Info

4. The Economist, "Invasion of the Sovereign Wealth Funds," January 19-25, 2008, front cover.

5. The rationale for this was detailed in Mohamed A. El-Erian, "Development and Globalization: Friends or Foes," Emerging Markets Watch, PIMCO, March 2002.

6. The Emerging Markets Watch publication, which I had the privilege of authoring from December 1999 until I left PIMCO for HMC in early 2006, was taken over by my two PIMCO colleagues Michael Gomez and Curtis Mewbourne. The articles are available on www.pimco.com. The columns that appeared in the Financial Times and Newsweek are available on www.ft.com and www.newsweek.com.

7. See the related discussion in Chapter 1 that refers to the February 16, 2005, testimony of Chairman Alan Greenspan before the Committee on Banking, Housing, and Urban Affairs of the U.S. Senate. Available on www.federalreserve.gov/boarddocs/hh/2005/february/testimony.htm.

8. Stephen Barrow, the CIO of Ironbridge Capital Management in London, put it in the following way in an interview that appeared in the August 20 edition of Barron's: "Wealth is not created by financial engineering. Financial engineering tends to be a transfer of wealth."

9. Ben White and David Wighton, "Credit Squeeze Costs Banks $18 Billion," Financial Times, October 6, 2007, p. 1.

10. Christine Harper, "Goldman Doesn't Plan Significant Mortgage Writedowns, CEO Blanfein Says," Bloomberg News, November 13, 2007.

11. Mohamed A. El-Erian, "Foreign Capital Must Not Be Blocked," Financial Times, October 2, 2007.

12. For an early discussion of SWFs, refer to the papers contained in Jennifer Johnson-Calari and Malan Rietveld, Sovereign Wealth Management, Central Banking Publications, London, 2007.

13. See, for example, Berkshire Hathaway Annual Report 2002.

Chapter 1

1. L.K. Jha Memorial Lecture by Lawrence H. Summers, "Reflections on Global Account Imbalances and Emerging Markets Reserve Accumulation," delivered on March 24, 2006, at the Reserve Bank of India, Mum-bai, India. Available on www.president.harvard.edu/speeches/2006/0324 _rbi.html.

2. Gillian Tett and Steve Johnson, "New Zealand Finance Chief Says Rush into Currency Is 'Irrational,'" Financial Times, September 7, 2006.

3. There is no single definition for the group of "emerging economies." For the purposes of our analysis, we will use the IMF/World Bank definition.

4. Martin Wolf, "Questions and Answers on a Sadly Predictable Debt Crisis," Financial Times, September 5, 2007.

5. Alan Greenspan, The Age of Turbulence: Adventures in a New World, Penguin Press, New York, 2007.

6. The argument is set out in his remarks: "The Global Saving Glut and the U.S. Current Account Deficit," Remarks by Governor Ben S. Bernanke at the Sandridge Lecture, Virginia Association of Economics, Richmond, Va., March 10, 2005: www.federalreserve.gov/boarddocs/speeches/2005/ 200503102/default.htm. (Governor Bernanke presented similar remarks with updated data at the Homer Jones Lecture, St. Louis, Mo., on

7. Ben Bernanke, "The Economic Outlook," testimony before the Committee on the Budget, U.S. House of Representatives, January 17, 2007.

Chapter 2

1. International Monetary Fund (IMF), The Managing Director's Report on the Fund's Medium-Term Strategy, September 15, 2005, IMF, Washington, D.C. See also IMF, The Managing Director's Report on Implementing the Fund's Medium-Term Strategy, April 5, 2006, IMF, Washington, D.C.

2. Barry Eichengreen, "The IMF Adrift on a Sea of Liquidity," in Reforming the IMF for the 21st Century, edited by Edwin M. Truman, Peter G. Peterson Institute for International Economics (HE), Washington, D.C., 2006.

3. Timothy D. Adams, "The IMF: Back to Basics," in Reforming the IMF for the 21st Century, edited by Edwin M. Truman, Peter G. Peterson Institute for International Economics (IIE), Washington, D.C., 2006.

