Archive for April, 2011

Center for Financial Policy and PRMIA Team-Up to Host Risk Management Leaders in NYC

April 28th, 2011 by under News & Events. No Comments.

Mark Olson, Keynote

The Center for Financial Policy (CFP) at the University of Maryland’s Robert H. Smith School of Business and the Professional Risk Managers’ International Association (PRMIA) hosted an intimate dinner event for financial services industry leaders in New York City at A Voce Restaurant on April 21st.  Sungard, one of the world’s leading software and technology services companies, sponsored this event.  Participants engaged in a dialogue about risk and regulatory issues within the financial services sector.

“Risk professionals need to have an ongoing dialogue, especially given the situations we face today,” Cliff Rossi, Executive-in-Residence at the Center for Financial Policy, said in his opening remarks.  “CFP has a wide amount of resources to contribute to this dialogue.”

Mark Olson, Co-Chair of Treliant Risk Advisors and CFP Advisory Board member, provided the keynote address.  “The role of risk management is elevated with the implementation of Dodd-Frank,” he said.  Comparing Dodd-Frank to the Sarbanes-Oxley Act (SOX) that resulted from the financial accounting scandals early last decade, Olson said that the recent regulation is larger than SOX because “Dodd-Frank impacts the way we do business.”  He shared a few predictions for the risk management field:  a greater emphasis on risk exposures related to executive compensation and pricing; better definition on the role of the board on risk management issues; more focused discussions on “stealth sections” of the Dodd-Frank Act such as Say on Pay; and more regulatory guidance.

Prior to joining Treliant Risk Advisors, Mark Olson was Chairman of the Public Company Accounting Oversight Board, a Federal Reserve Board Governor, and President of the American Bankers Association. His deep regulatory, public policy, and consulting expertise brought a valuable perspective to the discussion.

The Center for Financial Policy was launched in November 2009 and develops thought leadership in financial policy that impacts corporate performance, capital allocation and the stability of the global financial system. Located in both College Park, MD and in Washington, D.C. at the Smith’s School’s campus in the Ronald Reagan Building and International Trade Center, the center is well-situated to take a leadership role with its globally recognized faculty and its extensive relationships with key policymakers, practitioners and academics.

Visit for more information on Center events and activities.



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Banks Are Best: Firms with formal financing do best, study finds

April 23rd, 2011 by under Faculty Commentary. No Comments.





Professor Vojislav Maksimovic
Dean’s Chair Professor of Finance
Emerging Markets Track Lead
Center for Financial Policy

This article was featured in the Spring 2011 edition of Smith Business Magazine, written by Rebecca Winner.

China is one of the largest and fastest-growing economies in the world, despite the fact that its financial systems and institutions are underdeveloped, under strict central control and notoriously inefficient. It has also proven to be an excellent laboratory for researchers to explore basic principles of finance, identifying what works and what doesn’t.

A new study by Vojislav Maksimovic, Dean’s Chair Professor of Finance, has found that even a dysfunctional formal banking system is better than none. It upends conventional wisdom (and past financial research) that small, unsecured loans from family and friends or from local moneylenders or strongmen have fueled China’s remarkable growth.

“The idea is that you have more incentive to repay because you have a relationship, or because bad things will happen to you if you don’t repay the loan,” says Maksimovic. “Some people have suggested that this is the key to the ‘Chinese miracle.’ What we found was quite the opposite.”

Maksimovic studied 2,400 private-sector firms in China using data from the 2003 Investment Climate Survey that was led by the World Bank. About 20 percent of those firms were financed through formal channels, a number comparable to other developing countries.

Maksimovic and his co-authors found that while there was wide use of informal financing, bank financing was really the predictor of firm success. Small firms with bank funding grew faster than those financed from alternative channels. Firms that received bank loans had higher sales growth, were more productive, and had a higher rate of profit reinvestment.

