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The Fix: How Bankers Lied, Cheated and Colluded to Rig the World's Most Important Number (Bloomberg) by Liam Vaughan, Gavin Finch
asset allocation, asset-backed security, bank run, banking crisis, Bernie Sanders, Big bang: deregulation of the City of London, buy low sell high, call centre, central bank independence, collapse of Lehman Brothers, corporate governance, credit crunch, Credit Default Swap, eurozone crisis, fear of failure, financial deregulation, financial innovation, fixed income, interest rate derivative, interest rate swap, light touch regulation, London Interbank Offered Rate, London Whale, mortgage debt, Northern Rock, performance metric, Ponzi scheme, Ronald Reagan, sovereign wealth fund, urban sprawl
Not only did Hayes have to extract himself from every deal he’d done with Lehman, but he’d also made a series 1 2 THE FIX of enormous bets that in the coming days interest rates would remain stable. The collapse of the fourth-largest investment bank in the U.S. would surely cause those rates, which were really just barometers of risk, to spike. As Hayes examined his tradebook, one rate mattered more than any other: the London interbank offered rate, or Libor, a benchmark that influences $350 trillion of securities and loans around the world. For traders like Hayes, this number was the Holy Grail. And two years earlier, he had discovered a way to rig it. Libor was set by a self-selected,self-policing committee of the world’s largest banks. The rate measured how much it cost them to borrow from each other. Every morning, each bank submitted an estimate, an average was taken and a number was published at midday.
The Iranians had brought the beluga caviar and Zombanakis the vintage champagne—the party went on into the night. The Iranian loan was one of the first ever to charge a variable rate of interest that reflected changing market conditions and be split among a group of banks. It was just as revolutionary in the staid world of 1960s 13 14 THE FIX banking as the moon landing, though celebrated with less fanfare, and it marked the birth of the London interbank offered rate, or Libor. “I felt a sense of achievement to set up the whole thing, but I didn’t think we were breaking ground for a new period in the financial world,” says Zombanakis, now 90 and living back in Kalyves, on the island of Crete, amid the same olive groves his family has tended for generations. “We just needed a rate for the syndicated-loan market that everyone would be happy with. When you start these things, you never know how they are going to end up, how they are going to be used.”
Zombanakis and his team came up with a solution:charging borrowers an interest rate recalculated every few months and funding the loan with a series of rolling deposits. The formula was simple. The banks in the syndicate would report their funding costs just before a loan-rollover date. The weighted average, rounded to the nearest 1/8th of a percentage point plus a spread for profit, became the price of the loan for the next period. Zombanakis called it the London interbank offered rate. Other financiers cottoned on, and by 1982 the syndicated-loan market had ballooned to about $46 billion.4 Virtually all those loans used Libor to calculate the interest charged. Soon, the rate was adopted by bankers outside the loan market who were looking for an elegant proxy for bank borrowing costs that was simple, fair and appeared to be independent. In 1970, the financier Evan Galbraith, who would go on to be U.S. ambassador to France under President Ronald Reagan, is said to have come up with the idea of pegging the first bond to Libor—known as a floating-rate note.
Albert Einstein, asset allocation, asset-backed security, Brownian motion, business process, capital asset pricing model, clean water, collateralized debt obligation, computerized markets, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, equity premium, fixed income, implied volatility, index fund, intangible asset, interest rate swap, inventory management, London Interbank Offered Rate, margin call, market fundamentalism, money market fund, mortgage debt, Myron Scholes, passive investing, performance metric, risk tolerance, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, short selling, statistical model, time value of money, transaction costs, yield curve, zero-coupon bond
Data shows that the performance of load and no-load funds is similar. Related Terms: • Breakpoint • Mutual Fund • No-Load Fund • Front-End Load • Net Asset Value—NAV 166 The Investopedia Guide to Wall Speak London Interbank Offered Rate (LIBOR) What Does London Interbank Offered Rate (LIBOR) Mean? An interest rate at which banks borrow funds from other banks in the London interbank market; the LIBOR is fixed on a daily basis by the British Bankers’ Association and derived from a filtered average of the world’s most creditworthy banks’ interbank deposit rates for larger loans with maturities between overnight and a full year. Investopedia explains London Interbank Offered Rate (LIBOR) The LIBOR is the world’s most widely used benchmark for shortterm interest rates. It is important because it is the rate at which the world’s most preferred borrowers are able to borrow money.
Related Terms: • Equity • Premium • Risk-Return Trade-Off • Gordon Growth Model • Risk 96 The Investopedia Guide to Wall Speak Euro LIBOR What Does Euro LIBOR Mean? The London Interbank Offer Rate denominated in euros. This is the interest rate that banks offer one another for large short-term loans in euros. The rate is fixed once a day by a small group of large London banks but fluctuates throughout the day. This market makes it easier for banks to maintain liquidity requirements because they are able to borrow quickly from other banks that have surpluses. Investopedia explains Euro LIBOR The Euro LIBOR is based on the average lending rates of 16 banks. These bank rates are available to the public through the British Bankers’ Association. Euro LIBOR exists mainly for continuity purposes in swap contracts dating back to preeuro times and is not used very commonly. Related Terms: • Debt • Interest Rate • Money Market • London Interbank Offer Rate—LIBOR • Singapore Interbank Offered Rate—SIBOR Exchange-Traded Fund (ETF) What Does Exchange-Traded Fund (ETF) Mean?
See Leveraged buyout (LBO) Lease, 142, 206 Lehman Aggregate Bond Index, 21, 136, 158 334 Index Letter of credit, 158-159, 158-159 Leverage, 67-69, 71, 117-118, 159-160, 210-211 Leverage ratio, 160. See also Equity multiplier Leveraged buyout (LBO), 161, 234 Leveraged loan, 161-162 Liability, 4, 6-7, 8, 17, 61, 162, 162, 321. See also specific debts and liabilities Liability ratios, 209, 276 Liar loan, 162-163 LIBOR. See London Interbank Offer Rate (LIBOR) Life-cycle mutual funds, 14, 182 Limit order, 163 Liquid assets. See Cash and cash equivalents (CCE) Liquidity, 4-5, 38, 133-134, 163-164 Liquidity ratios, 61, 164, 242-243. See also Current ratio Listed, 165 Load fund, 99, 111-112, 165, 165, 201-202 Loan-to-value ratio (LTV), 163 London Interbank Offer Rate (LIBOR), 96, 140-141, 166 Long (long position), 33, 34, 56-57, 166-167, 197 Long squeeze, 167 Long-term debt, 167-168 Long-term debt to capitalization ratio, 168 MA. See Moving average (MA) M&A. See Mergers and acquisitions (M&A) MACD.
asset-backed security, bank run, banking crisis, Bernie Madoff, bonus culture, Bretton Woods, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, disintermediation, diversification, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Francis Fukuyama: the end of history, George Santayana, global reserve currency, Home mortgage interest deduction, Isaac Newton, joint-stock company, liquidity trap, London Interbank Offered Rate, long peace, margin call, market clearing, mass immigration, money market fund, moral hazard, mortgage tax deduction, Northern Rock, offshore financial centre, paradox of thrift, pattern recognition, pension reform, pets.com, Plutocrats, plutocrats, Ponzi scheme, profit maximization, pushing on a string, reserve currency, risk tolerance, risk-adjusted returns, road to serfdom, Ronald Reagan, shareholder value, Silicon Valley, South Sea Bubble, statistical model, The Great Moderation, the new new thing, the payments system, too big to fail, value at risk, very high income, War on Poverty, Y2K, yield curve
However, the game had changed, and no modern banker thought that you actually had to have deposits to make loans safely. Until, that is, the summer of 2007, when the interbank market froze up and our current financial crisis began. FINANCE RETURNS TO LONDON The first sign that the global financial system was falling apart came in the freezing up of the London interbank market in August of 2007. LIBOR—the London Interbank Offered Rate, essentially the rate at which banks will offer to lend to other banks for various periods— went through the roof. The first question that springs to mind is, ‘‘Why is the global market in dollar deposits in London anyway’’? The Natural History of Financial Folly This is due to yet another accident of history with big consequences, this time Kennedy Administration policies. In the 1960s, U.S. firms were rapidly expanding their operations overseas as Europe boomed.
This swelling of the sheer scale of the global financial economy was possible because banking in the Euromarkets gradually became almost purely concerned with trading in financial instruments unlinked to the real economy of buying and selling stuff. The bankers in the Euromarkets effectively had no constraints. All a bank needed was highly skilled (or lucky) traders. No pesky customers were needed for deposits—you simply bought OPM in the interbank market. The benchmark rate became know as LIBOR—the London Interbank Offered Rate—and remains the most important single interest rate in the financial world. This is why, when LIBOR went through the roof in August 2007, it was the canary in the mineshaft signaling the start of a global credit crunch that morphed into a full-fledged crisis: Interbank lending had seized up because banks The Natural History of Financial Folly wouldn’t trust each other with even short-term placements.
(LBJ), 140; and the Great Inflation, 154 Joint Stock Companies, history and role, 81–82, 89, 138; East India Company, 81–82 Keynes, John Maynard, 113–115, 129, 153, 155, 163, 165 Kindleberger, Charles, Manias, Panics and Crashes, 136 ‘‘legal tender,’’ xv, xvii, 10, 105, 148 Lender of Last Resort, 150 lending, xix, 15–18, 27, 34, 36–39, 56, 60–63, 66, 68, 70, 72, 83–84, 90, 92, 98, 102–103, 107, 109–110, 126, 131–132, 142, 148, 150–152, 156–158, 164, 166–167, 170, 185–189. See also Balance sheet lending Leverage, 4–5, 27–28, 66, 152, 160 liberalism, 125, 180, 182 Liberty and markets, 125, 179–182 LIBOR (London Interbank Offered Rate), 146, 150 ‘‘Lifeboat’’ method of bank rescue, 121 Liquidity, 30, 110, 113 Liquidity Trap, 113 Lombard Rate, 34 Lombard Street, book by Walter Bagehot, 102 Lombard Street, London, 34, 135 ‘‘long tail’’ risks, 69. See also ‘‘black swans’’ Long Term Credit Bank (LTCB), Japan, 170 195 196 Index Mackay, Charles, Great Popular Delusions and the Madness of Crowds, 136 Madoff, Bernard, 23, 175 Main Street, 1, 91, 104, 144, 176, 187 Manias, xviii–xx, 27, 109, 136–138 Manufacturers Hanover Trust Company, 148, 158 margin lending, 110 market capitalization, 47, 51, 70, 126, 159, 183 markets 19–22, 24–28, 40–41, 60, 72, 107, 111, 117–119, 124, 126–127, 150, 165–169, 175–176; 179–189; defined, xi–xx; functions, 18–28; history of, 75, 79–89, 135–145; how to play, 50–56; irrational, 52–53, 156–57; real estate market downturn and ‘‘Billy Bob’’ banking crisis, 131–32; secondary, 44 MBS (Mortgage Backed Securities), 57 Medici, 79 Meyer, Martin, Bankers, The, 143 MMA (Money Market Account), 130 models, uses in finance, 21, 25, 27, 63–65, 69–70, 99–100, 138, 152, 166, 171, 177, 182; faith in, 4, 58, 66, 68, 71–72, 74 MOF (Ministry of Finance, Japan), 167 money, creation of, 13; defined, x, xi, 117; history of, xv–xvi, 33–34, 77–80; function of, xii–xv; money supply, types of xv, xvii–xviii, 4, 8–9, 83, 92, 148, 155; value of, 4.
Affordable Care Act / Obamacare, algorithmic trading, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Black-Scholes formula, bonus culture, break the buck, Bretton Woods, call centre, Carmen Reinhart, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Graeber, diversification, diversified portfolio, Edmond Halley, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, family office, financial deregulation, financial innovation, fixed income, Flash crash, Google Glasses, Gordon Gekko, high net worth, housing crisis, Hyman Minsky, implied volatility, income inequality, index fund, information asymmetry, Innovator's Dilemma, interest rate swap, Kenneth Rogoff, Kickstarter, late fees, London Interbank Offered Rate, Long Term Capital Management, loss aversion, margin call, Mark Zuckerberg, McMansion, money market fund, mortgage debt, mortgage tax deduction, Myron Scholes, negative equity, Network effects, Northern Rock, obamacare, payday loans, peer-to-peer lending, Peter Thiel, principal–agent problem, profit maximization, quantitative trading / quantitative ﬁnance, railway mania, randomized controlled trial, Richard Feynman, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, short selling, Silicon Valley, Silicon Valley startup, Skype, South Sea Bubble, sovereign wealth fund, statistical model, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application
., 32 Keys, Benjamin, 48 Kharroubi, Enisse, 79 Kickstarter, 172 King, Stephen, 99 Klein, David, 182 Krugman, Paul, xv Lahoud, Sal, 166 Lang, Luke, 153, 161–162 Laplanche, Renaud, 179, 184, 188, 190, 193–194, 196–197 Latency, 53 Law of large numbers, 17 Layering, 57 Left-digit bias, 46 Lehman Brothers, x, 44, 65 Lending direct, 84 marketplace, 184 payday, 200 relationship-based, 11, 151, 206–208 secured, xiv, 76 unsecured, 206 See also Loans; Peer-to-peer lending Lending Club, 172, 179–180, 182–184, 187, 189, 194–195, 197 Leonardo of Pisa (Fibonacci), 19 Lerner, Josh, 59 Lethal pandemic, risk-modeling for demographic profile, 230 exceedance-probability curve, 231–232, 232 figure 3 historical data, 228–229 infectiousness and virulence, 229–230 location of outbreak, 230–231 Leverage, 51, 70–71, 80, 186, 188 Leverage ratio, 76–77 Lewis, Michael, 57 Liber Abaci or Book of Calculation (Fibonacci), 19 LIBOR (London Interbank Offered Rate), 41 Liebman, Jeffrey, 98 Life expectancy government reaction to, 128–129 projections of, 124–127, 126 figure 2 ratio of young to older people, 127–128 Life-insurance policies, 142 Life-settlements industry, 142–143 Life table, 20 Limited liability, 212 Liquidity, 12–14, 39, 185–186 List, John, 109 The Little Book of Behavioral Investing (Montier), 156 Lo, Andrew, 113–115, 117–123 Loans low-documentation, 48–49 secured, 76 small business, 181, 216 student, 164, 166–167, 169–171, 182 syndicated, 41 Victory Loans, 28 See also Lending; Peer-to-Peer lending Logistic regression, 201 London, early fire insurance in, 16–17 London, Great Fire of, 16 London Interbank Offered Rate (LIBOR), 41 Long-Term Capital Management, 123 Longevity, betting on, 143–144 Loss aversion, 136 Lotteries, 212, 213 Low-documentation loans, 48–49 Lumni, 165, 168, 175 Lustgarten, Anders, 111 Lynn, Jeff, 160–161 Mack, John, 180 Mahwah, New Jersey, 52, 53 Marginal borrowers assessment of, 216–217 behavioral finance and, 208–214 industrialization of credit, 206 microfinance and, 203 savings schemes, 209–214 small businesses, 215–219 unsecured lending to, 206 Wonga, 203, 205, 208 Marginal borrowers (continued) ZestFinance, 199, 202, 205–206 Maritime piracy, solutions to, 151–152 Maritime trade, role of in history of finance, 3, 7–8, 14, 17, 23 Market makers, 15–16, 55 MarketInvoice, 195, 207, 217–218 Marketplace lending, 184 Markowitz, Harry, 118 Massachusetts, use of inflation-protected bonds in, 26 Massachusetts, use of social-impact bonds in, 98 Matching engine, 52 Maturity transformation, 12–13, 187–188, 193 McKinsey & Company, ix, 42 Mercator Advisory Group, 203 Merrill, Charles, 28 Merrill, Douglas, 199, 201 Merrill Lynch, 28 Merton, Robert, 31, 113–114, 123–124, 129–132, 142, 145 Mian, Atif, 204 Michigan, University of, financial survey by, 134–135 Microfinance, 203 Micropayment model, 217 Microwave technology, 53 The Million Adventure, 213–214 Minsky, Hyman, 42 Minsky moment, 42 Mississippi scheme, 36 Mitchell, Justin, 166–167 Momentum Ignition, 57 Monaco, modeling risk of earthquake in, 227 Money, history of, 4–5 Money illusion, 73–74 Money laundering, 192 Money-market funds, 43, 44 Monkeys, Yale University study of loss aversion with, 136 Montier, James, 156–157 Moody, John, 24 Moody’s, 24, 235 Moore’s law, 114 Morgan Stanley, 188 Mortgage-backed securities, 49, 233 Mortgage credit by ZIP code, study of, 204 Mortgage debt, role of in 2007–2008 crisis, 69–70 Mortgage products, unsound, 36–37 Mortgage securitization, 47 Multisystemic therapy, 96 Munnell, Alicia, 129 Naked credit-default swaps, 143 Nature Biotechnology, on drug-development megafunds, 118 “Neglected Risks, Financial Innovation and Financial Fragility” (Gennaioli, Shleifer, and Vishny), 42 Network effects, 181 New York, skyscraper craze in, 74–75 New York City, prisoner-rehabilitation program in, 108 New York Stock Exchange (NYSE), 31, 52, 53, 61, 64 New York Times, Merrill Lynch ad in, 28 Noncorrelated assets, 122 Nonprofits, growth of in United States, 105–106 Northern Rock, x NYMEX, 60 NYSE Euronext, 52 NYSE (New York Stock Exchange), 31, 52, 53, 61, 64 OECD (Organization for Economic Co-operation and Development), 128, 147 Oldfield, Sean, 67–68, 80–84 OnDeck, 216–218 One Service, 94–95, 105, 112 Operating expense ratio, 188–189 Options, 15, 124 Order-to-trade ratios, 63 Oregon, interest in income-share agreements, 172, 176 Organization for Economic Co-operation and Development (OECD), 128, 147 Overtrading, 24 Packard, Norman, 60 Pandit, Vikram, 184 Park, Sun Young, 233 Partnership mortgage, 81 Pasion, 11 Pave, 166–168, 173, 175, 182 Payday lending Consumer Financial Protection Bureau, survey on, 200 information on applicants, acquisition of, 202 underwriting of, 201 PayPal, 219 Peak child, 127 Peak risk, 228 Peer-to-peer lending advantages of, 187–189 auction system, 195 big investors in, 183 borrowers, assessment of, 197 in Britain, 181 commercial mortgages, 181 CommonBond, 182, 184, 197 consumer credit, 181 diversification, 196 explained, 180 Funding Circle, 181–182, 189, 197 investors in, 195 Lending Club, 179–180, 182–184, 187, 189, 194–195, 197 network effects, 181 ordinary savers and, 184 Prosper, 181, 187, 195 RateSetter, 181, 187, 196 Relendex, 181 risk management, 195–197 securitization, 183–184, 196 Peer-to-peer lending (continued) small business loans, 181 SoFi, 184 student loans, 182 Zopa, 181, 187, 188, 195 Pensions, cost of, 125–126 Perry, Rick, 142–143 Peterborough, England, social-impact bond pilot in, 90–92, 94–95, 104–105, 112 Petri, Tom, 172 Pharmaceuticals, decline of investment in, 114–115 Piracy Reporting Centre, International Maritime Bureau, 151 Polese, Kim, 210 Poor, Henry Varnum, 24 “Portfolio Selection” (Markowitz), 118 Prediction Company, 60–61 Preferred shares, 25 Prepaid cards, 203 Present value of cash flows, 19 Prime borrowers, 197 Prince, Chuck, 50–51, 62 Principal-agent problem, 8 Prisoner rehabilitation programs, 90–91, 94–95, 98, 108, 112 Private-equity firms, 69, 85, 91, 105, 107 Projection bias, 72–73 Property banking crises and, xiv, 69 banking mistakes involving, 75–80 behavioral biases and, 72–75 dangerous characteristics of, 70–72 fresh thinking, need for, xvii, 80 investors’ systematic errors in, 74–75 perception of as safe investment, 76, 80 Prosper, 181, 187, 195 Provisioning funds, 187 Put options, 9, 82 Quants, 19, 63, 113 QuickBooks, 218 Quote stuffing, 57 Raffray, André-François, 144 Railways, affect of on finance, 23–25 Randomized control trials (RCTs), 101 Raphoen, Christoffel, 15–16 Raphoen, Jan, 15–16 RateSetter, 181, 187, 196 RCTs (randomized control trials), 101 Ready for Zero, 210–211 Rectangularization, 125, 126 figure 2 Regulation NMS, 61 Reinhart, Carmen, 35 Reinsurance, 224 Relendex, 181 Rentes viagères, 20 Repurchase “repo” transactions, 15, 185 Research-backed obligations, 119 Reserve Primary Fund, 44 Retirement, funding for anchoring effect, 137–138 annuities, 139 auto-enrollment in pension schemes, 135 auto-escalation, 135–136 conventional funding, 127–128 decumulation, 138–139 government reaction to increased longevity, 128–129 home equity, 139–140 life expectancy, projections of, 124–127, 126 figure 2 life insurance policies, cash-surrender value of, 142 personal retirement savings, 128–129, 132–133 replacement rate, 125 reverse mortgage, 140–142 savings cues, experiment with, 137 SmartNest, 129–131 Reverse mortgages, 140–142 Risk-adjusted returns, 118 Risk appetite, 116 Risk assessment, 24, 45, 77–78, 208 Risk aversion, 116, 215 Risk-based capital, 77 Risk-based pricing model, 176 Risk management, 55, 117–118, 123, 195–197 Risk Management Solutions, 222 Risk sharing, 8, 82 Risk-transfer instrument, 226 Risk weights, 77–78 Rogoff, Kenneth, 35 “The Role of Government in Education” (Friedman), 165 Roman Empire business corporation in, 7 financial crisis in, 36 forerunners of banks in, 11 maritime insurance in, 8 Rotating Savings and Credit Associations (ROSCAs), 209–210 Roulette wheel, use of in experiment on anchoring, 138 Royal Bank of Scotland, 186 Rubio, Marco, 172 Russia, mortgage market in, 67 S-curve, in diffusion of innovations, 45 Salmon, Felix, 155 Samurai bonds, 27 Satsuma Rebellion (1877), 27 Sauter, George, 58 Save to Win, 214 Savings-and-loan crisis in US (1990s), 30 Savings cues, experiment with, 137 Scared Straight social program, 101 Scholes, Myron, 31, 123–124 Science, Technology, and Industry Scoreboard of OECD, 147 Securities and Exchange Commission (SEC), 54, 56, 57, 58, 64 Securities markets, 14 Securitization, xi, 20, 37–38, 117–122, 183–184, 196, 236 Seedrs, 160–161 Sellaband, 159 Shared equity, 80–84 Shared-equity mortgage, 84 Shepard, Chris, xii–xiii Shiller, Robert, xv–xvi, 242 Shleifer, Andrei, 42, 44 Short termism, 58 SIBs.
