(eBook PDF) (AUCS) Banking and

Lending Decisions Custom for

University
Go to download the full and correct content document:
https://ebooksecure.com/product/ebook-pdf-aucs-banking-and-lending-decisions-cust
om-for-university/
More products digital (pdf, epub, mobi) instant
download maybe you interests ...

(eBook PDF) Translational Medicine in CNS Drug

Development, Volume 29

http://ebooksecure.com/product/ebook-pdf-translational-medicine-
in-cns-drug-development-volume-29/

Progress in Heterocyclic Chemistry Volume 29 1st

Edition - eBook PDF

https://ebooksecure.com/download/progress-in-heterocyclic-
chemistry-ebook-pdf/

(eBook PDF) Advanced Managerial Accounting for Tulane

University Custom

http://ebooksecure.com/product/ebook-pdf-advanced-managerial-
accounting-for-tulane-university-custom/

(eBook PDF) Materials in Today's World, Custom Edition

for Penn State University

http://ebooksecure.com/product/ebook-pdf-materials-in-todays-
world-custom-edition-for-penn-state-university/
(eBook PDF) Internal Controls Audit and Fraud
Prevention and Detection Custom eText for Arizona State
University

http://ebooksecure.com/product/ebook-pdf-internal-controls-audit-
and-fraud-prevention-and-detection-custom-etext-for-arizona-
state-university/

Cardiology-An Integrated Approach (Human Organ Systems)

(Dec 29, 2017)_(007179154X)_(McGraw-Hill) 1st Edition
Elmoselhi - eBook PDF

https://ebooksecure.com/download/cardiology-an-integrated-
approach-human-organ-systems-dec-29-2017_007179154x_mcgraw-hill-
ebook-pdf/

International Financial Management, Second Custom

Edition for University of Groningen S. Wang - eBook
PDF

https://ebooksecure.com/download/international-financial-
management-second-custom-edition-for-university-of-groningen-
ebook-pdf/

Netter Atlas of Human Anatomy-Classic Regional

Approach, 8e (Mar 29, 2022)_(0323793738)_(Elsevier) NOT
TRUE PDF 8th Edition - eBook PDF

https://ebooksecure.com/download/netter-atlas-of-human-anatomy-
classic-regional-approach-8e-mar-29-2022_0323793738_elsevier-not-
true-pdf-ebook-pdf/

Custom eBook: Effective Writing for University of

Windsor, Third Edition Kemper/Meyer/Van Rys/Holditch -
eBook PDF

https://ebooksecure.com/download/custom-ebook-effective-writing-
for-university-of-windsor-third-edition-ebook-pdf/
6
Bio

Dr. Mamiza Haq is Lecturer in Finance at the UQ Business School. She holds Bachelor of Commerce
(Banking and Finance), Master of Commerce (Finance), Master of Science (Finance) and PhD degrees.
Dr Haq's research interest centres on bank equity, and credit risks, bank regulation, capital adequacy
requirement and market discipline, bank competition and efficiency, financial crises, and non-
conventional banking (microfinance and Islamic finance). She is also interested in the area of corporate
finance including dividend policy, capital structure, mergers and acquisitions. Her research publications
have appeared in international and Australian peer-reviewed journals. Dr. Haq has received a number of
competitive research grants. She is an active researcher and presents her work regularly at international
and Australian conferences. Dr Haq teaches both undergraduate and postgraduate courses. She also
supervises honours, Masters and PhD students.

Banking & Lending Decisions 7

8
Acknowledgements
The author and publisher would like to thank the following copyright holders, organ-
isations and individuals for their permission to reproduce copyright material in Financial
Markets, Institutions and Money, 3rd edition.

IMAGES
• Reserve Bank of Australia: 47, 48, 49, 50, 51, 52, 53, 54 From ‘The Global Financial
Crisis: Causes, Consequences and Countermeasures’ by Luci Ellis, 15/4/09; 56, 57, 58
‘European Financial Developments’ by Ric Battellino, Deputy Governor, 14 December
2011; 71 Extracts from statistical tables ‘G1 — Measures of Consumer Price Inflation’ and
‘F1 — Interest Rates and Yields — Money Market’; 79 Extract from statistical table ‘F1 —
Interest Rates and Yields — Money Market’; 80 ‘Annual Report 2012’; 105 ‘Domestic Market
Operations’; 115 ‘The Australian Economy and Financial Markets Chart Pack, December
2012; 116 ‘The Australian Economy and Financial Markets Chart Pack, December 2012’;
117 ‘The Australian Economy and Financial Markets Chart Pack, December 2012’; 323
‘The Australian Economy and Financial Markets Chart Pack, December 2012’; 323 ‘The
Australian Economy and Financial Markets Chart Pack, December 2012’; 330 ‘The Australian
Semi-government Bond Market’ by David Lancaster and Sarah Dowling, Bulletin –
September Quarter 2011; 340 ‘The Australian Economy and Financial Markets Chart
Pack, December 2012’; 456 ‘The Australian Economy and Financial Markets Chart Pack,
December 2012’; 460 Extracts from statistical tables ‘A4 — Foreign Exchange Transactions
and Holdings of Official Reserve Assets’ & ‘F11 — Exchange Rates — Monthly’. • Australian
Prudential Regulation Authority: 86 © Australian Prudential Regulation Authority 2012,
‘Organisation Chart’; 489 © Australian Prudential Regulation Authority (APRA); 492
© Australian Prudential Regulation Authority 2012, from ‘Supervisory Oversight and Res-
ponse System’, APRA, June 2012, p. 5; 495 © Australian Prudential Regulation Authority
2012, from ‘Probability and Impact Rating System’, APRA, June 2012, p. 8; 608, 617 ©
Australian Prudential Regulation Authority 2012, ‘List of Authorised Deposit-taking Insti-
tutions’.• ASIC 88 © Australian Securities & Investments Commission. Reproduced with
permission. • Australian Bureau of Statistics: 117 ‘5206.0 Australian National Accounts:
National Income, Expenditure and Product, March Quarter 2012’; 760 ‘Venture Capital
and Later Stage Private Equity 5678.0 2010–11’, viewed February 2012. • © Thomson
Reuters Datastream: 143, 144, 144, 145, 145. • ASX: 381 © ASX Limited ABN 98 008 624
691 (ASX) 2013. All rights reserved. This material is reproduced with the permission of
ASX. This material should not be reproduced, stored in a retrieval system or transmitted in
any form whether in whole or in part without the prior written permission of ASX. • Bank
For International Settlements (BIS): 503/ BIS Basel from ‘International Convergence of
Capital Measurement and Capital Standards. A Revised Framework’, June 2006, www.bis.
org. • Financial Ombudsman Service: 523, 525. Reproduced with permission from the
Financial Ombudsman Service, www.fos.org.au. • Federal Deposit Insurance Corporation:
578 ‘Risk Management Manual of Examination Policies’. • Wide Bay Australia Ltd: 609,
615 Reproduced with permission from Wide Bay Australia Ltd. • Credit Union Australia
Ltd: 620–1. • Deloitte — Sydney: 748, Deloitte Annual IPO Report 2010–2011.

TEXT
• © Australian Prudential Regulation Authority (APRA) 2012: 20–1 ‘APRA Annual Report
2011’; 23–4 ‘Monthly Banking Statistics, February 2012’; 487; 490 from ‘Probability and