4. Messrs. Lerrick and O'Neil are quoted in Christopher Swann, "Strauss-Kahn to Inherit IMF Job with Reduced Clout," Bloomberg News, August 31, 2007.

5. "Europe Is Wrong to Push Strauss-Kahn," Financial Times, August 28, 2007, p. 8.

6. As reported by Jude Webber and Richard Lapper, "It Won't be Easy . . . No Tears for the IMF as Feisty Argentina Awaits Its Next Evita," Financial Times, October 25, 2007.

7. For a summary discussion, refer to Mohamed A. El-Erian, "IMF Reforms: Attaining the Critical Mass," in Reforming the IMF for the 21st Century, edited by Edwin M. Truman, Peter G. Peterson Institute for International Economics (IIE), Washington, D.C., 2006.

8. For a description of the problem and potential solutions, see the International Monetary Fund (IMF), Committee to Study Sustainable Long-Term Financing of the IMF, Final Report, IMF, Washington, D.C., 2007. Available on http://www.imf.org/external/np/oth/2007/013107.pdf.

9. These issues are discussed in detail in the Peter G. Peterson Institute for International Economics (IIE) volume edited by Edwin M. Truman (2006). For further details, see also the following two op-ed articles that appeared in the Financial Times: Mohamed A. El-Erian and Michael Spence, "Refocus the IMF," Financial Times, August 6, 2007; and Mohamed A. El-Erian, "It's Time to End Feudal Selection Processes," Financial Times, March 29, 2005.

10. Data are derived from IMF inFocus, which is a supplement of the International Monetary Fund's IMF Survey, vol. 35, September 2006: www.imf.org/external/pubs/ft/survey/2006/090106.pdf.

11. Alexei Kudrin, "The Era of Empires Is Over for International Bodies," Financial Times, September 30, 2007.

12. Neil Unmack and Sebastian Boyd, "HSBC Will Take on $45 Billion of Assets from Two SIVs," Bloomberg News, November 26, 2007.

13. For background information, see the U.S. Securities and Exchange Commission, Report on the Role and Function of Credit Rating Agencies in the Operation of the Securities Markets, January 2003.

14. Gillian Tett, "Why Financiers Have Missed the New Monster," Financial Times, September 7, 2007, p. 22.

15. Michiyo Nakamoto and David Wighton, "Bullish Citigroup Is 'Still Dancing' to the Beat of the Buyout Boom," Financial Times, July 10, 2007.

16. Susanne Craig, David Reilly, and Randall Smith, "More Zeroes for Investors," Wall Street Journal, January 18, 2008.

17. See, for example, Irving Fisher, "The Debt-Deflation Theory of Great Depression," Econometrica, vol. 1, no. 4, October 1933.

18. Lawrence H. Summers, "Why America Must Have a Fiscal Stimulus," Financial Times, January 6, 2008.

19. Quoted from the letter of Meryvn King, the Bank of England's governor, to John McFall, chairman of the Treasury Select Committee of Parliament, as cited in Scheherazade Daneshkhu, "Bank Chief Defends Role in Northern Rock Crisis," Financial Times, September 21, 2007, p. 2.

20. Matt Ridley, Letters to the Editor, Economist, September 29, 2007, p. 19.

21. Martin Wolf, "The Bank Loses a Game of Chicken," Financial Times, September 21, 2007, p. 11.

22. See discussion in Xavier Freixas, "Systematic Risk and Prudential Regularities in the Global Economy," paper prepared for the joint Federal Reserve Bank of Chicago and the International Monetary Fund Conference on Globalization and Systemic Risk, Chicago, September 27-28, 2007.

23. Guillermo A. Calvo, Alejandro Izquierdo, and Luis-Fernando Mjia, "On the Empirics of Sudden Stops: The Relevance of Balance Sheet Effects," National Bureau of Economic Research, Cambridge, Mass., 2004.

24. Charlie McCreevy, Official Opening Speech, Wachovia Bank International, October 26, 2007, p. 5. Available on ec.europa.eu/commission_ barroso/mccreevy/docs/speeches/2007-1026/regulators_to_be_humble.pdf.

