Payday Loansharks, Don't Bother!!

With the price of living drastically rising, and wages only slowly increasing, UK citizens are turning in numbers greater than ever to payday loansharks to plug the gap! Between 1999 and 2009, the average personal debt rose by 158%, making it harder than ever for those already struggling. This is where the predators came into play, with Wonga offering loans with attached interest charges of up to 4200% (2013 figures), the public saw it as quick and easy cash. Months later when the loan wasn't repaid, unsuspecting customers were landed with a fat amount of debt, of which many could not afford. This is known as Usury, the crime of charging and unethical level of interest on a loan. For those in desperate need of cash, it was a temporary fix and easy to obtain, with no background checks, no security and no processing it was a gift - so they thought. Although, the question that should be asked is do these individuals bear responsibility for their indebtedness? should they not carry out their own due diligence before they invest?

Many argue that these loansharks target the vulnerable, but I think its more of a case of the customers not carrying out enough research into the investment. All the figures are sitting in-front of them, so customers should make themselves fully aware of the risk they are getting themselves into. Saying this, we should be steering away from a growth industry that exploits desperate people, its simply unethical!



It comes after Kane Sparham-Price's death that the FCA decided to intervene. The vulnerable teenagers bank account was drained after loaning money from Wonga, unaware of the extraordinarily high interest rates. Although Wonga did not act unlawfully, the draining of his bank account, leaving him penniless may have been a factor that led to his death. In 2014, the FCA requested information about the volume of Wonga's relending rates and from this saw that it was 'not taking adequate steps to assess customer's ability to meet repayments in a sustainable manner' (FCA, 2014). This highlights a fundamental PIPCO principal 'professional competence and due care' that has not been followed. Wonga was forced to write off £220 million of debt, some 330,000 borrowers who were in excess of 30 days in arrears. Furthermore, 45,000 customers were only asked to repay the amount they borrowed, interest free.



Wonga need to ensure that they lend affordably and responsibly in the future. Even though Wonga claim to carry out credit checks and use "behavioural algorithms" in order to find suitable clients, vulnerable people are still being targeted! With many reports of individuals unable to repay their loans, who were already financially unstable, sadly ending their lives. These people should have been blacklisted by companies like Wonga, to prevent them from becoming more financially distressed.


Why is it that those who are suffering financially don't just turn to banks for loans instead of these loansharks? Many may already have poor credit ratings and so banks will not loan to those when they may not see a return. This is a serious reoccurring problem which has only worsened after the financial crisis.


One final issue to address is the ethical dilemma raised when Wonga sent out letters to customers in order to intimidate them, even though they were completely FALSE! Absurd and unethical in my books!

Madoff's 'Titanic Crime'

Bernie Madoff, one of the greatest con-men of all time was sentenced to 150 years imprisonment back in 2009 for a crime that went unseen for decades. So how did he manage to fool so many people for so long?

The so called 'lion' of wall street, swindled billions of dollars from investors, with offers that were certainly to good to be true. This should no doubt be the biggest lesson that everyone should take away from the Madoff scandal. With steady annual returns, no matter what the state of market, people believed this was the safe option to take with their money and so began investing largely, worldwide. It is this kind of performance that should have raised flags from the first time the market took a bad turn. How was Bernie still making delivering high returns despite the market taking a turn for the worse? Stock investing is no doubt a risky investment, returns have fluctuated wildly in past decades but it is possible to beat the market for some time although eventually the winning streak will stop at some point. So how is it that Bernie managed to beat the market year, after year?

Madoff's high annual returns and ultra safe investment filed in the face of the "Eat Well, Sleep Well" principle of investing, in reference to risk and reward. If you want to gain high returns for your investment (Eat Well), you must take on high risks that will prevent you from sleeping well. Alternatively, if you invest in risk-free investments (Sleep Well),  you will receive considerably smaller returns, hence not eating well.

Madoff claimed to implement the split strike conversion strategy that involved investing in a basket of 40-50 stocks from the S&P 100. He then promised to "opportunistically time" his purchases and would occasionally roll the money into Treasury Notes. Also claiming to use option contracts, it limited his potential losses caused by unpredictable stock price movements. He fooled investors by sending out fake statements created by the firm showing how he kept to his promise of delivering the gains. Investors were content, those who wanted to withdraw their money did so with no problem, as their were simply paid with someone else's investment. Ironically, they were the only ones that received the imaginary gains.