This connection between bank financing and the success of small firms is important, especially for policymakers in nations with developing economies. “It is important because how you develop policy depends on what you believe,” says Maksimovic. “If you believe that formal and informal financing do equally well, then perhaps you do not put as much emphasis on strengthening the banking sector, putting in regulations and controls; instead you would let an organic system grow up to finance small firms through informal means. But countries really need to have a formal banking system in place, for small firms to go to. The better firms will try to do that. ”

Funding from informal sources also can’t be scaled up beyond a certain point, because their monitoring and enforcement mechanisms aren’t equipped to handle larger firms. For long-term success, firms must “graduate” to more formal financing, says Maksimovic.

It is often difficult to get published data about private firms in nations with developing economies. By working with the World Bank, Maksimovic had access to data far in advance of when public records would become available.

“Most of the research done by finance professors used to be very U.S.-centric,” says Maksimovic, “because that’s where the data is. But we’re finding that more of our students now come from developing countries, and more students are working with companies outside the U.S. So it is important that they understand the differences between how things work in the U.S. and how they work elsewhere.”

“Formal versus Informal Finance: Evidence from China” was co-authored by Vojislav Maksimovic; Meghana Ayyagari, PhD ’04, George Washington University; and Asli Demirguc-Kunt, of the World Bank; and published in The Review of Financial Studies. This research was partially funded by a grant from the National Science Foundation. For more information, contact – RW


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Excerpt from the April Longbrake Letter

April 20th, 2011 by under Faculty Commentary. No Comments.

by Bill Longbrake
Executive-in-Residence at the Center for Financial Policy

Read the full April Longbrake Letter


There is little doubt that political momentum has swung in the direction of reducing federal budget deficits. The questions now are ones of how much and how soon.

As of this writing the House of Representatives has passed a fiscal year 2011 budget resolution that includes $38.5 billion in spending reductions. It is likely that the Senate will follow suit. This action ends the cat and mouse game of temporary continuing resolution extensions but shifts the gamesmanship to the debt ceiling and fiscal year 2012 budget.

In addition, payroll tax cuts and extension of unemployment insurance benefits, which were enacted last December, and which have contributed significantly and favorably to economic activity during the first quarter of 2011, are scheduled to expire at the end of the year. It is too early to forecast whether any or all of these measures will be renewed for 2012. Extension will probably depend on the strength of the economy later this year, the mood of the public, and presidential electioneering. If economic recovery is grinding along, odds tilt in the direction of letting these measures expire as scheduled, given the current mood of Congress.

So, on balance, fiscal policy is already in the process of shifting from stimulus to restriction. The risk going forward is tilted in the direction of even greater fiscal restrictiveness rather than less.

With the battle over the continuing resolution for fiscal 2011 now resolved, attention is shifting to the need to raise the federal debt ceiling and to adopt a continuing budget resolution for fiscal 2012, which begins on October 1, 2011.

Republicans remain focused on spending cuts, but significantly Representative Paul Ryan’s 10-year budget proposal begins the necessary process of downsizing entitlement programs by focusing on restructuring Medicare and Medicaid. Importantly, Ryan’s proposal does not touch Social Security. As is well known by all, the developing U.S. sovereign debt problem cannot be brought under long-term control without dealing with entitlements.

President Obama at last long has entered the budget debate with his own proposal. After studiously ignoring the work and recommendations of his own fiscal commission after it submitted its report last December and then subsequently submitting a budget proposal to Congress that in essence denied the severity of the long-term debt problem, the president has finally joined the debate. Of course, the president’s proposal differs considerably from Paul Ryan’s, reflecting differing imperatives of each one’s political constituency. Importantly, the president’s proposal also addresses the need to restructure entitlement programs, but the projected deficit reduction over ten years is much smaller than the number targeted by Ryan.

