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


The world of modern finance presents a landscape of significant uncertainty, but also of rapid innovation and opportunity. Once-comfortable financial business face increased competition and lower profit margins. Time-tested investment and business strategies are being threatened by disruptive technologies and globalization. “Once-in-a-lifetime” financial crises seem to be occurring with an alarming regularity. More than ever before, success rests on the ability to make sense of the profound changes, link up ...

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The world of modern finance presents a landscape of significant uncertainty, but also of rapid innovation and opportunity. Once-comfortable financial business face increased competition and lower profit margins. Time-tested investment and business strategies are being threatened by disruptive technologies and globalization. “Once-in-a-lifetime” financial crises seem to be occurring with an alarming regularity. More than ever before, success rests on the ability to make sense of the profound changes, link up seemingly unrelated phenomena, and understand the global forces at play. In Financial Darwinism, author Leo Tilman analyzes the tectonic financial shift that has taken place over the past quarter century and then comprehensively explores the challenges facing financial institutions—as well as the entire universe of their potential responses.

Financial Darwinism explores why and how financial firms must continuously evolve amidst genuine complexity and uncertainty in order to survive and remain competitive. It analyzes the strategic, investment, regulatory, and public policy implications of a “future that has already happened” and identifies actionable ways of putting new ideas into practice in risk-focused manner.

This book starts by introducing Dynamic Finance—and evolutionary thesis about the origins, the drivers, and the implications of the ongoing financial revolution. After examining how financial institutions used to create economic value in the past, Tilman offers a concise new risk-based approach to thinking about economic performance. He then develops a practical decision-making framework he calls Financial Darwinism that is designed to help financial institutions navigate the dynamic new world. Financial Darwinism—a blend of business strategy, corporate finance, investment analysis, and risk management—gives financial executives and investors a menu of broad choices on how to create economic value. In the process, a new kind of strategic vision, the breadth of global perspective, and command of advanced financial tools are shown to be essential ingredients of success.

This book is about change, and change is always difficult, indeed wrenching—institutions must be redesigned, outdated paradigms discarded, and corporate cultures redefined. However, the alternative—the Darwinian failure to evolve—is far more painful, particularly when capital markets, clients, and competitors beat you to the punch and make difficult choices for you. Financial Darwinism is an invaluable road map to the new financial order and an essential guide to adapting and succeeding in it.

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Editorial Reviews

From the Publisher
"As the world places increasing emphasis on fair valuation, risk-based financial disclosure and risk-focused regulation, Tilman's guide becomes more important for CEOs, directors and fiduciaries who must build risk evaluation into all fundamental decisions." (Corporate Governance)

“While Tilman's thesis is directed to financial firms, the concept applies to all businesses. Failure to adopt a risk management strategic planning model will lead to extinction, hence the "Darwinism" in the title. Summing Up: Recommended.” (Choice, April 2009)

"...Tilman couldn't have chosen a better time...clearly written and with plenty of rational advice for financial institutions" (City A.M., December 11th 2008)

"One of the book's merits is that he offers tables that provide taxonomies of business model transformation." (Financial World, February 2009)

"This book is highly recommended for finance professional sat all levels of an organization as well as investors desiring insights into how firms can weather the "tectonic shift" in the financial landscape. The terminology and models used should be within the grasp of anyone who has taken an undergraduate course in finance." (Journal of Corporate Finance and Accounting)

“[Tilman] sees much to be learned from the collective blindness that led to the economic meltdown. … says the first steps to recovery are humility and innovation” (Alpha magazine)

"This book offers a deeply thoughtful and well-reasoned analysis of what has gone wrong and the outlines of an eventual road to recovery." (Financial Executive International)

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Product Details

  • ISBN-13: 9780470385463
  • Publisher: Wiley
  • Publication date: 11/10/2008
  • Edition number: 1
  • Pages: 172
  • Product dimensions: 6.10 (w) x 9.10 (h) x 0.90 (d)

Meet the Author

Leo M. Tilman is President of L.M. Tilman & Co., a strategic advisory firm that serves governments, financial institutions, corporations, and institutional investors worldwide. Prior to founding his own company, he held senior positions with BlackRock and Bear Sterns. Tilman teaches finance at University, which is also his graduate alma mater. He is coauthor of Risk Management (Wiley) and editor of Asset/Liability Management of Financial Institutions (Institutional Investor). Tilman is a contributing editor of the Journal of Risk Finance and a frequent speaker at leading business schools and conferences. He serves on the advisory board of the Center on Capitalism and Society at Columbia University and on the board of directors of Atlantic Partnership. Tilman has been honored by the World Economic Forum as a Young Global Leader, joining a select group of executives, public figures, and intellectuals recognized for “their professional accomplishments, commitment to society, and potential to contribute to shaping the future of the world.”

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Table of Contents

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

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