Acknowledgements xvii

Banking & Lending Decisions 9

 Impact Rating System’, APRA, June 2012, p. 11; 491 from ‘Probability and Impact Rating
System’, APRA, June 2012, p. 21; 492 from ‘Probability and Impact Rating System’, APRA,
June 2012, p. 23; 503 ‘Prudential Standard APS 111 — Capital Adequacy: Measurement
of Capital’, January 2012; 504 ‘Prudential Standard APS 112 — Capital Adequacy: Stan-
dardised Approach to Credit Risk’, December 2010; 505 ‘Prudential Standard APS 112 —
Capital Adequacy: Standardised Approach to Credit Risk’, December 2010; 507 ‘Prudential
Standard APS 112 — Capital Adequacy: Standardised Approach to Credit Risk’, December
2010; 536 ‘Monthly Banking Statistics’ July 2012; 576 ‘Prudential Standard APS 111,
Capital Adequacy: Measurement of Capital’ January 2008; 671–2 ‘List of Authorised
Deposit-taking Institutions’; 673–4 ‘APRA Insight — 4th Quarter 2001’ & ‘APRA Insight —
Issue 2 2011’; 710 ‘Quarterly Superannuation Performance’; 716–8 ‘Statistics: Super-
annuation Fund-level Rates of Return, June 2011 (issued 29 February 2012)’; 740 ‘List of
Registered Financial Corporations: money market corporations’; 744–5. • Reserve Bank
of Australia: 22 Extract from statistical table ‘B1 — Assets of Financial Institutions’;
30 Extract from statistical table ‘D4 — Debt Securities Outstanding’; 32–3 Extract from
statistical table ‘D4 — Debt Securities Outstanding’; 35 Extract from statistical table
‘B12 — Assets and Liabilities of Australian — located Operations’; 47–55 From ‘The
Global Financial Crisis: Causes, Consequences and Countermeasures’ by Luci Ellis,
15/4/09; 55–60, 59 ‘European Financial Developments’ by Ric Battellino, Deputy
Governor, 14 December 2011; 102–3 Media Release Number 2012–18 — ‘Statement by
Glenn Stevens, Governor: Monetary Policy Decision’, 7 August 2012; 105 Extract from
statistical table ‘D3 — Monetary Aggregates’; 110 Extract from statistical table ‘A3 — Open
Market Operations — 2004–2012’; 111 Extract from statistical table ‘A3 — Open Market
Operations – 2004–2012’; 122–5 ‘The Conduct of Monetary Policy in Crisis and Recovery’
by Glenn Stevens, Governor, 15 October 2009; 230–1 Extract from statistical table E10 —
Commonwealth Government Securities on Issue; 258 Extracts from statistical tables
‘F1 — Interest Rates and Yields — Money Market’, ‘F2 — Capital Market Yields —
Government Bonds’, ‘F3 — Capital Market Yields and Spreads — Non-government
Instruments’; 268 Extract from statistical table ‘F3 — Capital Market Yields and Spreads —
Non-government Instruments’; 294, 742 Extract from statistical table ‘B9 — Money
Market Corporations — Selected Assets & Liabilities’; 310–1 From ‘The Australian money
market in a global crisis’, The Reserve Bank Bulletin — June 2009; 324 Extract from stat-
istical table ‘D4 — Debt Securities Outstanding’; 329 Extract from statistical table ‘E9 —
Commonwealth Government Securities Classified by Holder as at 30 June’; 340 Extract
from statistical table ‘B19 — Securitisation Vehicles’; 342–3 From ‘A comparison of the
US and Australian housing markets’ by Guy Debelle, 16/5/08; 379 Extract from statistical
table ‘F7 — Australian Share Market’; 449 Extract from statistical table ‘H1 — Balance of
Payments — Current Account’; 450 Extract from statistical table ‘H2 — Balance of
Payments — Financial Account’; 480–2 ‘A history of last-resort lending and other support
for troubled financial institutions in Australia’ by Bryan Fitz-Gibbon and Marianne
Gizycki, Research Discussion Paper 2001–07, October 2001; 496–8 Speech – ‘Basel III
and Beyond’ by Malcolm Edey, Assistant Governor (Financial System), 24 March 2011;
604, 703 Extract from statistical table ‘B1 — Assets of Financial Institutions’; 605–6 ‘Main
Types of Financial Institutions’, March 2012; 610–1, 612 Extract from statistical table
‘B7 — Building Societies — Selected Assets & Liabilities’; 619, 622 Extract of statistical

xviii Acknowledgements

10
table ‘B8 — Credit Unions — Selected Assets & Liabilities’; 627–8, 632–3 Extract from
statistical table ‘B10 — Finance Companies & General Financiers — Selected Assets & Lia-
bilities’; 670–1 Derived from various statistical tables; 691–2, 705 Extract from statistical
table ‘B18 — Managed Funds’; 709 Extract from statistical table ‘B14 — Life Insurance
Offices — Statutory Funds’; 719–20 Extract from statistical table ‘B17 — Cash Manage-
ment Trusts’; 720 Extract of statistical table ‘B16 — Public Unit Trusts’; 744 ‘Main Types
of Financial Institutions’, March 2012; 755–6 Extract from statistical table ‘B19 —
Securitisation Vehicles’. • Copyright Clearance Center: 36 Republished with permission
of the International Monetary Fund, from ‘Articles of agreement of the International
Monetary Fund (1944) – Washington, D.C.: International Monetary Fund, 2011; per-
mission conveyed through Copyright Clearance Center; 453–5 © The Economist News-
paper Limited, London (July 26, 2012); 660 ‘Doing Business 2012: Doing Business in a
More Transparent World’ © 2012 The International Bank for Reconstruction and Devel-
opment / The World Bank. • Australian Office of Financial Management: 238, 298, 327
Commonwealth of Australia under a Creative Commons Attribution 3.0 Australia
Licence. The Commonwealth of Australia does not necessarily endorse this content. •
AFMA: 286 ‘2012 Australian Financial Markets Report’, Copyright: © Australian Financial
Markets Association — AFMR 2012; 294 From OTC Financial Product Conventions
© Australian Financial Markets Association; 325 ‘2011 Australian Financial Markets
Report’, Copyright: © Australian Financial Markets Association — AFMR 2011. • Copyright
Agency Limited: 263–4 ‘Strong dollar points to October rate cut’ by Jacob Greber,
published in The Australian Financial Review, 19 September, 2012; 361–2 27 August, 2012
Trading Data published in The Australian Financial Review, 28 August, 2012; 457–8
‘A dollar plan that Wayne Swan might prefer’ by Maximilian Walsh, published in The
Australian Financial Review, 9 August, 2012. • PARS International: 291–2 ‘Strains drive
Australian bank rates to 13-year high’ by Anirban Nag, www.reuters.com, 10/3/08. ‘All
rights reserved. Republication or redistribution of Thomson Reuters content, including
by framing or similar means, is expressly prohibited without the prior written consent of
Thomson Reuters. Thomson Reuters and its logo are registered trademarks or trademarks
of the Thomson Reuters group of companies around the world. © Thomson Reuters
2013. Thomson Reuters journalists are subject to an Editorial Handbook which requires
fair presentation and disclosure or relevant interests.’ • Australian Bureau of Statistic: 307
‘5232.0 Financial Accounts, Australian National Accounts, June Quarter 2012’, Australian
Bureau of Statistics. • Bloomberg Businessweek: 336–8 ‘Junk Bonds From Fortescue
Signal Confidence: Australia Credit’ by Elisabeth Behrmann and Sarah McDonald,
Bloomberg Businessweek November 09, 2011. Used with permission of Bloomberg L.P.
Copyright © 2013. All rights reserved. • Lander & Rogers Lawyers: 356–7 This article is
reproduced with permission from Lander & Rogers Lawyers. For further information
please contact: Greg McKenzie (gmckenzie@landers.com.au), Craig Higginbotham
(chigginbotham@landers.com.au) or Gavin Rakoczy (grakoczy@landers.com.au) http://
www.landers.com.au/Publications/Insolvency/Publicationdetail/tabid/381/ArticleID/
318/Default.aspx. • ASX: 358, 403–4, 414–5, 415 © ASX Limited ABN 98 008 624 691
(ASX) 2013. All rights reserved. This material is reproduced with the permission of ASX.
This material should not be reproduced, stored in a retrieval system or transmitted in any
form whether in whole or whole in part without the prior written permission of ASX.

Acknowledgements xix

Banking & Lending Decisions 11

 • Los Angeles Times: 366–8 ‘SEC may take stock market tip from Australia’ by Andrew
Tangel, published in Los Angeles Times, August 17, 2012. Reproduced with permission. •
CFTC: 424 U.S. Commodities and Futures Trading Commission, ‘Dodd-Frank Wall Street
Reform and Consumer Protection Act’. • Commonwealth Bank: 438–9. • Australia &
New Zealand Banking Group Limited: 509–12, 540–2, 562, 791–2. • Financial
Ombudsman Service: 526 Reproduced with permission from the Financial Ombudsman
Service www.fos.org.au. • Federal Reserve: 646 Board of Governors of the Federal Reserve
System. • BIS Basel: 652–3 From ‘International Banking Statistics’, September 2012, Bank
For International Settlements (BIS) www.bis.org. • Financial Action Task Force: 669
Copyright © FATF/OECD. All rights reserved. • Deloitte — Sydney: 747 Deloitte Annual
IPO Report 2010–2011. • Australian Private Equity and Venture Capital Association
Limited (AVCAL): 758, 759. • International Finance Corp.: 773 From pp. 12–13 of
‘Banking On Sustainability. Financing Environmental And Social Opportunities In
Emerging Markets’, International Finance Corporation, January 2007. • Finsia: 784–6
Text extracts from the report ‘In the long grass: leadership in adversity’ published by
Finsia, May 2009, reproduced with permission.

