Now, I'd like to say a few words about research and innovation. I thought that they deserve a special episode. Well, this is a very important part of the investment banking activity, but I would start with research in its routine form. That investment banks they have really advanced personnel, including mathematicians and physicists, and the people who are really advanced in the rocket science. So, these people basically do two things, the first thing, although, seems to be routine and not very much advanced, it still plays an important role in support of both underwriting and trading. And this is research in a generic meaning of this word. Namely, they employ specialist who study and monitor the issuers, the markets, the industries, and the clients. So these people basically, they study let's say, the airline industry. And they say, well, these airlines are better positions and these are worse positioned, and these are the trends, these are gaining market share, these are losing market share. So as a result they produce some notes, reports, sometimes they answer phone calls for their clients. So basically, they provide the up to date information about these companies. Now, this in itself may be kind of within and maybe you can always say well, everyone can get that on Internet. But you can get the real information in some financial statements for public companies. But you're unlikely to be able to digest that quickly, and to provide some ideas of future development, some recommendations, and some assessments. And by the same token, when providing support for underwriting in this process of due diligence there are special people who do that. But they sometimes use pieces of information that is produced by these generic research people who just they say, well, what are the standards for the industry? And they take that from that from them. Now like I said, this is no rocket science but this is also kind of important. The next thing, that is important here is innovation. And by innovation, we mean the invention of new financial instruments, schemes, and financial technologies, financial engineering, whatever. So, why is that the key activity of an investment bank? Well first of all, in order to do so we have to have a really very advanced and experienced people who know how to use not only algebra, but very high math. And who are extremely advanced in modern technology of stochastic calculations and some others. And as a result, the company who does that should be able to afford to hire these people and sometimes powerful team, so you have to have you know quite a few. And then the more important thing is that they these banks, they have a huge incentive to do so. Because if for example, we take someone's idea, or the idea of a client's, or the idea of an issue, and then we pack that up as a new product that can be marketed to the investment community. Then we may have, maybe a short living, but still a monopoly advantage. The average a life of this quotes monopoly over the last couple of decades has been no more than two weeks. So basically, other competing investment banks they create similar products because you cannot have a patent for that. Because basically a new financial product is just a scheme of repackaging cash flows and risk analysis. Well, that sounds very generic. But that still opens up a huge area of creative activity. Now, on top of that there is also the idea of technology that I mentioned the previous episodes. And sometimes with the existence of new technology, we have a better way to market that, and even sometimes you have other options to invent something. Now, this kind of activity seems great. It seems to be really a front edge of the financial business. And clearly this is the area in which you seem to be really jumping ahead so this is pretty cool. However, the key story here is that if you have these proprietary systems of valuation, often times you may first of all make a mistake. Because sometimes these systems are quite difficult, and quite complex obviously. But on the other way, sometimes there's some bank is not interested in telling the whole truth. This is not what you're lying but this is your competitive advantage. And so you can claim that we assess the risk this way and our valuation brings us these numbers. And they can declare or go to the market some other numbers that will allow them to reap some monopoly profit. Now, this in itself is not so bad, or it's not illegal because that's an invented thing. But what is important is sometimes that results in the fact that other people in this process, they have inferior information about that. They are sort of uninformed investors. And that creates a conflict of interest because here what happens is that if I market very risky new financial instruments, then I can easily get an advantage over the public. And then these people will roughly speaking, overpay or they will be in disadvantageous position. Because they do not have this ability to really value that properly, even if there's a procedure. Now, what I just said seems to be kind of strange and highly unlikely, but that's what's going on. And that results oftentimes in some fundamental crises, because we will talk about crises in the next episode and quite some details. But here, I am specifying the idea that the new crises, the crises of the new era of this century, they are closely linked to the fact that oftentimes the instruments that feed these crises are so advanced. That sometimes it's not enough for the people just to know that they exists, but it does require some kind of specific procedures of information disclosure and even of explaining to the people why the risk are so and so. We can see some conflict here, because the inventor would not like to disclose everything to be able to take advantage of that. And on the other hand, if there is the process in which a lot more people get involved, and they all know this standard perfectly, that may result in significant damage.
