Liquidity

Norway's Oil Fund - An Infrastructure Investor of Choice

NOTE: This is a longer version of an Oped that appeared in the Norwegian business newspaper Dagens Naeringsliv on 21 March 2014.

The revelation of the Oil Fund’s controversial investment in Formula 1 has led to Ola Mestad, Lars Hakon Sooras and Sofie Mathiasen and other Norwegian commentators to warn against allowing the Fund to invest in unlisted assets. This would be a grave mistake that would cost Norwegians dearly.

Instead, the government should bolster Fund capacity and set up a powerful independent watchdog in the form of a “Stortingets Råd for Oljefondet”.

Critics say that unlisted assets will make it harder to detect unethical investments or exercise oversight. They also warn about the lack of relevant expertise at the Fund and in the Norges Bank board that oversees it. As a reaction to the Formula 1 fiasco these concerns are understandable, but misconceived.

While unlisted investments, private equity and infrastructure disclose less information publicly, they will give NBIM access to hordes of private information. It will also be in a much stronger position to demand private information and to successfully challenge questionable practices. For effective oversight, the SRO should not only enjoy privileged access to all the data NBIM holds, but also have the right to demand more information on any of its investments.

Does anyone seriously think that Formula 1, with the constant whiff of scandal and a controversial promoter repeatedly accused of corruption, would have been an appropriate investment if only it were listed? It did not pass the smell test, period.

Did Lehman Brothers die in vain?

Having once worked for Lehman Brothers and having championed financial reform long before it became fashionable subject, I have strong opinions on the issue. Just as I was about to write something for the 5th anniversay of Lehman's collapse, a Good Samaritan sent me this transcribed text of a keynote speech I had made at the 2nd anniversary of the collapse. After browsing through it, I decided it did not need any editing -  so here goes… It is also a good précis of my book that you can download here. You might also want to read my recent FT op-ed on how financial reform is lagging behind and a piece I wrote on what a good banking system ought to look like. Enjoy!

The world has been rocked by the most major financial and economic crisis in recent history. This exposed several aspects of financial system dysfunction. These not only increased the instability of the financial markets, but also impeded their normal functioning as tools to allocate economic resources efficiently throughout the real economy.

The collapse of Lehman Brothers two years ago was at the heart of this crisis. This is not a Eulogy to Lehman Brothers. That having been said, Lehman in death managed what it could not do while alive – be more famous than its peers Goldman Sachs and Morgan Stanley. In death, Lehman may have performed a greater service for society than it did perhaps in the many decades of its existence – provided of course that we have learnt the right lessons from its failure and acted on them. Did Lehman die in vain? 

Seven Lessons from Finance as a Traffic System

Causes of the Financial Crisis

The world has still not recovered from the most serious financial and economic crisis in recent history. This exposed several aspects of financial system dysfunction which not only increased the instability of the financial markets but also impeded their normal functioning as tools to allocate economic resources efficiently throughout the real economy. Policy maker response to this crisis remains very inadequate and will do little to correct the deep structural flaws exposed by the crisis. 

In this new set of blog posts, we will serialize our 2009/2010 e-book "The Financial Crisis - Causes & Cures" which was written for both the layperson as well as policy-makers at the European Parliament, the European Commission and national finance ministries and regulators. The book may be a bit dated, but the issues are current.

EU banking, whither now?

Large uncertainties haunt the banking sector in the EU. A lack of clarity about the scope and timing of several pieces of financial sector legislation that are in the pipeline, the macroeconomic headwinds from the unresolved problems of the Eurocrisis and the prospect of a risky transition to a smaller, safer and better-regulated banking system are weighing on investor interest in the sector. Without a renewal of interest from investors in recapitalizing and funding banks, the sector will remain in limbo. In this piece, first published in the Quantum Magazine of the Qatar Financial Centre, Sony Kapoor highlights the key aspects of reforms underway.

The European Union’s initial legislative response to the global financial crisis was much slower than that of the United States, which moved rapidly to introduce the Dodd-Frank bill on financial reform. But, as the economic crisis in the EU deepens, new legislation on the functioning of the financial system continues apace and the Eurozone is now pressing ahead with plans to create a banking union.

The reforms which are in the pipeline will result in a radical transformation of the banking sector. There will be changes in the structure of banks, their capital and liquidity requirements and even a single supervisory authority. However, the speed at which these reforms are to be introduced is much less clear. The new structure will have to be approved by EU governments, balance the needs of Eurozone and non-Eurozone states and take into account the views of the banking sector, which itself remains divided on some of these reforms.

A proportionate approach to bank regulation

In this post we highlight how concerns about regulation driven excessive pace of bank deleveraging can be reconciled with tackling the problem of too-big-to-fail institutions which is now worse than ever, particularly in the EU. 

We suggest that a much more differentiated approach is needed wherein financial institutions classified as systemically significant at the Global, European, Domestic level face more stringent regulations proportionate to their systemic importance and smaller, less risky banks, particularly those that have a more direct connection to the real economy are given more leeway. This post is loosely based on the advice we have given to EU policymakers on this issue.

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