Every effort has been made to trace the ownership of copyright material. Information
that will enable the publisher to rectify any error or omission in subsequent editions will
be welcome. In such cases, please contact the Permissions Section of John Wiley & Sons
Australia, Ltd who will arrange for the payment of the usual fee.

xx Acknowledgements

12
1 Overview

Learning objectives
After studying this chapter, you should be able to:
1 explain the role of the financial system and why it is important to individuals and to the
economy as a whole

2 explain the function of direct and indirect financial markets and the key services
provided by financial intermediaries

3 describe the different types of financial intermediaries

4 describe the various types of financial markets

5 explain the economic function of the money markets and identify the most important
money-market securities

6 explain the economic function of the capital markets and identify the most important
capital-market securities

7 identify the key risks that financial institutions face and describe how they manage
these risks.

Banking & Lending Decisions 13

 Chapter preview
The financial system is a key influencer of the health and efficiency of an economy. The
role of the financial system is to gather money from people and businesses that cur-
rently have more money than they need and transfer it to those that can use it for either
business or consumer expenditures. This flow of funds through financial markets and
institutions in the Australian economy is huge (in the billions of dollars), affecting busi-
ness profits, the rate of inflation, interest rates and the production of goods and services.
In general, the larger the flow of funds and the more efficient the financial system, the
greater the economic output and welfare in the economy. It is not possible to have a
modern, complex economy such as that in Australia, without an efficient and sound
financial system. The global financial crisis (GFC) of late 2007–09 (and the ensuing
European debt crisis), where the global financial market was on the brink of collapse
with only significant government intervention stopping a catastrophic global failure of
the market, illustrated the importance of the financial system. This will be discussed in
further detail later.
The financial system is comprised of financial institutions, markets and money.
Some of the players in the financial system are household names such as the Reserve
Bank of Australia (RBA), Macquarie Bank, Commonwealth Bank and NRMA Insur-
ance. Others are lesser-known firms that vary widely in size, reputation, product
line and international presence. The financial system uses various markets to facili-
tate the flow of funds among the various market participants through the buying and
selling of financial products. Each market accommodates different types of financial
products, with some dealing only in new ones; and others in ones specific in type,
maturity, location and size (value). Money is also important to the financial system as
the medium of exchange used in these markets. It also helps in maintaining an efficient
financial system because it is easily aggregated and divided to permit transactions of
various sizes. This is more efficient than a barter system, particularly given electronic
systems such as EFTPOS, which can quickly move money from one place to another.
It is not so easy to move other mediums of exchange, such as goods and services, from
place to place.
The financial system also affects your everyday life. For example, Sally is a business
student and she obtains a $10 000 student loan for university at the beginning of the
year but needs only $3000 of it right away. Sally deposits the remaining $7000 in the
bank near campus but is surprised to learn that, even at this amount, her savings account
pays virtually no interest because her balance is below the bank’s minimum requirement.
Sally decides to move the funds to a high interest ‘internet saver’ account, but due to the
low interest rates as a result of the GFC, she still only gets 4 per cent. At least she will be
earning some interest that will be able to contribute to her tuition for the second sem-
ester. At the same time that the bank received Sally’s $7000, it was reviewing an appli-
cation from the local café for a $25 000 loan to expand its operations. The loan interest
rate is 8 per cent, payable in five years, and money from Sally’s deposit is pooled with
the money from other deposits to provide the funding. Consistent with its goal of profit
maximisation, the bank ultimately decided to make the café loan because of the project’s
favourable rate of return and the owner’s high credit standing. Other loan applications
were rejected because applicants had poor credit ratings or the projects’ rates of return
were not as favourable as that of the café project. The bank is happy with the café loan

2 Financial Markets, Institutions and Money

14
at 8 per cent because it has borrowed the money for 4 per cent (from Sally and its other
depositors), earning a tidy 4 per cent (8–4) gross profit margin. In the bigger picture, the
financial system works properly when consumers receive the highest possible interest
rates for their deposits and only loans with favourable rates of return and good credit
standing are financed. The more efficient and competitive the financial system, the more
likely this is to happen.
The financial crisis of 2007–09 is an example of what happens when the efficiency
of the financial system disappears. The crisis began when so-called subprime mort- subprime mortgages
gages began to default in the United States. This quickly spread across the globe as a Mortgages that do not
meet the ‘prime’ or usual
crisis of confidence in the system emerged, with banks not lending to each other and credit requirement for
spiralling credit defaults shrinking the pool of funds available in the global financial issuing a loan. Possible
system (hence the name credit crisis). This led to a rapid and destructive unwinding of characteristics include loans
investment and credit positions across the globe as financial market participants fled that vary from traditional
structure, size, borrower
risk for cash safe havens. This included a rapid deterioration in the Australian and US credit rating (low), high ratio
equity markets, unemployment spiking around the globe, the price of oil (seen as a key of borrower debt to income
indicator of economic expectations) crashing, and the value of the Australian dollar col- and/or assets, high ratio
lapsing (largely due to the exposure of the Australian economy to commodity prices of loan to collateral, or low
documentary evidence to
which in turn rely on economic growth). In response, the RBA cut interest rates with support the loan (so-called
significant monthly reductions during late 2008 and early 2009. What was most con- low-doc loans).
cerning about these impacts was their speed and severity, which in the end was stemmed
only by significant intervention by governments and central banks (in particular in the
United States, Europe and China). It is widely believed that the effects of this crisis will
be long lasting and it may take decades for asset prices, market confidence and govern-
ment financial positions to recover. This will have an impact in society, and highlights
the importance of everyone having an understanding of the operation of financial insti-
tutions, markets and money.
For a more detailed discussion of the causes of the crisis see the appendix to this
chapter.
This chapter presents an overview of the financial system and how it facilitates the
allocation of funds throughout the economy. The chapter begins by describing the role
of the financial system, defining surplus and deficit spending units and describing char-
acteristics of financial claims. It then explains how surplus and deficit spending units
are brought together in financial markets, either directly or with the help of financial
intermediaries. Next, the chapter identifies the types of financial institutions and markets
that exist in Australia and the benefits they provide to the economy. Finally, the chapter
provides a unifying framework for the book by discussing the key risks faced by financial
institutions and participants in financial markets: credit, interest rate, liquidity, foreign
exchange, political risk, reputational risk and environmental risk.
The structure of the chapter is shown in the following diagram.

Chapter 1 Overview 3

Banking & Lending Decisions 15

 ■ The flow of funds
■ Settlement of transactions
Role of the financial ■ Provision of information
system ■ Transferring and managing risk
■ Managing incentive problems
■ Financial market efficiency
■ Direct financing
Transferring funds from
■ Indirect financing
SSUs to DSUs
■ Benefits of financial intermediation
■ Commercial banks
Types of financial
■ Nonbank financial corporations
intermediaries
■ Other financial institutions
■ Primary and secondary markets
■ Organised and over-the-counter markets
Types of financial ■ Futures markets
markets ■ Option markets
■ Foreign exchange markets
■ International and domestic markets
■ Treasury notes
■ Commercial paper
Overview The money markets ■ Commercial bills
■ Negotiable certificates of deposit
■ Other money-market instruments
■ Shares
■ Corporate bonds
The capital markets
■ Government bonds
■ Mortgages
■ International assets of Australian institutions
Internationalisation of
■ International organisations
financial markets
■ Islamic finance
■ Credit risk
■ Interest rate risk
■ Liquidity risk
Risks faced by financial ■ Foreign exchange risk
institutions ■ Political risk
■ Reputational risk
■ Environmental risk
■ Operational risk

LO 1 Role of the financial system

The financial system consists of financial markets, institutions and money. Financial
markets are just like any kind of market you have seen before: people buy and sell, haggle
and argue, win and lose and, yes, some may become rich playing the financial markets
and others may lose it all. Markets can be informal, like a flea market in your commu-
nity, or highly organised and structured, like the gold markets in London or Zurich. The

4 Financial Markets, Institutions and Money

16
only difference is that in financial markets people buy and sell financial instruments financial markets
such as stocks, bonds, futures contracts or mortgage-backed securities. The markets for buying
and selling financial
Financial markets have five primary functions: instruments.
1. facilitating the flow of funds
2. providing the mechanism for the settlement of transactions
3. generating and disseminating information that assists decision making
4. providing means for the transfer and management of risk
5. providing ways of dealing with the incentive problems that arise in financial
contracting.

