(Bhopal, India, February 3, 1963) was the "Economic Counselor and Director of Research" (Chief Economist) at the International Monetary Fund from September 2003 until January 2007. He was the youngest individual to hold the position (beginning at the age of 40).
Raghuram G. Rajan served as Chief Economist at the International Monetary Fund between 2003 and 2006. His major research focus is on economic growth, and the role finance plays in it. Rajan believes there is no issue with greater urgency or moral imperative than economic development.
FT.com: "Bankers’ pay is deeply flawed" January 8 2008
Banks have recently been acknowledging enormous losses, yet those losses are barely reflected in employee compensation. For example, Morgan Stanley announced a $9.4bn charge-off in the fourth quarter and at the same time increased its bonus pool by 18 per cent. The justification was that many employees had a banner year and their compensation should not be held hostage to mistakes that were made in the subprime market. The chief executive, John Mack, however, assumed some responsibility and agreed to take no bonus for 2007 – although he got a $40m payout for 2006.
The typical manager of financial assets generates returns based on the systematic risk he takes – the so-called beta risk – and the value his abilities contribute to the investment process – his so-called alpha. Shareholders in asset management firms, such as commercial banks, investment banks and private equity or insurance companies are unlikely to pay the manager much for returns from beta risk. For example, if the shareholder wants exposure to large traded US stocks she can get the returns associated with that risk simply by investing in the Vanguard S&P 500 index fund, for which she pays a fraction of a per cent in fees. What the shareholder will really pay for is if the manager beats the S&P 500 index regularly, that is, generates excess returns while not taking more risks. Hence they will pay for alpha.
In reality, there are only a few sources of alpha for investment managers. One of them comes from having truly special abilities in identifying undervalued financial assets. Warren Buffett, the US billionaire investor, certainly has it, yet this special ability is, by definition, rare.
A second source of alpha is from what one might call activism...
Raghuram G. Rajan, draws the distinction between “liquidation values” and those of calmer times, or “going concern values.” In a troubled time for banks, Mr. Rajan said, analysts are constantly scrutinizing current and potential losses at the banks, but that is not the norm.
“If they had to sell these securities today, the losses would be far beyond their capital at this point,” he said. “But if the prices of these assets will recover over the next year or so, if they don’t have to sell at distress prices, the banks could have a new lease on life by giving them some time.”