Chapter 3

1. John Mayard Keynes, The General Theory of Employment, Interest and Money, Macmillan, London, 1936.

2. Stuart Sim, Manifesto for Silence: Confronting the Politics and Culture of Noise, Edinburgh University Press, Edinburgh, 2007.

3. See, for example, Milton Friedman, Essays in Positive Economics, University of Chicago Press, Chicago, 1953. For a more holistic discussion, see Frank

Hahn and Martin Hollis, Philosophy and Economic Theory, Oxford University Press, New York, 1979.

4. Javier C. Hernandez, "Boston Tea Party Catches Fire Again," Boston Globe, August 28, 2007.

5. Amartya K. Sen, "Rational Fools: A Critique of the Behavioral Foundations of Economic Theory," Philosophy and Public Affairs, vol. 6, no. 4, Summer 1977.

6. Michael Douglas won the 1987 Oscar for best actor for this role. The movie was directed by Oliver Stone.

7. Thomas S. Kuhn, The Structure of Scientific Revolutions, University of Chicago Press, Chicago, 1962.

8. George A. Akerlof, "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," Quarterly Journal of Economics, vol. 84, no. 3, August 1970, pp. 488-500.

9. Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable, Random House, New York, 2007, p. xviii.

10. As an example, see the many letters to the Financial Times editors sent in response to Taleb's op-ed: Nassim Nicholas Taleb, "The Pseudo-science Hurting Markets," Financial Times, October 24, 2007.

11. Howard Wainer, "The Most Dangerous Equation," American Scientist, May-June 2007, p. 250.

12. This is discussed in James J. Choi, David Laibson, and Brigitte Madrian, Plan Design and 401(k) Savings Outcomes, NBER Working Paper No. 10486, National Bureau of Economic Research, Cambridge, Mass., May 2004.

13. A detailed discussion may be found in Daniel Kahneman, and Amos Tver-sky, editors, Choices, Values, and Frames, Cambridge University Press, Cambridge, U.K., 2000.

14. Daniel Kahneman, "Maps of Bounded Rationality: A Perspective on Intuitive Judgment and Choice," Nobel Prize Lecture, Stockholm, Sweden, December 8, 2002.

15. The term was coined in Hersh Shefrin, and Meir Statman, "The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence," Journal of Finance, vol. 40, no. 3, 1985, pp. 777-790.

16. See, for example, Baba Shiv and Alexander Fedorikhin, "Heart and Mind in Conflict: The Interplay of Affect and Cognition in Consumer Decision Making," Journal of Consumer Research, vol. 26, no. 3, December 1999, pp. 278-292.

17. John Y. Campbell, "An Interview with Robert J. Shiller," in Inside the Economist's Mind: Conversations with Eminent Economists, edited by Paul A. Samuelson and William A. Barnett, Blackwell Publishing, Malden, Mass., 2007.

18. Samuel M. McClure, David I. Laibson, George Lowenstein, and Jonathan D. Cohen, "Separate Neural Systems Value Immediate and Delayed Monetary Rewards," Science, vol. 306, October 15, 2004, pp. 503-507.

19. Drew Gilpin Faust, "Unleashing Our Most Ambitious Imaginings," Inauguration Speech, Harvard University, Cambridge, Mass., October 12, 2007.

20. See, for example, the work by Andrei Shleifer including Andrei Shleifer and Robert W. Vishny, "The Limits to Arbitrage," Journal of Finance, March 1997, pp. 35-55.

21. Ben S. Bernanke, "The Economic Outlook," testimony before the Committee on the Budget, U.S. House of Representatives, January 17, 2008.

22. For an example of such analysis, see Paul R. Masson, Multiple Equilibria, Contagion, and the Emerging Market Crises, International Monetary Fund (IMF) Working Paper No. 99/164, Washington, D.C., November 1999.

23. For a more detailed discussion, see Mohamed A. El-Erian, Mexico's External Debt and the Return to Voluntary Capital Market Financing, International Monetary Fund (IMF) Working Paper No. 91/83, Washington, D.C., August 1991.