ISDA—whose members include banks, asset managers, and companies—helped develop something called the “ISDA master agreement,” a set of standard terms that apply automatically to over-the-counter derivatives transactions. ISDA is where banks go when new areas of OTC activity reach a critical mass and custom-made documents no longer do the job. It also acts as Solomon when ambiguities arise: ISDA’s determinations committee meets to decide on when credit-default swaps have been triggered, for example. The London Interbank Offered Rate also has its roots in a search for standardized efficiency. LIBOR is an interest rate that has become central to pricing loans and derivatives worldwide and that we now know was being routinely manipulated before and during the 2007–2008 financial crisis. It is very common to hear a phrase like “the loan was priced at LIBOR plus 60” when you talk to bankers: that means the loan carried an interest rate of whatever LIBOR was, plus another 60 basis points (100ths of a percentage point) on top.
Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, banks create money, break the buck, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Detroit bankruptcy, diversification, double entry bookkeeping, eurozone crisis, facts on the ground, financial innovation, fixed income, friendly fire, full employment, hiring and firing, housing crisis, Hyman Minsky, illegal immigration, inflation targeting, interest rate swap, Isaac Newton, Kenneth Rogoff, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market bubble, market clearing, market fundamentalism, McMansion, money market fund, moral hazard, naked short selling, new economy, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, price mechanism, quantitative easing, Ralph Waldo Emerson, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, statistical model, the payments system, time value of money, too big to fail, working-age population, yield curve, Yogi Berra
Never Again: Legacies of the Crisis Notes Sources Index LIST OF ACRONYMS AND ABBREVIATIONS ABCP: asset-backed commercial paper ABS: asset-backed securities AIG: American International Group AIG FP: AIG Financial Products AMLF: Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility ANPR: Advance Notice of Proposed Rulemaking ARM: adjustable-rate mortgage ARRA: American Reinvestment and Recovery Act (2009) BofA: Bank of America CBO: Congressional Budget Office CDO: collateralized debt obligation CDS: credit default swaps CEA: Council of Economic Advisers CEO: Chief Executive Officer CFMA: Commodity Futures Modernization Act (2000) CFPA: Consumer Financial Protection Agency CFPB: Consumer Financial Protection Bureau CFTC: Commodity Futures Trading Commission CME: Chicago Mercantile Exchange CP: commercial paper CPFF: Commercial Paper Funding Facility CPI: Consumer Price Index CPP: Capital Purchase Program DTI: debt (service)-to-income ratio ECB: European Central Bank EMH: efficient markets hypothesis ESF: Exchange Stabilization Fund FCIC: Financial Crisis Inquiry Commission FDIC: Federal Deposit Insurance Corporation FHA: Federal Housing Administration FHFA: Federal Housing Finance Agency FICO: Fair Isaac Company FOMC: Federal Open Market Committee FSA: Financial Services Authority (UK) FSLIC: Federal Savings and Loan Insurance Corporation FSOC: Financial Stability Oversight Council G7: Group of Seven (nations) GAAP: generally accepted accounting principles GAO: Government Accountability Office GDP: gross domestic product GLB: Gramm-Leach-Bliley Act (1999) GSE: government-sponsored enterprise H4H: Hope for Homeowners HAFA: Home Affordable Foreclosure Alternatives Program HAMP: Home Affordable Modification Program HARP: Home Affordable Refinancing Program HAUP: Home Affordable Unemployment Program HHF: Hardest Hit Fund HOLC: Home Owners’ Loan Corporation HUD: Department of Housing and Urban Development IMF: International Monetary Fund ISDA: International Swaps and Derivatives Association LIBOR: London Interbank Offer Rate LTCM: Long-Term Capital Management LTRO: Longer-Term Refinancing Operations LTV: loan-to-value (ratio) MBS: mortgage-backed securities MOM: my own money NBER: National Bureau of Economic Research NEC: National Economic Council NINJA (loans): no income, no jobs, and no assets NJTC: new jobs tax credit OCC: Office of the Comptroller of the Currency OFHEO: Office of Federal Housing Enterprise Oversight OMB: Office of Management and Budget OMT: Outright Monetary Transactions OPM: other people’s money OTC: over the counter OTS: Office of Thrift Supervision PDCF: Primary Dealer Credit Facility PIIGS: Portugal, Ireland, Italy, Greece, and Spain QE: quantitative easing Repo: repurchase agreement S&L: savings and loan association S&P: Standard and Poor’s SEC: Securities and Exchange Commission Section 13(3): of Federal Reserve Act SIFI: systemically important financial institution SIV: structured investment vehicle SPV: special purpose vehicle TAF: Term Auction Facility TALF: Term Asset-Backed Securities Loan Facility TARP: Troubled Assets Relief Program TBTF: too big to fail TED (spread): spread between LIBOR and Treasuries TIPS: Treasury Inflation-Protected Securities TLGP: Temporary Liquidity Guarantee Program TSLF: Term Securities Lending Facility UMP: unconventional monetary policy WaMu: Washington Mutual PREFACE When the music stops . . . things will be complicated.
In less severe cases, enormous “flights to quality” are triggered, typically to U.S. Treasury bills. In any case, the bond bubble, which was predicated on blissfully ignoring risk, ended with a bang on August 9, 2007. That faith in counterparties started to evaporate on that day is evidenced by the sharp rise in interbank lending rates. The key rate that everyone watches is LIBOR—the London Interbank Offer Rate—which indicates what one big bank charges another for short-term lending. This is a market restricted to the big boys: HSBC lending to Citibank, and so on. Was there actually a risk that such august financial giants might fail to repay overnight loans? The risk premium reflected in LIBOR said yes. After being stable for months, the LIBOR spread over Treasuries jumped by 30 basis points in just three business days.
See also Wells Fargo Krugman, Paul, 33, 181, 225, 245 Lacker, Jeffrey, 111 Lagarde, Christine, 420–21 Leamer, Ed, warning about crisis, 92 Lee, Mike, 362 Leeson, Nick, 62 Lehman Brothers, 119–28 asset size, 111 bailout, rejection by Fed, 100–101, 122, 123–28, 146 bailout as illegal, 126–27 collapse, as beginning of economic crisis, 3–4, 19–21, 127–28, 168, 171 collapse of, 52, 125 commercial real estate exposure of, 120 history of, 119–20 leverage ratio of, 52, 121 mortgage-related holdings and decline of, 89, 120, 121, 125, 127 rejection by other banks, 122–24 Reserve Primary Fund, 143–44 run on bank, cause of, 53 and UK financial crisis, 168 Lender of last resort, Fed as, 93–94, 98 Leverage, 47–55 by banks, normal use, 50, 272 and capital injection process, 197–98 dangerous ratios, 47, 50–52 excess, negative impacts of, 47–48, 52, 435 financial returns, illustration of, 48–49 against home, problem of, 37–38, 47–49 ratio, meaning of, 37 short-term borrowing by investment banks, 52–53 stock options example, 53–54 structured investment vehicles (SIVs) by banks, 50–52 synthetic, derivatives as, 53–55, 281 Levitt, Arthur, derivatives regulation failure, 63 Lewis, Ken, 122, 152–53, 164. See also Bank of America Liar loans, 69, 70 Libertarians, Federal Reserve chairmen as, 57, 57n LIBOR (London Interbank Offered Rate), 70n financial collapse, sign of, 91 Lincoln, Blanche, 313–14 Liquidity crisis. See also Bailouts AIG, 135 Bagehot principal, 94, 97, 104 Bear Stearns, 102–5 danger of, 104 Fed initial actions, 93–96 insolvency versus illiquidity, 103–4 preventing, regulatory needs, 271–72, 294–95, 308 Loans asset purchase with. See Leverage nonrecourse, 147–48, 206–7 Logue, Ronald, 201 Longer-Term Refinancing Operations (LTRO), 424–25 Long-Term Capital Management (LTCM), 101 bailout of, 63, 113 derivatives crisis, 62–63 Maastricht Treaty, 421–22 McCain, John, 188 and presidential election 2008, 203–4 McConnell, Mitch, 183–84, 220, 439 Mack, John, 153.
Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rosenbaum, Joshua Pearl, Joseph R. Perella
asset allocation, asset-backed security, bank run, barriers to entry, capital asset pricing model, collateralized debt obligation, corporate governance, credit crunch, discounted cash flows, diversification, fixed income, intangible asset, London Interbank Offered Rate, performance metric, shareholder value, sovereign wealth fund, technology bubble, time value of money, transaction costs, yield curve
See letters of credit lease legal counsel letters of credit (LC) leverage levels leverage ratios leveraged buyouts (LBO). See also Contents leveraged loan. See also bank debt levered beta predicted. See also Barra levered free cash flow. See also cash available for debt repayment LexisNexis liabilities, long-term LIBOR. See London Interbank Offered Rate LIBOR floor limited partners (LPs) liquidity London Interbank Offered Rate (LIBOR) long-term growth rate LPs. See limited partners LTM. See last twelve months M M&A. See mergers & acquisitions MAC/MAE. See material adverse change/effect maintenance capex maintenance covenants make-whole provision management buyout (MBO) Management Case management discussion & analysis (MD&A) management presentation sample mandatory amortization/repayment marginal tax rate margins market capitalization.
., for Q4 2008E) in the projection period and adjust the discounting for a quarter year. 105 Alternatively, ValueCo’s cost of debt could be extrapolated from that of its peers. We took comfort with using the current yield on ValueCo’s existing term loan because its current capital structure is in line with its peers. 106 A basis point is a unit of measure equal to 1/100th of 1% (100 bps = 1%). 107 The London Interbank Offered Rate (LIBOR) is the rate of interest at which banks can borrow funds from other banks, in marketable size, in the London interbank market. 108 An alternate approach is to use historical betas (e.g., from Bloomberg), or both historical and predicted betas, and then show a range of outputs. 109 For simplicity, we assumed that the market value of debt was equal to the book value. 110 Ibbotson estimates a size premium of 1.65% for companies in the Low-Cap Decile for market capitalization. 111 Depending on the long-term structural effects of the subprime mortgage crisis and ensuing credit crunch, including the ability to raise debt at historical levels, these long-established benchmarks may be revisited. 112 The “free cash flow” term (“levered free cash flow” or “cash available for debt repayment”) used in LBO analysis differs from the “unlevered free cash flow” term used in DCF analysis as it includes the effects of leverage. 113 The term “investment bank” is used broadly to refer to financial intermediaries that perform corporate finance and M&A advisory services, as well as capital markets underwriting activities. 114 These letters are typically highly negotiated among the sponsor, the banks providing the financing, and their respective legal counsels before they are executed. 115 To compensate the GP for management of the fund, LPs typically pay 1% to 2% per annum on committed funds as a management fee.
accounting loophole / creative accounting, airline deregulation, Andrei Shleifer, asset allocation, Bretton Woods, buy low sell high, capital asset pricing model, commodity trading advisor, corporate governance, discounted cash flows, diversification, diversified portfolio, fixed income, frictionless, high net worth, index fund, inflation targeting, invisible hand, John Meriwether, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market bubble, merger arbitrage, money market fund, new economy, passive investing, Paul Samuelson, price mechanism, purchasing power parity, risk tolerance, risk-adjusted returns, risk/return, Ronald Reagan, selection bias, shareholder value, Sharpe ratio, short selling, statistical arbitrage, survivorship bias, the market place, transaction costs, Y2K, yield curve, zero-sum game
See tax-rate changes leverage in pure-alpha strategy, 256-257, 261 leveraged buyouts (LBOs), 74 LIBOR (London Interbank Offered Rate), 257 lifecycle allocations for benchmark portfolio, 115-116 lifecycle funds case study, 152-157 liquidity trap, 221 LJE quantitative model, probabilities in, 134-136 local companies, 190 location cycles, 57-58 location effect, 186. See also elasticity elasticity and, 187-189 large-cap stocks and, 190-193, 202-204, 273-274 regional stock indices and, 198-202 small-cap stocks and, 193-198, 202-204, 213, 273-274 location portfolios, Sharpe ratio, 61-63 location-based asset allocation cyclical asset allocation and, 34-37, 125-126 optimal mixes, 24-25 London Interbank Offered Rate (LIBOR), 257 long-run asset allocation. See also strategic asset allocation (SAA) length of sample period, 285n optimal mixes, 40-43, 118, 127, 274-275 Long-Term Capital Management (LTCM) example, 228 low cost-managed index funds, 110 LTCM (Long-Term Capital Management) example, 228 M M&As (mergers and acquisitions), 77 market allocations for benchmark portfolio, 108-115, 266-269 312 market breadth, size cycles and, 168-170, 237-238 market portfolio, 3 market risk, 19 market valuation, CEM (capitalized earnings model), 90-94 modifying for earnings growth, 94-96 performance indicators and, 96-100 market-timing strategy, value-timing strategy versus, 243-250, 276-277 markets, correlation of, 186 mean return, Sharpe ratio, 2 mean-reversion hypothesis, 4, 18, 46, 59 mergers and acquisitions (M&As), 77 Meriwether, John, 228 Microsoft, 84 Milkin, Michael, 75-76 mobile factors, immobile factors versus, 187-189, 273-274 mobility, elasticity and, 208 monetary policy style cycles and, 55-56 tax rates and, 88-90 Monte Carlo simulations, 4-6 N national factor, 191 negative incentives, 81 new-economy view, mean-reversion hypothesis versus, 59 NIPA (National Income and Product Accounts), 77 Nixon, Richard, 89 nominal interest rate, 128 O-P oil prices global economy and, 219-224 location effect and, 200-201 supply shift and tax increase example, 216-219 OPEC (Organization of the Petroleum Exporting Countries), 220 P/E ratio, 79, 90-94 passive management, 164.
On the other hand, I have noticed absolute funds returns can exhibit temporary deviations from a trend, or can track the market or some aggregate returns. One simple way for investors to compensate for this is to demand an absolute strategy deliver a return in excess of the risk-free rate (such as the rate of short-term T-bills) close to or above the long-run rate of return. In practice, the average of the one-month London Interbank Offered Rate (LIBOR) plus 400 basis points is commonly used for the hurdle rate. LIBOR is a reference rate used by banks for lending. Surpassing the hurdle is clearly a sign of a superior investment strategy—one that delivers a higher return with lower volatility. The next step in the process is to determine whether a pure-alpha strategy can deliver the expected target rate of return. Looking at Table 14.2, one sees, over the 1997–2004 period, the average annual rate of return for the hurdle rate would have been 7.88 percent, a figure close to the long-run historical average of 8 percent for stocks.
The Production of Money: How to Break the Power of Banks by Ann Pettifor
Ben Bernanke: helicopter money, Bernie Madoff, Bernie Sanders, bitcoin, blockchain, borderless world, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, clean water, credit crunch, Credit Default Swap, cryptocurrency, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, distributed ledger, Donald Trump, eurozone crisis, fiat currency, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, interest rate derivative, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, light touch regulation, London Interbank Offered Rate, market fundamentalism, Martin Wolf, mobile money, Naomi Klein, neoliberal agenda, offshore financial centre, Paul Samuelson, Ponzi scheme, pushing on a string, quantitative easing, rent-seeking, Satyajit Das, savings glut, secular stagnation, The Chicago School, the market place, Thomas Malthus, Tobin tax, too big to fail
Bankers make decisions about the rate of interest on a loan based on their assessment of the riskiness of the borrower, and on the rate of return they seek for themselves, but also on what other creditors are offering borrowers in the market place. Given that the banking sector is oligopolistic, there is in reality very little competition and instead a great deal of collusion on decisions about rates. How rates are ‘fixed’ by private, commercial bankers The LIBOR – London Interbank Offered Rate – is critical to determining the rate of interest on $800 trillion–worth of global financial instruments, including millions of mortgages. In 2008 the Wall Street Journal began drawing attention to the manipulation of LIBOR. The scandal erupted in 2012 and brought to the attention of the general public, but also to economists and regulatory authorities, the role played by the British Bankers Association (a cartel) and back office bank staff – the ‘submitters’ – in ‘fixing’ the price of inter-bank loans.
The exposure of this fraud suddenly made clear that these rates were not determined by the ‘invisible hand’, the demand for or supply of money. Instead, the rate was fixed by back office staff determined to make money for the bank and to ensure their annual bonus exceeded the last year’s bonus. The Economist examined ‘The Rotten Heart of Finance’: The most memorable incidents in earth-changing events are sometimes the most banal. In the rapidly spreading scandal of LIBOR (the London Interbank Offered Rate) it is the very everydayness with which bank traders set about manipulating the most important figure in finance. They joked, or offered small favours. ‘Coffees will be coming your way,’ promised one trader in exchange for a fiddled number. ‘Dude. I owe you big time! … I’m opening a bottle of Bollinger,’ wrote another. One trader posted diary notes to himself so that he wouldn’t forget to fiddle the numbers the next week.
Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn
banking crisis, banks create money, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, labor-force participation, labour market flexibility, light touch regulation, liquidity trap, London Interbank Offered Rate, lump of labour, market bubble, market clearing, Martin Wolf, means of production, mobile money, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Ponzi scheme, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, seigniorage, shareholder value, Silicon Valley, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra, zero-sum game
For the large global banks based outside the United States, and therefore without domestic dollar deposits, the ability to tap these sources is normally taken for granted, as it is for the big US institutions whose lending and trading businesses vastly exceed their own deposits. It’s Still All About Trust The canary in the mineshaft leading up to the 2008 ﬁnancial market meltdown was that banks in the interbank-lending market began to get very nervous about the creditworthiness of one another and ramped up prices (the key one being the London Interbank Offered Rate [LIBOR]) while cutting back supply.The market froze up and has never become completely unfrozen since; it’s down 60 percent from its pre-crisis peak as I write.The original deterioration of mutual trust in the market was based on worries about which banks had big, illiquid positions in dud securities backed by US mortgages. Today, the culprit is called sovereign risk—the fear that some banks are sitting on government bonds that might become worthless or take a big haircut in the event of a default by Greece or other weak links in the euro system.The total collapse of the interbank-lending market is no longer viewed as an unthinkable event, as evidenced by dramatic recent actions by the ECB.
eBook <www.wowebook.com> 170 Index Global whirlwinds (continued) economic primacy, 113 European banking crisis ECB, 102–103 federal funds market, 102 Federal Reserve, 103 global money market, 102 interbank market, 101 interbank-lending market, 102 interest rate and currency risks, 101 investment-banking industry, 101 recession, 103 short-and medium-term credit, 101 short-term funding and liquidity, 101 sovereign risk, 102 steroids, 103 globalization, 113 global money pump, 103–105 global trade, zero-sum game ants and grasshoppers, 96 cheap TV deal, 94–95 Chinese Central Bank, 94 currency manipulation, 95–96 multilateral trade, 94 political demagoguery, 94 hegemon, 113–116 sustainable development, 112 technology vs. friction, 105–106 US global economic leadership, 112 US losing clout, 111–112 war, settlement risk, 108–109 Western decline acceleration, 113 Government-sponsored enterprises (GSEs), 17 Graham-Leach-Bliley Act, 36 Great Depression, 5, 44, 61 Great Moderation, 16–18, 21, 61 “Green” economy, 85 Growth-killing austerity, 111 H Home equity lines of credit (HELOCs), 16 I Industrial Revolution, 77 Inﬁnite customization, 68 J Joint-stock banking, 63, 76 L Laissez-faire economy, 84–86 Liberal arts, 132 Life after ﬁnance, 75 credit-driven economy, 76–77 death knell, consumer credit American optimism, 90 big data, 90 entrepreneurs starvation, 91–92 loan factories, 90 per-account/per-transaction, 90 securitization, 90 unbanking, 91 ﬁnancial repression Bretton Woods system, 79 capital exports and foreignexchange transactions, 79 captive domestic audience, 79 debt restructuring, 78 GDP, 79 government banks ownership, 79 industrial policy, 86 monopolies, 86 negative real interest rates, 78, 79 prudential regulation, 79 rules, 80 subsidized green energy, 86 tax raising and lowering, 81–82 World War II, 79 Government expenditure, 75–76 low interest rates, 77–78 political direction, credit and investment formal taxation, 82 government-run utility, 83 Japanese banks, 83 laissez-faire economy myth, 84–86 Index market-driven banking system, 83 winners and losers, 83–84 risky business amalgamation, 88 coincidence, 88 competition, 89–90 joint-stock banks, 87 often-contradictory rules and requirements, 88 private partnerships, 87 separation of functions, 87 shareholder-owned banks, 87 small-town banks, 87 Life-line banking, 70 R Liquidity trap, 72 Ring fencing, 88 London Interbank Offered Rate (LIBOR), 102 Rules-based regulation, 59, 61 M S “Market-centric” ﬁnancial system, 110 Real Time Gross Settlement (RTGS), 108 Regulation process “Anglo-Saxon” world, 36 balance sheets and trading desks, 35 deﬁnition, 36 ﬁnance deregulation, 35–36 Graham-Leach-Bliley Act, 36 Triple A–rated bonds, 37 “ultra-safe” money market mutual fund, 37 Regulatory arbitrage, 61 Resolution Trust Corporation (RTC), 31 Savings-and-loan (S&L) industry, 28, 30 Mass-market retail banking, 66 Securities and Exchange Commission (SEC) rules, 33 McKinsey Global Institute (MGI), 110 S&L industry.See Savings-and-loan industry Micro-regulation, 92 Ministry of International Trade and Industry (MITI), 83 Society for Worldwide Interbank Financial Telecommunications (SWIFT), 107 Moral hazard, 18 Straight-through procession, 107 N National Bank Act, 49 National Bureau of Economic Research (NBER), 78 O Outsourcing, 13 P Personal Consumption Expenditure (PCE), 90 Price discovery, 104 Principles-based regulation, 59 Printing money, 78 Professional/proprietary trading, 12 Subprime mortgage market, 66 T The Dodd-Frank Act, 49 Trillion-pound banking groups, 60 Troubled Asset Relief Program (TARP), 39 U US Federal Reserve, 6 V Volcker rule, 88 W Working capital, 11 171 Broken Markets A User’s Guide to the Post-Finance Economy Kevin Mellyn Broken Markets: A User’s Guide to the Post-Finance Economy Copyright © 2012 by Kevin Mellyn All rights reserved.
Bakken shale, bank run, Credit Default Swap, diversification, fixed income, Gordon Gekko, index fund, light touch regulation, locking in a profit, London Interbank Offered Rate, Long Term Capital Management, margin call, paper trading, peak oil, Ponzi scheme, risk tolerance, Ronald Reagan, side project, Silicon Valley, Sloane Ranger, sovereign wealth fund, supply-chain management, the market place
But the more time he spent observing the industry’s behavior in the various contract markets—known overall as derivatives because they were derived from simpler products like stocks and commodities—the more objectionable Gensler felt it was. The swindle that first captured his attention was the handling of an internationally regarded interest rate known as LIBOR, the acronym for the London Interbank Offered Rate, in London, which had little to do with commodities. But his sudden enforcement zeal spurred a crackdown on misconduct and sleaze in the contract market for raw materials. Late in 2010, Gensler hired David Meister, a trim, antsy father of two teenagers, to run the forgotten enforcement division. Meister was a partner at the prominent New York law firm Skadden, Arps, Slate, Meagher & Flom, where he represented securities firms in white-collar crime cases.
See also Delta Air Lines Delta hedging decisions and, 113, 208, 212–14 Delta refinery purchase and, 120 Jaffe, Amy Myers, 98 jet fuel hedging airlines’ need for, 106, 107–8 crude oil used for, 67, 78–79 for Emirates by Morgan Stanley, 77–83, 106 John, Elton, 134 JPMorgan charged by FERC, 226 Glencore-Xstrata merger and, 168, 172 Henry Bath & Son warehousing company and, 143 physical commodities business sale of, 226 Klein, Michael, 164–65, 166, 175, 177, 178 Lazard, 169, 170, 180 legal issues. See regulation and legal issues Lehman Brothers, Chapter 11 filed by, 43 Levin, Carl, 85–87 Lincoln, Blanche, 101 London Interbank Offered Rate (LIBOR) scandal, 190, 200 London Metal Exchange (LME) aluminum stockpiling complaints of, 141, 142, 144, 151 Goldman board seat secured by Cohn, 148 minimum load-out rate mandated by, 144, 152, 155 sued for violating antitrust laws, 156 Lukken, Walter, 92–93, 182 Mack, John commodity traders’ arrogance disliked by, 77 Glasenberg advised about Glencore-Xstrata merger by, 166 negotiation with Emirates management by, 81–83 Purchase, New York, office visited by, 76 as Rosneft director, 227 Managed Funds Association, 97 Marc Rich & Co.
asset-backed security, bank run, banking crisis, break the buck, Bretton Woods, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Doha Development Round, fear of failure, financial innovation, fixed income, housing crisis, income inequality, London Interbank Offered Rate, Long Term Capital Management, margin call, money market fund, moral hazard, Northern Rock, price discovery process, price mechanism, regulatory arbitrage, Ronald Reagan, Saturday Night Live, short selling, sovereign wealth fund, technology bubble, too big to fail, trade liberalization, young professional
ACRONYMS USED IN THE TEXT ABCP: asset-backed commercial paper AIG: American International Group AMLF: Asset-Backed Commercial Paper Money Market Fund Liquidity Facility ARM: adjustable-rate mortgage ASF: American Securitization Forum BofA: Bank of America CDO: collateralized debt obligation CDS: credit default swap(s) CIC: China Investment Corporation CPP: capital purchase program ECB: European Central Bank ESF: Exchange Stabilization Fund FDIC: Federal Deposit Insurance Corporation FHA: Federal Housing Administration FHFA: Federal Housing Finance Agency FSA: Financial Services Authority FSB: Financial Stability Board GAO: Government Accountability Office GDP: gross domestic product GSE: government-sponsored enterprise (Fannie Mae, Freddie Mac) HERA: Housing and Economic Recovery Act HUD: U.S. Department of Housing and Urban Development IASB: International Accounting Standards Board IMF: International Monetary Fund KDB: Korea Development Bank LIBOR: London Interbank Offered Rate LIBOR-OIS: London Interbank Offered Rate–overnight indexed swap LTCM: Long-Term Capital Management MAC: material adverse change MBS: mortgage-backed securities MLEC: Master Liquidity Enhancement Conduit NAV: net asset value NEC: National Economic Council OCC: Office of the Comptroller of the Currency OFHEO: Office of Federal Housing Enterprise Oversight OTC: over the counter PDCF: Primary Dealer Credit Facility PWG: President’s Working Group on Financial Markets S&P 500: Standard & Poor’s 500 Index SARS: severe acute respiratory syndrome SEC: Securities and Exchange Commission SED: Strategic Economic Dialogue SIV: structured investment vehicle TAF: Term Auction Facility TALF: Term Asset-Backed Securities Loan Facility TARP: Troubled Assets Relief Program TIAA-CREF: Teachers Insurance and Annuity Association of America and College Retirement Equities Fund TLGP: Temporary Liquidity Guarantee Program TSLF: Term Securities Lending Facility WaMu: Washington Mutual ACKNOWLEDGMENTS Writing On the Brink required me not only to live through the crisis the first time, but also to live through it again.
What made it special was our complete candor—laying all the cards on the table, determining where we had differences, and talking very directly about them. I kept Ben abreast of what I saw happening, passing along to him any market color I picked up from my conversations with senior bankers in the U.S. and around the world, including difficulties we’d begun to see in July with funding based on the London Interbank Offered Rate (LIBOR). By law, the Federal Reserve operates independently of the Treasury Department. Though we took care to observe this separation, Ben, Tim Geithner, and I developed a spirit of teamwork that allowed us to talk continually throughout the oncoming crisis without compromising the Fed’s independence. Ben was always willing to cooperate and a pleasure to work with. He is, easily, one of the most brilliant people I’ve ever known, astonishingly articulate in his spoken word and in his writing.
The Bankers' New Clothes: What's Wrong With Banking and What to Do About It by Anat Admati, Martin Hellwig
Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, break the buck, Carmen Reinhart, central bank independence, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversified portfolio, en.wikipedia.org, Exxon Valdez, financial deregulation, financial innovation, financial intermediation, fixed income, George Akerlof, Growth in a Time of Debt, income inequality, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Larry Wall, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nick Leeson, Northern Rock, open economy, peer-to-peer lending, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Satyajit Das, shareholder value, sovereign wealth fund, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra
In line with our previous assertion that runs do not come out of the blue, the withdrawals were concentrated in institutions that were known to be in trouble, such as U.S. investment banks, or that subsequent developments would show to be in trouble because they had excessive leverage, such as Dexia in France or Hypo Real Estate in Germany. However, less risky institutions such as Aareal Bank in Germany were also hit (see Expertenrat 2011). 13. As banks came to be perceived as very risky, interest rates for unsecured lending rose dramatically. One example is the behavior of the London interbank offered rate (LIBOR), an index for the rates that London banks charge each other in unsecured borrowing and lending. Before August 2007, the difference between LIBOR and an interest rate for lending that was considered riskless was around 10 basis points (0.01 percent). On September 14, 2007, the day that the Bank of England announced emergency funding for Northern Rock, one of the largest mortgage lenders in the United Kingdom, the difference reached 85 basis points.
Instead, it’s increasingly evident that these institutions instead [sic] elevate the interests of the most powerful interest groups over collective interests, and neglect long-term primary needs.” 67. See Norimitsu Onishi and Ken Belson, “Culture of Complicity Tied to Stricken Nuclear Plant,” New York Times, April 26, 2011. THIRTEEN Other People’s Money 1. For the full letter, see http://www.bbc.co.uk/news/business-18678731, accessed October 15, 2012. 2. LIBOR, the “London interbank offered rate,” is not actually quoted in any market but is based on interest rates reported by participating banks. If traders manipulate their reports, this can change the interest on all LIBOR-related debts—for example, on any debt with interest specified at a variable rate equal to “LIBOR + 1 percent.” The traders themselves profited from the way the lower rates affected their own positions in derivatives or the costs attributed to the funds they were employing.
See bank lending; bank loans; borrowing Lessig, Lawrence, 319n9, 320n22, 324n46, 325n49, 326n56, 326n60, 331n25, 332n35 Leuz, Christian, 258n26 “level playing field” rhetoric, 10, 194–99 leverage: of corporations, 27; created by borrowing, 17, 19, 107–8; effects on shareholders, 108; excessive, in financial crisis of 2007–2009, 232n17; in mortgages, 19, 21–22, 107–8, 118–19; regulation of (See leverage ratio); and required return on equity, 108; risk-weighting approach and, 184–85 leveraged buyouts (LBOs), 234n26 leverage ratio: in Basel III, 177–78, 183, 235n28, 308n42; definition of, 308n42; resistance to, 183, 312n58, 325n47 Levin, Carl, 231n13, 259n52 Levitin, Adam J., 309n50, 335n46 Levitt, Arthur, 204 Lewis, Michael, 60, 240n4, 253n38, 253n42, 259n29, 259n34, 261n51, 262n53, 282n14, 285n37, 290n27, 297n33, 300n49, 320n17, 329n6, 329n8, 331n20 liabilities, in balance sheets, 48, 48f, 248n4 liability: for covered bonds versus mortgage-backed securities, 254n48; extended, 31; limited, 25–26, 30–31, 240n10; unlimited, 30–31, 153 LIBOR (London interbank offered rate): definition of, 208, 256n13, 328n2; in financial crisis of 2007–2009, 256n13; scandal involving manipulation of, 208, 209, 215, 276n5, 328n2, 328n4 light-touch regulation, in UK, 204 Liikanen Commission, 90, 270nn34–35 limited-liability businesses, 25–26; banks as, 30–31; versus extended liability, 31; forms of, 240n10; rise of, 30; versus unlimited liability, 30–31. See also corporation(s) Lincoln Savings and Loan Association, 252n35 liquid assets, definition of, 295n24; in liquidity regulations, 92–93, 272nn44–45 liquidation(s): versus bankruptcy, 37; as normal in market economies, 38 liquidity: central banks’ role in, 39–40, 63, 179, 256n13; creation of, by banks, 154, 295n23; definition of, 250n17; “need” for, 153–58; in plumbing metaphor, 210; transformation of, by banks, 155–56, 158–59, 250n17, 296n31 liquidity coverage ratio, 92–93 liquidity problems (illiquidity), 38–40; approaches to controlling, 92–94; in bank runs, 52, 93; capital regulation’s impact on, 95; central banks’ support in, 39–40, 63, 179, 256n13; contagion mechanisms in, 63; definition of, 38; in financial crisis of 2007-2009, 40, 209–12, 238n46, 246n15; guarantees and, 93–94; in maturity transformation, 159; money creation and, 158; in money market fund runs, 63; of mortgage-related securities, 156–57, 297n34; narrative of, 209–12, 330nn12–13, 330n18; pure (temporary), 32, 38–39; reserve requirements and, 92, 272n41, 272n43; safety nets for, 39–40, 93, 210–11; versus solvency problems, dangers of, 93, 152 liquidity transformation, 155–56, 158–59, 250n17, 296n31 living wills, for financial institutions, 77, 263n65 loans.
Derivatives Markets by David Goldenberg
Black-Scholes formula, Brownian motion, capital asset pricing model, commodity trading advisor, compound rate of return, conceptual framework, Credit Default Swap, discounted cash flows, discrete time, diversification, diversified portfolio, en.wikipedia.org, financial innovation, fudge factor, implied volatility, incomplete markets, interest rate derivative, interest rate swap, law of one price, locking in a profit, London Interbank Offered Rate, Louis Bachelier, margin call, market microstructure, martingale, Myron Scholes, Norbert Wiener, Paul Samuelson, price mechanism, random walk, reserve currency, risk/return, riskless arbitrage, Sharpe ratio, short selling, stochastic process, stochastic volatility, time value of money, transaction costs, volatility smile, Wiener process, Y2K, yield curve, zero-coupon bond, zero-sum game
TABLE 7.9 Buying or Selling Spot Eurodollars Placing (P) or Taking (T) Position, Explicit Long (EL) or Explicit Short (ES) Borrowing (B) or Lending (L) Buy Eurodollars Sell Eurodollars n CONCEPT CHECK 8 Consider a bank in the spot ED market that borrows $100,000,000. a. At what annualized rate would the bank borrow? b. Suppose the bank immediately lends out the $100,000,000. What annualized rate would the bank earn on its investment? c. Is the above set of transactions an arbitrage opportunity? 7.6.3 LIBOR3, LIBID3, and Fed Funds The annualized lending rate corresponding to a 3-month Eurodollar time deposit is called LIBOR3 (London Interbank Offered Rate). Annual in the world of LIBOR means 360 days, by market convention. A 3-month (90 days) Eurodollar time deposit earns interest at the rate LIBOR3*(90/360) =LIBOR3/4. FINANCIAL FUTURES CONTRACTS 251 So, on $1,000,000 that amounts to $1,000,000*LIBOR3/4. Say LIBOR3= 3%. Interest would be, 1,000,000 * .03 = $1,000,000 * .0075 4 = $7,500 On a Eurodollar placement of US$50,000,000 that amounts to 50*$7500= $375,000 which is not a bad 3 months work.