The flow of funds

Financial institutions, as part of the financial system, allow the flow of funds from savers,
or surplus spending units (SSUs), to borrowers, or deficit spending units (DSUs). surplus spending unit
Financial institutions are firms such as commercial banks, credit unions, life insurance An economic unit whose
income in a period exceeds
companies and finance companies. They are called financial intermediaries because they expenditure. SSUs often
are in between the parties that want to buy and sell financial instruments. These firms purchase financial claims
dominate the financial scene worldwide and are the ones that most consumers transact issued by DSUs.
with when they seek financial services. Money as a medium of exchange is important to deficit spending unit
the efficiency of the financial system. It overcomes the divisibility problem caused if the An economic unit whose
expenditure in a period
mediums of exchange are not equal. For example, exchanging a car for a bicycle may be exceeds current income. A
difficult because the car would generally be worth much more. You cannot divide the car DSU sells financial claims
and exchange a portion of it for the bicycle. Money helps by providing all participants on itself (liabilities) or sells
with a means of exchanging value. In this case, the car could be sold for money in the equity to obtain needed
funds.
second-hand car market, with some of this cash then used to buy the bicycle.
financial intermediaries
The role of the financial system — financial markets, institutions and money — is to Institutions that issue
permit the flow and efficient allocation of funds throughout the economy. Figure 1.1 liabilities to SSUs and use
depicts a simplified flow of funds model, in which SSUs supply surplus funds to the the funds so obtained to
financial markets in return for financial instruments. The markets then provide these acquire liabilities of DSUs.
funds in return for financial instruments to those who require additional funds. The case money
The medium of exchange
of Sally discussed in the introduction is an example of this system in action. For this used in the financial
system to be efficient, however, it requires sufficient volume (many borrowers and many system.
lenders). The greater the flow of funds, the greater possible accommodation of individual
preferences for spending and saving.

Suppliers of funds Funds Funds %FNBOEFST
PG
GVOET

(SSUs) (DSUs)
t
)PVTFIPMET 'JOBODJBM
NBSLFUT t
)PVTFIPMET
t
#VTJOFTTFT 'JOBODJBM 'JOBODJBM t
#VTJOFTTFT
t
(PWFSONFOUT JOTUSVNFOUT JOTUSVNFOUT t
(PWFSONFOUT FIGURE 1.1
Flow of funds

But the financial system is not just a safe haven for funds that are subsequently used
to settle transactions; it is far more complex. Although funds settlement (the payments
system discussed later in the chapter) is an important part of the financial system, market
participants expect much more from it. In short, they expect wealth creation. The SSUs
forgo current consumption and accrue savings that are then invested in the financial
markets in return for financial instruments. These financial instruments are expected to

Chapter 1 Overview 5

Banking & Lending Decisions 17

 provide some return or income to the SSUs to compensate them for forgoing consump-
tion. This return represents an increase in wealth, which can then be used at a later
date or reinvested in financial instruments to generate additional wealth. Although this
sounds straightforward, several complications need to be considered.
First and foremost, SSUs have different risk preferences and can be classified as risk
averse, risk neutral or risk taking. Although risk takers are willing to bear more risk than
the other categories, they will do so only if they are compensated with higher returns.
Conversely, those who are risk averse will accept a lower return to avoid risk.
An additional element of risk is the timing of the cash flows related to the financial
instruments. Some are designed to deliver returns steadily over the life of the instru-
ment (such as most term deposits), while in others the cash flows are uneven, occur at
maturity (such as zero-coupon bonds where the invested funds, incorporating the return
on the investment, are returned at one time — when the instrument expires) or are even
contingent on performance (such as shares). As a basic principle, the earlier the returns
are realised, the lower the risk because with time comes uncertainty.
The ease with which the financial instrument can be converted back into cash without
liquidity losing capital value is referred to as liquidity . For example, shares in BHP Billiton have a
Having sufficient cash and high degree of liquidity because many are traded daily and the price is published for all
cash equivalents on hand
to meet daily obligations. to see by the stock exchange. However, an investment in a specialised piece of manufac-
Includes the ease with turing equipment may be more difficult to sell. Accordingly, instruments with higher
which an asset can be liquidity are more attractive to risk-averse investors because they will be able to liquidate
converted into cash with a
(that is sell) them at a price that approximates their worth more easily than they can
minimum of loss of value.
illiquid instruments.
For financial markets to operate efficiently they need to provide a range of financial
instruments to meet the return, risk, timing and liquidity preferences of the market par-
ticipants. Providing this will promote an increased flow of funds because savers will be
able to structure their savings to suit their needs. Over time, the flow of funds should
increase as market participants create wealth. This in turn provides an increased pool of
investment capital that can be used by DSUs to increase the productive capacity of the
economy, and so generate economic growth. For this reason, an efficient and stable finan-
cial system is a necessary condition to having an advanced economy such as Australia’s.

Economic units
All economic units can be classified into one of the following groups:
■ households
■ businesses
■ governments (local, state and federal).
Each economic unit must operate within a budget constraint imposed by its total
income for the period. Households typically receive income in the form of wages and
then make frequent expenditures for food, clothing, medical needs, entertainment, edu-
cation, taxes and housing (either as rent or home mortgage payments). Businesses sell a
variety of goods and services to households and other businesses for revenues and spend
their money on paying wages, buying inventory and meeting other business expenses.
Occasionally, businesses make capital expenditures on new buildings and equipment.
Government units obtain income by collecting taxes and fees and spend on a wide range
of services such as health, welfare, education, police, the fire service and defence.

6 Financial Markets, Institutions and Money

18
Budget position
Any economic unit can have one of three possible budget positions:
■ a balanced budget position: income and planned expenditures are equal
■ a surplus position: income for the period exceeds planned expenditure
■ a deficit position: planned expenditure for the period exceeds income.
The financial system is concerned with transferring money — and with it purchasing
power — from SSUs to DSUs. DSUs include some households, some state and local
governments, the Commonwealth government and many businesses. Other economic
units may be SSUs. Taken as groups, however, business firms and governments are typi-
cally DSUs. Overall, households are SSUs, though in developed countries in recent years
this norm has been challenged by the dramatic growth in personal debt levels.
What makes a household an SSU or a DSU? There is a strong correlation between
a person’s age and whether he or she is a DSU or SSU. People typically start out life
as ‘big time’ DSUs (child rearing is expensive) and remain that way, more or less,
until they graduate from school or university. There is typically a brief flirtation with
being an SSU as a young single or couple. Then, if one has children, you gain a greater
appreciation for your parents as you rejoin the ranks of the DSUs. At some point,
children graduate university, the house is paid for and family units become SSUs. Of
course, if you are rich, you may spend most of your life as an SSU: not a bad situation.
Remember that the only difference between the rich and the poor is that the rich have
more money!

Financial claims
The problem facing the financial system is how to transfer the SSUs’ excess purchasing
power to the DSUs that wish to borrow to finance current expenditure. The transfer can
be accomplished by an SSU lending money to and accepting an IOU from a DSU. An
IOU is a written promise to pay a specific sum of money (the principal) plus a fee (an
interest rate) for the privilege of borrowing the money over a period of time (maturity
of the loan). IOUs are called financial claims . They are claims against someone else’s financial claims
money at a future date. Written promises to pay a
specific sum of money (the
To the DSU, a financial claim is a liability and the interest payments are the penalty for principal) plus interest for
consuming before income is earned. To the SSU, the financial claim is an asset and the the privilege of borrowing
interest earned is the reward for postponing consumption. That financial claims (IOUs) money over a period of
are simultaneously liabilities for borrowers (DSUs) and assets for lenders (SSUs) illus- time. Financial claims are
issued by DSUs (liabilities)
trates the two faces of debt. That is, total financial liabilities outstanding in the economy and purchased by SSUs
must equal total financial assets. (assets).
Once a financial claim is outstanding, the lender (SSU) may hold the claim until it
matures. Alternatively, the SSU may sell the financial claim to someone else before it
matures. The DSU continues to have use of the funds even though the lender is now a
debt funds
different party. Funds supplied in the form
Financial claims are sourced from either debt or equity funds. Debt funds are sup- of a loan.
plied in the form of a loan and can be classified into short or long-term facilities. Short- credit risk
term loans are referred to as money; long-term loans are referred to as capital. Suppliers The risk that the borrower
will not pay back all or part
of loans face credit risk , that is, the risk that the borrower will default on scheduled
of the interest or principal
repayments as specified in the loan agreement. In return for exposure to credit risk, the as specified in the loan
lender is rewarded with interest income. agreement.