        'Everyone wants something for nothing, you just give them nothing for something'

When Harry Markopolos tried to out Madoff as a fraud almost a decade before his conviction, SEC didn't listen to him. Why? Simply because they thought it was too big to be a scam, and simply brushed the case off their shoulders without investigating any further! With SEC failing to do their due diligence into the case, who now would be powerful enough to stop Madoff? It took the credit crunch years later to bring him to his knees. Investors demanded money, and fast. With so little money coming in, Bernie simply could not afford the pay-outs being demanded. For the first time, his ponzi scheme was publicised worldwide. Finally, some justice!
There are several lessons that we should take away from this case:
- If something looks too good to be true, it probably is!
- Never put your eggs in one basket and ensure you get a second opinion on any investment!
- Don't rely on collective due diligence, reputations aren't always everything, independent verification is needed!

How big is the psychological impact of M&A's on employees?

A study carried out by KPMG in 2004, involving 700 mergers & acquisitions, showed that between 50 and 70 percent of M&A's fail to achieve their objectives. Not only did they fail to achieve revenue and cost synergies, but in many cases the failed M&A diluted shareholder value! What some people don't realise is that the human dimension of M&A's plays a large part in their failure or success, with studies showing the cause of over half the failures being down to not addressing the human dimension.

“Mergers and acquisitions represent a significant and potentially emotional and stressful life event because they change an individual’s working life significantly but fail to provide an individual with any control over the event”
                                 (Cartwright and Cooper 1992) 

In addition to this, there are also a number of direct commercial impacts of M&A's including a rise in unwanted turnover and loss of good staff, significant decrease in employee engagement which therefore leads to a fall in productivity and performance and an increase employee stress levels which quickly manifests into increased sickness and absenteeism.

Throughout the M&A process, there are typically four key problems which arise, these being:

1. Neglect of psychological issues
2. Inadequate communication throughout the merger process
3. Cultural clashes between both organisations
4. Ambiguous company direction and unclear roles and responsibilities

M&A's can actually cause what is identified as "merger syndrome", creating uncertainty and widespread psychological effects on employees throughout the business. Am I stable in this position? Will I be moved? and will I get along with my new colleagues? are some of the questions employees are faced with as a result of M&A activity. This so called "merger syndrome" has the following psychological impacts on employees:

• Social Identity - employees can lose their old organisational identity. This can have detrimental effects as employees who identify themselves to their previous organisation may feel lost, angry and will be less inclined to accept the change
• Anxiety - employees become uncertain of their future job prospects and their career which results in a decline in productivity as they begin to show 'survival-seeking behaviours'. In the long term, anxiety can begin to cause psychological and physical illness, leaving employees with a lack of motivation and a rise in stress levels which can cause operational tension
• Acculturation - typically arising in most horizontal mergers, adapting to a new culture can cause a serious increase in resistance and have serious inter-organisational culture conflicts
• Role Conflict - employees may struggle to see where they stand after M&A activity, as their existing roles and reporting structures may have been disrupted 
• Job Characteristics - In many cases, employee job circumstances decline post-merger, resulting in a decline in job satisfaction and engagement
• Organisational Justice - organisations need to be transparent with who they are laying off and must be honest in the decision-making process as employees will begin to lose trust if they are not. This is shown to have the largest impact on employee attitudes and their behaviour post merger

Although these issues are manageable, organisations need to ensure they build the communication and engage with their employees when these issues arise, with employee attitude measures in place in order to try prevent it. One of the most important factors is the attention they pay to employee stress, managers need to beware of "merger syndrome" and have effective methodologies in place to tackle it. Neglecting these issues can have major consequences on productivity, eventually destroying shareholder value - the last thing a business needs!

"Margin Call", Its Most Definitely Real!!

Inspired by a true story, Margin Call's fictional character 'John Tuld' resembles Merrill Lynches John Thain and Lehman Brother's Dick Fuld in a taut, sinewy drama set in a Wall Street Investment Bank on the night before worldwide financial meltdown. 

After John is informed that his firm is drowning in toxic mortgage backed securities, he demands all the traders under his power to wipe their balance sheet clean and dump all the worthless junk on unsuspecting customers. No, not just any customers, their most valued and loyal ones too. Ruthless! Not like any other movies/documentaries on the crisis I have watched, Margin Call conjured up feelings of disgust, pity and confusion as to why and how one person with all the power is allowed to sit there and potentially cause a global meltdown before they are stopped. It is those emotions indeed that get you thinking: Was this really how Lehman Brothers collapsed? Did the Bank of America save Merrill Lynches in the same way? Did Goldman Sachs and JP Morgan sell these same worthless securities to their clients?. My answer? Yes. 