224; bank borrowing in spot Eurodollar (ED) market 250; ‘buying’ and ‘selling’ Eurodollar (ED) futures 256; calculation of adjusted hedge ratios 245; solution to 269; calculation of optimal (riskminimizing) hedge ratio 240; cash settlement and effective price on S&P 500 spot index units 234; solution to 269; exchange rate risk, currency positions and 218; solution to 268; foreign exchange (FX) risk and jet fuel market 219; solution to 268–9; underlying spot 3-month Eurodollar (ED) time deposit 261; solution to 270; contract month listings 214, 215, 228; contract offerings 227–8; contract size 214, 215, 227, 228; contracts offered 257–8; currency forward positions vs. currency futures positions 220; currency futures 213–17; contract speciﬁcations 213–15; pricing vs. currency forward pricing 225; quote mechanism, future price quotes 216–17; risk management strategies using 217–24; daily price limits 228, 229; daily settlements 216, 260; diversiﬁable risk 225; dividend-adjusted geometric mean (for S&P 500) 227; dollar equivalency 227, 234, 239–40; economy-wide factors, risk and 225–6; effective payoff 220, 233; EFP eligibility 214; Eurodollar (ED) deposit creation 253; Eurodollar (ED) futures 220–1, 245, 246, 249, 250, 252–64; cash settlement, forced convergence and 258–61; contract speciﬁcations 254–5; forced convergence, cash settlement and INDEX 258–61; open positions, calculation of proﬁts and losses on 262–4; quote mechanism 256–8; exchange rate risks and currency futures positions 217–20; Lufthansa example 217–20; exchange rule 214, 228; exchange-traded funds (ETFs) 226; exercises for learning development 266–8; Fed Funds Rate (FFR) 251; Federal Funds (FF) 249–50, 251, 252; Federal Reserve system (US) 249; ﬁnancial futures contracts, selection of 213; FLIBOR (Futures LIBOR) 256, 257, 262, 263, 264, 267–8; forced conversion of Eurodollar (ED) futures 260; foreign exchange (FX) reserves, currency composition of 247–8; forward price change, present value of 242; hedging 224–5; hedging a cross hedge 244; issues in 224–5; quantity uncertainty 224–5; holding period rate of return 237; idiosyncratic risk 225; index points 226; interest rate derivatives (IRDs) 254; International Monetary Fund (IMF) 246; JPY/USD futures 213–15; key concepts 265–6; last trade date/time view calendar 214, 228; lending (offering) Eurodollars (EDs) 249–50; liabilities, Eurodollars (EDs) and 246; LIBID (London Interbank Bid Rate) 249–50, 252; LIBOR (London Interbank Offered Rate) 249, 250–4, 262, 263–4; Federal Funds (FF) vs. 251–2; liquidity and 220, 222, 231, 237, 252, 258; lock-in characteristics 220, 233; market risk 225–6; minimum price increment 214, 215; naive hedge ratio (NHR) 234, 240–1, 243; open interest 258; placing Eurodollars (EDs) 248–9; position accountability 214, 215, 228, 229; raw price change, present value of 243; realized daily cash ﬂows, creation of 243; risk management strategies using currency futures 217–24; risk management using stock index futures 231–45; cross-hedging 243–5; monetizing S&P 500 Spot Index 231–4; naive hedge ratio, adjustment for risk- 645 minimizing hedge ratio 239–41; non S&P 500 portfolios, adjustment of hedge for 243–5; pricing and hedging preliminaries 231; proﬁts from traditional hedge 235–6; risk, return analysis of traditional hedge 236–8; risk minimizing hedge using forward vs. futures contracts 241–3; risk-minimizing hedging 238–9; rolling hedge strategy: efﬁcient market hypothesis (EMH) 223; interpretations of proﬁts from rolling hedge 221–3; Metallgesellschaft example 223; numerical example of 223–4; rule book chapter 228; settlement procedure 214, 228, 229, 258–9; S&P 500 Fact Sheet 226; S&P 500 Futures 228; spot commodities, S&P 500 futures contracts as 233–4; spot Eurodollar market 245–54; Eurodollar time deposits, creation of 252–4; spot 3-month Eurodollar time deposits 246–8; spot trading terminology 248–50; Stigum’s Money Market (Stigum, M.) 252; stock index futures 225–30; commentary 230; S&P 500 futures quotes, quote mechanism for 230; S&P 500 Spot Index 225–7; S&P 500 Spot Index, effective payoff on monetization of 233; S&P 500 Spot Index, monetization of 231–4; S&P 500 Stock Index Futures Contract Speciﬁcations 227–9; tailing the hedge 241–2; taking Eurodollars (EDs) 249; ticker symbol 214, 215, 228, 229, 261; timing in Eurodollar (ED) futures 257; tick size 228, 229; trading hours 214, 228; traditional hedge, risk and return analysis on 236–8; basis risk 238; holding period rate 237; intermediate execution, basis risk and 237–8; liquidity advantage in execution 237; unallocated foreign exchange (FX) reserves 248 ﬁnancial innovation using European PutCall Parity 401–5; American Put-Call Parity (no dividends) 403–5; generalized forward contracts 401–3 ﬁnancial institutions and use of swaps 299–301 646 INDEX ﬁnite-maturity ﬁnancial instruments, options as 20, 354 ﬁxed leg in interest-rate swaps 293 ﬁxed payments in interest-rate swaps 278–9 ﬁxed-rate mortgages 7 FLIBOR (Futures LIBOR): ﬁnancial futures contracts 256, 257, 262, 263, 264, 267–8; interest-rate swaps 278, 287 ﬂoating leg in interest-rate swaps 293 ﬂoating payments in interest-rate swaps 279–80 ﬂoating-rate bond implicit in swap 306 ﬂoating-rate payments as expected cash ﬂows 306 ﬂoor-brokers 140 ﬂoor-traders 140 foreign currencies: forward prices on 24–5; futures prices on 25–6; see also currency futures foreign economy (FE) 103–4 foreign exchange (FX) forward contracts: example of pricing 107–9; pricing using no-arbitrage 106–7 foreign exchange (FX) markets, price quotes in 103–5 foreign exchange (FX) rates (New York, March 11, 2014) 30–1 foreign exchange (FX) reserves, currency composition of 247–8 foreign exchange (FX) risk 3–5 forward contracts: differences between futures contracts and 122; on dividendpaying stocks, pricing with no-arbitrage 100–3; hedging with 37, 43–5; on stocks with dividend yield, pricing with net interest model 99–100; swaps as strips of 274–8; valuation of (assets without dividend yield): default on 76; interpretation via synthetic contracts 78–82; leverage and 80–2; no up-front payments on 75; payment on maturity, expectation of 81; price vs. value for 73; valuing at expiration 74–5; valuing at initiation 75–8 forward market contracting: buying forward 7–8; Clearing House intermediation 14–15; concept checks: controlling for counterparty risk 12–13; exploration of forward rates in long-term mortgage market 9–10; exploration of spot rates in long-term mortgage market 11; solution 29; intermediation by Clearing House 15–16; solution 29–30; spot markets, dealing with price quotes in 6–7; counterparty risk 11; default 11–12; exit mechanism 15–16; features of 8; ﬁxedrate mortgages 7; forward agreement, terms of 8; forward contracts, differences between futures contracts and 122; forward market 8; forward prices 9, 24–5; forward transactions 8; historical data, checking on 9–10; interest-rate risk management 9–10; intermediation 13–14, 14–15; liquidity, enablement of 16; locked-in prices 12; market levels 11; market organization, importance of 13, 14; obligations, transfer of 16; offsetting trades 15–16; overnight averages 11; price quotes in forward markets 9–11; problems with forward markets 11–13; ‘reversing’ of trades 15–16; short positions 7; SouthWest Airlines, case example 12–13; spot, forward, and futures contracting 7–13; standardization 14; transfer of obligations 16; see also hedging with forward contracts; valuation of forward contracts forward prices 9, 24–5; change in, present value of 242; no-arbitrage, forward pricing with 102–3 front stub period 294 fundamental theorem of asset pricing number one (FTAP1): equivalent martingale measures (EMMs) 509, 511–12, 517, 528–9, 530, 532, 533; model-based option pricing (MBOP) 450, 451, 452; option pricing in continuous time 540; risk-neutral valuation 596–7, 601–2, 605, 606, 624, 631 fundamental theorem of asset pricing number two (FTAP2): binomial option pricing model (BOPM) 490; modelbased option pricing (MBOP) 452; INDEX option pricing in continuous time 540; risk-neutral valuation 596–7, 601–2, 605, 606, 624, 631; risk-neutral valuation and another version of 606 future value (FV) 69–70, 382, 386, 390, 395 Futures Commission Merchant (FCM) 122, 123, 124, 125, 137, 140 futures contracts: futures market contracting 17; market organization for: ‘buying’ and ‘selling’ of 126–7; daily value of 146; differences between forward contracts and 122; futures price and 127; market participants 122–5 futures market contracting 17–26; concept check, price quotes in futures markets 19; contract size 19; contract speciﬁcations 17, 18–19; delivery dates 19; fancy forward prices 19, 25; futures contract 17; futures market 17; futures prices 17, 25–6; futures transaction 17; key deﬁnition, futures contract 17; mapping out spot, forward, and futures prices 20–6; ‘Open Outcry Futures’ 19; price quotes in futures markets 17–19; seller’s options 17; as solution to forward market problems 13–16; volatility (uncertainty) 22; see also hedging with futures contracts; market organization for futures contracts futures trading: hedging with forward contracts 35; market organization for futures contracts: cash ﬂow implications of 144; daily settlement, perspectives on 144; delivery obligations 142; offsetting trades 142–4; phases of 125–6 gap management problem, solutions for 300–1 Gaussian distributions 543, 546, 548, 557, 565, 577 general equilibrium (GE) 453; models of, risk-neutral valuation and 615 generalized forward price 402 geometric Brownian motion (GBM) 553–61; continuous version 559–61; discrete version 553–9 647 Girsanov’s theorem 605 Globex and Globex LOB 134–6 Globex trades, rule for recording of 135 Gold pricing on London Bullion Market 20–3 guaranteeing futures obligations 139–41 hedge ratio: dollar bond position and 478; model-based option pricing (MBOP) and 455 hedging: ﬁnancial futures contracts 224–5; hedging a cross hedge 244; issues in 224–5; quantity uncertainty 224–5; hedged position proﬁts, graphical method for ﬁnding 55; hedgers 37; hedging deﬁnitions 168; minimum variance hedging 185–8; estimation of risk minimization hedge ratio 187–8; OLS regression 187–8; risk minimization hedge ratio, derivation of 186–7; motivation for hedging with forward contracts 33–7; objective of 167–8; as portfolio theory 165–8; reverse hedge 618, 620, 621; riskless hedge 607, 616, 620, 628, 632; rolling hedge strategy: efﬁcient market hypothesis (EMH) 223; interpretations of proﬁts from rolling hedge 221–3; Metallgesellschaft example 223; numerical example of 223–4; short hedge 168; synthesis of negative correlation, hedging as 165–7 hedging a European call option in BOPM (N=2) 477–85; complete hedging program (for BOPM, N=2) 484–5; concept check, value conﬁrmation 485; hedge ratio and dollar bond position, deﬁnition of (step 2) 478; parameterization (step 1) 477–8; replicating portfolio, construction of (step 3) 478–84; concept check: interpretation of hedge ratio 482; down state, replication in 481; hedge ratio, interpretation of 482–3; replication over period 2 (under scenario 1) 479–82; replication under scenario 2 (over period 2) 484; scenarios 478–9; solving equations for ?
and B 481; solving for 648 INDEX dollar position in bonds under scenario 1 (over period 2) 483; up state, replication in 480 hedging with forward contracts 33–64; cash commodity prices 35; combinations of positions 50; combining charts to see proﬁts from hedged positions 54–5; commitment prices 41; concept checks: charting payoff to long forward position 39; solution to 62; charting payoff to short forward position 42; solution to 62; charting proﬁts to fully unhedged position 45; solution to 63; charting proﬁts to long spot position sold forward 49; payoff per share to long forward position 39; solution to 61; payoff per share to short forward position 42; proﬁts to fully naked (unhedged) short forward position 50; solution to 64; proﬁts to long spot position sold forward 48–9; proﬁts to naked long spot position 45; wheat price volatility, dealing with 36; decision-making process, protection of potential value 36–7; exercises for learning development of 56–61; forward contracts 37; hedging with 43–5; fully hedged current long spot position, proﬁts to 47–9; fully hedged position, adding proﬁt tables to determine proﬁts from 50–4; futures trading 35; hedged position proﬁts, graphical method for ﬁnding 55; hedgers 37; individual stock forwards: long position 38–9; short position 41–3; key concepts 56; long forward position, payoff to 37–9; motivation for 33–7; naked (unhedged) forward contracts 41; naked (unhedged) long spot position, proﬁts to 45–6; payoff position 37; payoff to long forward position in IBM 40; payoff to short forward position in IBM 43; proﬁt from fully hedged spot position in wheat 53; proﬁts from fully naked (unhedged) spot position in wheat 51; proﬁts from short forward position in wheat 52; proﬁts to long spot position sold forward 49; proﬁts to naked (unhedged) long spot position 46; risk aversion 37; scenarios: adding proﬁt tables to determine proﬁts from fully hedged position 52–4; hedging with forward contracts 44–5; long position contracts 38–9; short position contracts 42; selling a forward contract 40–1, 47–8; settlement price 35; short forward position, payoff to 39–43; spot prices 34–5; uncertainty (volatility), unhedged positions and 45; wheat price uncertainties, dealing with 33–7 hedging with futures contracts 163–209; backwardation, contango and 198–9; basis risk vs. spot price risk 178–82; calendar spreads 199; carrying charge hedging 188–93; convergence, implications for 189; equilibrium (noarbitrage) in full carrying charge market 190–3; overall proﬁts on 189; concept checks: bond equivalent yield (BEY) of actual T-bill 167; solution to 207–8; construction of risk-free arb if r > 0 with no dividends 173; solution to 208; effect of narrowing basis in traditional short hedge 178; solution to 208–9; effect of widening basis in traditional short hedge 176; failure of traditional hedging 184; solution to 209; proﬁts in traditional short hedge and the basis 172; veriﬁcation arb is arb without noninterest carrying charges and is riskless 192–3; solution to 209; veriﬁcation of no current cost in arb 190; veriﬁcation of riskless arb 191; contango and backwardation 198–9; convergence of futures to cash price at expiration 189; correlation effect 165–6; cost-of-carry model, spread and price of storage for 195; equilibrium forward pricing, comparison with equilibrium futures pricing 193–5; equilibrium (no-arbitrage) in full carrying charge market 190–3; classical short selling a commodity 192; Exchange Traded Funds (ETF) 191–2; formal arbitrage opportunity 192; noninterest carrying changes, arb without 192–3; setting up arb 190; unwinding INDEX arb 190–2; exercises for learning development of 205–7; hedging as portfolio theory 165–8; hedging deﬁnitions 168; informational effects 181–2; inter-commodity spreads 199; inter-market spreads 199; interestadjusted marginal carrying costs 196; key concepts 204; long vs. short positions 164; marginal carrying charges 188; minimum variance hedging 185–8; estimation of risk minimization hedge ratio 187–8; OLS regression 187–8; risk minimization hedge ratio, derivation of 186–7; non-traditional (-for-one) hedging theory 182–8; objective of hedging 167–8; OLS regression 181–2, 187–8; one-for-one theory with basis risk 174–8; non-constant basis example with basis narrowing 177; non-constant basis example with basis widening 175–6; one-for-one theory with no basis risk 168–71; basis, concept of 170–1; consistency with no-arbitrage 172–4; constant basis example 168–71; with dividends, r > 0 and r=p, case of 173–4; no dividends and r=0, case of 172–3; speculation on the basis 171; perfectly negatively correlated asset returns 166; portfolio theory, hedging as 165–8; portfolio variance, calculation of 179–81; proﬁts in one-for-one short hedge and basis 171–2; risk reduction with (-forone) hedging 183–5; risk reduction with traditional hedging 179–82; informational effect 181–2; OLS regression 181–2; portfolio variance calculation 179–81; selling hedge 168; short hedge 168; spread basis, deﬁnition of 200–1; spreads as speculative investment 199–203; stock index futures contracts, introduction of 167; storage and price (cost) of 195–7; subsequent inventory sale price, locking in of 195; synthesis of negative correlation, hedging as 165–7; synthetic risk, diversifying away of 167; synthetic treasury bill vs. actual bill 165; systematic, market risk 649 after diversiﬁcation, protection against 168; transportation across time, storage as 195; treasury bill synthesis 166–7 Heston volatility model 587–8 historical data, checking on 9–10 holding period rate of return 237 idiosyncratic risk 225 immediate exercise value 330 implicit bonds 303, 304; implicit ﬂoatingrate bond, valuation of 308 implicit short positions 340 In-the-Money calls 337 In-the-Money covered call writes 421–4 incomplete markets 450–1 independent securities and risks 600 index points 226 individual stock forwards: long position 38–9; short position 41–3 inﬁnitesimal intervals 93 informational effects 181–2 instantaneous yields 90–2, 93–4 insurance features, options and 327 inter-commodity spreads 199 inter-market spreads 199 interest-adjusted marginal carrying costs 196 interest rate derivatives (IRDs): ﬁnancial futures contracts 254; interest-rate swaps 278–80; paying ﬁxed in 278–9; receiving variable in 279–80 interest-rate risk management 9–10 interest-rate swaps 273–319; back stub period 294; cash ﬂows for annual rate swap 302; cash ﬂows in nonintermediated swaps 282–4; commodity forward contracts: paying ﬁxed and receiving ﬂoating in 276; as single period swaps 275–6; concept checks: calculation of implied forward rates (IFRs) 310; solution to 319; graphical representation of swap’s cash ﬂows 283; solution to 318; paying ﬁxed in an interest rate derivative (IRD) 279; solution to 317–18; receiving variable in an interest rate derivative (IRD) 280; strip of forward contracts, short’s position in 650 INDEX 278; solution to 317; swapping ﬁxed for ﬂoating payments 276; solution to 317; credit spreads 298–9; currency swaps, notional value of 274; dealer intermediated plain vanilla swaps 284–93; arbitraging swaps market 292–3; asked side in 286; bid side in 285; dealer’s spread 286; example of 284–6; hedging strategy: implications of 291–2; outline of 288–90; plain vanilla swaps as hedge vehicles 286–92; dealer’s problem, ﬁnding other side to swap 294–8; asked side in 295; bid side in 295; credit spreads in spot market (AA-type ﬁrms) 296; dealer swap schedule (AA-type ﬁrms) 295; selling a swap 296; swap cash ﬂows 298; synthetic ﬂoating-rate ﬁnancing (AA-type ﬁrms) 297; transformation from ﬁxed-rate to ﬂoating rate borrowing 297–8; duration 300; effective date 293; Eurodollar (ED) futures 278; strips of 280–1; exercises for learning development of 315–16; ﬁnancial institutions and use of swaps 299–301; ﬁxed leg 293; ﬁxed payments 278–9; FLIBOR (Futures LIBOR) 278, 287; ﬂoating leg 293; ﬂoating payments 279–80; ﬂoating-rate bond implicit in swap 306; ﬂoating-rate payments as expected cash ﬂows 306; forward contracts, swaps as strips of 274–8; front stub period 294; gap management problem, solutions for 300–1; generic example, ﬁve-year swap 294; implicit bonds 303, 304; implicit ﬂoating-rate bond, valuation of 308; interest rate derivatives (IRDs) 278–80; paying ﬁxed in 278–9; receiving variable in 279–80; key concepts 315; LIBOR (London Interbank Offered Rate) 274–5, 278, 282, 293, 297, 303, 304, 306, 307, 309–10, 311–13; yield curve (spot rates) 304; matching principle 300; mortgage bonds 279; non-dealer intermediated plain vanilla swaps 281–4; notional value of 274; over-the-counter (OTC) bilateral agreements 278; par swap rate 294, 301; paying ﬁxed 293; in interest rate derivatives (IRDs) 278–9; and receiving ﬂoating in commodity forward contracts 276; plain vanilla interest-rate swaps 274; dealer intermediated swaps 284–93; nondealer intermediated swaps 281–4; pricing a swap 294; quality spreads 299; receiving ﬂoating 293; receiving variable in interest rate derivatives (IRDs) 279–80; reset date 293; resetting ﬂoating rate 293; selling short 293; single period swaps, commodity forward contracts as 275–6; strip cash ﬂows, generation of 277; strips of forward contracts 277–8; swap cash ﬂows: decomposition into implicit bonds 303; graphical representation of 318; swap spread 294; swapping ﬁxed for ﬂoating payments 276; swaps as strips of forward contracts 274–8; swaps pricing 301–14; example of 301–3; ﬁxed-rate bond, valuation of 303–5; ﬂoating-rate bond, valuation of 305–8; implied forward rates (IFRs) 309–11; par swap rate 301; interpretations of 311–14; swap at initiation, valuation of 308–9; synthetic ﬁxed-rate bond 291–2; synthetic ﬁxedrate ﬁnancing 290; tenor of swap 293; terminology for 278–81, 293–4; trade date 293; valuation of ﬂoating-rate bonds prior to maturity 306–7; zero sum game, swaps as?