Chapter 1 Overview 7

Banking & Lending Decisions 19

 equity funds
Funds supplied in the
form of the acquisition of
an ownership share of a
business.
investment risk
The possibility that the
investor’s expected return
will not be realised.
payments system
The system that permits the
settlement of transactions
(i.e. the transfer of funds)
within the financial system.
8 Financial Markets, Institutions and Money
20
Providing equity funds involves the acquisition of an ownership share of a business.
This is usually seen as longer term and is consequently referred to as capital investment.
Equity investors face investment risk , which is the possibility that the investor’s expected
return will not be realised. Equity investors are compensated with dividend payments
and capital growth (where the value of the ownership share increases over time) for
bearing investment risk. The size of these returns is largely dependent on the perfor-
mance of the business and so is less certain than returns on debt funds, which are usually
specified in the debt contract.
The ability to resell financial claims is important because it allows SSUs to purchase
financial claims with maturities that do not exactly match their investment horizon. If
an SSU purchases a financial claim with maturity longer than the planned investment
period, the claim can be resold to another SSU at the appropriate time. Likewise, an SSU
can purchase a financial claim with maturity shorter than its time horizon if additional
claims, either new or outstanding, can easily be purchased. The ease with which a finan-
cial claim can be resold is called its marketability.
A wide variety of financial claims trade in the financial markets, all designed to
meet the preferences of both SSUs and DSUs. Financial claims differ according to their
maturity, risk of default, marketability, tax treatment and other special features that
may be attached to them, such as options or convertibility into another type of finan-
cial claim. How these characteristics interact to determine the interest rate on a financial
claim is the topic of chapter 4.
Settlement of transactions
As discussed, the financial system permits the flow of funds through an economy. This
occurs through millions of transactions occurring each day among the various market
participants. Each of these transactions generates a transfer of funds that must be settled
(or completed) within the system. This occurs when the seller has provided the item
purchased and received the agreed amount of funds in return. A key role of the finan-
cial system is to provide the mechanism for these settlements to occur through what is
known as the payments system .
Many transactions in the payments system are settled immediately. For example, when
buying a music CD or paying for food at the local takeaway, most people either use cash
or EFTPOS. Either way, the funds are provided to the retailer immediately and the buyer
receives the CD or food. Other transactions, however, are much larger than this and are
settled after the terms of the transaction have been agreed. For example, when one pur-
chases a house, the settlement occurs on the settlement date, which is usually either 30
or 60 days after the contract is signed (when terms are agreed). Many transactions in the
securities markets are settled on a T+3 basis, which is three business days after the trade
was agreed. To allow for this disparity, separate settlement systems have been developed
for the usually small-value retail transactions and large-value wholesale transactions.
These are discussed in chapter 2.
The payments system is a critical part of the financial system because it is the mech-
anism by which funds are actually transferred to complete transactions. An effective pay-
ments system is characterised by its efficiency, in terms of speed, cost and stability; in
terms of the financial strength of the financial institutions (including the central bank);
and in terms of the settlement mechanism for transferring funds among them. The impor-
tance of this is clear when you consider that approximately $12.5 billion is withdrawn
from ATMs on average per month and almost $1.1 trillion on average per month in
direct entry payments are settled each month in Australia through the payments system.1
In addition in Australia (as at the end of June 2011), there were more than 774 556 access
points to the payments system, including:2
■ 5588 bank branches
■ 1173 nonbank branches
■ 3261 Bank@Post outlets
■ 30 154 ATMs
■ 734 380 EFTPOS machines.
Transactions from all of these access points are settled by the payments system. In
February 2012, there were more than 159 million EFTPOS transactions worth more than
$8.3 billion.3 Without an efficient and stable payments system, the ability of the financial
system to handle this volume of transactions and maintain the flow of funds throughout
the economy would be questionable. Indeed, this is something that most people take
for granted and assume will occur without fault, and without considering the complex
system that makes this a reality. Consequently, there is economic value in ensuring the
payments system operates efficiently. The mechanics of the Australian payments system
are examined in chapter 2.

Provision of information
A further role of an efficient financial market is to provide sufficient economic and finan-
cial information to enable participants to make informed investment decisions. For the
markets to be efficient, this information needs to be available in a timely fashion to
all market participants so that all have equal opportunity to act on it. In the knowl-
edge economy we now operate in, this is a key function of financial markets, as routine
decisions in relation to investments, loans, savings, insurance and other financial prod-
ucts require information to facilitate them. For example, without information on such
details as credit history, income and assets, how could a credit analyst make an informed
decision about a loan application?
Credit ratings agencies also play a role in the provision of information on
companies, governments and other organisations, and the financial instruments that
they use (e.g. they would rate a corporate bond issue). They typically publish informed
assessments about the financial standing of securities and institutions using a standard
scale; the best rating is AAA, B− is the worst, and there are 16 possible ratings in total.
Investment grade ratings run from AAA to BBB− and non-investment grade from there
on (BB+ to B−). The three big rating agencies are Standard & Poor’s, Moody’s and Fitch
Ratings. Ratings agencies have been the subject of significant criticism in recent years for
various reasons including:
■ concerns over conflicts of interest with them getting too close to the management
of companies they are rating and being paid by, opening them up to influence
and bias
■ suggested errors in ratings given to structured debt products which have subsequently
been downgraded or even defaulted
■ allegations that they are either too slow, or reluctant to downgrade organisations
(e.g. Enron was rated AAA a week prior to filing for bankruptcy, despite the ratings
agencies being aware of the company’s problems for several months)

Chapter 1 Overview 9

Banking & Lending Decisions 21


information asymmetry
Where one party to a deal
or transaction has access to
more or better information
than the other parties.
adverse selection
A market process where a
less than optimal outcome
is achieved due to parties
having asymmetric
information.
moral hazard
Where a party that is
insulated from risk behaves
differently to the way
they would were they not
insulated.
10 Financial Markets, Institutions and Money
22
■ concern over the small number of ratings agencies and the power and influence this
provides them
■ a lack of disclosure in terms of their processes, methods and relationship with rated
entities.
Transferring and managing risk
Risk relates to uncertainty and the chance of an unexpected outcome being achieved.
A key role of the financial system is to allow for financial risk to be managed and/or
transferred to other parties. This provides various mechanisms to financial system par-
ticipants: systems to manage the risks they are exposed to including insurance products,
securitisation (packaging up like assets and selling them on to a third party) and deriv-
ative products (these will be discussed later in the chapter). Risk management is a key
issue in all financial products and services, and this will be an ongoing theme in this text
as we work through the various financial products, markets and institutions. The risks
that financial institutions face are introduced later in this chapter.
Managing incentive problems
The financial system also has a role in mitigating incentive issues that arise in finan-
cial contracts. Three key examples of this are information asymmetry, moral hazard and
agency problems, all of which undermine the financial system’s processes and create risk
for parties to a financial contract.
Information asymmetry occurs when the contracting parties do not have equal access
to relevant information and therefore one party is at an advantage. For example, a pros-
pective borrower is likely to know more about their capacity to repay, and intended use
of the borrowed funds, than the lender. The outcome could be that a bank, when pre-
sented with a choice between funding several loans, does not select the ‘best’ loan as
they do not have all the relevant information available to them. This is what is known as
adverse selection . Intermediaries apply standardised credit procedures in an attempt to
mitigate this and the regulations impose disclosure rules on financial organisations in an
attempt to provide all parties with adequate information.
A second incentive issue is moral hazard . This is the risk that one party to a contract
can change their behaviour to the detriment of the other party once a contract has been
concluded. This is a key issue for insurance businesses, where there is a risk that once an
asset is insured, the covered party may not be as careful to protect the asset as they other-
wise would be. This is the ‘don’t worry, it is insured’ attitude. This is managed through
continuous monitoring of clients (e.g. if you have multiple claims on your insurance
your premiums will go up), sharing of information between organisations (such as with
credit record data) and the regulations requiring continuous disclosure of material infor-
mation by companies.
The principal–agent relationship is created when there is a separation between own-
ership (the principal) and control (the agent) of an asset. A classic example of this is
when shareholders of a company (principals) employ managers (agents) to act on their
behalf. Problems arise when the interests of the principals and agents are not aligned.
For example, the shareholders may want maximum long-term returns, but the man-
agers are interested in short-term returns to maximise their chances of employment else-
where and to improve their yearly bonus. The financial system manages this through
various devices that align the interest of principals and agents, as well as implementing
a regulatory environment that both promotes this and penalises those who breach
their duties.

Financial market efficiency

As noted above, having an efficient and effective financial system is critical for a modern
economy. This section discusses how different aspects of financial market efficiency affect
the efficiency and growth of the economy. It discusses three forms of market efficiency:
allocational, informational and operational efficiency.