What is important is that the political debate is no longer a matter of whether but a matter of what and when. Although Ryan’s proposal would begin the fiscal consolidation process in fiscal 2012, most of its firepower would not take effect until after the presidential election, which means fiscal 2013. My best sense is that there will be a lot of political posturing and debate over the next two years but little significant action until after the 2012 election. However, that will depend upon how hard Republicans choose to press their agenda for spending cuts and longer-term budget reforms. Both the debt ceiling and the fiscal year 2012 continuing budget resolution are in play and could lead to more restrictive fiscal policy sooner than later.

While reducing budget deficits is essential to restoration of long-term fiscal health of the United States, and the sooner this process is commenced the better, let there be no doubt that fiscal consolidation will have short-term negative consequences for economic recovery and growth. This fact is not reason for engaging in further delay because as long as the U.S. federal debt problem remains unaddressed imbalances will continue to grow and when fiscal consolidation is ultimately addressed, as it will have to be, the cure will be even more painful. One has only to consider what is happening to Greece, Ireland and Portugal to appreciate the risks of delay.

Thus, it would be better to address the budget problem now, and perhaps it will be. But, it seems more likely that serious action will be delayed for another two years. This will not be fatal by any means, but, as I have said, the problem doesn’t get any easier with the passage of time – it gets worse.

To read more, click here.

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Frank Medina highlights CFP’s first Congressional Briefing Series

April 14th, 2011 by under News & Events. No Comments.

On Monday, April 11th, the Center for Financial Policy at the Robert H. Smith School of Business hosted Frank Medina, Senior Counsel at the House Financial Services Committee.  This talk was the first in a series of Congressional Briefings that will regularly host Capitol Hill staffers at the Smith School to speak about legislative issues related to financial policy.  The Center for Financial Policy partnered with the University of Maryland’s School of Public Policy and International Economic Policy Professor Phillip Swagel in hosting this event.

Medina led a compelling and highly interactive discussion on reform issues pertaining to the Dodd-Frank Act.   The conversation centered on the non-bank resolution authority and touched on issues such as moral hazard, “too big to fail”, transparency of resolution sequencing plans, and trade-offs between deposit insurance and not bailing out failing financial institutions.

Frank Medina with Phillip Swagel (left) and Lemma Senbet (right)

“The Congressional Briefing Series exemplifies the Center’s combination of education and research strategies,” said Lemma Senbet, Director of the Center for Financial Policy in his opening remarks.  “We are honored to have Capitol Hill staffers such as Frank Medina contribute to the education at the Smith School and, in turn, we look forward to having our faculty members share their research with Capitol Hill Staffers to help inform policy.”

The Center for Financial Policy was launched in November 2009 and develops thought leadership in financial policy that impacts corporate performance, capital allocation and the stability of the global financial system. Located in both College Park, MD and in Washington, D.C. at the Smith’s School’s campus in the Ronald Reagan Building and International Trade Center, the center is well-situated to take a leadership role with its globally recognized faculty and its extensive relationships with key policymakers, practitioners and academics.

Visit for more information on Center events and activities.


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Emerging Markets Forum: The Rise of New Economic Powers and America’s Future

April 12th, 2011 by under Faculty Commentary. No Comments.

by Kislaya Prasad
Director, Center for International Business Education and Research
Research Professor

Have you had emerging markets on your mind? You probably should. The facts cannot fail to impress – persistently high growth rates, multi-fold increases in per capita incomes, and hundreds of millions of people lifted out of poverty over the last decade. Yet the numbers do not give the full picture. We find in countries like Brazil, China and India widespread optimism about the future and excitement about the possibilities. It is the kind of mindset that leads people to build great things. The absolute scale of the transformation occurring is striking. We are talking about billions of newly confident, innovative, and increasingly assertive people around the globe. Ignorance of, or complacency about, this phenomenon is not a luxury we can afford.