 A dilemma arises with one of his co-workers, Sam who is unhappy about it all, but is unable to take it further as he risks losing everything if he opposes his boss's ways. Not only does he have to partake in this unethical activity, the entire firm are forced to fire off these securities at rock bottom prices, knowing in a few hours time they will be worthless to everyone! Unethical business at its finest!

  "Your selling something you know has no value!" 

           John - "Be first, be smarter....... or cheat!!" 

More so, analysts should have never let their books to be kept so that if there was a 25% decrease in value of their assets, the loss they would suffer would be greater than the market capitalisation of the whole firm! It is down to Johns ignorance, lack of knowledge and understanding that allowed the firm to cook up and package such toxic mortgage backed securities that ultimately made them crumble. 

The mistake he made was by placing all his eggs in one basket, he ran a huge risk and the company over leveraged itself. In my opinion, he should have invested more so in equity capital, spreading the risk, making failure less and less likely!

So What Is The Best Kind Of Dividend Policy?

As you may already know, the goal of management is to 'create value for stockholders specifically to maximise shareholder wealth' (Jensen, 2001) and one of the factors that plays a role in achieving this goal is dividend policy. Dividend policy is the 'payout policy that a firm follows in determining the size and pattern of distributions to shareholders over time. Firms will distribute cash to shareholders through cash dividends, share repurchases, and specially designated dividends' (Baker & Weigand, 2015). Managers will have the responsibility to devise the best possible dividend policy for both the company and shareholders.

However, early literature on dividend policy expresses different views on the relationship between cash dividends and firm value. Modigliani & Miller (M&M) (1961) suggest that dividends are irrelevant for firm value and possibly even value destroying, whilst Linter (1965) and Gordon (1959) argue that dividends are an extremely important determinant of a firms value.

According to M&M's model, 'the value of a company is determined by its assets and and the cash flows generated by those assets and not by the way firms distribute cash flows to shareholders'(Baker & Weigand, 2015). They argue that in a perfect capital market (no transaction costs, no market imperfections, no taxation), existing shareholders are only fussed about increasing their own wealth, but will be indifferent as to wether it reaches them via dividend or through capital growth. This therefore means that a company can pay any level of dividend, with any financial shortfalls being solved by a new equity issue, being that it is investing in all +NPV projects. If investors needed cash, they could 'manufacture' their own by selling part of their shareholding. As-well as this, shareholders wanting retentions when a dividend is paid can just purchase more shares with the dividend they have received.

Linter (1965) and Gordon (1959) on the other hand argued that dividend policy is relevant to the share value and that investors prefer to receive dividends rather than invest the value of the dividend into future investments that are uncertain. This is known as the "Bird-in-the-hand" theory. Therefore, as investors prefer dividends, if a certain company were to begin paying low dividends investors may sell those shares and instead invest in a company which hayes out higher dividends. This will therefore cause the initial company's share price to fall.

Inevitably it is up to the management to decide wether they want to follow Modigliani & Millers or Linter & Gordons policy, or perhaps any other theories out there. What you must recall though is that in the real world M&M's assumptions stating that perfect capital markets exist, there is no issue cost for securities and that there is no tax, simply can't happen. Otherwise stock market exchange would be useless since we could assume there would not be any tax evasion or fraud in the financial world to establish M&M's assumption.

What is the 'Optimal Capital Structure' companies aim to achieve?

One of the key components of corporate finance nowadays is finding the right mix of debt and equity which is used in order to fund a business. Different companies will have different methods of financing their operations, some may even solely rely on debt or equity whilst others will try find the perfect mix. 'Capital Structure' is defined by Arnold (2013) as the proportion of a company's capital which is debt or equity, but what does this mean?. Capital Structure uses the Weighted Average Cost of Capital (WACC) in order to calculate the average return for a company based on how much debt and equity they hold. This calculation suggests a possible optimal structure. The lower the company's debt and gearing level, the higher the WACC and return for investors. As the gearing level begins to increase, the overall cost of finance decreases , but with it brings the risk of the company becoming financially distressed!

But if debt is a lower cost than equity, it should suggest that companies should just take on more debt rather than equity does it not??? Why is debt generally cheaper than equity? This is down to debt interest being a tax deductible expense which generates tax benefits in most countries, and this is something that dividends are not. The issuing and transaction costs involved with debt are also much lower than that for ordinary shares as-well! On the down side, debt increases the possibility of financial distress due to all its potential costs, which can ultimately lead to bankruptcy!


