonds themselves. The problem is that the markets depend on this second lending standard and as it erodes, the availability of municipal credit will both shrink and become more expensive for all market participants.”

The Puerto Rico bankruptcy dwarves that of Detroit, which was previously the U.S.’s largest municipal bankruptcy. The city filed for Chapter 9 protection in 2013, with $18 billion in debt. While studies are underway to assess the impact of Detroit’s financial woes, Ryffel says the Puerto Rico situation could send even more shockwaves, not just because of the amount owed, but also for the way it could change laws allowing massive debt forgiveness.

“Puerto Rico may have even larger impacts on the market because they have not only moved to the Doomsday scenario, they successfully had law changed to allow them to do so,” Ryffel said. “In essence, they not only started the markets down the slippery slope, they had a slippery slope built for them.

“To be fair, Puerto Rico is only doing what they need to do to protect their citizens, and they have used every tool available to them. One can’t blame their leadership for that.  While there may not be enough money to go around, there is plenty of blame to go around.  Healthy portions of it go to prior administrations which borrowed without a plan to repay and which borrowed to pay operating expenses rather than invest in the future. Still too, blame must also go to the municipal bond markets, which for years knew of Puerto Rico’s increasing lack of ability to pay, yet still lent it money.”

Guest blogger: Erika Ebsworth-Goold, WashU’s The Source

CATEGORY: News