A great danger is from notions that are out of date. For instance, that China is all about low-cost manufacturing, that India is just call centers, or that after the effects of the financial crisis of 2008 have passed thing will be the way they were – with the US at the center of the economic firmament. Harvard historian Niall Ferguson goes so far as to liken our current moment to the one before the fall of great empires. While I disagree with him on this particular, I do believe that the rise of new economic powers, such Brazil, China, and India, has been the defining economic event of our lifetime, in the category of things that change the course of human history. US policymakers are no longer just focused on economic relations with Europe and Japan, and are as likely to be found in Beijing, New Delhi or Sao Paulo. American businesses are already busy coming to terms with the new reality, formulating their “emerging markets strategy.” In conversations with students in our own and other business schools about these topics, I sometimes pose the same question – What is your emerging markets strategy? It is hard to think of a career path that could be untouched by these new developments. What capabilities will be needed? What must students do to prepare themselves?

To make sense of what this means for the US, its businesses, and its students, the Smith School CIBER is launching its Emerging Markets Forum. This year’s theme is: The Rise of New Economic Powers and America’s Future. The opening keynote address for the conference is to be delivered by Rebecca Blank, Acting Deputy Secretary in the US Department of Commerce. After that we will hear from a CEO Panel comprised of Peter Bowe (President of Ellicott Dredges), Susan Ganz (CEO of Lion Brothers) and William Hutton (President of Titan Steel). We will get their perspective on the phenomenon of the rise of new powers and explore how the events discussed above figure into the strategies of their companies.

People occasionally suggest that the rise of new powers must come at the expense of the US. The closing of the gap between our countries will certainly affect relative living standards – but there is no obvious cause for worry in that. In fact, a rise in living standards elsewhere is probably a great opportunity for some US firms. So, our intention is to examine the proposition that the rise of new economic powers signals the decline of the West. This will be the topic of discussion for a very distinguished panel to be moderated by Steven Pearlstein of the Washington Post. Other members of the panel are Arvind Panagariya (the Jagdish Bhagati Professor of Indian Political Economy at Columbia University and author of India: The Emerging Giant), John Haltiwanger (University Professor at the University of Maryland), and Walter Bastian (Deputy Assistant Secretary for the Western Hemisphere at the U.S. Department of Commerce).

The luncheon keynote speaker will be Kemal Dervis (Brookings). Mr. Dervis was formerly the head of UNDP, and also Minister of Economic Affairs and the Treasury of Turkey. As part of the government in Turkey he was the architect for its economic reforms and created the blueprint that in some ways is being followed even today – which makes him one of the causes for the rise of this particular rising economic power. Incidentally, it is important to remember that the rise of China, India, and others all began with crucial market-based reforms. These days, we are watching history being made in the Middle East and Mr. Dervis is uniquely positioned to put the events (so critical to the economies of the region and the world) into perspective for us.

We count, with some pride, on our ability to innovate. And indeed, the US is still the best bet as a source for radically new knowledge. Advances in science and technology that will transform our lives in the future – whether in genomics, nanotechnology, or robotics – are still more likely to come from the US. But there are interesting trends worth watching. IBM, GE, and many other companies that are fundamentally reliant on new science are setting up labs in emerging markets. To some extent this is to be expected and is motivated by the need to create new products based on better local knowledge of the growth markets of the future. More disturbingly, George Buckley, CEO of 3M pointed in a recent interview to the decline in numbers of students with advanced degrees in science and engineering in the U.S. For a while now, a significant proportion of US science Ph.D. students have been foreign born. But now, as the quality of opportunities in other countries improves, such students are increasingly to be found elsewhere. At least in the case of 3M, research has followed the talent. To examine this trend (and others) we have organized a panel entitled The Evolving Innovation Landscape. The panel will be moderated by Anil Gupta of the Smith School, and includes Manish Gupta (Director of IBM Research – India).

The third keynote of the day is by Tarun Khanna (Harvard Business School). As an author of two books that are essential reading on emerging markets (Billions of Entrepreneurs and, with K. Palepu, Winning in Emerging Markets) Mr. Khanna is among the foremost authorities on the subject. He is also an advisor to some of the world’s leading corporations and his insights on what it takes to succeed in emerging markets are bound to be invaluable.

