Is the free market to blame for the 2008 Financial Crisis?

By Balaji Viswanathan, MBA from Babson

Only a living being can get sick or die. Stones don’t die. In the same way, only a market economy can have a market crisis. In that sense, the “free” market is the cause of the crisis. If US had been a Liberia or North Korea, 2008 financial crisis would have never happened.

Like any living thing, markets have ups & downs. They are susceptible to emotions. They swing between euphoria and despair. Since the time of Keynes (1930s) Governments have desperately tried to smooth out these cycles of boom & bust. But, markets have a mind of their own.

“We need more regulations” is an empty and oversimplistic phrase. It is often used by media pundits who don’t understand the markets. More regulations of what kind? Many of the regulations have worsened the crisis and in some other cases relaxation of regulations caused the crisis. For instance, the community development act of 1992 forced the banks to lend more to risky, poor individuals. That is an example of a regulation that worsened the system. Repeal of the Glass-Steagall act enabled the regular banks to “play Vegas”. That is an example of a lack of regulation worsening the system.

You need to look at both, although the fundamental factors involve neither.

Fundamental Causes
1. Overconfidence in math models: In the years running up to the crisis many financial institutions became too reliant math models built out of insufficient data and used that as a substitute for conventional judgment. 15 years of bond market stability lulled them into thinking that the market risk is a thing of the past. Hubris lead to collapse, like in all other human endeavors.
2. Excess capital in the system: US was flooded with cash from global investors since early 1990s. China, Japan, West Asia and other regions brought a lot of dollars the US bond markets, from their exports. This increased availability of capita reduced the returns in a lot of investments, forcing the investors to choose riskier & unproven investment options. Real estate received a lot of attention from the investors, as the bank interest rates & bond rates swung to rock bottom.

3. Herd behavior & communication explosion: The availability of new media since late 1990s increased the magnitude of herd behavior that was always present in humans. People shared stuff about how smart their home investment in 2001 turned out to be. If you didn’t borrow on your home equity, you were considered dumb. Peer pressure got really strong, as people could instantly share photos of their trophy homes. In 2008, this thing worked completely opposite. The trend became on how to walk away from your home mortgages.

Secondary Factors
These fundamental factors now impacted a lot of other secondary factors:
1. Overconfidence in math and herd behavior forced the rating agencies to understate the risk in many investments. No one wanted to look stupid and loose business by playing the tune of caution.
2. Excess capital in the system enabled the US government backed mortgage providers – Freddie Mac and Fannie Mae to expand their home loans.
3. Overconfidence, excess capital and herd behavior led a lot of otherwise conservative US banks & insurance companies to play speculative games in the bond market.
4. The reduced returns in the bonds, forced insurers and pension funds to look beyond their traditional investments. Companies like AIG were tempted to look into unknown territories – such as insuring the bond defaults of big companies.
5. The communication explosion led even the most novice of the investors get access to highly complex mortgages. HELOCs, ARMs and Alt-A loans became available to even the poor and illiterate.

Review of the Microsoft HoloLens

By Vincen Mathai, Syrian Christian forged in the heat of Qatar, Class 2017

People might say the Google ‘Glass’ is the first augmented reality product . But do you honestly think that people will wear that abomination on their face and walk around in the public ?

Hololens is a  standalone device that is not connected by wires in anyway and is not tethered to any devices. It is a completely independent device where the computer with HPU (Holographic Processing Unit) handles the complex processing of  superimposing the 3D images , taking the immediate surroundings into consideration. Watch the video below to have the idea of how the product will create an experience of augmented reality from the user’s POV.

The product is fitted with 18 sensors that takes in huge amount of data every second and with a camera (120 by 120 degrees) ,which is more powerful than the Kinect Camera while consuming only the fraction of the power. It has vent facing outward and this will make sure that the product doesn’t overheat and fry the user’s head.

Microsoft hit the nail on its head when they created a product that is not meant to worn on the face throughout the day, unlike how Google marketed the ‘Glass’ . From the pictures and videos it is seen that the product is big , making it not suitable for wearing throughout the day. Microsoft made it clear that Hololens is meant to be worn when you require it, like when you are working, playing , skyping and watching movies. The intended applications of the product are aimed at specialized functions that mostly happen inside closed rooms in companies, factories, living rooms and game rooms, clearly making sure the product will not be worn in the public . This move makes sure that Hololens users don’t get stigmatized by the people , unlike how Glass users were treated.

One application I think is possible with the Hololens :

The minecraft segment of the Hololens demo video made me realize that virtual toys can be made that can be used by kids without actually having the toys scattered around the room.

Imagine you are the parent who will buy  Hololens as a toy for the kids . You will be able to  load  the Legos app and give the product to the kids and let them  create whatever they can with unlimited bricks . Once they are done or bored , the parent doesn’t have to worry about the bricks strewn across the floor.

Why?
1. You can’t step on lego bricks and hurt yourself if they are only there in virtual reality.
2. You won’t lose a brick that remains elusive  for many months.

Therefore I believe this is one application that Microsoft needs to capitalize upon soon.

The possibilities of using Hololens for various applications is immense and IMHO it has been a while since  Microsoft released a product that made heads turn . This product indeed  stands as a testament to the vision of Microsoft’s new CEO, Satya Nadella.