Back in 1958, two men called Modigliani and Miller devised a theory which argued that companies capital structure has NO impact on the WACC,  NO optimal structure exists and that the companies value depends solely on business risk!! M&M put forward the following 5 assumptions:


1. There is no taxation
2. There are perfect capital markets
3. There are no costs of financial distress and liquidation
4. Firms can be classified into distinct risk classes
5. Individuals can borrow as cheaply as operations






From my current understanding of the topic, I completely disagree with them as you simply cannot ignore taxation when it comes to capital structure!! I think we all know by now as-well that perfect capital markets don't exist in real life and so this was yet another flaw that M&M would come to realise in 5 years time when they had to revise their paper. The 1963 paper proposes that the more in debt a company is the more shareholders will gain although one of the main points to address is that the WACC falls as the gearing rises meaning the company value will increase.


Lehman Brothers is a great example of a company that ended up filing for bankruptcy due to significant debt they racked up, otherwise known as gearing. Its leverage ratio was posing a high risk to the company at 31:1 in 2007. Yes, this may have generated huge profits during the boom, but it left them very vulnerable to extreme risk. I believe that this ratio was very inaccurate and left them susceptible to any downfall. Companies need to ensure they maintain a manageable weighted cost of capital to achieve an optimal capital structure. Both debt and equity obligations should be paid in a timely fashion and that the costs of financing don't ultimately bankrupt the company. My solution is that a firm should choose a range for the optimal; around 20-40% optimal debt ratio in order to maintain financially stable. What do you think? Let me know below!  

Jon Corzine; The Intrepid Trader Who Pushed The Limits Of Risk

Jon Corzine has crashed and burned before; sent packing by Goldman Sachs in 1999 after a 24 year career, evading death in 2007 from a near-fatal car accident and now the $40 billion implosion of his own brokerage firm, MF Global. John Corzine made double edged risks, with the potential to drive his firm forwards, or with the potential to demolish it all. It was all but 20 months after taking over when his company filed for bankruptcy, after suffering a massive $192 million QUARTERLY loss and disclosing more than $6.3 billion in bets on European Government Bonds!!

The financial crisis should have put an end to risk takers, but it only fuelled Corzine's hunt for more and more profit. He saw the crisis as an opportunity to make money by taking on higher risks which will eventually generate greater returns. By trading with the company's own money, he exposed them immediately to trading risk, which then also required senior management and ethos changes as MF Global was new to this. Corzine took the plunge and bought half a billion dollars worth of struggling European bonds (Portugal, Italy, Greece....). The return was high as the market was unsure if the governments would pay back their debt. By using the bonds as collateral to borrow money, he transferred the risk to his firm in New York. The reason being? American accounting rules meant that he could book the profits immediately before the bonds had matured! Convenient, for him. By 2011, Corzine had borrowed $6 billion to buy European bonds, forever increasing the risk, whilst yielding higher profits. The strategy that depended on the markets perception of risk in the Eurozone was working, for now anyways!
What is the most I could lose on this investment? The question that almost every investor should ask themselves when considering very risky investments. Value at Risk is a useful tool for risk assessment, most often used by commercial and investment banks to capture the potential loss in value of their traded portfolios from adverse market movement over a specific period. It will then be compared to their available capital and cash reserves to make sure that their losses can be covered without putting the firm in danger of risk. The absence of MF Global's European bonds in its published VAR meant that the company lacked the complete picture, concealing information from the public and hiding their risk. Once the news finally did get out, it took markets a week to absorb the information as it was such a huge shock. MF Global was slashed of their credit rating by Moody's investment service to non-investment grade, 'junk bonds'. This meant that shareholders were very unlikely to receive payments and so to no surprise, MF Globals share price halved! Creditors in London were left in shock, demanding millions from the company, anxious about their European bond holdings.This inevitably left the firm with nothing else but to file for bankruptcy.

The question posed at the end of the day is that did Corzine really take that big of a risk? Or did he simply just fail to understand how risk can be seen in the post crash world?. What we have to remember is that finance is not just a mathematical game, but a social one too. 'Real risk' is not always the cause for failure, it is perception of risk that sometimes matters more. This brings me to my final question, should financial giants like MF Global be allowed to get away with this? Or should there be regulations put in place in order to prevent financial giants failing in the future?
Let me know what you think!