Our forum will conclude with a panel on finance in emerging markets. This has been something of a “hot topic” for a while now, as investors have sought out high performing companies listed on exchanges in emerging markets. However, engagement with these economies requires insight into forces that propel them. We have organized a panel precisely to this end. Lemma Senbet of the Smith School will moderate the discussion. His own topic for the day will be African finance where he will dispel commonly held myths, and introduce the audience to current realities. Mr. Senbet will be joined by other distinguished speakers – Stijn Claessens of the International Monetary Fund and George Allayannis from the University of Virginia.

If you are interested in participating in the forum, do join us on April 29, 2011. Registration details can be found at the CIBER website ( or the dedicated conference website ( A highly subsidized conference fee has been arranged for Smith School students – but it requires registering by April 18.

I will pen my thoughts on the day’s proceedings in early May. I hope to see you at the forum.


Longbrake Comments on Congress Budget Showdown

April 6th, 2011 by under News & Events. No Comments.

In an interview at University of Maryland’s Robert H. Smith School of Business, Executive-in-Residence at the Center for Financial Policy Bill Longbrake talks to Michelle Lui, the Center’s Assistant Director, about the impending April 8th budget deadline for the extension of the current continuing resolution, the process of increasing the debt ceiling, and the 2012 federal budget.

Watch the video now.

Longbrake says that the debate in Congress on the extension of the current continuing resolution is very much a political story at the moment.  Democrats and Republicans are in continual competition with each other for political advantage, so that leads to different views on how best to deal with the deficit problem.   With $10 billion in spending cuts as part of the previous two continuing resolution extensions on the books, the two parties are in disagreement on the level of further cuts for the rest of the fiscal year 2011.

“The stage is set potentially for a stalemate,” comments Longbrake.  Speaking to the potential government shutdown if an agreement is not passed by April 8th, he says it “could occur just as part of the poker game being played here in terms of trying to obtain political advantage.”  He believes there will be a resolution, probably just short of shutting down the government, but it will be close.  Spending cuts will probably be in the ballpark of $40 billion, a compromise between the different levels the two parties are seeking.

The debt ceiling refers to the ability of the US Treasury to borrow money to finance federal spending.  Longbrake says that this ceiling will technically be reached by the end of April, but the Treasury could employ strategies to buy 60 days, pushing the realized deadline back to June.  If it is not raised by that time, “you have more than a government shutdown; you have a government that cannot pay its bills and that will actually have financial market implications.”  He believes that this will not occur, but it will be resolved only at the last possible moment.

The deadline for passing the fiscal year 2012 budget is April 15th, though the two parties are far from a resolution.  Longbrake predicts that there will be “something very specific on the table from the House, nothing from the Senate, and we’ll see how this game plays out on fiscal 2012 over the next several months.”  He believes that the House resolution will not only include significant cuts in spending, but will also attack entitlement programs.

In the full length video, Longbrake also discusses the Middle East/North Africa political crisis, the U.S. economy’s possibility for self-sustaining growth, and the continuing European sovereign debt crisis.  He further provides some important lessons that can be learned from previous crises while also expressing why he believes it is difficult for policymakers to apply these lessons.

The Center for Financial Policy was launched in November 2009 and develops thought leadership in financial policy that impacts corporate performance, capital allocation and the stability of the global financial system. Located in both College Park, MD and in Washington, D.C. at the Smith’s School’s campus in the Ronald Reagan Building and International Trade Center, the center is well-situated to take a leadership role with its globally recognized faculty and its extensive relationships with key policymakers, practitioners and academics.

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News Alert

April 6th, 2011 by under News & Events. No Comments.

On April 4th, Bill Longbrake joined the Kojo Nnamdi show for the segment “No Relief for Homeowners” to share his thoughts on the government programs intended to help homeowners.