24. For additional information, see Mohamed A. El-Erian, Restoration of Access to Voluntary Capital Market Financing: The Recent Latin American Experience, International Monetary Fund (IMF) Staff Papers 39, no. 1, Washington, D.C., March 1992.

25. Mohamed A. El-Erian, "How Investors Should Respond to the Boom in M&A Activity," Financial Times, May 30, 2007.

Chapter 4

1. This section draws heavily on Mohamed A. El-Erian, and Michael Spence, "Growth Strategies and Dynamics: Insights from Country Experiences," World Economics, vol. 9, no. 1, January-March 2008.

2. This insight comes from a discussion with Egypt's minister of finance, Youssef Boutros-Ghali during a 1995 conference on the country's economic prospects.

3. El-Erian and Spence,"Growth Strategies and Dynamics," p. 4.

4. El-Erian and Spence, "Growth Strategies and Dynamics," p. 7.

5. Dani Rodrik, One Economics, Many Recipes: Globalization, Institutions, and Economic Growth, Princeton University Press, Princeton, N.J., 2007.

6. Tim Callen, "Emerging Markets Main Engine of Growth," IMF Survey Magazine, International Monetary Fund (IMF), Washington, D.C., October 17, 2007.

7. The Economist, "Stronger China," September 29, 2007, p. 14.

8. For details, see Mohamed A. El-Erian, "Asia: Regionalism with an Outward Orientation," Emerging Markets Watch, PIMCO, Newport Beach, Calif., July 2004.

9. Lawrence H. Summers, "The U.S. Current Account Deficit and the Global Economy," The Per Jacobsson Foundation, Washington, D.C., October 3, 2004. Available on www.perjacobsson.org/2004/100304.pdf.

10. Michael Dooley, David Folkerts-Landau, and Peter Garber, The Revived Bretton Woods System: The Effects of Periphery Intervention and Reserve Management on Interest Rates and Exchange Rates in Center Countries, NBER Working Paper No. 10332, National Bureau of Economic Research (NBER), Cambridge, Mass., March 2004.

11. Nouriel Roubini and Brad Setser, "How Scary Is the Deficit?" Foreign Affairs, July-August 2005.

12. Chris P. Dialynas and Marshall Auerback, "Renegade Economics and the Bretton Woods II Fiction," PIMCO, Newport Beach, Calif., 2007.

13. Alan Greenspan, The Age of Turbulence: Adventures in a New World, Penguin Press, New York, 2007.

14. For example, India's labor force is still predominantly in the agricultural sector, and there is significant surplus labor to draw into the activities of the modern global economy.

15. Greenspan, The Age of Turbulence, p. 382.

16. International Energy Agency (IEA), World Energy Outlook (WEO), Paris, October 2007.

17. Aasim M. Husain, "Riding the Crest of the Oil Boom," IMF Survey Magazine, International Monetary Fund (IMF), Washington, D.C., October 30, 2007.

18. The four steps were initially set out in Mohamed A. El-Erian, "The Policy Challenge of Managing Success," Emerging Markets Watch, PIMCO, Newport Beach, Calif., January 2005. Further elucidation may be found in Mohamed A. El-Erian, "Asset-Liability Management in Emerging Economies," in Sovereign Wealth Management, edited by Jennifer Johnson-Calari, and Malan Rietveld, Central Banking Publications, London, 2007.

19. See, for example, Barry Eichengreen and Ricardo Hausmann, "How to Eliminate Original Sin," Financial Times, November 22, 2002. Available on www.ft.com.

20. Paul Blustein's January 2005 book on Argentina has a good discussion of this and related issues. See Paul Blustein, And the Money Kept Rolling In (and Out): Wall Street, the IMF, and the Bankrupting of Argentina, Public Affairs/Perseus, 2005.

21. McKinsey Global Institute (MGI), The New Power Brokers: How Oil, Asia, Hedge Funds, and Private Equity Are Shaping Global Capital Markets, MGI, San Francisco/McKinsey & Company, October 2007.