Allocational efficiency
Allocational efficiency is a form of economic efficiency that implies that funds will be allocational efficiency
allocated to (i.e. invested in) their highest-valued use. This means that the funds could The market situation in
which funds are allocated
not have been allocated in any other way that would have made society better off. The to their highest-value use.
practical implication is that business firms invest in the projects offering the highest risk-
adjusted rates of return, and that households invest in direct or indirect financial claims
offering the highest yields for given levels of risk.

Informational efficiency
The ability of investors to obtain accurate information about the relative values of dif-
ferent financial claims (or securities) is critical. Informational efficiency is achieved informational efficiency
when securities’ prices are the best indicators of relative value because they reflect all rel- The market situation in
which market prices reflect
evant information about the securities. When new information about a security arrives in all relevant information
an efficient market, market prices adjust very quickly. Prices adjust quickly because thou- about the securities.
sands of analysts and millions of investors are gathering information about securities in
a quest for quick profits. Large profits can be earned by identifying overpriced securities
before the price begins to rise. The actions of analysts and investors ensure that market
prices reflect all information relevant to their values at any time.
Why is it important that market prices reflect all relevant information about securities?
With accurate price information, investors can determine which investments are the most
valuable — providing the highest expected return for a given level of risk — and invest
accordingly. Thus informational efficiency ensures that the financial markets are allo-
cationally efficient because households or business firms can get the information they
need to make intelligent investment decisions.

Operational efficiency
Operational efficiency is achieved in a market when the costs of conducting trans- operational efficiency
actions are as low as possible. These transaction costs include broker commissions, bid– The market situation
in which the costs of
ask spreads and underwriter spreads. Operational efficiency is important because fewer conducting transactions are
financial transactions will take place and more otherwise valuable investment projects as low as possible.
will be passed up if transaction costs are high. Firms can be prevented from investing
in all the projects that they want to if transaction costs are high. The forgone invest-
ment opportunities mean that fewer people are employed and economic growth slows or
declines. Society becomes worse off.

Chapter 1 Overview 11

Banking & Lending Decisions 23

Another random document with
no related content on Scribd:
The Project Gutenberg eBook of Rogue psi
This ebook is for the use of anyone anywhere in the United States
and most other parts of the world at no cost and with almost no
restrictions whatsoever. You may copy it, give it away or re-use it
under the terms of the Project Gutenberg License included with this
ebook or online at www.gutenberg.org. If you are not located in the
United States, you will have to check the laws of the country where
you are located before using this eBook.

Title: Rogue psi

Author: James H. Schmitz

Illustrator: Virgil Finlay

Release date: November 27, 2023 [eBook #72245]

Language: English

Original publication: New York, NY: Ziff-Davis Publishing Company,

1962

Credits: Greg Weeks, Mary Meehan and the Online Distributed

Proofreading Team at http://www.pgdp.net

*** START OF THE PROJECT GUTENBERG EBOOK ROGUE PSI

***
 ROGUE PSI

By JAMES H. SCHMITZ

Illustrated by FINLAY

How do you trap a man who has the entire world at his mercy?

[Transcriber's Note: This etext was produced from

Amazing Stories August 1962
Extensive research did not uncover any evidence that
the U.S. copyright on this publication was renewed.]
Shortly after noon, a small side door in the faculty restaurant of
Cleaver University opened and a man and a woman stepped out into
the sunlight of the wide, empty court between the building and the
massive white wall opposite it which bordered Cleaver Spaceport.
They came unhurriedly across the court towards a transparent gate
sealing a tunnel passage in the wall.
As they reached the center of the court, a scanning device in the wall
fastened its attention on them, simultaneously checking through a
large store of previously registered human images and data
associated with these. The image approaching it on the left was that
of a slender girl above medium height, age twenty-six, with a
burnished pile of hair which varied from chestnut-brown to copper in
the sun, eyes which appeared to vary between blue and gray, and an
air of composed self-reliance. Her name, the scanner noted among
other details, was Arlene Marguerite Rolf. Her occupation:
micromachinist. Her status: MAY PASS.
Miss Rolf's companion was in his mid-thirties, big, raw-boned and
red-haired, with a formidably bulging forehead, eyes set deep under
rusty beetle-brows, and a slight but apparently habitual scowl. His
name was also on record: Dr. Frank Dean Harding. Occupation:
marine geologist. Status—
At that point, there was an odd momentary hesitancy or blurring in the
scanner's reactions, though not quite pronounced enough to alert its
check-mechanisms. Then it decided: MAY NOT PASS. A large sign
appeared promptly in brilliant red light on the glassy surface of the
wall door.
WARNING—SOMATIC BARRIERS!
Passage Permitted to Listed
Persons Only

The man looked at the sign, remarked dourly, "The welcome mat's
out again! Wonder if the monitor in there can identify me as an
individual."
"It probably can," Arlene said. "You've been here twice before—"
"Three times," Frank Harding corrected her. "The first occasion was
just after I learned you'd taken the veil. Almost two years now, isn't
it?" he asked.
"Very nearly. Anyway, you're registered in the university files, and
that's the first place that would be checked for an unlisted person who
showed up in this court."
Harding glanced over at her. "They're as careful as all that about
Lowry's project?"
"You bet they are," Arlene said. "If you weren't in my company, a
guard would have showed up by now to inform you you're
approaching a restricted area and ask you very politely what your
business here was."
Harding grunted. "Big deal. Is someone assigned to follow you
around when you get off the project?"
She shrugged. "I doubt it. Why should they bother? I never leave the
university grounds, and any secrets should be safe with me here. I'm
not exactly the gabby type, and the people who know me seem to be
careful not to ask me questions about Ben Lowry or myself anyway."
She looked reflective. "You know, I do believe it's been almost six
months since anyone has so much as mentioned diex energy in my
presence!"
"Isn't the job beginning to look a little old after all this time?" Harding
asked.
"Well," Arlene said, "working with Doctor Ben never gets to be boring,
but it is a rather restrictive situation, of course. It'll come to an end by
and by."
Harding glanced at his watch, said, "Drop me a line when that
happens, Arlene. By that time, I might be able to afford an expert
micromachinist myself."
"In a dome at the bottom of some ocean basin?" Arlene laughed.
"Sounds cosy—but that wouldn't be much of an improvement on
Cleaver Spaceport, would it? Will you start back to the coast today?"
"If I can still make the afternoon flight." He took her arm. "Come on. I'll
see you through the somatic barrier first."
"Why? Do you think it might make a mistake about me and clamp
down?"
"It's been known to happen," Harding said gloomily. "And from what I
hear, it's one of the less pleasant ways to get killed."
Arlene said comfortably, "There hasn't been an accident of that kind
in at least three or four years. The bugs have been very thoroughly
worked out of the things. I go in and out here several times a week."
She took a small key from her purse, fitted it into a lock at the side of
the transparent door, twisted it and withdrew it. The door slid
sideways for a distance of three feet and stopped. Arlene Rolf
stepped through the opening and turned to face Harding.
"There you are!" she said. "Barely a tingle! If it didn't want to pass me,
I'd be lying on the ground knotted up with cramps right now. 'By,
Frank! See you again in two or three months, maybe?"
Harding nodded. "Sooner if I can arrange it. Goodby, Arlene."
He stood watching the trim figure walk up the passage beyond the
door. As she came to its end, the door slid silently shut again. Arlene
looked back and waved at him, then disappeared around the corner.
Dr. Frank Harding thrust his hands into his pockets and started back
across the court, scowling absently at nothing.