Listen to the show now:

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The Global Mortgage Servicer Settlement

April 1st, 2011 by under Faculty Commentary. No Comments.

by Phillip L. Swagel, Professor in International Economic Policy at the Maryland School of Public Policy and featured contributor to the Center for Financial Policy

Mortgage servicers are now the focus of an effort by some state and federal government authorities to change servicing practices, penalize past wrongdoing, and help homeowners in danger of foreclosure.  This would be done through a settlement agreement between a group of state attorney generals and large mortgage servicers, many of which are owned by major banks.  In addition to monetary penalties, the idea of the proposed settlement is for servicers to agree to help “underwater” homeowners who owe more on their mortgage than their home is worth.  These borrowers are at considerable risk of foreclosure but have received little assistance from governmental efforts to date.  Servicers would agree to mandatory principle reduction, reducing the loan balance for as many as three million borrowers.

The attempt by state attorney generals and the federal Consumer Financial Protection Bureau (CFPB) to force servicers into a legal settlement has attracted attention for several reasons:  it implies the Obama Administration’s efforts at foreclosure prevention have been inadequate; there appears to be substantive action by the CFPB ahead of this agency’s formal launch; and part of the settlement appears to be an end run around Congressional reluctance to change the bankruptcy code to allow judges to reduce mortgage balances (the so-called “cram down” approach to bankruptcy).   An interesting point that has not received as much attention is that a leaked presentation from the CFPB implies that some of the costs of helping underwater homeowners ultimately will accrue to the federal government—that is, to taxpayers.  This belies an ostensible attraction of the proposed settlement that the costs will be borne by the financial industry.

Servicers perform much of the administrative work associated with homeownership.  They collect mortgage payments, arrange for money to be paid out to the beneficial owners of mortgage-backed securities, and–when things go wrong–interact with delinquent borrowers.  This latter activity can involve anything from working out a loan modification to initiating foreclosure proceedings.  Servicers were among the many institutions in the financial system that performed poorly during the financial crisis, including through the use of so-called “robo-signing” in which employees attested to the validity of foreclosure-related paperwork without taking the time to check what they were signing.  As described in many places, including recently in the New York Times (, servicers have been widely criticized for their performance working with homeowners hoping to obtain a modified loan in order to avoid foreclosure.  Among the critics are officials at the Treasury Department, who have complained about servicers’ poor performance in modifying loans through the administration’s HAMP program (Homeowner Affordable Modification Program) that uses TARP funds to subsidize mortgage modifications.

State attorney generals, apparently with support from the federal Consumer Financial Protection Bureau and the Federal Deposit Insurance Corporation in developing the settlement terms, have proposed a settlement that would require servicers to modify loans for underwater borrowers.  A leaked presentation from the CFPB that discusses the settlement available on describes some of the goals as deterring wrongful conduct and improving incentives for servicers, helping to eliminate future foreclosures (which would clear the so-called shadow inventory of unsold houses), and helping borrowers.  A criticism of the settlement by Joseph Mason and Hal Singer on notes among other points that the cost of the settlement would be passed through to future borrowers as higher interest rates and that the servicers would be required to write down mortgage principal for some borrowers who can pay their loans without distress, thereby giving rise to serious concerns about other homeowners intentionally missing payments as a “strategic default” to obtain their own writedown.

A further interesting aspect of the settlement can be seen on page 5 of the leaked CFPB presentation, which notes that investors would “absorb” some of the costs of the loan modifications.  Investors in this context means the beneficial owners of mortgage-backed securities rather than having servicers lose out.  But some—or possibly many—of the mortgage-backed securities in question are either owned or guaranteed by Fannie Mae and Freddie Mac, the two housing finance firms taken over by the U.S. government in September 2008.  In their present conservatorship, the U.S. Treasury is committed to ensuring that Fannie and Freddie are solvent.  This means that any losses ultimately accrue to the Treasury—that is, to taxpayers.  The proposed global settlement is thus likely to involve public money—taxpayers covering the cost of reducing the mortgage for people in homes they cannot afford.  It is unclear that this proposal would be enacted if Congress had to vote to spend public money on it.

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