22. Norges Bank Investment Management, Oslo, Norway: www.norges-bank.no/.

23. Lee Kuan Yew, From Third World to First—The Singapore Story: 1965-2000, HarperCollins, New York, 2000, p. 97.

24. This category covers assets that would be expected to do well in an inflationary environment. In addition to real estate, this includes Treasury Inflation-Protected Securities (TIPS) and commodities.

25. Simon Johnson, "The Rise of Sovereign Wealth Funds," Finance and Development, September 2007, p. 57.

26. China Universal Asset Management Co. Ltd., Shanghai, China.

27. Bank for International Settlements (BIS), Triennial and Semiannual Surveys on Positions in Global Over-the-Counter (OTC) Derivative Markets at EndJune 2007, BIS, Basel, Switzerland, 2007.

28. Darrell Duffie, "Innovation in Credit Risk Transfer: Implications for Financial Stability," paper presented at the Bank for International Settlements (BIS) Sixth Annual Conference, Financial System and Macroeco-nomic Resilience, Brunnen, Switzerland, June 18-19, 2007. Available on www.bis.org/events/brunnen07/duffiepres.pdf.

29. Two-thirds of subprime risk is said to have resided in structured finance instruments.

Chapter 5

1. The Economist, "Getting the Message, At Last," December 13, 2007.

2. Antoine van Agtmael, The Emerging Markets Century: How a New Breed of World Class Companies Is Overtaking the World, Free Press, New York, 2007.

3. These allocations are reflected in the evolution of the Policy Portfolio (or neutral asset mix) that is set out on the Web site www.hmc.harvard.edu.

4. Data on asset allocations are available on the Harvard Management Company (HMC) Web site www.hmc.harvard.edu.

5. Mohamed A. El-Erian, "In the New Liquidity Factories, Buyers Must Still Beware," Financial Times, March 22, 2007.

6. Martin Wolf, "Questions and Answers on a Sadly Predictable Debt Crisis," Financial Times, September 5, 2007.

7. Kevin Warsh, "The End of History?" Speech to the New York Association for Business Economics, New York, N.Y., November 7, 2007.

8. Bryan Keogh and Shannon D. Harrington, "Citigroup Pushes Bank Borrowing Costs Above Companies," Bloomberg News, November 16, 2007.

9. Ben S. Bernanke, "Housing, Housing Finance, and Monetary Policy," Speech at the Federal Reserve Bank of Kansas City's Economic Symposium, Jackson Hole, Wyo., August 31, 2007. Available on www. federalreserve.gov/newsevents/speech/bernanke20070831a.htm.

10. For an early application of this view, see Mohamed A. El-Erian, "Symbiotic Parenting," Emerging Markets Watch, PIMCO, Newport Beach, Calif., June 2004.

11. Mohamed A. El-Erian, "A Route Back to Potency for Central Banks," Financial Times, January 17, 2007, p. 9.

12. Jim Cramer's outburst, Friday, August 10, 2007, may be seen on YouTube.com and www.cnbc.com.

13. Frederic S. Mishkin, "Monetary Policy and the Dual Mandate," Speech delivered at Bridgewater College, Bridgewater, Va., on April 10, 2007. The speech is available on www.federalreserve.gov/newsevents/speech/ Mishkin20070410a.htm.

14. Roberto Cardarelli, Selim Elekdag, and M. Ayhan Kose, "Managing Large Capital Inflows," World Economic Outlook, International Monetary Fund (IMF), Washington, D.C., October 2007, ch. 3, p. 123.

15. Edwin M. Truman, "The Management of China's International Reserves: China and an SWF Scorecard," paper prepared for the Conference on China's Exchange Rate Policy, Peterson Institute for International Economics (IIE), Washington, D.C., October 19, 2007, p. 11. Available on www.petersoninstitute.org/publications/papers/truman1007.pdf. Also published in Debating China's Exchange Rate Policy, edited by Nicholas R. Lardy and Morris Goldstein, Peterson Institute for International Economics, Washington, D.C., 2008.

16. Jim VandeHei and Jonathan Weisman, "Republicans Split with Bush on Ports: White House Vows to Brief Lawmakers on Deal with Firm Run by Arab State," Washington Post, February 23, 2006, p. A01.