The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal by Ludwig B. Chincarini
affirmative action, asset-backed security, automated trading system, bank run, banking crisis, Basel III, Bernie Madoff, Black-Scholes formula, buttonwood tree, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, discounted cash flows, diversification, diversified portfolio, family office, financial innovation, financial intermediation, fixed income, Flash crash, full employment, Gini coefficient, high net worth, hindsight bias, housing crisis, implied volatility, income inequality, interest rate derivative, interest rate swap, John Meriwether, labour mobility, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low skilled workers, margin call, market design, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Northern Rock, Occupy movement, oil shock, price stability, quantitative easing, quantitative hedge fund, quantitative trading / quantitative ﬁnance, Ralph Waldo Emerson, regulatory arbitrage, Renaissance Technologies, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Sharpe ratio, short selling, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, survivorship bias, systematic trading, The Great Moderation, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond
Morgan and legal opinion on bankruptcy of leverage liquidity pool liquidity stress test results losses of market imbalances and moving business strategy profits of real estate exposure Repo repo imbalance and Reserve Primary Fund and run on Russian default and size of stock price storage business strategy swap imbalance and Lehman Brothers Bank Lenders: of last resort marking to market by mortgage, and housing bubble Lessons from financial crisis: arbitrage conflicts of interest counterparty interaction derivatives hedge funds interconnectedness and crowds leverage overview of policy lessons risk management systemic risk and “too big to fail,” Lessons from LTCM failure: compensation contingency capital counterparties and clearinghouses counterparty due diligence Fed as coordinator of last resort interconnected crowds leverage overview of quantitative theory regulation size of firms and “too big to fail,” spread the love VaR Leverage: capital ratio and dangers of of investment banks lessons from financial crisis at LTCM Leveraged bank loans Levitt, Arthur Lewis, Joe Lewis, Ken LIBOR (London Interbank Offer Rate) Liebowitz, Martin Liew, John Lim, Steven Liquidity, price of during crisis Liquidity risk Liquid securities London Interbank Offer Rate (LIBOR) Long swap spread trade Long-Term Capital Management (LTCM). See also Lessons from LTCM failure; Trades of LTCM Buffett hostile offer causes of failure consolidated balance sheet consortium bailout copycat firms core trading strategies correlation and daily profit and loss early success of fate of investors founding partners J.P.
LTCM typically looked at LIBOR versus repo before making that trade, and might have avoided it if the expected financing gains were too small compared with the spread.3 (A repo transaction is collateralized lending: One party lends cash to another party in exchange for a bond. The repo rate is the interest rate LTCM paid on the cash it borrowed in exchange for a bond offered to a counterparty as collateral. LIBOR is an acronym for the London Interbank Offer Rate. This is the interest rate that LTCM received on the swap in a long swap spread transaction.) If the spread between received LIBOR and paid-out repo stays wide, the trade is more profitable, even if the swap spread moves against the position. LTCM traders considered how they thought the LIBOR-repo spread would evolve over time, as this would create future financing terms. If the LIBOR traded above repo and LTCM believed that this would continue into the foreseeable future, then going long the swap spread looked favorable on a financing basis.
She lost everything in 2009, undone by her own greed.45 Adjustable-rate mortgages (ARMs) were another way to make home ownership more affordable. As its name implies, an ARM’s interest rate varies with interest rates in the overall economy. Hybrid ARMs were common during the housing bubble. These had a fixed interest rate for some period of time—perhaps a year or more—then charged a variable rate pegged to a reference index rate such as U.S. Treasury yields, the Fed Funds rate, or the London Interbank Offer Rate (LIBOR). A 2/28 hybrid ARM was a common offering. For the first two years, this loan’s monthly payments were lower than monthly payments would have been for a standard 30-year fixed-rate mortgage for the same amount. To make up for this, payments must be higher after year two, even if the reference interest rate doesn’t move. If the reference interest rate goes higher, borrowers would make even higher mortgage payments.
In FED We Trust: Ben Bernanke's War on the Great Panic by David Wessel
Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, Black Swan, break the buck, central bank independence, credit crunch, Credit Default Swap, crony capitalism, debt deflation, Fall of the Berlin Wall, financial innovation, financial intermediation, fixed income, full employment, George Akerlof, housing crisis, inflation targeting, information asymmetry, London Interbank Offered Rate, Long Term Capital Management, market bubble, money market fund, moral hazard, mortgage debt, new economy, Northern Rock, price stability, quantitative easing, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, savings glut, Socratic dialogue, too big to fail
The purpose — unlike nearly everything the Fed had done for decades — was not to lower the overall level of interest rates in the economy. That’s what changes in the federal funds rate were supposed to do. The purpose was instead to reduce an important gap once of concern only to bond geeks: the spread between Fed-influenced rates and the rates banks were charging one another for loans, the London Interbank Offered Rate (LIBOR). This spread usually was a few hundredths of a percentage point. By early December, though, it had widened to around a full percentage point — a huge move, though not nearly as wide as it would get later. Basically, the gap revealed that banks were so wary of one another and so worried about their own balance sheets that they were hoarding cash instead of lending it out. And the interest rates their customers paid on many of the loans they had made in the past were tied to the now-rising LIBOR rate.
res=9807E1DD1F3AE633A25752C0A9629C946296D6CF CHAPTER 3: AGE OF DELUSION 50 only the third time: Press release, Board of Governors of the Federal Reserve System, February 3, 2006. http://www.federalreserve.gov/newsevents/press/other/ 20060203b.htm 50 “Alan Greenspan is perhaps” The White House, “President Attends Swearing-In Ceremony for Federal Reserve Chairman Ben Bernanke,” February 6, 2006. http://georgewbush-whitehouse.archives.gov/news/releases/2006/02/ 20060206.html 51 Bernanke’s Dashboard: From publicly available sources. Price of oil is spot price for West Texas Intermediate Crude. Unemployment is latest available on date shown. Financial stress indicator is spread between London Interbank Offered Rate (LIBOR) and overnight indexed swaps. 51 During the 2000: Joshua Cooper Ramo, “After Greenspan: The Taylor Rule?” Time, February 26, 2001. http://www.time.com/time/magazine/article/ 0,9171,999303,00.html 51 Richard Fisher: Personal communication, Richard Fisher. 52 “Jim Baker didn’t” Bob Woodward, Maestro (New York: Simon & Schuster, 2000), 19. 52 “How did my Jewish uncle” Robert B.
Capitalism: Money, Morals and Markets by John Plender
activist fund / activist shareholder / activist investor, Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, bonus culture, Bretton Woods, business climate, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, Fractional reserve banking, full employment, God and Mammon, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, labour market flexibility, liberal capitalism, light touch regulation, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, mass immigration, means of production, Menlo Park, money market fund, moral hazard, moveable type in China, Myron Scholes, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, price stability, principal–agent problem, profit motive, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, Veblen good, We are the 99%, Wolfgang Streeck, zero-sum game
At the same time, the revelation in 2013 that JP Morgan had been obliged to put aside a $23 billion reserve for litigation arising from mis-selling mortgages – a euphemism for duping people – underlined the depressing fact that the culture of the banking industry was fundamentally rotten. The biggest banks in the US and Europe appear to have suffered an extraordinary collapse of ethical standards in the light not only of widespread mis-selling but of the numerous criminal charges brought against them for rigging the interbank lending rates used in global financial markets such as the London Interbank Offered Rate; rigging the foreign exchange market; criminal violations of the US sanctions regime against Iran; criminal drug money laundering; and facilitating tax evasion. The economist J. K. Galbraith had an interesting theory on morality in financial markets: At any given time there exists an inventory of undiscovered embezzlement in – or more precisely not in – the country’s businesses and banks.
H. 1 Laws (Plato) 1, 2 Lay, Kenneth 1 Lazard Brothers 1 Le Rêve (Picasso) 1 Leeson, Nick 1 Lehman Brothers 1, 2, 3, 4, 5, 6 Lenin 1, 2 Leonardo da Vinci 1 Letters on the Aesthetic Education of Mankind (Friedrich Schiller) 1 Lettres Philosophiques (Voltaire) 1 Lewis, John Spedan 1 Lewis, Michael 1, 2 Lewis, Sinclair 1 Liar’s Poker (Michael Lewis) 1 liberal internationalism 1, 2, 3 limited liability 1, 2, 3, 4 Little Dorrit (Dickens) 1, 2 Livermore, Jesse 1 Lloyd George, David 1 ‘Locksley Hall’ (Tennyson) 1 London Interbank Offered Rate 1 Long-Term Capital Management (hedge fund) 1 Louis XIV of France 1, 2 Lowenstein, Roger 1 Lucas, Robert 1 Lunar Society 1 McDonald’s theory of conflict 1 McDonough, William 1 Machiavelli 1, 2 Mackay, Charles 1, 2, 3, 4 McKenna, Reginald 1, 2 McKinley, William 1 Madame Nui’s toad 1 Maddison, Angus 1 madness of crowds 1 Madouros, Vasileios 1 Major Barbara (George Bernard Shaw) 1 Making of the English Working Class (E.
The Global Minotaur by Yanis Varoufakis, Paul Mason
active measures, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business climate, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, correlation coefficient, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, declining real wages, deindustrialization, endogenous growth, eurozone crisis, financial innovation, first-past-the-post, full employment, Hyman Minsky, industrial robot, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, light touch regulation, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market fundamentalism, Mexican peso crisis / tequila crisis, money market fund, mortgage debt, Myron Scholes, negative equity, new economy, Northern Rock, paper trading, Paul Samuelson, planetary scale, post-oil, price stability, quantitative easing, reserve currency, rising living standards, Ronald Reagan, special economic zone, Steve Jobs, structural adjustment programs, systematic trading, too big to fail, trickle-down economics, urban renewal, War on Poverty, Yom Kippur War
At the same time, the Fed, the Bank of Canada, the Reserve Bank of Australia and the Bank of Japan begin to pump undisclosed billions into their financial sectors. On 17 August, Bernanke reduces interest rates slightly, demonstrating a serious lack of appreciation of the scale of the problem. September – The obvious unwillingness of the banks to lend to one another is revealed when the rate at which they do this lending (the LIBOR, short for the London Interbank Offered Rate) exceeds the Bank of England’s rate by more than 1 per cent (for the first time since the South East Asian crisis of 1998). At that point, we witness the first run on a bank since 1929. The bank in question is Northern Rock. While it holds no CDOs or sub-prime mortgage accounts, the bank relies heavily on short-term loans from other banks. When this source of credit dries up, it can no longer meet its liquidity needs.
., New Frontier social programmes, 83, 84 Keynes, John Maynard: Bretton Woods conference, 59, 60, 62, 109; General Theory, 37; ICU proposal, 60, 66, 90, 109, 254, 255; influence on New Dealers, 81; on investment decisions, 48; on liquidity, 160–1; trade imbalances, 62–6 Keynsianism, 157 Kim Il Sung, 77 Kissinger, Henry, 94, 98, 106 Kohl, Helmut, 201 Korea, 91, 191, 192 Korean War, 77, 86 labour: as a commodity, 28; costs, 104–5, 104, 105, 106, 137; hired, 31, 45, 46, 53, 64; scarcity of, 34–5; value of, 50–2 labour markets, 12, 202 Labour Party (British), 69 labourers, 32 land: as a commodity, 28; enclosure, 64 Landesbanken, 203 Latin America: effect of China on, 215, 218; European banks’ exposure to, 203; financial crisis, 190 see also specific countries lead, prices, 96 Lebensraum, 67 Left-Right divide, 167 Lehman Brothers, 150, 152–3 leverage, 121–2 leveraging, 37 Liberal Democratic Party (Japan), 187 liberation movements, 79, 107 LIBOR (London Interbank Offered Rate), 148 liquidity traps, 157, 190 Lloyds TSB, 153, 156 loans: and CDOs, 7–8, 129–31; defaults on, 37 London School of Economics, 4, 66 Long-Term Capital Management (LTCM) hedge fund collapse, 13 LTCM (Long-Term Capital Management) hedge fund collapse, 2, 13 Luxembourg, support for Dexia, 154 Maastricht Treaty, 199–200, 202 MacArthur, Douglas, 70–1, 76, 77 machines, and humans, 50–2 Malaysia, 91, 191 Mao, Chairman, 76, 86, 91 Maresca, John, 106–7 Marjolin, Robert, 73 Marshall, George, 72 Marshall Plan, 71–4 Marx, Karl: and capitalism, 17–18, 19, 34; Das Kapital, 49; on history, 178 Marxism, 181, 182 Matrix, The (film), 50–2 MBIA, 149, 150 McCarthy, Senator Joseph, 73 mercantilism, in Germany, 251 merchant class, 27–8 Merkel, Angela, 158, 206 Merrill Lynch, 149, 153, 157 Merton, Robert, 13 Mexico: effect of China on, 214; peso crisis, 190 Middle East, oil, 69 MIE (military-industrial establishment), 82–3 migration, Crash of 2008, 3 military-industrial complex mechanism, 65, 81, 182 Ministry for International Trade and Industry (Japan), 78 Ministry of Finance (Japan), 187 Minotaur legend, 24–5, 25 Minsky, Hyman, 37 money markets, 45–6, 53, 153 moneylenders, 31, 32 mortgage backed securities (MBS) 232, 233, 234 NAFTA (North American Free Trade Agreement), 214 National Bureau of Economic Research (US), 157 National Economic Council (US), 3 national income see GDP National Security Council (US), 94 National Security Study Memorandum 200 (US), 106 nationalization: Anglo Irish Bank, 158; Bradford and Bingley, 154; Fortis, 153; Geithner–Summers Plan, 179; General Motors, 160; Icelandic banks, 154, 155; Northern Rock, 151 NATO (North Atlantic Treaty Organization), 76, 253 negative engineering, 110 negative equity 234 neoliberalism, 139, 142; and greed, 10 New Century Financial, 147 New Deal: beginnings, 45; Bretton Woods conference, 57–9; China, 76; Global Plan, 67–71, 68; Japan, 77; President Kennedy, 84; support for the Deutschmark, 74; transfer union, 65 New Dealers: corporate power, 81; criticism of European colonizers, 79 ‘new economy’, 5–6 New York stock exchange, 40, 158 Nietzsche, Friedrich, 19 Nixon, Richard, 94, 95–6 Nobel Prize for Economics, 13 North American Free Trade Agreement (NAFTA), 214 North Atlantic Treaty Organization (NATO), 76 North Korea see Korea Northern Rock, 148, 151 Obama administration, 164, 178 Obama, Barack, 158, 159, 169, 180, 230, 231 OECD (Organisation for Economic Co-operation and Development), 73 OEEC (Organisation for European Economic Co-operation), 73, 74 oil: global consumption, 160; imports, 102–3; prices, 96, 97–9 OPEC (Organization of the Petroleum Exporting Countries), 96, 97 paradox of success, 249 parallax challenge, 20–1 Paulson, Henry, 152, 154, 170 Paulson Plan, 154, 173 Penn Bank, 40 Pentagon, the, 73 Plaza Accord (1985), 188, 192, 213 Pompidou, Georges, 94, 95–6 pound sterling, devaluing, 93 poverty: capitalism as a supposed cure for, 41–2; in China, 162; reduction in the US, 84; reports on global, 125 predatory governance, 181 prey–predator dynamic, 33–5 prices, flexible, 40–1 private money, 147, 177; Geithner–Summers Plan, 178; toxic, 132–3, 136, 179 privatization, of surpluses, 29 probability, estimating, 13–14 production: cars, 70, 103, 116, 157–8; coal, 73, 75; costs, 96, 104; cuts in, 41; in Japan, 185–6; processes, 30, 31, 64; steel, 70, 75 production–distribution cycle, 54 property see real estate prophecy paradox, 46, 47, 53 psychology, mass, 14 public debt crisis, 205 quantitative easing, 164, 231–6 railway bubbles, 40 Rational Expectations Hypothesis (REH), 15–16 RBS (Royal Bank of Scotland), 6, 151, 156; takeover of ABN-Amro, 119–20 Reagan, Ronald, 10, 99, 133–5, 182–3 Real Business Cycle Theory (RBCT), 15, 16–17 real estate, bubbles, 8–9, 188, 190, 192–3 reason, deferring to expectation, 47 recession predictions, 152 recessions, US, 40, 157 recycling mechanisms, 200 regulation, of banking system, 10, 122 relabelling, 14 religion, organized, 27 renminbi (RMB), 213, 214, 217, 218, 253 rentiers, 165, 187, 188 representative agents, 140 Reserve Bank of Australia, 148 reserve currency status, 101–2 risk: capitalists and, 31; riskless, 5, 6–9, 14 Roach, Stephen, 145 Robbins, Lionel, 66 Roosevelt, Franklin D., 165; attitude towards Britain, 69; and bank regulation, 10; New Deal, 45, 58–9 Roosevelt, Theodore (‘Teddy’), 180 Royal Bank of Scotland (RBS), 6, 151, 156; takeover of ABN-Amro, 119–20 Rudd, Kevin, 212 Russia, financial crisis, 190 Saudi Arabia, oil prices, 98 Scandinavia, Gold Standard, 44 Scholes, Myron, 13 Schopenhauer, Arthur, 19 Schuman, Robert, 75 Schumpter, Joseph, 34 Second World War, 45, 55–6; aftermath, 87–8; effect on the US, 57–8 seeds, commodification of, 163 shares, in privatized companies, 137, 138 silver, prices, 96 simulated markets, 170 simulated prices, 170 Singapore, 91 single currencies, ICU, 60–1 slave trade, 28 SMEs (small and medium-sized enterprises), 186 social welfare, 12 solidarity (asabiyyah), 33–4 South East Asia, 91; financial crisis, 190, 191–5, 213; industrialization, 86, 87 South Korea see Korea sovereign debt crisis, 205 Soviet Union: Africa, 79; disintegration, 201; Marshall Plan, 72–3; Marxism, 181, 182; relations with the US, 71 SPV (Special Purpose Vehicle), 174 see also EFSF stagflation, 97 stagnation, 37 Stalin, Joseph, 72–3 steel production, in Germany, 70 Strauss-Kahn, Dominique, 60, 254, 255 Summers, Larry, 230 strikes, 40 sub-prime mortgages, 2, 5, 6, 130–1, 147, 149, 151, 166 success, paradox of, 33–5, 53 Suez Canal trauma, 69 Suharto, President of Indonesia, 97 Summers, Larry, 3, 132, 170, 173, 180 see also Geithner–Summers Plan supply and demand, 11 surpluses: under capitalism, 31–2; currency unions, 61; under feudalism, 30; generation in the EU, 196; manufacturing, 30; origin of, 26–7; privatization of, 29; recycling mechanisms, 64–5, 109–10 Sweden, Crash of 2008, 155 Sweezy, Paul, 73 Switzerland: Crash of 2008, 155; UBS, 148–9, 151 systemic failure, Crash of 2008, 17–19 Taiwan, 191, 192 Tea Party (US), 162, 230, 231, 281 technology, and globalization, 28 Thailand, 91 Thatcher, Margaret, 117–18, 136–7 Third World: Crash of 2008, 162; debt crisis, 108, 219; interest rate rises, 108; mineral wealth, 106; production of goods for Walmart, 125 tiger economies, 87 see also South East Asia Tillman Act (1907), 180 time, and economic models, 139–40 Time Warner, 117 tin, prices, 96 toxic theory, 13–17, 115, 133–9, 139–42 trade: balance of, 61, 62, 64–5; deficits (US), 111, 243; global, 27, 90; surpluses, 158 trades unions, 124, 137, 202 transfer unions, New Deal, 65 Treasury Bills (US), 7 Treaty of Rome, 237 Treaty of Versailles, 237 Treaty of Westphalia, 237 trickle-down, 115, 135 trickle-up, 135 Truman Doctrine, 71, 71–2, 77 Truman, Harry, 73 tsunami, effects of, 194 UBS, 148–9, 151 Ukraine, and the Crash of 2008, 156 UN Security Council, 253 unemployment: Britain, 160; Global Plan, 96–7; rate of, 14; US, 152, 158, 164 United States see US Unocal, 106 US economy, twin deficits, 22–3, 25 US government, and South East Asia, 192 US Mortgage Bankers Association, 161 US Supreme Court, 180 US Treasury, 153–4, 156, 157, 159; aftermath of the Crash of 2008, 160; Geithner–Summers Plan, 171–2, 173; bonds, 227 US Treasury Bills, 109 US (United States): aftermath of the Crash of 2008, 161–2; assets owned by foreign state institutions, 216; attitude towards oil price rises, 97–8; China, 213–14; corporate bond purchases, 228; as a creditor nation, 57; domestic policies during the Global Plan, 82–5; economy at present, 184; economy praised, 113–14; effects of the Crash of 2008, 2, 183; foreign-owned assets, 225; Greek Civil War, 71; labour costs, 105; Plaza Accord, 188; profit rates, 106; proposed invasion of Afghanistan, 106–7; role in the ECSC, 75; South East Asia, 192 value, costing, 50–1 VAT, reduced, 156 Venezuela, oil prices, 97 Vietnamese War, 86, 91–2 vital spaces, 192, 195, 196 Volcker, Paul: 2009 address to Wall Street, 122; demand for dollars, 102; and gold convertibility, 94; interest rate rises, 99; replaced by Greenspan, 10; warning of the Crash of 2008, 144–5; on the world economy, 22, 100–1, 139 Volcker Rule, 180–1 Wachowski, Larry and Andy, 50 wage share, 34–5 wages: British workers, 137; Japanese workers, 185; productivity, 104; prophecy paradox, 48; US workers, 124, 161 Wal-Mart: The High Cost of Low Price (documentary, Greenwald), 125–6 Wall Street: Anglo-Celtic model, 12; Crash of 2008, 11–12, 152; current importance, 251; Geithner–Summers Plan, 178; global profits, 23; misplaced confidence in, 41; private money, 136; profiting from sub-prime mortgages, 131; takeovers and mergers, 115–17, 115, 118–19; toxic theory, 15 Wallace, Harry, 72–3 Walmart, 115, 123–7, 126; current importance, 251 War of the Currents, 39 Washington Mutual, 153 weapons of mass destruction, 27 West Germany: labour costs, 105; Plaza Accord, 188 Westinghouse, George, 39 White, Harry Dexter, 59, 70, 109 Wikileaks, 212 wool, as a global commodity, 28 working class: in Britain, 136; development of, 28 working conditions, at Walmart, 124–5 World Bank, 253; origins, 59; recession prediction, 149; and South East Asia, 192 World Trade Organization, 78, 215 written word, 27 yen, value against dollar, 96, 188, 193–4 Yom Kippur War, 96 zombie banks, 190–1
Crisis and Dollarization in Ecuador: Stability, Growth, and Social Equity by Paul Ely Beckerman, Andrés Solimano
banking crisis, banks create money, barriers to entry, capital controls, Carmen Reinhart, carried interest, central bank independence, centre right, clean water, currency peg, declining real wages, disintermediation, financial intermediation, fixed income, floating exchange rates, Gini coefficient, income inequality, income per capita, labor-force participation, land reform, London Interbank Offered Rate, Mexican peso crisis / tequila crisis, microcredit, money: store of value / unit of account / medium of exchange, offshore financial centre, old-boy network, open economy, pension reform, price stability, rent-seeking, school vouchers, seigniorage, trade liberalization, women in the workforce
Centro de Planificación y Estudios Sociales (World Bank Poverty Group) el Consejo de las Mujeres del Ecuador (National Council of Ecuadoran Women) debt-and-debt-service reduction Dirección Nacional de la Mujer (National Directory for Women, Ecuador) early childhood development Encuesta de Condiciones de Vida (Ecuador LSMS survey) economically active population European Union Fondo de Inversión Social de Emergencia (Emergency Social Investment Fund, Ecuador) gross domestic product Inter-American Development Bank Instituto Ecuatoriano de Seguro Social (Ecuadoran Social Security Institute) International Monetary Fund Instituto Nacional de Estadística y Censo (National Institute of Statistics and Census, Ecuador) Instituto Nacional del Niño y de la Familia (National Institute of the Child and the Family, Ecuador) London interbank offered rate Living Standards Measurement Study Mercado Común del Sur (Southern Common Market) National Center for Health Statistics, U.S. nongovernmental organization Organisation for Economic Co-operation and Development xi xii OPEC ORI PACMI PAHO PANN PDI PRONEPE SIISE SIMUJER STFS VAT WHO CRISIS AND DOLLARIZATION IN ECUADOR Organization of Petroleum Exporting Countries Operación Rescate Infantil (Child Rescue Program, Ecuador) Programa de Alimentación Complementaria Materno-Infantil (Maternal-Infant Nutrition Program, Ecuador) Pan American Health Organization Programa Nacional de Alimentación y Nutrición (Food and Nutrition Program that replaces PACMI in Ecuador) Programa de Desarrollo Infantil (Child Development Program, Ecuador) Alternativo Programa Nacional de la Educación Prescolar (National Alternative Preschool Education Program, Ecuador) Sistema Integrado de Indicadores Sociales del Ecuador (Integrated System of Social Indicators of Ecuador) Situation of Women and Gender Inequality Indicators database, Ecuador Secretaría Técnica del Frente Social (Technical Secretariat of the Social Front, Ecuador) value added tax World Health Organization 1 Crisis and Dollarization: An Overview Andrés Solimano Introduction On January 9, 2000, Ecuador decided to adopt the U.S. dollar as its national currency, its domestic medium of exchange, and its unit of account,1 thus becoming the first country to officially dollarize its economy in the 21st century.
