The crash in the price of oil — from $108 a barrel in June 2014 to below $27 earlier this year — has rattled the stock market, triggered layoffs across the energy sector, and plunged many oil producing countries into crisis.
Oil has since rebounded significantly from its lows, to above $40 a barrel, but the price plunge since 2014 has put much pressure on oil companies. Reports have pointed to an increase in debt among oil producers, raising the specter of default on bankruptcy and default on debt, withfollow-on effects beyond oil producers.
Looking at the numbers, the mortgage-debt crisis dwarfs what is currently happening in oil. According to a report in the Financial Times, the global oil and gas industry’s debts rose to $3 trillion from $1.1 trillion between 2006 and 2014. Compare that to the $10 trillion of housing debt weighing on Americans in 2008.
MIT Sloan Senior Lecturer and Visiting Scientist Barbara Dyer
Let’s say you have offers for two different jobs that interest you. The first one pays more, but comes from a company you don’t know that much about. The second offer is a bit lower, but that company has a long history that you know well. How do you decide between the two?
By taking the higher offer, you guarantee yourself a bigger salary, but you also open yourself up to more unknowns down the road. The lower offer means you’d work for a firm you admire and while your initial paycheck would be smaller, you might realize other benefits such as professional development and career advancement down the road.
In a sense, this is the same dilemma facing Starwood Hotels & Resorts Worldwide, the Connecticut-based owner of such brands as Sheraton, Westin and St. Regis. Since agreeing to an initial $12.2 billion takeover offer from Marriott International MAR-5.45%, Inc. in November, Starwood HOT-4.61% has become the object of a mad-lover’s pursuit between Marriott and a consortium led by China’s Anbang Insurance Group. Following a round of counteroffers, Maryland-based Marriott’s latest proposal values Starwood at $13.6 billion while Anbang Insurance Group came in with an all-cash bid of $14 billion.
After nearly a decade of crisis, bailout and reform in the United States and the European Union, the financial system — both in those countries and globally — is remarkably similar to the one we had in 2006. Many financial reforms have been attempted since 2010, but the overall effects have been limited. Some big banks have struggled, but others have risen to take their place. Both before the 2008 global financial crisis and today, just over a dozen big banks dominate the world’s financial landscape. And yet the ground is shifting beneath the financial sector, and big banks could soon become a thing of the past.
Few officials privately express satisfaction with the progress of financial reform. In public, most of them are more polite, but the president of the Federal Reserve Bank of Minneapolis, Neel Kashkari, struck a chord recently when he called for a reevaluation of how much progress has been made on addressing the problem of financial institutions that are “too big to fail” (TBTF).
Doug Criscitello, Executive Director of MIT’s Center for Finance and Policy
High rates of debt growth by local governments are a cause for concern in any country. In China, where recent turmoil in the equity and foreign-exchange markets has put a spotlight on that country’s economy and growth prospects, increasing levels of borrowing by provincial and other lower levels of government has resulted in local indebtedness rising nearly four-fold since 2008, reaching about 40% of GDP.
Debt growth of that magnitude raises concerns about fiscal sustainability, debt affordability, transparency and accountability. Cautionary tales abound. From New York City in the ‘70s, emerging market countries in the ‘80s, Russia in the ‘90s, and Detroit, Greece and Puerto Rico more recently, there is a long list of governments that have experienced the painful economic repercussions of taking on debt they could not afford.
While the massive debt buildup in China presents challenges, the situation is not as dire as a full-blown debt crisis, a new policy brief from the MIT Center for Finance and Policy by Xun Wu, a visiting scholar, suggests.
Mutual-fund and other asset managers trying to get the best price on a stock purchase or sale face a formidable challenge from fast-moving high-frequency traders — but managers are not defenseless.
To be sure, it’s difficult to execute large trades when HFTs deploy sophisticated pattern-recognition software in search of order-flow information that they can use to their advantage. When an asset manager unintentionally leaves footprints that tip its hand to these HFTs, the price is often impacted to the detriment of the asset manager.
So what can an asset manager do to prevent this from happening? By answering this question, we can help institutional investors improve their execution, reduce transaction costs, and ultimately deliver better investment returns.
In a recent study, my colleague and I looked into this issue. Our goal was to provide a realistic analysis of the strategic interaction between investors trading for fundamental reasons, such as pension funds, mutual funds, and hedge funds, and traders seeking to exploit leaked order-flow information, such as certain types of HFTs.
We find that asset managers have a powerful weapon against HFTs that exploit order flow information: Randomness.