17. My remarks are contained in Mohamed A. El-Erian, "Towards a Better Understanding of Sovereign Wealth Funds," discussant comments on Peterson Institute Senior Fellow Edwin M. Truman's paper, "The Management of China's International Reserves," for the Conference on China's Exchange Rate Policy, Peterson Institute for International Economics (IIE), Washington, D.C., October 19, 2007. Available on www.petersoninstitute.org/events/event_detail.cfm?EventID=47.

18. The Economist, "The Invasion of the Sovereign-Wealth Funds," January 17, 2008, p. 11.

19. The transcript of the Democratic Debate in Las Vegas on January 15, 2008, as provided by the Federal News Service and reprinted in the New York Times, is available on www.nytimes.com/2008/01/15/us/politics/ 15demdebatetranscript.html?_r=2&pagewanted=all&oref=slogin&oref= slogin.

20. The Economist, "The Invasion of the Sovereign-Wealth Funds."

21. El-Erian, "Towards a Better Understanding of Sovereign Wealth Funds."

22. David Evans, "Public School Funds Hit by Defaulted SIV Debts Hidden in Investment Pools," Bloomberg News, November 15, 2007.

23. The members of the Group of Seven (G-7) are Canada, France, Germany, Italy, Japan, United Kingdom, and United States. The G-7 agreed in 1994 unofficially and in 1997 officially to include Russia in a new, mainly political forum, known as the Group of Eight (G-8).

24. Robert F. Bruner and Sean D. Carr, The Panic of 1907: Lessons Learned from the Market's Perfect Storm, Wiley, Hoboken, N.J., 2007.

Chapter 6

1. Jeremy J. Siegel, Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies, 4th ed., McGraw-Hill, 2008, p. 4.

2. Mohamed A. El-Erian, "Waning Days of the Dollar," Newsweek, November 19, 2007.

3. David Swensen, Unconventional Success: A Fundamental Approach to Personal Investment, Free Press, New York, 2005.

4. For an interesting discussion on fundamental indexing, see Robert D. Arnott, Jason C. Hsu, and Philip Moore, "Fundamental Indexation," Financial Analysts Journal, vol. 61, no. 2, March/April 2005.

5. Marc Lifscher, "CalPERS Panel OKs Broader Mix," Los Angeles Times, December 18, 2007, p. C2.

6. For an early and comprehensive analysis of inflation-protected securities, see John Brynjolfsson and Frank J. Fabozzi, editors, Handbook of Inflation Indexed Bonds, Frank J. Fabozzi Associates, New Hope, Pa., 1999.

7. C.A.E. Goodhart, "Monetary Relationship: A View from Threadneedle Street," Papers in Monetary Economics, Vol. I, Reserve Bank of Australia, 1975.

8. Similar considerations have prompted the ongoing shift in company pension plans to automatic enrollment—that is, offering new hires the choice of opting out rather than opting in. This change has been shown to result in significant increases in the amount and speed of enrollment. See John Beshears, James J. Choi, David Laibson, and Brigitte C. Madrian, The Importance of Default Options for Retirement Savings Outcome: Evidence from the United States, CeRP Working Paper 43, Center for Research on Pensions and Welfare Policies (CeRP), Turin, Italy, 2003.

9. Mohamed A. El-Erian, "Decomposing Emerging Markets Bonds," Emerging Markets Watch, PIMCO, Newport Beach, Calif., September 2004.

10. William H. Gross, "Philosopher's Stone," Investment Outlook, PIMCO, Newport Beach, Calif., September 2004.

11. See, for example, Jasmina Hasanhodzic and Andrew W. Lo, "Can Hedge-Fund Returns Be Replicated? The Linear Case," August 16, 2006. Available at the Social Science Research Network (SSRN): http://ssrn.com/ abstract=924565.

12. See, for example, Steven N. Kaplan and Antoinette Schoar, "Private Equity Performance: Returns, Persistence and Capital Flows," Journal of Finance, vol. 60, no. 4, 2005.

