CORE DOMAINS

Eight Domains of Elite Finance

The institutional lens: how top operators think about liquidity, governance, capital, accounting, derivatives, uncertainty, rates, and valuation.

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Liquidity Governance Capital Accounting Derivatives Uncertainty Rates & Credit Valuation
01

Liquidity & Survival

Available ≠ usable. Track what is actually callable under stress.

Institutional liquidity is a funding stack with maturity ladders, encumbrance, and stress scenarios. The Fed's SVB post-mortem: "Liquidity stress tests existed but no workable action plans." Tests that don't trigger actions are theater.

SVB (2023)

~94% uninsured deposits. $40B withdrawn in one day. The bank had stress-tested; it had not built executable playbooks. Click for full timeline

The Four Gates
  • Unencumbered liquidity – LCR ≥ 100%. Define "how many days can we survive."
  • Concentration – Identify top-N; set break-the-glass caps.
  • Leverage – "How easily can we be forced to sell?"
  • Time-to-failure – Days until minimum cash or covenant breach.
02

Governance & Risk Appetite

Limits are binding. Override = consequence. Adjust the business—not the limits.

Governance failure is the common thread in Lehman, Enron, SVB. Valukas on Lehman: risk limits existed; management used Repo 105—redefining the constraint instead of changing behavior.

Lehman (2008)

~$50B moved off balance sheet at quarter-end. The firm stayed within limits by changing the definition of leverage—assumption gaming. Click for details

Failure Modes
  • Limit redefinition – Change assumptions to fit limits.
  • Escalation without consequence – Nothing changes. Escalation becomes ritual.
  • Board information asymmetry – Board doesn't get adequate risk info.
  • Incentive misalignment – Profit rewarded over risk management.
03

Capital Allocation

Buffers → franchise → returns → bets. Never pay dividends from survival capital.

JPMorgan's "fortress balance sheet": capital in strict priority. Apple's CFO: we only return what we can sustain through cycles.

The Hierarchy
  • Buffers – Liquidity, capital adequacy, covenant headroom. First claim.
  • Franchise – Core business, maintenance capex, working capital.
  • Returns – Dividends, buybacks. Payout = sustainable FCF after buffers.
  • Bets – M&A, new ventures. Only after the above.
04

Accounting & Cash Truth

CFO vs net income. Accruals can be managed; cash cannot.

Institutional operators treat the cash flow statement as the reality check. If net income grows while CFO lags—dig deeper. Enron: reported earnings; cash flow was a different story.

Key Concepts
  • Accruals vs cash – High accruals relative to cash = earnings quality risk.
  • Working capital forensics – DSO stretching? Payables extended?
  • CFO vs net income – Persistent gap = investigate.
  • Earnings quality – One-time gains, "adjusted" metrics. What's repeatable?
05

Derivatives & Hedging

Margin and collateral create cash demands in stress. Basis risk = hedge and exposure diverge when you need protection.

LTCM (1998): correlations broke; everything moved against them. Margin calls forced asset sales. Illiquidity + leverage = death spiral. The hedge failed when it mattered.

Key Concepts
  • Hedge design – What exactly are you hedging? Mismatch = basis risk.
  • Margin & collateral – In stress, margin calls spike. Can you post?
  • Basis risk – Hedge and exposure move differently in crisis.
  • Crisis failure – Correlation goes to 1. Liquidity vanishes.
06

Uncertainty & Modeling

VaR says nothing about the 99th percentile. Expected Shortfall captures the tail. Fat tails break "normal" assumptions.

VaR is not coherent. Basel moved to Expected Shortfall for market risk. In crisis, stationarity, normal residuals, and stable relationships all break.

Key Concepts
  • VaR vs ES – VaR = "95% we lose less than X." ES = "Worst 5%, average loss is Y."
  • Fat tails – 2008, COVID—"6 sigma" events happen more often.
  • Scenario vs Monte Carlo – Scenarios for governance. Monte Carlo for quantification.
  • Regression literacy – What breaks in stress?
07

Rates & Credit

Duration = rate sensitivity. Covenants are tripwires. Maturity walls concentrate refinancing risk.

Yield curve inversion often precedes recession. Duration: 1% rate rise → ~duration% price decline. When market-implied and fundamental diverge, one is wrong.

Key Concepts
  • Yield curves – Inversion, steepening/flattening.
  • Duration – % price change per 1% yield change.
  • Credit spreads – Market vs fundamental.
  • Covenants – What triggers default? Cure periods?
  • Refinancing risk – Can you roll when term comes due? At what cost?
08

Valuation

DCF = explicit cash flows + terminal value. TV often dominates. Survivability gate: does the firm survive to realize value?

NPV is additive; IRR is not. IRR assumes reinvestment at IRR—often unrealistic. Garbage growth rate = garbage value. Sensitivity analysis is mandatory.

Key Concepts
  • DCF mechanics – Unlevered FCF, WACC, explicit + terminal. Each assumption matters.
  • Survivability gates – Does the firm survive to year 5?
  • NPV vs IRR – IRR can rank projects wrong. Use NPV.
  • Terminal value – Often 60–80% of value. Sensitivity is critical.
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