The living room of the quarters assigned to Dr. Benjamin B. Lowry on

Cleaver Spaceport's security island was large and almost luxuriously
furnished. In pronounced contrast to the adjoining office and work-
rooms, it was also as a rule in a state of comfortable disorder. An
affinity appeared to exist between the complex and the man who had
occupied it for the past two years. Dr. Lowry, leading authority in the
rather new field of diex energy, was a large man of careless and
comfortable, if not downright slovenly personal habits, while a
fiendish precisionist at work.
He was slumped now in an armchair on the end of his spine, fingering
his lower lip and staring moodily at the viewphone field which formed
a pale-yellow rectangle across the living room's entire south wall,
projecting a few inches out into the room. Now and then, his gaze
shifted to a narrow, three-foot-long case of polished hardwood on the
table beside him. When the phone field turned clear white, Dr. Lowry
shoved a pair of rimless glasses back over his nose and sat up
expectantly. Then he frowned.
"Now look here, Weldon—!" he began.
Colors had played for an instant over the luminous rectangle of the
phone field, resolving themselves into a view of another room. A
short, sturdily built man sat at a desk there, wearing a neat business
suit. He smiled pleasantly out of the field at Dr. Lowry, said in a casual
voice, "Relax, Ben! As far as I'm concerned, this is a command
performance. Mr. Green just instructed me to let you know I'd be
sitting in when he took your call."
"Mr. Green did what?"
The man in the business suit said quickly, "He's coming in now, Ben!"
His hand moved on the desk, and he and the room about him faded
to a pale, colorless outline in the field. Superimposed on it appeared
a third room, from which a man who wore dark glasses looked out at
Dr. Lowry.
He nodded, said in a briskly amiable manner, "Dr. Lowry, I received
your message just a minute ago. As Colonel Weldon undoubtedly has
informed you, I asked him to be present during this discussion. There
are certain things to be told you, and the arrangement will save time
all around.
"Now, doctor, as I understand it, the situation is this. Your work on the
project has advanced satisfactorily up to what has been designated
as the Fourth Stage. That is correct, isn't it?"
Dr. Lowry said stiffly, "That is correct, sir. Without the use of a trained
telepath it is unlikely that further significant advances can be made.
Colonel Weldon, however, has seen fit now to introduce certain new
and astonishing conditions. I find these completely unacceptable as
they stand and...."
"You're entirely justified, Dr. Lowry, in protesting against an apparently
arbitrary act of interference with the work you've carried out so
devotedly at the request of your government." One of Mr. Green's
better-known characteristics was his ability to interrupt without leaving
the impression of having done it. "Now, would it satisfy you to know
that Colonel Weldon has been acting throughout as my personal
deputy in connection with the project—and that I was aware of the
conditions you mention before they were made?"

Dr. Lowry hesitated, said, "I'm afraid not. As a matter of fact, I do

know Weldon well enough to take it for granted he wasn't simply
being arbitrary. I...."
"You feel," said Mr. Green, "that there are certain extraneous
considerations involved of which you should have been told?"
Lowry looked at him for a moment. "If the President of the United
States," he said drily, "already has made a final decision in the matter,
I shall have to accept it."
The image in the phone field said, "I haven't."
"Then," Lowry said, "I feel it would be desirable to let me judge
personally whether any such considerations are quite as extraneous
as they might appear to be to...."
"To anybody who didn't himself plan the diex thought projector,
supervise its construction in every detail, and carry out an extensive
series of preliminary experiments with it," Mr. Green concluded for
him. "Well, yes—you may be right about that, doctor. You are
necessarily more aware of the instrument's final potentialities than
anyone else could be at present." The image's mouth quirked in the
slightest of smiles. "In any event, we want to retain your ungrudging
co-operation, so Colonel Weldon is authorized herewith to tell you in
as much detail as you feel is necessary what the situation is. And he
will do it before any other steps are taken. Perhaps I should warn you
that what you learn may not add to your peace of mind. Now, does
that settle the matter to your satisfaction, Dr. Lowry?"
Lowry nodded. "Yes, sir, it does. Except for one detail."
"Yes, I see. Weldon, will you kindly cut yourself out of this circuit. I'll
call you back in a moment."
Colonel Weldon's room vanished from the phone field. Mr. Green
went over to a wall safe, opened it with his back to Dr. Lowry, closed it
again and turned holding up a small, brightly polished metal disk.
"I should appreciate it incidentally," he remarked, "if you would find it
convenient to supply me with several more of these devices."
"I'll be very glad to do it, sir," Dr. Lowry told him, "after I've been
released from my present assignment."
"Yes ... you take no more chances than we do." Mr. Green raised his
right hand, held the disk facing the phone field. After a moment, the
light in Dr. Lowry's living room darkened, turned to a rich, deep
purple, gradually lightened again.
Mr. Green took his hand down. "Are you convinced I'm the person I
appear to be?"
Lowry nodded. "Yes, sir, I am. To the best of my knowledge, there is
no way of duplicating that particular diex effect—as yet."

Arlene Rolf walked rapidly along the passage between the thick inner
and outer walls enclosing Cleaver Spaceport. There was no one in
sight, and the staccato clicking of her high heels on the light-green
marblite paving was the only sound. The area had the overall
appearance of a sun-baked, deserted fortress. She reached a double
flight of shallow stairs, went up and came out on a wide, bare
platform level with the top of the inner wall.
Cleaver Spaceport lay on her left, a twenty-mile rectangle of softly
gleaming marblite absolutely empty except for the narrow white spire
of a control tower near the far side. The spaceport's construction had
been begun the year Arlene was born, as part of the interplanetary
colonization program which a rash of disasters and chronically
insufficient funds meanwhile had brought to an almost complete
standstill. Cleaver port remained unfinished; no space-ship had yet
lifted from its surface or settled down to it.
Ahead and to Arlene's right, a mile and a half of green lawn stretched
away below the platform. Automatic tenders moved slowly across it,
about half of them haloed by the rhythmically circling rainbow sprays
of their sprinklers. In the two years since Arlene had first seen the
lawn, no human being had set foot there. At its far end was a cluster
of low, functional buildings. There were people in those buildings ...
but not very many people. It was the security island where Dr. Lowry
had built the diex projector.
Arlene crossed the platform, passed through the doorless entry of the
building beyond it, feeling the tingle of another somatic barrier as she
stepped into its shadow. At the end of the short hallway was a narrow
door with the words NONSPACE CONDUIT above it. Behind the door
was a small, dimly lit cube of a room. Miss Rolf went inside and sat
down on one of the six chairs spaced along the walls. After a
moment, the door slid quietly shut and the room went dark.
For a period of perhaps a dozen seconds, in complete blackness,
Arlene Rolf appeared to herself to have become an awareness so
entirely detached from her body that it could experience no physical
sensation. Then light reappeared in the room and sensation returned.
She stood up, smoothing down her skirt, and discovered smiling that
she had been holding her breath again. It happened each time she
went through the conduit, and no previous degree of determination to
breathe normally had any effect at all on that automatic reaction. The
door opened and she picked up her purse and went out into a hall
which was large, well-lit and quite different in every respect from the
one by which she had entered.

In the wall screen across the hall, the image of a uniformed man
smiled at her and said, "Dr. Lowry has asked that you go directly to
the laboratory on your return, Miss Rolf."
"Thank you, Max," she said. She had never seen Max or one of the
other project guards in person, though they must be somewhere in
the building. The screen went blank, and she went on down the long,
windowless hall, the sound of her steps on the thick carpeting again
the only break in the quiet. Now, she thought, it was a little like being
in an immaculately clean, well-tended but utterly vacant hotel.

Arlene pressed the buzzer beside the door to Dr. Lowry's quarters
and stood waiting. When the door opened, she started forwards then
stopped in surprise.
"Why, hello, Colonel Weldon," she said. "I didn't realize you would be
on the project today." Her gaze went questioningly past him to Dr.
Lowry who stood in the center of the room, hands shoved deep into
his trousers pockets.
Lowry said wryly, "Come in, Arlene. This has been a surprise to me,
too, and not a pleasant one. On the basis of orders coming directly
from the top—which I have just confirmed, by the way—our schedule
here is to be subjected to drastic rearrangements. They include
among other matters our suspension as the actual operators of the
projector."
"But why that?" she asked startled.
Dr. Lowry shrugged. "Ask Ferris. He just arrived by his personal
conduit. He's supposed to explain the matter to us."
Ferris Weldon, locking the door behind Arlene, said smilingly, "And
please do give me a chance to do just that now, both of you! Let's sit
down as a start. Naturally you're angry ... no one can blame you for it.
But I promise to show you the absolute necessity behind this move."
He waited until they were seated, then added, "One reason—though
not the only reason—for interrupting your work at this point is to avoid
exposing both of you to serious personal danger."
Dr. Lowry stared at him. "And what's that supposed to mean?"
"Ben," Ferris Weldon asked, "what was the stated goal of this project
when you undertook it?"
Lowry said stiffly, "To develop a diex-powered instrument which would
provide a means of reliable mental communication with any specific
individual on Earth."
Weldon shook his head. "No, it wasn't."
Arlene Rolf laughed shortly. "He's right, Ben." She looked at Weldon.
"The hypothetical goal of the project was an instrument which would
enable your department telepaths to make positive identification of a
hypothetical Public Enemy Number One ... the same being described
as a 'rogue telepath' with assorted additional qualifications."
Weldon said, "That's a little different, isn't it? Do you recall the other
qualifications?"
"Is that important at the moment?" Miss Rolf asked. "Oh, well ... this
man is also a dangerous and improbably gifted hypnotist. Disturb him
with an ordinary telepathic probe or get physically within a mile or so
of him, and he can turn you mentally upside down, and will do it in a
flash if it suits his purpose. He's quite ruthless, is supposed to have
committed any number of murders. He might as easily be some
unknown as a man constantly in the public eye who is keeping his
abilities concealed.... He impersonates people.... He is largely
responsible for the fact that in a quarter of a century the
interplanetary colonization program literally hasn't got off the
ground...."
She added, "That's as much as I remember. There will be further
details in the files. Should I dig them out?"
"No," Ferris Weldon said. "You've covered most of it."