13. Oliver Gottschlag and Ludovic Phalippou, "The Truth about Private Equity Performance," Harvard Business Review, December 2007.

14. Josh Lerner and Antoinette Schoar, The Illiquidity Puzzle: Theory and Evidence from Private Equity, NBER Working Paper No. W9146, National Bureau of Economic Research (NBER), Cambridge, Mass., 2002.

15. Josh Lerner, Antoinette Schoar, and Wan Wong, Smart Institutions, Foolish Choices? The Limited Partner Performance Puzzle, NBER Working Paper No. 11136, National Bureau of Economic Research (NBER), Cambridge, Mass., February 2005.

16. Prashant A. Bhatia, Chief Investment Officer Survey, Citigroup Global Markets, September 25, 2007, 36 pages.

17. See, for example, Raghuram Rajan, "Bankers' Pay Is Deeply Flawed," Financial Times, January 8, 2008, p. 9.

18. Mohamed A. El-Erian, "Global Investor: Hedge Fund Truths," Newsweek, October 1, 2007.

19. David S. Scharfstein, and Jeremy Stein, "Herd Behavior and Investment," American Economic Review, vol. 80, no. 3, June 1990, p. 465.

20. The total pool of assets managed by HMC at the end of June 2007, which includes the endowment and related accounts, amounted to $41 billion.

21. Every December, Harvard University issues a press release detailing the compensation of the five top earners at the Harvard Management Company and that of HMC's CEO. This information is also contained in the tax statements of the university.

22. The sixth HMC spin-off, Convexity, which started investing in February 2006, raised over $6 billion up front. The amount constituted the largest initial capital raise-up for a hedge fund at that time.

Chapter 7

1. William H. Gross, "What Do They Know?" Investment Outlook, PIMCO, Newport Beach, Calif., October 2007.

2. International Monetary Fund (IMF), "Managing Large Capital Inflows," World Economic Outlook, IMF, Washington, D.C., October 2007.

3. Conference on China's Exchange Rate Policy, Peter G. Peterson Institute for International Economics (HE), Washington, D.C., October 19, 2007. Truman's comments are reflected in his paper: Edwin M. Truman, "The Management of China's International Reserves: China and an SWF Scorecard." Also published in Debating China's Exchange Rate Policy, edited by Nicholas R. Lardy and Morris Goldstein, Peter G. Peterson Institute for International Economics (IIE), Washington, D.C., 2008.

4. For a more detailed discussion, see Mohamed A. El-Erian, "Towards a Better Understanding of Sovereign Wealth Funds," discussant comments on Peterson Institute Senior Fellow Edwin M. Truman's paper, "The Management of China's International Reserves," for the Conference on China's Exchange Rate Policy, Peter G. Peterson Institute for International Economics (IIE), Washington, D.C., October 19, 2007. Available on www.petersoninstitute.org/events/event_detail.cfm?EventID=47.

5. A detailed discussion may be found in Mohamed A. El-Erian, "Asset-Liability Management in Emerging Economies," in Sovereign Wealth Management, edited by Jennifer Johnson-Calari and Malan Rietveld, Central Banking Publications, London, 2007.

6. One example of these regulatory agencies is the U.S. Treasury's Committee on Foreign Investment in the United States (CFIUS).

7. U.S. Department of the Treasury, Office of Domestic Finance, "Who/What Is the Treasury Borrowing Advisory Committee (TBAC)?" See www.treas.gov/offices/domestic-finance/debt-management/who-is-tbac.shtml.

8. Thomas L. Friedman, The World Is Flat: A Brief History of the Twenty-First Century, Farrar, Straus and Giroux, New York, 2005.

9. As an example, see the recent survey article by Pinelopi K. Goldberg and Nina Pavcnik, "Distributional Effects of Globalization in Developing Countries," Journal of Economic Literature, vol. 45, no. 1, March 2007, pp. 39-82.

10. International Monetary Fund (IMF), "Globalization and Inequality," World Economic Outlook, IMF, Washington, D.C., October 2007, p. 49.