In addition, after December 1998, the Treasury added an additional US$1.6 billion in dollar-denominated bonds to recapitalize commercial banks and pay deposit guarantees (see Part 4). (In November 1999, as the predollarization crisis turned acute, the authorities unilaterally termed out the dollar-denominated domestic debt falling due through December 2000 for seven years, with two years’ grace, at London interbank offered rate (LIBOR) plus 2 percent interest.) Although the volatile performance of public finances is basically the consequence of the volatility of oil revenue and the large interest bill and payroll, the problem has additional dimensions. The Public Budgets Law and various reform attempts by the Council for the Modernization of the State notwithstanding, administration of the various aspects of LONGER-TERM ORIGINS OF ECUADOR’S “PREDOLLARIZATION” CRISIS 41 public finance has remained weaker than the country requires.
accounting loophole / creative accounting, algorithmic trading, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Big bang: deregulation of the City of London, capital asset pricing model, central bank independence, corporate governance, Credit Default Swap, dematerialisation, discounted cash flows, diversified portfolio, double entry bookkeeping, Edward Lloyd's coffeehouse, Elliott wave, Exxon Valdez, forensic accounting, global reserve currency, high net worth, index fund, inflation targeting, intangible asset, interest rate derivative, interest rate swap, John Meriwether, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Nick Leeson, North Sea oil, Northern Rock, pension reform, Piper Alpha, price stability, purchasing power parity, Real Time Gross Settlement, reserve currency, Right to Buy, shareholder value, short selling, The Wealth of Nations by Adam Smith, transaction costs, value at risk, yield curve, zero-coupon bond
A rolling cash bet on Vodafone has a spread of a quarter of a point at the time of writing, which is the same as on its shares. Spreads, even as narrow as this, are one way in which spread betting ﬁrms make their money. A second way is through overnight lending charges to traders on rolling cash bets, which are based on 100 per cent of the underlying money. The daily charge is typically LIBOR (London Interbank Offered Rate – at which banks can borrow from other banks) plus perhaps 2 or 3 per cent, which is divided by 365, representing days of the year. It is a small daily sum but, on an aggregate basis from all customers, it makes a proﬁt for the spread betting ﬁrm. If you take a short position, it is the ﬁrm that pays interest on overnight positions. The ﬁrm pays no interest on _______________________________ DERIVATIVES FOR RETAIL INVESTORS 75 deposit accounts where the margin is placed, or perhaps, if the margin is sizable, a low rate, which means it can use the money so saved more proﬁtably.
Index 419 fraud 204 9/11 terrorist attacks 31, 218, 242, 243, 254, 257 Abbey National 22 ABN AMRO 103 accounting and governance 232–38 scandals 232 Accounting Standards Board (ASB) 236 administration 17 Allianz 207 Alternative Investment Market (AIM) 44–45, 131, 183, 238 Amaranth Advisors 170 analysts 172–78 fundamental 172–74 others 177–78 Spitzer impact 174–75 technical 175–77 anti-fraud agencies Assets Recovery Agency 211–13 City of London Police 209 Financial Services Authority 208 Financial Crime and Intelligence Division 208 Insurance Fraud Bureau 209 Insurance Fraud Investigators Group 209 International Association of Insurance Fraud Agencies 207, 210, 218 National Criminal Intelligence Service 210 Serious Fraud Ofﬁce 213–15 Serious Organised Crime Agency 210–11 asset ﬁnance 24–25 Association of Investment Companies 167 backwardation 101 bad debt, collection of 26–28 Banco Santander Central Hispano 22 Bank for International Settlements (BIS) 17, 27, 85, 98, 114 bank guarantee 23 Bank of Credit and Commerce International (BCCI) 10, 214 Bank of England 6, 10–17 Court of the 11 credit risk warning 98 framework for sterling money markets 81 Governor 11, 13, 14 history 10, 15–16 Inﬂation Report 14 inﬂation targeting 12–13 interest rates and 12 international liaison 17 lender of last resort 15–17 Market Abuse Directive (MAD) 16 monetary policy and 12–15 Monetary Policy Committee (MPC) 13–14 Open-market operations 15, 82 repo rate 12, 15 role 11–12 RTGS (Real Time Gross Settlement) 143 statutory immunity 11 supervisory role 11 Bank of England Act 1988 11, 12 Bank of England Quarterly Model (BEQM) 14 Banking Act 1933 see Glass-Steagall Act banks commercial 5 investment 5 Barclays Bank 20 Barings 11, 15, 68, 186, 299 Barlow Clowes case 214 Barron’s 99 base rate see repo rate Basel Committee for Banking Supervision (BCBS) 27–28 ____________________________________________________ INDEX 303 Basel I 27 Basel II 27–28, 56 Bear Stearns 95, 97 BearingPoint 97 bill of exchange 26 Bingham, Lord Justice 10–11 Blue Arrow trial 214 BNP Paribas 145, 150 bond issues see credit products book runners 51, 92 Borsa Italiana 8, 139 bps 90 British Bankers’ Association 20, 96, 97 building societies 22–23 demutualisation 22 Building Societies Association 22 Capital Asset Pricing Model (CAPM) see discounted cash ﬂow analysis capital gains tax 73, 75, 163, 168 capital raising markets 42–46 mergers and acquisitions (M&A) 56–58 see also ﬂotation, bond issues Capital Requirements Directive 28, 94 central securities depository (CSD) 145 international (ICSD) 145 Central Warrants Trading Service 73 Chancellor of the Exchequer 12, 13, 229 Chicago Mercantile Exchange 65 Citigroup 136, 145, 150 City of London 4–9 Big Bang 7 deﬁnition 4 employment in 8–9 ﬁnancial markets 5 geography 4–5 history 6–7 services offered 4 world leader 5–6 clearing 140, 141–42 Clearing House Automated Payment System (CHAPS) 143 Clearstream Banking Luxembourg 92, 145 commercial banking 5, 18–28 bad loans and capital adequacy 26–28 banking cards 21 building societies 22–23 credit collection 25–26 ﬁnance raising 23–25 history 18–19 overdrafts 23 role today 19–21 commodities market 99–109 exchange-traded commodities 101 ﬂuctuations 100 futures 100 hard commodities energy 102 non-ferrous metals 102–04 precious metal 104–06 soft commodities cocoa 107 coffee 106 sugar 107 Companies Act 2006 204, 223, 236 conﬂict of interests 7 consolidation 138–39 Consumer Price Index (CPI) 13 contango 101 Continuous Linked Settlement (CLS) 119 corporate governance 223–38 best practice 231 Cadbury Code 224 Combined Code 43, 225 compliance 230 deﬁnition 223 Directors’ Remuneration Report Regulations 226 EU developments 230 European auditing rules 234–35 Greenbury Committee 224–25 Higgs and Smith reports 227 International Financial Reporting Standards (IFRS) 237–38 Listing Rules 228–29 Model Code 229 Myners Report 229 OECD Principles 226 operating and ﬁnancial review (OFR) 235– 36 revised Combined Code 227–28 Sarbanes–Oxley Act 233–34 Turnbull Report 225 credit cards 21 zero-per-cent cards 21 credit collection 25–26 factoring and invoice discounting 26 trade ﬁnance 25–26 credit derivatives 96–97 back ofﬁce issues 97 credit default swap (CDS) 96–97 credit products asset-backed securities 94 bonds 90–91 collateralised debt obligations 94–95 collateralised loan obligation 95 covered bonds 93 equity convertibles 93 international debt securities 92–93 304 INDEX ____________________________________________________ junk bonds 91 zero-coupon bonds 93 credit rating agencies 91 Credit Suisse 5, 136, 193 CREST system 141, 142–44 dark liquidity pools 138 Debt Management Ofﬁce 82, 86 Department of Trade and Industry (DTI) 235, 251, 282 derivatives 60–77 asset classes 60 bilateral settlement 66 cash and 60–61 central counterparty clearing 65–66 contracts for difference 76–77, 129 covered warrants 72–73 futures 71–72 hedging and speculation 67 on-exchange vs OTC derivatives 63–65 options 69–71 Black-Scholes model 70 call option 70 equity option 70–71 index options 71 put option 70 problems and fraud 67–68 retail investors and 69–77 spread betting 73–75 transactions forward (future) 61–62 option 62 spot 61 swap 62–63 useful websites 75 Deutsche Bank 136 Deutsche Börse 64, 138 discounted cash ﬂow analysis (DCF) 39 dividend 29 domestic ﬁnancial services complaint and compensation 279–80 ﬁnancial advisors 277–78 Insurance Mediation Directive 278–79 investments with life insurance 275–76 life insurance term 275 whole-of-life 274–75 NEWICOB 279 property and mortgages 273–74 protection products 275 savings products 276–77 Dow theory 175 easyJet 67 EDX London 66 Egg 20, 21 Elliott Wave Theory 176 Enron 67, 114, 186, 232, 233 enterprise investment schemes 167–68 Equiduct 133–34, 137 Equitable Life 282 equities 29–35 market indices 32–33 market inﬂuencers 40–41 nominee accounts 31 shares 29–32 stockbrokers 33–34 valuation 35–41 equity transparency 64 Eurex 64, 65 Euro Overnight Index Average (EURONIA) 85 euro, the 17, 115 Eurobond 6, 92 Euroclear Bank 92, 146, 148–49 Euronext.liffe 5, 60, 65, 71 European Central Bank (ECB) 16, 17, 84, 148 European Central Counterparty (EuroCCP) 136 European Code of Conduct 146–47, 150 European Exchange Rate Mechanism 114 European Harmonised Index of Consumer Prices 13 European Union Capital Requirements Directive 199 Market Abuse Directive (MAD) 16, 196 Market in Financial Instruments Directive (MiFID) 64, 197–99 Money Laundering Directive 219 Prospectus Directive 196–97 Transparency Directive 197 exchange controls 6 expectation theory 172 Exxon Valdez 250 factoring see credit collection Factors and Discounters Association 26 Fair & Clear Group 145–46 Federal Deposit Insurance Corporation 17 Federation of European Securities Exchanges 137 Fighting Fraud Together 200–01 ﬁnance, raising 23–25 asset 24–25 committed 23 project ﬁnance 24 recourse loan 24 syndicated loan 23–24 uncommitted 23 Financial Action Task Force on Money Laundering (FATF) 217–18 ﬁnancial communications 179–89 ____________________________________________________ INDEX 305 advertising 189 corporate information ﬂow 185 primary information providers (PIPs) 185 investor relations 183–84 journalists 185–89 public relations 179–183 black PR’ 182–83 tipsters 187–89 City Slickers case 188–89 Financial Ombudsman Service (FOS) 165, 279–80 ﬁnancial ratios 36–39 dividend cover 37 earnings per share (EPS) 36 EBITDA 38 enterprise multiple 38 gearing 38 net asset value (NAV) 38 price/earnings (P/E) 37 price-to-sales ratio 37 return on capital employed (ROCE) 38 see also discounted cash ﬂow analysis Financial Reporting Council (FRC) 224, 228, 234, 236 Financial Services Act 1986 191–92 Financial Services Action Plan 8, 195 Financial Services and Markets Act 2001 192 Financial Services and Markets Tribunal 94 Financial Services Authority (FSA) 5, 8, 31, 44, 67, 94, 97, 103, 171, 189, 192–99 competition review 132 insurance industry 240 money laundering and 219 objectives 192 regulatory role 192–95 powers 193 principles-based 194–95 Financial Services Compensation Scheme (FSCS) 17, 165, 280 Financial Services Modernisation Act 19 ﬁnancial services regulation 190–99 see also Financial Services Authority Financial Times 9, 298 First Direct 20 ﬂipping 53 ﬂotation beauty parade 51 book build 52 early secondary market trading 53 grey market 52, 74 initial public offering (IPO) 47–53 pre-marketing 51–52 pricing 52–53 specialist types of share issue accelerated book build 54 bought deal 54 deeply discounted rights issue 55 introduction 55 placing 55 placing and open offer 55 rights issues 54–55 underwriting 52 foreign exchange 109–120 brokers 113 dealers 113 default risk 119 electronic trading 117 exchange rate 115 ICAP Knowledge Centre 120 investors 113–14 transaction types derivatives 116–17 spot market 115–16 Foreign Exchange Joint Standing Committee 112 forward rate agreement 85 fraud 200–15 advanced fee frauds 204–05 boiler rooms 201–04 Regulation S 202 future regulation 215 identity theft 205–06 insurance fraud 206–08 see also anti-fraud agencies Fraud Act 2006 200 FTSE 100 32, 36, 58, 122, 189, 227, 233 FTSE 250 32, 122 FTSE All-Share Index 32, 122 FTSE Group 131 FTSE SmallCap Index 32 FTSE Sterling Corporate Bond Index 33 Futures and Options Association 131 Generally Accepted Accounting Principles (GAAP) 237, 257 gilts 33, 86–88 Giovanni Group 146 Glass-Steagall Act 7, 19 Global Bond Market Forum 64 Goldman Sachs 136 government bonds see gilts Guinness case 214 Halifax Bank 20 hedge funds 8, 77, 97, 156–57 derivatives-based arbitrage 156 ﬁxed-income arbitrage 157 Hemscott 35 HM Revenue and Customs 55, 211 HSBC 20, 103 Hurricane Hugo 250 306 INDEX ____________________________________________________ Hurricane Katrina 2, 67, 242 ICE Futures 5, 66, 102 Individual Capital Adequacy Standards (ICAS) 244 inﬂation 12–14 cost-push 12 deﬁnition 12 demand-pull 12 quarterly Inﬂation Report 14 initial public offering (IPO) 47–53 institutional investors 155–58 fund managers 155–56 hedge fund managers 156–57 insurance companies 157 pension funds 158 insurance industry London and 240 market 239–40 protection and indemnity associations 241 reform 245 regulation 243 contingent commissions 243 contract certainty 243 ICAS and Solvency II 244–45 types 240–41 underwriting process 241–42 see also Lloyd’s of London, reinsurance Intercontinental Exchange 5 interest equalisation tax 6 interest rate products debt securities 82–83, 92–93 bill of exchange 83 certiﬁcate of deposit 83 debt instrument 83 euro bill 82 ﬂoating rate note 83 local authority bill 83 T-bills 82 derivatives 85 forward rate agreements (FRAs) 85–86 government bonds (gilts) 86–89 money markets 81–82 repos 84 International Financial Reporting Standards (IFRS) 58, 86, 173, 237–38 International Financial Services London (IFSL) 5, 64, 86, 92, 112 International Monetary Fund 17 International Securities Exchange 138 International Swap Dealers Association 63 International Swaps and Derivatives Association 63 International Underwriting Association (IUA) 240 investment banking 5, 47–59 mergers and acquisitions (M&A) 56–58 see also capital raising investment companies 164–69 real estate 169 split capital 166–67 venture capital 167–68 investment funds 159–64 charges 163 investment strategy 164 fund of funds scheme 164 manager-of-managers scheme 164 open-ended investment companies (OEICs) 159 selection criteria 163 total expense ratio (TER) 164 unit trusts 159 Investment Management Association 156 Investment Management Regulatory Organisation 11 Johnson Matthey Bankers Limited 15–16 Joint Money Laundering Steering Group 221 KAS Bank 145 LCH.Clearnet Limited 66, 140 letter of credit (LOC) 23, 25–26 liability-driven investment 158 Listing Rules 43, 167, 173, 225, 228–29 Lloyd’s of London 8, 246–59 capital backing 249 chain of security 252–255 Central Fund 253 Corporation of Lloyd’s 248–49, 253 Equitas Reinsurance Ltd 251, 252, 255–56 Franchise Performance Directorate 256 future 258–59 Hardship Committee 251 history 246–47, 250–52 international licenses 258 Lioncover 252, 256 Member’s Agent Pooling Arrangement (MAPA) 249, 251 Names 248, one-year accounting 257 regulation 257 solvency ratio 255 syndicate capacity 249–50 syndicates 27 loans 23–24 recourse loan 24 syndicated loan 23–24 London Interbank Offered Rate (LIBOR) 74, 76 ____________________________________________________ INDEX 307 London Stock Exchange (LSE) 7, 8, 22, 29, 32, 64 Alternative Investment Market (AIM) 32 Main Market 42–43, 55 statistics 41 trading facilities 122–27 market makers 125–27 SETSmm 122, 123, 124 SETSqx 124 Stock Exchange Electronic Trading Service (SETS) 122–25 TradElect 124–25 users 127–29 Louvre Accord 114 Markets in Financial Instruments Directive (MiFID) 64, 121, 124, 125, 130, 144, 197–99, 277 best execution policy 130–31 Maxwell, Robert 186, 214, 282 mergers and acquisitions 56–58 current speculation 57–58 disclosure and regulation 58–59 Panel on Takeovers and Mergers 57 ‘white knight’ 57 ‘white squire’ 57 Merrill Lynch 136, 174, 186, 254 money laundering 216–22 Egmont Group 218 hawala system 217 know your client (KYC) 217, 218 size of the problem 222 three stages of laundering 216 Morgan Stanley 5, 136 multilateral trading facilities Chi-X 134–35, 141 Project Turquoise 136, 141 Munich Re 207 Nasdaq 124, 138 National Strategy for Financial Capability 269 National Westminster Bank 20 Nationwide Building Society 221 net operating cash ﬂow (NOCF) see discounted cash ﬂow analysis New York Federal Reserve Bank (Fed) 16 Nomads 45 normal market share (NMS) 132–33 Northern Rock 16 Nymex Europe 102 NYSE Euronext 124, 138, 145 options see derivatives Oxera 52 Parmalat 67, 232 pensions alternatively secured pension 290 annuities 288–89 occupational pension ﬁnal salary scheme 285–86 money purchase scheme 286 personal account 287 personal pension self-invested personal pension 288 stakeholder pension 288 state pension 283 unsecured pension 289–90 Pensions Act 2007 283 phishing 200 Piper Alpha oil disaster 250 PLUS Markets Group 32, 45–46 as alternative to LSE 45–46, 131–33 deal with OMX 132 relationship to Ofex 46 pooled investments exchange-traded funds (ETF) 169 hedge funds 169–71 see also investment companies, investment funds post-trade services 140–50 clearing 140, 141–42 safekeeping and custody 143–44 registrar services 144 settlement 140, 142–43 real-time process 142 Proceeds of Crime Act 2003 (POCA) 211, 219, 220–21 Professional Securities Market 43–44 Prudential 20 purchasing power parity 118–19 reinsurance 260–68 cat bonds 264–65 dispute resolution 268 doctrines 263 ﬁnancial reinsurance 263–64 incurred but not reported (IBNR) claims insurance securitisation 265 non-proportional 261 offshore requirements 267 proportional 261 Reinsurance Directive 266–67 retrocession 262 types of contract facultative 262 treaty 262 retail banking 20 retail investors 151–155 Retail Prices Index (RPI) 13, 87 264 308 INDEX ____________________________________________________ Retail Service Provider (RSP) network Reuters 35 Royal Bank of Scotland 20, 79, 221 73 Sarbanes–Oxley Act 233–34 securities 5, 29 Securities and Futures Authority 11 self-regulatory organisations (SROs) 192 Serious Crime Bill 213 settlement 11, 31, 140, 142–43 shareholder, rights of 29 shares investment in 29–32 nominee accounts 31 valuation 35–39 ratios 36–39 see also ﬂotation short selling 31–32, 73, 100, 157 Society for Worldwide Interbank Financial Telecommunications (SWIFT) 119 Solvency II 244–245 Soros, George 114, 115 Specialist Fund Market 44 ‘square mile’ 4 stamp duty 72, 75, 166 Sterling Overnight Index Average (SONIA) 85 Stock Exchange Automated Quotation System (SEAQ) 7, 121, 126 Stock Exchange Electronic Trading Service (SETS) see Lloyd’s of London stock market 29–33 stockbrokers 33–34 advisory 33 discretionary 33–34 execution-only 34 stocks see shares sub-prime mortgage crisis 16, 89, 94, 274 superequivalence 43 suspicious activity reports (SARs) 212, 219–22 swaps market 7 interest rates 56 swaptions 68 systematic internalisers (SI) 137–38 Target2-Securities 147–48, 150 The Times 35, 53, 291 share price tables 36–37, 40 tip sheets 33 trading platforms, electronic 80, 97, 113, 117 tranche trading 123 Treasury Select Committee 14 trend theory 175–76 UBS Warburg 103, 136 UK Listing Authority 44 Undertakings for Collective Investments in Transferable Securities (UCITS) 156 United Capital Asset Management 95 value at risk (VAR) virtual banks 20 virt-x 140 67–68 weighted-average cost of capital (WACC) see discounted cash ﬂow analysis wholesale banking 20 wholesale markets 78–80 banks 78–79 interdealer brokers 79–80 investors 79 Woolwich Bank 20 WorldCom 67, 232 Index of Advertisers Aberdeen Asset Management PLC xiii–xv Birkbeck University of London xl–xlii BPP xliv–xlvi Brewin Dolphin Investment Banking 48–50 Cass Business School xxi–xxiv Cater Allen Private Bank 180–81 CB Richard Ellis Ltd 270–71 CDP xlviii–l Charles Schwab UK Ltd lvi–lviii City Jet Ltd x–xii The City of London inside front cover EBS Dealing Resource International 110–11 Edelman xx ESCP-EAP European School of Management vi ICAS (The Inst. of Chartered Accountants of Scotland) xxx JP Morgan Asset Management 160–62 London Business School xvi–xviii London City Airport vii–viii Morgan Lewis xxix Securities & Investments Institute ii The Share Centre 30, 152–54 Smithﬁeld Bar and Grill lii–liv TD Waterhouse xxxii–xxxiv University of East London xxxvi–xxxviii