More on Microsoft HoloLens:

Source Link: https://www.quora.com/Reviews-of-Microsoft-HoloLens/review/Vincen-Mathai

The Dynamics of the Coal Mining Industry in Indonesia

by Daniel Kristanto Harliman, AGSM MBA, 2016

The Asian Financial Crisis (1998) was both a boon and a bane for Indonesia. Although a lot of companies folded, the crisis provided a new opportunity for multinational and local companies to invest in a previously overlooked sector, coal. The coal mining industry peaked in 2010 because of the increase in coal price and demand. The boom also provided great opportunities for other sectors that supported this industry such as mining contractors and marine transportation companies. In addition to the boom, the tremendous coal reserves caused Indonesia to become the fourth largest coal producer in the world and enjoy significant growth in its economy. However, a sudden drop in the industry, due to a significant decrease in natural gas prices and oversupply in coal production, brought down the coal price from USD 130/MT in 2013 to slightly above USD 40/MT by 2015. Many mining companies were forced to file for bankruptcy as they were no longer able to fund their daily operations.

It was a tough time for not only the mining companies themselves, but also the businesses that supported the coal mining industry. Without exception was my previous company, PT. Perusahaan Pelayaran Rusianto Bersaudara, where I worked for the last four years. It is a well-known marine transportation company in Indonesia that operates tug boats and barges to assist mining companies with transporting coal from a mining site to its final destination. During the downturn, I assisted my company in escaping financial distress by creating efficiencies and operating under a tight budget. Fortunately enough, the company is debtless and based on customer trust. Both of these characteristics, along with the management’s commitment and persistence, assisted us to survive and even make marginal profits during a very difficult period in the industry.

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Daniel Kristanto Harliman was a Finance & Accounting Manager for PT. Perusahaan Pelayaran Rusianto Bersaudara inIndonesia. Prior to that, he also worked in the Internal Audit Services at PT. PricewaterhouseCoopers Indonesia Advisory.

AGSM at the Molsen Case Competition

Montreal, Canada January 2016

by Aina Tugbobo, Alejandro Escobar, Christine Savage and Shane Simon

Participation in case competitions is part of ASGM’s active learning methodology. It is an opportunity for the MBAs to get practical application of the skills and competences developed in the AGSM program. As an MBA student, there are several benefits to participating in case competitions: first, you test your skills at solving real-life business problems; second, you practice your communication and presentation abilities, which is a critical skill for the aspiring managers that we are; finally, it is a safe, low-risk environment – if you get it wrong, nobody goes bankrupt you only learn and grow.

Our Cohort, the full-time MBA class of 2016, are big enthusiasts of case competitions. Last

year, we had high participation levels in the Nespresso Sustainability MBA Challenge and

Strategy& case competitions, as well as the big Accenture case competition in August. We were very excited to have the opportunity to go all the way to Canada to compete in the John Molson MBA International Case Competition on the 4th to 9th of January 2016.

The John Molson MBA International Case Competition is a one-week event organised by the John Molson School of Business at Concordia University in Montreal, Quebec, Canada. The event is open to business schools worldwide, and its main purpose is to bridge the gap between the corporate and academic worlds. The competition format is a preliminary round-robin tournament consisting of five unpublished business cases, followed by a semi-final and final round. This year, the round-robin cases presented business challenges encountered by several internationally recognized corporations including McDonald’s, Uniqlo, the Mahindra Group and Maggi Noodles. The highlight of the competition was a live case presentation by Spanish companies AMC Group and Natura Bisse, who are facing a real-life business challenge with their new JV Beauty&Go product line. This case involved the creation of a new product (cosmetic juice) and a new market (ingestible cosmetics), which presented a unique, fun, and interesting challenge to the team and an opportunity to present ideas and solutions to company executives.

This year marked the 35th anniversary of the Competition and AGSM’s first participation in the event. The selection of the team to represent AGSM was a rigorous process that considered the following aspects: academic criteria, such as marks and in-course presentation performance; non-academic criteria, such as contribution to the AGSM community and brand ambassadorship for AGSM; and lastly, the essay responses to an application questionnaire. The selected team reflects the diverse professional and academic backgrounds of the 2016 cohort and consisted of Alejandro Escobar, Robert Ludwick, Christine Savage, Shane Simon and Aina Tugbobo.

We, the AGSM team, and the entire AGSM community were very confident that our powerhouse team would bring home the win! Unfortunately, it didn’t happen for us this time. During the competition, we were outmaneuvered by teams that have been involved with the event for several years and knew the ‘secret recipe’, or checklist of items, that

the judges looked for in deciding the outcome. We are very satisfied with the intellectual level of strategic solutions we presented in each of the cases, but realised that to achieve victory in this event, you have to play by some unwritten rules and expectations that only experience in the competition can provide. We adapted and improved with each case presentation, but by the time we fully realised these inside tricks, it was too late for a comeback.

Despite the less than ideal results, we certainly took away some positives from the experience of attending this competition. We represented the AGSM proudly in meeting and interacting with the students, coaches, and sponsors from 35 other MBA programs from all over the world. Additionally, the sheer scale and precise organisation and execution of the events in this competition has inspired dreams of a future regional, and eventually global, case competition hosted in Sydney by AGSM MBA students. The John Molson competition was organised by four MBA students just like us and it ran like clockwork. There is no reason that a top tier MBA case competition cannot be held in Sydney in the future and we believe that it will be achieved as our program continues to grow and evolve.