Dr. Lowry interrupted irritably, "What's the point of this rigmarole,

Weldon? You aren't assuming that either of us has taken your rogue
telepath seriously...."
"Why not?"
Lowry shrugged. "Because he is, of course, one of the government's
blandly obvious fictions. I've no objection to such fictions when they
serve to describe the essential nature of a problem without revealing
in so many words what the problem actually is. In this case, the
secrecy surrounding the project could have arisen largely from a
concern about the reaction in various quarters to an instrument which
might be turned into a thought-control device."
Weldon asked, "Do you believe that is the purpose of your projector?"
"If I'd believed it, I would have had nothing to do with it. I happen to
have considerable confidence in the essential integrity of our
government, if not always in its good sense. But not everyone shares
that feeling."
Ferris Weldon lit a cigarette, flicked out the match, said after a
moment, "But you didn't buy the fiction?"
"Of course not."
Weldon glanced at Miss Rolf. "You, Arlene?"
She looked uneasy. "I hadn't bought it, no. Perhaps I'm not so sure
now—you must have some reason for bringing up the matter here.
But several things wouldn't make sense. If...."
Dr. Lowry interrupted again. "Here's one question, Weldon. If there
did happen to be a rogue telepath around, what interest would he
have in sabotaging the colonization program?"
Weldon blew two perfect smoke rings, regarded their ascent with an
air of judicious approval. "After you've heard a little more you should
be able to answer that question yourself," he said. "It was precisely
the problems connected with the program that put us on the rogue's
trail. We didn't realize it at the time. Fourteen years ago.... Have you
had occasion to work with DEDCOM, Ben?"
Lowry made a snorting sound. "I've had a number of occasions ...
and made a point of passing them up! If the government is now
basing its conclusions on the fantastically unrealistic mishmash of
suggestions it's likely to get from a deducting computer...."
"Well," Ferris Weldon said deprecatingly, "the government doesn't
trust DEDCOM too far, of course. Still, the fact that it is strictly logical,
encyclopedically informed and not hampered by common sense has
produced surprisingly useful results from time to time.
"Now don't get indignant again, Ben! I assure you I'm not being
facetious. The fact is that sixteen years ago the charge that
interplanetary colonization was being sabotaged was frequently
enough raised. It had that appearance from the outside. Whatever
could go wrong had gone wrong. There'd been an unbelievable
amount of blundering."

"Nevertheless, all the available evidence indicated that no organized

sabotage was involved. There was plenty of voluble opposition to the
program, sometimes selfish, sometimes sincere. There were multiple
incidents of forgetfulness, bad timing, simple stupidity. After years of
false starts, the thing still appeared bogged down in a nightmare of—
in the main—honest errors. But expensive ones. The month-by-
month cost of continuing reached ridiculous proportions. Then came
disasters which wiped out lives by the hundreds. The program's
staunchest supporters began to get dubious, to change their minds.
"I couldn't say at the moment which genius in the Department of
Special Activities had the notion to feed the colonization problem to
DEDCOM. Anyway, it was done, and DEDCOM, after due checking
and rumination, not only stated decisively that it was a matter of
sabotage, after all; it further provided us with a remarkably detailed
description of the saboteur...."
Arlene Rolf interrupted. "There had been only one saboteur?"
"Only one who knew what he was doing, yes."
"The rogue telepath?" Dr. Lowry asked.
"Who else?"
"Then if the department has had his description...."
"Why is he still at large?" Ferris Weldon asked, with a suggestion of
grim amusement. "Wait till you hear what it sounded like at the time,
Ben! I'll give it to you from memory.
"Arlene has mentioned some of the points. The saboteur, DEDCOM
informed us, was, first, a hypnotizing telepath. He could work on his
victims from a distance, force them into the decisions and actions he
wanted, leave them unaware that their minds had been tampered
with, or that anything at all was wrong.
"Next, he was an impersonator, to an extent beyond any ordinary
meaning of the word. DEDCOM concluded he must be able to match
another human being's appearance so closely that it would deceive
his model's most intimate associates. And with the use of these two
talents our saboteur had, in ten years, virtually wrecked the
colonization program.
"Without any further embellishments, DEDCOM's report of this
malevolent superman at loose in our society would have raised
official eyebrows everywhere...."
"In particular," Miss Rolf asked, "in the Department of Special
Activities?"
"In particular there," Weldon agreed. "The department's experience
made the emergence of any human supertalents worth worrying
about seem highly improbable. In any event, DEDCOM crowded its
luck. It didn't stop at that point. The problems besetting the
colonization program were, it stated, by no means the earliest
evidence of a rogue telepath in our midst. It listed a string of
apparently somewhat comparable situations stretching back through
the past three hundred years, and declared unequivocally that in
each case the responsible agent had been the same—our present
saboteur."

Weldon paused, watched their expressions changing. A sardonic

smile touched the corners of his mouth.
"All right," Dr. Lowry said sourly after a moment, "to make the thing
even more unlikely, you're saying now that the rogue is immortal."
Weldon shook his head. "I didn't say it ... and neither, you notice, did
DEDCOM. The question of the rogue's actual life span, whatever it
may be, was no part of the matter it had been given to investigate. It
said only that in various ways he had been interfering with mankind's
progress for at least three centuries. But added to the rest of it, that
statement was quite enough."
"To accomplish what?"
"What do you think?" Weldon asked. "The report passed eventually
through the proper hands, was properly initialed, then filed with
DEDCOM's earlier abortions and forgotten. Special Activities
continued, by its more realistic standard investigative procedures, to
attempt to find out what had bogged down the colonization program.
As you're aware, the department didn't make much headway. And
neither has the program."
"The last is very apparent," Lowry said, looking puzzled. "But the fact
that you've failed to solve the problem seems a very poor reason to
go back now to the theory of a rogue telepath."
Weldon blew out a puff of smoke, said thoughtfully, "That wouldn't
have been too logical of us, I agree. But our failure wasn't the reason
for reviving DEDCOM's theory."
"Then what was your reason?" Irritation edged Lowry's voice again.
"The unexpected death, five years ago, of one of the world's better-
known political figures," Weldon said. "You would recognize the name
immediately if I mentioned it. But you will not recognize the
circumstances surrounding his death which I am about to relate to
you, because the report published at the time was a complete
falsehood and omitted everything which might have seemed out of
the ordinary. The man actually was the victim of murder. His corpse
was found floating in the Atlantic. That it should have been noticed at
all was an unlikely coincidence, but the body was fished out and
identified. At that point, the matter acquired some very improbable
aspects because it was well known that this man was still alive and in
the best of health at his home in New York.
"It could have been a case of mistaken identification, but it wasn't.
The corpse was the real thing. While this was being definitely
established, the man in New York quietly disappeared ... and now a
number of people began to take a different view of DEDCOM's long-
buried report of a hypnotizing telepath who could assume the identity
of another person convincingly enough to fool even close friends. It
was not conclusive evidence, but it did justify a serious inquiry which
was promptly attempted."
"Attempted?" Arlene Rolf asked. "What happened?"

"What happened," Weldon said, "was that the rogue declared war on
us. A limited war on the human race. A quiet, undercover war for a
specific purpose. And that was to choke off any kind of investigation
that might endanger him or hamper his activities. The rogue knew he
had betrayed himself; and if he hadn't known of it earlier, he learned
now about the report DEDCOM had made. Those were matters he
couldn't undo. But he could make it very clear that he wanted to be
left undisturbed, and that he had methods to enforce his wishes."
Dr. Lowry blinked. "What could one...."
"Ben," Ferris Weldon said, "if you'll look back, you'll recall that a little
less than five years ago we had ... packed into the space of a few
months ... a series of the grimmest public disasters on record. These
were not due to natural forces—to hurricanes, earthquakes, floods or
the like. No, each and every one of them involved, or might have
involved, a human agency. They were not inexplicable. Individually,
each could be explained only too well by human incompetence,
human lunacy or criminal purpose. But—a giant hotel exploded, a
city's water supply was poisoned, a liner ... yes, you remember.
"Now, notice that the rogue did not strike directly at our investigators.
He did that on a later occasion and under different circumstances, but
not at the time. It indicated that in spite of his immense natural