Market Sense and Nonsense by Jack D. Schwager
3Com Palm IPO, asset allocation, Bernie Madoff, Brownian motion, collateralized debt obligation, commodity trading advisor, computerized trading, conceptual framework, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, fixed income, high net worth, implied volatility, index arbitrage, index fund, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, market fundamentalism, merger arbitrage, negative equity, pattern recognition, performance metric, pets.com, Ponzi scheme, quantitative trading / quantitative ﬁnance, random walk, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, selection bias, Sharpe ratio, short selling, statistical arbitrage, statistical model, survivorship bias, transaction costs, two-sided market, value at risk, yield curve
In its most basic form, the strategy is the credit counterpart of an equity hedge strategy: The manager will buy corporate bonds whose prices are expected to rise (rates expected to fall) and sell corporate bonds whose prices are considered vulnerable, with a net long bias being typical. As is the case of equity hedge funds, the net exposure held by credit arbitrage managers can vary widely. Although some managers run a true arbitrage strategy, approximately balancing long and short positions, most credit-based hedge funds will routinely maintain significant net long exposure. A common approach is for credit arbitrage managers to borrow money at the London interbank offered rate (LIBOR) plus and buy corporate bonds or other debt instruments with the proceeds, earning the interest rate differential on the borrowed assets. As long as credit spreads move sideways or narrow, this approach will be very profitable with minimal downside volatility. The risk, however, is that if credit spreads widen significantly, the combination of leverage and the assumption of credit risk (through net long positions) can lead to substantial losses.
Treasury bills types of Hedge funds investment about advantages of hidden risk managed futures perception vs. reality rationale for single fund risk Hedge selling Hedgers Hedging Hidden risk Hidden risk evaluation qualitative assessment quantitative measures High-water mark Housing bubble (mid-2000s) Hseigh, David Hulbert Financial Digest Human emotions Idiosyncratic risk Illiquid portfolio Illiquid trades Illiquidity risk Incentive fees Index funds Indicators contrarian credit quality of differentiation of diversification of future performance futures market as interest rates merger arbitrage past as past returns return levels risk volatility Inflation Information availability efficient use of Initial public offerings (IPO) Insider trading Institutional investors Interest rates Internet bubble In-the-money options Inverse correlated fund Inverse relationship Investment analysis Investment decisions Investment durations Investment insights correlation diversification hedge fund of funds hedge funds leverage managed accounts past performance portfolio allocations portfolio considerations portfolio rebalancing pro-forma statistics track records volatility Investment principle Investment size, maximum Investment strategies Investment timing Investor behavior Investor fees Investor requirements IPO price Irrational behavior Irrational choices Jones, Alfred Winslow Junk bonds Kahneman, Daniel Knowledge use Kudlow, Larry Lack, Simon Lagged shifts in supply Leverage about danger from investor performance and and risk Leverage risk Leveraged EFTs Leveraged/rebalanced funds Liar loans Life, Liberty and Property (Jones) Limit orders Linear relationships Liquidation selling Liquidations Liquidity of futures Liquidity crunch Liquidity risk Lockups London interbank offered rate (LIBOR) London Metal Exchange Long bias position Long only hedge funds Long-Term Capital Management (LTCM) Long-term investment Look-back period Loomis, Carol J. Lowenstein, Roger Luck Mad Money Madoff scandal Managed accounts advantages of vs. funds in hedge funds individual vs. indirect management objections to Managed futures Management fees Manager performance Managers hedge funds vs.
Frequently Asked Questions in Quantitative Finance by Paul Wilmott
Albert Einstein, asset allocation, beat the dealer, Black-Scholes formula, Brownian motion, butterfly effect, capital asset pricing model, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, discrete time, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, fixed income, fudge factor, implied volatility, incomplete markets, interest rate derivative, interest rate swap, iterative process, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, martingale, Myron Scholes, Norbert Wiener, Paul Samuelson, quantitative trading / quantitative ﬁnance, random walk, regulatory arbitrage, risk/return, Sharpe ratio, statistical arbitrage, statistical model, stochastic process, stochastic volatility, transaction costs, urban planning, value at risk, volatility arbitrage, volatility smile, Wiener process, yield curve, zero-coupon bond
These contracts are best valued by finite-difference means because the contract contains a decision feature. Floating Rate Note (FRN) is a bond with coupons linked to a variable interest rate issued by a company. The coupon will typically have a spread in excess of a government interest rate, and this spread allows for credit risk. The coupons may also have a cap and/or a floor. The most common measure of a floating interest rate is the London Interbank Offer Rate or LIBOR. LIBOR comes in various maturities, one month, three month, six month, etc., and is the rate of interest offered between Eurocurrency banks for fixed-term deposits. Floor is a fixed-income option in which the holder receives a payment when the underlying interest rate falls below a specified level, the strike. This payment is the strike less the interest rate. These payments happen regularly, monthly, or quarterly etc., as specified in the contract, and the underlying interest rate will usually be of the same tenor as this interval.
Intimately related to calibration. Lévy A probability distribution, also known as a stable distribution. It has the property that sums of independent identically distributed random variables from this distribution have the same distribution. The normal distribution is a special case. Of interest in finance because returns data matches this distribution quite well. See page 231. LIBOR London Interbank Offered Rate. An interest rate at which banks offer to lend funds to other banks in the London wholesale money market. It is quoted at different maturities. Being a standard reference rate it is often the underlying interest rate in OTC fixed-income contracts. Market maker Someone who gives prices at which he will buy or sell instruments, in the hope of making a profit on the difference between the bid and offer prices.
Why Wall Street Matters by William D. Cohan
Apple II, asset-backed security, bank run, Bernie Sanders, bonus culture, break the buck, buttonwood tree, corporate governance, corporate raider, creative destruction, Credit Default Swap, Donald Trump, Exxon Valdez, financial innovation, financial repression, Fractional reserve banking, Gordon Gekko, greed is good, income inequality, Joseph Schumpeter, London Interbank Offered Rate, margin call, money market fund, moral hazard, Potemkin village, quantitative easing, secular stagnation, Snapchat, South Sea Bubble, Steve Jobs, Steve Wozniak, too big to fail, WikiLeaks
Or that bank regulators can now pass judgment on everything from the wisdom of an individual loan to how much capital a bank must have and how it uses it? Or that as a result of regulatory requirements, the bond market is now shockingly illiquid, costing millions of Americans with 401(k)s and pensions money every time they, or their fiduciaries, try to buy or sell a bond? Or that new regulations in the money-market industry have more than tripled the cost of the three-month London Interbank Offered Rate, or LIBOR, the short-term money rate that banks charge each other and on which most loans are based? Have you tried to get a loan or a mortgage lately? It’s not very easy, even for Ben Bernanke, the architect of the Fed’s “zero-interest-rate policy” that has kept interest rates as low as they have ever been in our nation’s history. In 2014, the newly private citizen Bernanke could not refinance the mortgage on his home because he no longer had a steady source of income.
asset-backed security, bank run, barriers to entry, Bretton Woods, card file, central bank independence, computer age, corporate governance, credit crunch, declining real wages, deindustrialization, diversified portfolio, financial independence, financial innovation, fixed income, Gini coefficient, Home mortgage interest deduction, housing crisis, income inequality, invisible hand, late fees, London Interbank Offered Rate, market fundamentalism, means of production, mortgage debt, mortgage tax deduction, p-value, pattern recognition, profit maximization, profit motive, risk/return, Ronald Reagan, Silicon Valley, statistical model, technology bubble, the built environment, transaction costs, union organizing, white flight, women in the workforce, working poor, zero-sum game
The credit card– backed security required the skills and assets of both commercial banks and investment banks, in this case Bank One and Salomon Brothers. Not to be outdone, by January of 1987 MBNA securitized its first pool of credit card receivables through the investment bank Morgan Guaranty.147 Unlike Bank One’s security, which paid a fixed rate, MBNA’s security paid a floating rate pegged to the London Interbank Offered Rate—a standard internationally recognized interest rate. Such a feature eliminated the interest rate risk in such a security, something that could threaten the value of a fixed rate security like a traditional mortgage. But the riskiness of unsecured debt, compared to the secured debt of mortgages, made the card bonds look for ways to decrease the risk of investments. The tranches of collateralized mortgage obligations were not enough to get the card bonds to AA or AAA investment-grade ratings.
Credit rating agencies rated them BBB, which, if they had not used tranched securitization, would have made their funding prohibitively expensive.160 Tranched securities were the only way that these companies could get AAA ratings on at least part of their securities. First USA, for instance, securitized two-thirds of its debt, according to its CFO Peter Bartholow. In 1994, as First USA’s portfolio doubled to $11 billion, its securitized debt rose from $2.6 billion to $7.2 billion.161 With tranches, First USA’s rival Advanta could offer a tranche of its security as a AAA bond and pay only 0.18 percent more than London Interbank Offered Rate (LIBOR). Advanta would have to pay a much higher rate to its last tranche, and use credit default insurance, but for the other tranches the rate was very low. Instead of not being able to sell any of its debt as a BBB bond, it could sell nearly all of its debt with an AAA rating. Compressing the bulk of the risk to the last tranche and then using insurance to offset that risk, companies with few assets could sell AAA bonds.
Chemical Bank (1992), 359n251 Hilton Hotel, Carte Blanche card, 170 Hire-Purchase in a Free Society (Harris, Naylor, and Seldon), 295n12 History of Consumer Credit, The: Doctrines and Practices (Gelpi), 295n12 Hodge, Paul, 115 home equity loans, 220–23, 234–37, 252, 275–78 Home Owners’ Loan Corporation (HOLC), 46, 49–50, 68, 71, 302n24, 306n71; criticism of from business, 50; lack of funding for, 50 INDEX hooks, bell, 347n139 Hoover, 300n106 Hopkins, Harry, 66 Horowitz, Daniel, 293n6, 294n9 Household Finance Company, 13, 237, 266, 276, 278; Children’s Spending instruction book, 281–82 Housing and Urban Development Act (1968), 221, 225, 231, 232, 283, 350n14; Section 235 program, 226–27, 334n42 Howard, Betty, 192, 201 Hubbard, Dehart, 141 Hudson County National Bank, 76 hybrid credit, 99, 113–18 Hyman, Louis, 350n5 Ickes, Harold, 50, 51, 52, 59, 62, 71, 71–72 inflation, 100–101, 119, 221 installment coupon books, 123–24 installment credit, 3, 4, 6, 10, 11, 12, 100, 100–101, 107–8, 113–14, 317n5; in the 1920s, 20–31; and class identity, 36–42; and collection fees, 29–30; comparison of to personal loans, 75–76; consumers’ abandonment of, 150; decrease in importance of by the early 1960s, 166–67; demise of, 167; and down payments, 29–30; at the end of the 1920s, 42–44; financial infrastructure of, 21; and gender relations, 36–42; and pricing schemes, 319n37; and Regulation W, 115–18; risk of for borrowers, 35–36; in urban ghettos, 177, 178, 179; in Western Europe, 8; without resale, 31–36 installment financing theory, in the 1920s and 1930s, 308n115 “Installment Selling and the Consumer: A Brief for Regulation” (Nugent and Henderson), 100 Interbank Card Association, 240 interest rates: D’Amato’s push for an interest rate cap, 259–62; the end of rate caps, 244–47; floating interest rates, 236, 272, 278, 279; individual interest rates, 218; interest rate deregulation, 246–47; of loan sharks, 14; London Interbank Offered Rate, 255 Irresistible Empire: America’s Advance through Twentieth-Century Europe (De Grazia), 295n12 INDEX Isenberg, Alison, 295n11 It’s in the Cards: Consumer Credit and the American Experience (L. Klein), 293n6 Jackson, Philip, 226 Jacob, John, 187–90 Jacobs, Meg, 295n11 Jacobson, Matthew, 302n180 Javits, Jacob, 182 J. C. Penny, 196 “jerry-building,” 63 J. N. Adam department store, 118 Johnson, E.
Wall Street: How It Works And for Whom by Doug Henwood
accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, affirmative action, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, capital asset pricing model, capital controls, central bank independence, computerized trading, corporate governance, corporate raider, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, information asymmetry, interest rate swap, Internet Archive, invisible hand, Irwin Jacobs, Isaac Newton, joint-stock company, Joseph Schumpeter, kremlinology, labor-force participation, late capitalism, law of one price, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, Louis Bachelier, market bubble, Mexican peso crisis / tequila crisis, microcredit, minimum wage unemployment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, oil shock, Paul Samuelson, payday loans, pension reform, Plutocrats, plutocrats, price mechanism, price stability, prisoner's dilemma, profit maximization, publication bias, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, selection bias, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond
Currency swaps take care of this by stipulating that a default by one party means the end of the agreement; this limits risk only to the difference between the two interest streams, not the full face value of principal and interest. And here's an example of an interest rate swap (Abken 1991). Say a bank issues a one-month certificate of deposit, and then invests the proceeds in a two-year note whose interest payments are tied to the London Interbank Offered Rate (LIBOR, the rate banks charge each other in the London-based Euromarkets). The CD will mature well before the note, and the rate the bank might have to pay the CD holder may not move in lockstep with LIBOR. Should the two interest rates march to their own drummers, the bank could find itself losing money on the two-sided transaction. To protect itself, the bank could visit its swap dealer, and work out a LIBOR-CD swap.