12. See, for example, International Monetary Fund (IMF), The Managing Director's Report on the Fund's Medium-Term Strategy, September 15, 2005, and IMF, The Managing Director's Report on Implementing the Fund's Medium-Term Strategy, April 5, 2006, IMF, Washington, D.C.

13. See, for example, International Monetary Fund (IMF), Committee to Study Sustainable Long-Term Financing of the IMF, Final Report, IMF, Washington, D.C., January 31, 2007.

14. Edwin M. Truman, editor, Reforming the IMF for the 21st Century, Peter G. Peterson Institute for International Economics (IIE), Washington, D.C., 2006.

15. Mohamed A. El-Erian, "IMF Reform: Attaining the Critical Mass," in Reforming the IMF for the 21st Century, edited by Edwin M. Truman, Peter G. Peterson Institute for International Economics (IIE),Washington, D.C., 2006.

16. Richard P. Feynman, Personal Observations on the Reliability of the Shuttle, reprinted as Appendix A in What Do You Care What Other People Think: Further Adventures of a Curious Character, Norton, New York, 1988.

17. Mohamed A. El-Erian and Michael Spence, "Refocus the Fund," Financial Times, August 6, 2007.

18. Recall the CEO qualities that Jack Welch is fond of stressing: authenticity, vision, hiring ability, resilience, strategic mindset, and execution. For details, see Jack Welch and Suzy Welch, "Chief Executive Officer-in-Chief," BusinessWeek, February 4, 2008, p. 88.

19. Olivier Blanchard, "An Interview with Stanley Fischer," in Inside the Economist's Mind: Conversations with Eminent Economists, edited by Paul A. Samuelson and William A. Barnett, Blackwell Publishing, Malden, Mass., 2007.

Chapter 8

1. The impact of moral hazard, and the partly related phenomenon of adverse selection, is elegantly discussed in Joseph E. Stiglitz and Andrew

Murray Weiss, "Credit Rationing in Markets with Imperfect Information," American Economic Review, vol. 73, no. 3, June 1981, pp. 303-410.

2. Xavier Freixas, "Systemic Risk and Prudential Regulation in the Global Economy," paper prepared for the joint Federal Reserve Bank of Chicago and the International Monetary Fund (IMF) conference on Globalization and Systemic Risk, Chicago, September 27-28, 2007.

3. Krishna Guha, "Fed Ready to Act against 'Tail Risk,' " Financial Times, September 8/9, 2007, p. 5.

4. Mohamed A. El-Erian, "Sophistication in Managing Risk Is Part of the Regime Change," Financial Times, July 26, 2007.

5. Clawbacks seek to insure longer-term outperformance. They provide the owner of the capital with the ability to claw back performance fees from the investment manager should the record of outperformance not be sustained from a prespecified period of time.

6. Among the Emerging Markets Watch (EMW) issues that dealt with Argentina and that are available in the archive section of the PIMCO Web site (www.pimco.com), see "IMF Delivers Packages for the Holidays," December 2000; "Distracted by Reality," April 2001; "The Ant Trail," August 2001; "Cambia Todo Cambia," November 2001; and "To B Or Not to D.?," January 2002.

7. The Emerging Market Bond Index (EMBI) is maintained by JPMorgan Chase.

8. As an illustration, ProShares advertised on page M9 of the December 17, 2007 edition of Barron's, the weekly financial paper, that it was offering investors 29 short ETFs for the U.S. markets and was looking to introduce funds that short foreign markets.

9. See, for example, Geraldine Fabrikant, "Playing Hunches at Harvard," New York Times, March 15, 2007.

10. Blaise Pascal, Pensées, Penguin Classics, Penguin Books, London, 1995.

11. Mohamed A. El-Erian, "The Elusive Center," Emerging Markets Watch, PIMCO, Newport Beach, Calif., November 2003.

12. For those of you that have not come across this British concept, a "bedsit" is essentially what is labeled a "studio apartment" in the United States: It is a one-room abode that serves as both a bedroom and a living room.

Acknowledgments

1. I am taking the liberty here of drawing on the remarks I made to the October 4, 2006, Arab Bankers Association of North America (ABANA) Achievement Award Dinner (available on www.arabbankers.org).

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