Financial Darwinism: Create Value or Self-Destruct in a World of Risk

Foreword ix

Preface xv

Acknowledgments xix

CHAPTER 1 Understanding and Navigating the Financial Revolution 1

Introduction: The Need for Transformational Thinking 1

From George Bailey to the Golden Age 5

Accounting for Profits the Old-Fashioned Way 7

The “Great Moderation” As an Evolutionary Catalyst 11

Economic Performance in the Dynamic New World 14

Pressures on Static Business Models 18

Dynamic Finance Perspective on Financial Crises 21

Pillars of Strategic Decision Making 25

Value Creation Through Dynamism and Business Model Transformations 26

Beyond the Facade: The Importance of Risk-Based Transparency 35

CHAPTER 2 The Old Regime and Its Demise 39

Economic Performance and Viability of Financial Institutions 39

Static Business Models 41

Dominant Forces: The Future that Has Already Happened 46

Pressures on Static Business Models 55

CHAPTER 3 The Dynamic New World 65

Risk-Based Economic Performance 65

Balance Sheet Arbitrage 68

Principal Investments 69

Systematic Risk Exposures 71

Fees and Expenses 74

Capital Structure Optimization 75

Economic Performance Attribution 75

CHAPTER 4 Business Model Transformations 79

Pillars of Strategic Decisions in a Dynamic World 79

Responsive Recalibrations of Business Models 81

Full-Scale Business Model Transformations 86

Making the Strategic Vision a Reality 93

CHAPTER 5 The Road to Financial Darwinism 99

Real-World Business Model Transformations 99

Stakeholder Communication & Equity Valuation in a Dynamic World 109

Economic Value Creation (and Destruction) by Non-Financial Corporations 112

The Infamous “Carry Trade” and the Old Ways of Thinking 115

A Dynamic Finance Perspective on Modern Financial Crises 118

Beyond the Facade: The Need for Risk-Based Transparency 127

Conclusion 129

Epilogue: Financial Darwinism and the Crisis of 2007–2008 133

Appendix A: The Risk-Based Economic Performance Equation 137

Appenidx B: A Case Study in Dynamic Finance 141

Notes 157

References 163

About the Author 167

Index 169