See capital structure leveraged buyouts, 181-182, 264 capital structure, 298 costs to nature, 274 importance of public pension funds, 271 365 WALL STREET Jensen and Meckling's dismissal in 1976, 268 Jensen's later enthusiasm for, 270-271 job loss in RJR deal, 274 productivity gains from closures, 299 the record, 283-285 separation of cash and carcass, 272 and stock valuations, 284 Levinson, Jerome, 294-295 Lewis, Michael, 180 Lexecon Inc., 182 liberals incorrect position on Fed, 123 upscale, 311 Lintner, John, 162 Liscio, John, 102, 104 Litan, Robert, 88 Livingston, James, 93-94 localism often not progressive, 302-303 London Interbank Offered Rate (LIBOR), 35 London Stock Exchange, 13 Long, William, 283-284 loose-money ideology, 301 Malkiel. Burton, 105 Malthus, Thomas Robert, 209 Malthusianism, green, 245 Managerial school, 251 managerialism, 258; see also corporations, governance managers hired by workers, 239; see also corporations, governance; money managers Mandeville, Bernard, 208-210 Manhattan, income distribution, 79 Manne, Henry, 277, 278 manufacturing, FIRE "output" surpasses, 76 margin, 30 market(s) apologists, 179-183 clearing vs. nonciearing, 138 information asymmetry and, 172 costlessness/expense of, 138, 139 failures, 138 freedom of (Marx), 231 incomplete, 179 manipulation of, 53, 105 religious belief in, 150 self-regulating, and governance issue, 247 Markowitz, Harry, 179 Marx, Kari, 13, 135, 187, 229-241 anticipation of governance literature, 246 on credit as boundary-smasher, 235 as fundamental, 244 corporate form as presaging worker control (Marx), 239-240 critique of Ricardo's self-realization, 213-214 as endogenist, 220-221 gold in a crisis, 221 on government debt, 24 on interest rates, 244 on interest-bearing capital, 22 and Keynes, 212-214 on money and crisis, 232-236 as object of greed, 236 and power, 231-232, 320 no abolition of interest alone, 237 primitive accumulation, 252 revenue vs. capital, 245 on unproductive labor, 209 wrong on bailouts, 235 Marxian views of finance, 244 Marxism as Benthamism (Keynes), 212 mathematics required for economics, 139 Matthei, Charles, 314 Maxxam, 274 Mayer, Martin, 89 McDonough, William, 40 mean reversion, 178 Means, Gardiner C, 246, 252-256. 257-258 media, financial.
The Ascent of Money: A Financial History of the World by Niall Ferguson
Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, negative equity, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, value at risk, Washington Consensus, Yom Kippur War
All of these devices were intended to allow an immediate reduction in the debt-servicing costs of the borrower. But the small print of subprime contracts implied major gains for the lender. One particularly egregious subprime loan in Detroit carried an interest rate of 9.75 per cent for the first two years, but after that a margin of 9.125 percentage points over the benchmark short-term rate at which banks lend each other money: conventionally the London interbank offered rate (Libor). Even before the subprime crisis struck, that already stood above 5 per cent, implying a huge upward leap in interest payments in the third year of the loan. Subprime lending hit Detroit like an avalanche of Monopoly money. The city was bombarded with radio, television, direct-mail advertisements and armies of agents and brokers, all offering what sounded like attractive deals.
be Technically, according to the US Securities and Exchange Commission, a short sale is ‘any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller’. bf A swap is a kind of derivative: a contractual arrangement in which one party agrees to pay another a fixed interest rate, in exchange for a floating rate (usually the London interbank offered rate, or Libor), applied to a notional amount. bg For example, the spread over US Treasuries of the JP Morgan emerging market bond index rose from 3.3 per cent in October 1997, to 6.6 per cent in July 1998, to 17.05 per cent on 10 September 1998. bh It is surely no coincidence that it was reports of losses at hedge funds run by Bear Stearns and by Goldman Sachs that signalled the onset of the credit crunch in the summer of 2007.
A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation by Richard Bookstaber
affirmative action, Albert Einstein, asset allocation, backtesting, beat the dealer, Black Swan, Black-Scholes formula, Bonfire of the Vanities, butterfly effect, commoditize, commodity trading advisor, computer age, computerized trading, disintermediation, diversification, double entry bookkeeping, Edward Lorenz: Chaos theory, Edward Thorp, family office, financial innovation, fixed income, frictionless, frictionless market, George Akerlof, implied volatility, index arbitrage, intangible asset, Jeff Bezos, John Meriwether, London Interbank Offered Rate, Long Term Capital Management, loose coupling, margin call, market bubble, market design, merger arbitrage, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, oil shock, Paul Samuelson, Pierre-Simon Laplace, quantitative trading / quantitative ﬁnance, random walk, Renaissance Technologies, risk tolerance, risk/return, Robert Shiller, Robert Shiller, rolodex, Saturday Night Live, selection bias, shareholder value, short selling, Silicon Valley, statistical arbitrage, The Market for Lemons, time value of money, too big to fail, transaction costs, tulip mania, uranium enrichment, William Langewiesche, yield curve, zero-coupon bond, zero-sum game
One reason is the proliferation of ever more creative mortgage structures, structures that appear to be reasonably designed just because the interest rates have cooperated. A second reason is that the long period with rates at a relatively constant level means there is a concentration of gamma exposure. The nonlinearities that will accompany a rise in rates will hit a substantial proportion of the existing mortgage supply. 3. LIBOR, the London Interbank Offered Rate, is the interest rate that the banks charge each other for short-term loans and serves as the benchmark for determining the rate of short-term loans to corporations. 263 ccc_demon_261-270_notes.qxd 2/13/07 1:47 PM Page 264 NOTES CHAPTER 6 Long-Term Capital Management Rides the Leverage Cycle to Hell 1. One example of the unexpected problems is the losses by the III Offshore Advisors’ High Risk Opportunities fund during the Russia crisis.
Senate hearings, 129–130 Epstein, Sheldon, 46–47, 49 index-amortizing swap, 116 Equity trading profitability, 71–75 proprietary reliance, 73–74 European Monetary System currency crisis (1992), 3 Event risk, 248–249 Factor exposures, 202 Fair value basis, 29 Federal Deposit Insurance Corporation (FDIC), 113 Federal Reserve policy shifts, 85 rate hike, impact, 53 Feduniak, Bob, 42, 52 Feuerstein, Donald, 196 Financial instability, aspects, 3–4 Financial markets, 224–225 Financial risk, 256–257 Fisher, Andy, 59, 80 Fixed income focus, 251–252 Fixed income research (FIR), 8–9, 43–44 Flood, Gene, 190 Franklin, Mark, 97 Free-floating anxiety, 235 Frictionless markets, 209 FrontPoint Partners, 204, 205 FTSE Index, 117 Fundamental data, 166 Furu, example, 233–235 Futures market, 17–19 Futures shock (1635), 175–177 Galbraith, John Kenneth, 16 Gamma, problems, 24–25 General Electric (GE), 41–42 Generally accepted accounting principles (GAAP), 135 Geographic regions, classification, 246 Global Crossing, restatements/liability, 135 Godel, Kurt, 222–224, 227–228 Gold, Jeremy, 8–9 Goldman Sachs acquisition, 75 public offering, delay, 109 Goldstein, Ramy, 116–118 Gracie family, 258–259 Gracie, Gastao, 258 Greenhill, Bob, 73 Greenmail, taxation, 13–14 Gross Domestic Product (GDP), 3–4 Growth bias, 202 Grubman, Jack, 128–130, 134 MCI/BT involvement, 69–71 nursery school admissions, 131–132 Gutfreund, John, 62–63, 105, 195–197 resignation, 199 Haghani, Victor, 102–104, 110, 112 Hall, Andy, 63–67 Hawkins, Greg, 51 Hedgefundedness, 243–244 Hedge funds, 165, 207, 214–215, 243 classification, problem, 245 classification, 245–246 control, 252–253 defining, 245 economic service, 219 existence, question, 244 regulation, 247–250 Heisenberg, Werner, 223–228 Hilibrand, Larry, 79, 110, 113 Human error, 149 272 bindex.qxd 7/13/07 2:44 PM Page 273 INDEX Kaplan, Joel, 44–45 Kaplanis, Costas, 63, 79 Kidder, Peabody, 39–42 Knowledge, limits, 221–230 Krasker, Bill, 86 Liquidity basics, 213–220 complexity, relationship, 145 demand, 26, 191 hedge fund classification, 246 history, 217–218 impact, 212–213 needs, 183 providers, 213–215 role, 215–220 squeeze, prospects, 105 suppliers, 22, 192–193 supply, price elasticity, 94–95 transparency, 226 Liquidity crisis cycle, 93–94 prevention, 94–95 providing, hedge funds (impact), 214–215 Long-range forecasting, 228 London Exchange, Rothschild visit, 90 London Interbank Offered Rate (LIBOR) government rates, parity, 57 higher-yielding LIBOR bond, 57 LIBOR-denominated debt, 56 Long-dated call options, 57 Long-Distance Discount Service (LDDS), acquisitions, 70 Long/short equity hedge funds, 200–205 Long-Term Capital Management (LTCM) capital reserves, assumption, 106–108 collapse, 93 decision point, 110 disaster, 57, 60, 92–93, 100, 145 hedge fund debacle/crisis, 1–3 leverage cycle, 97 liquidity risk, 107–108 losses, 108–111 management, initiation, 195–200 market price positions, feedback, 112 market risks, modeling/monitoring, 111–112 problems, public knowledge, 104–105 repurchase agreement, problem, 104 risk arbitrage position, 107 risk burden, 108 Long-term rates, short-term rates (interaction), 47 Loops, usage/impact, 45 Loosely coupled system, 157 Lorenz, Edward, 227–229 deterministic systems, 229–230 Langsam, Joe, 232, 236–237 Laplace, Pierre-Simon, 223, 225 Lead-lag strategy, 193–194 Leeson, Nick (impact), 38–39 Leibowitz, Marty, 8, 51, 53 Leland, Hayne, 10 Leverage, 244 amount, reduction, 260 crisis, occurrence, 111–113 regulations, imposition, 248 Levin, Carl, 130 Lewis, Michael, 52 Liquidation ability, 93 Mack, John, 28, 29, 35, 37 trader emulation, 35 Macro data, usage, 166–167 Macro strategies, 202 Maeda, Mitsuyo, 258 Margin-induced sale, 94 Market aberrations, opportunities, 122 breakdown, reaction, 146 crises, worsening (aspects), 3–4 cycle, basis, 169 decline, respite, 23–24 exponential growth, 17 Illiquidity, cost, 217–218 Index-amortizing swap, 46–48 Information flow, process, 210 implications, derivation, 170–171 overload, 220–230 Information-based trading, 166 Information Technology (IT), support function, 185–186 Initial public offerings (IPOs), 72 creation, 173–174 issuance, amount, 178–179 Innovation, positive effects, 255–256 INSEAD, 66 Intangibles, 137–138 Interactive complexity, 154–157 Interest only (IO), 55 Interest rate, 84–85, 87 International Monetary Fund (IMF) package, 103 Internet bubble, 179–181 businesses, virtual nature, 172 stocks, run-up (1998), 178 Interrelated markets, complexity (by-product), 143 Intraday price movement, 183 Inventory service, 71 Investment buyers, scare, 22 coverage, 249–250 investor behavior, 203–204 strategy, 247 type, classification, 246 Investors, irrational behavior, 203–204 Irrational markets, impact, 180–181 Iverson, Keith, 48 Iverson, Ken Japan, liquidity, 39 Japanese swap spread strategy/profit, 100 Jenkinson, Robert Banks, 89–90 Jett, Joe, 39–41 Jiu Jitsu Academy, 258 Jones, Paul Tudor, 165 Junk bonds, 71 273 bindex.qxd 7/13/07 2:44 PM Page 274 INDEX Market (Continued) failures, safeguards, 239–240 illiquidity, portfolio insurance by-product, 14 innovation, 11–12 makers, problem, 191–192 regulation, 146–154 risk, paradox, 1 volatility, 5, 25 vulnerability, 224–225 Market bubbles, 168–174 Market-to-book ratio, 138 Marx, Karl, 250 Marxist backward market, exploitation, 250 Material adverse change clause, 65 Maughan, Deryck, 59, 73–77 MCI Communications British Telecom (BT), merger/trade, 63–64, 67, 128 conclusion, 74 EPS, decline, 70 renegotiation, willingness, 67–68 stock, decline, 64 Mean-reversion analysis, 190 Mechanical failure, 149 Mercury Asset Management, 196 Mergers and acquisitions (M&A) advice/underwriting, 33 Meriwether, John, 52, 100, 197 resignation, 199 Merrill Lynch, 42 Merton, Robert, 9, 207 Metallgesellschaft Refining and Marketing (MGRM), oil price risk (offloading), 37–38 Mexican Brady bond/Eurobond spread, 107 Mexican peso crisis (1994), 3 Miller, Heidi, 78–80, 140 Modigliani, Franco, 208–209 Money flows, 167 Morgan Stanley APL, usage, 44–45 Dean Witter, merger, 75 IT department, 43 portfolio insurance, 10–12 risk arbitrage department, 15 risk manager, 42 Morgan Stanley Asset Management (MSAM), 11 Morgan Stanley Investment Management (MSIM), 205 Mortgage-backed securities (MBSs), 54–56, 213 Mortgage market, 35, 54–55, 102 Mortgages, opportunities, 35 Mozer, Paul, 195–198 Munger, Charlie, 62, 99, 101, 197–198 Myojin, Sugar, 59, 63, 78–79 Natural catastrophe, 257 New York Stock Exchange (NYSE) specialists, impact, 20–21 stock sale, 13 Noncash exchanges, 40 Norman Conquest, 215 Norris, Floyd (editorial), 91–92 O’Brien, John, 10 One-off events, 249 Opportunistic strategies birth/death cycle, 252 history, 251 Optimal behavior, mathematical framework, 237–240 Options, stripping, 117 Option theory, 24 Orange County, bankruptcy, 38 Organizational dysfunction, 134–136 Pacioli, Luca, 136–137 Pairwise stock trades, 187 Palmedo, Peter, 17, 28–29 Paloma Partners Management Company, 42 Pandit, Vikram, 12 Parets, Andy, 63–69 Parkhurst, Charlie, 85 Partnership model, 37 Perfect market paradigm, 209–210 imperfections, 210–212 liquidity, degree, 212–213 Phibro, Salomon acquisition, 66 Physical processes, modeling, 229 Platt, Bob, 7–8 Portfolio insurance, 10–15 market crash, 22 Portfolio managers, loss (risk), 204–205 Position disclosure, problems, 225 transparency, increase (financial market regulator advocacy), 225 Preference shares, illiquidity, 115 Price convergence, 121–122 Primal risk, 235–237 knowledge, limits, 230–232 Primogeniture, 215–220 implications, 216–217 objective, impact, 216 Principal only (PO), 54–55 Principia Mathematica (Russell), 221–223 Procter & Gamble, losses, 38 Program trading, absence, 24–25 Protest bids, 195–196 Quants, 8–9, 82–84 Quantum Fund, 180–181 Quattrone, Frank, 72 Rational man approach, 231 Real assets, valuation, 137–138 Real-world risk, 237–238 Reed, John, 127 Relative strength index (RSI), 190 Relative value trades, 101–102 Rhoades, Loeb, 125 RISC workstations, 191 Risk control, 220 knowledge, absence, 231–232 management, 36 nature, variation, 249 reduction, 185 progress/refinement, impact, 4 tactical usage, 200 274 bindex.qxd 7/13/07 2:44 PM Page 275 INDEX Risk arbitrage, 15–16, 65, 71 Risk Architecture, 126 Risk-controlled relative value trading, 102–103 Risk-management structure, 238 Robertson, Julian, 165, 179–182 Rosenbluth, Jeff, 59, 83 Rosenfeld, Eric, 51, 79, 86 Rothschild, Nathan, 88–89 trading strategy, 90–93 Waterloo, relationship, 89–90 Rubinstein, Mark, 10 Russell, Bertrand, 221–223 Russia default, 103–104 Russian short-term bonds, 103 Salomon Brothers arbitrage units, 73–74, 80–82 closure, 88–89 tracking error, problems, 86–89 competition, 60–61 fixed income trading floor, 82 Japanese unit, 56–62 July Fourth massacre, 86–89 mortgage position, loss, 55–56 organization, trader involvement, 73 risk arbitrage group, mortgage position, 80–81 Travelers purchase, 77 Salomon North, 81, 100, 199 Salomon Smith Barney convergence trades, 120–124 proprietary trading, reduction, 92 risk management committee, 98–101 risk measuring/monitoring, 126 Travelers, interaction, 125 U.S. fixed income arbitrage group, 91–93 U.S.
How Markets Fail: The Logic of Economic Calamities by John Cassidy
Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Bretton Woods, British Empire, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative ﬁnance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game
In the subprime industry, where mortgages had been designed on the assumption that prices would keep rising forever, the falling housing market had a shattering impact. Many borrowers who had taken out 2/28 subprime loans in 2005 and 2006 hadn’t built up enough equity to cover the fees associated with a refinancing, and they were facing an extremely costly reset in their monthly payments. The turmoil in the credit markets was adding to this problem. With a 2/28 loan, typically the interest rate after two years is tied to the London interbank offered rate (LIBOR), which, since the summer of 2007, had climbed sharply. Rather than looking at a rise of $200 or $300 in their monthly payments, borrowers were facing hikes of $500, $600, or even more. By February 2008, roughly one in four subprime lenders was at least one month behind on his payment, according to the financial information firm Equifax. For many homeowners, missing a monthly payment was the first step toward being evicted.
Kuwait Kyoto Protocol Labor Statistics, Bureau of Labour Party, British Laffer, Arthur Lagrange, Joseph-Louis Lahart, Justin Laibson, David laissez-faire of Friedman general equilibrium theory and Greenspan and of Hayek middle ground between collectivism and of Mill Landlord’s Game, The Lange, Oskar Lausanne, University of “Law and Economics” school Lay, Kenneth Learned Hand, Billings Leeson, Nick Lehman Brothers collapse of compensation of CEO of subprime mortgage securities issued by Lehn, Kenneth Lenin, Vladimir Leontief, Wassily Lerner, Abba Levittown (New York) Lewis, Kenneth Liberal Party, British Liebniz, Gottfried Loan Performance Locke, John Loewenstein, George Lombard Street (Bagehot) London interbank offered rate (LIBO) London School of Economics (LSE) Long Beach Mortgage Company Long-Term Capital Management (LCTM) Lucas, Robert Lucent Technologies Luftwaffe Macaulay, Thomas Babington Mack, John J. Mackay, Charles Macroeconomic Advisers macroeconomics Macroeconomics (Miles and Scott) Mad Money (television program) Madoff, Bernie Magie, Lizzie Mail on Sunday, The Malkiel, Burton Mandelbrot, Benoit Manhattan Project Mankiw, Greg Mantel, Rolf Manual of Political Economy (Pareto) “Market for Lemons, The” (Akerlof) Market Signaling (Spence) Markowitz, Harry mark-to-market accounting Mark Twain Bank Marshall, Alfred Martin, William McChesney Marx, Karl Marxism Massachusetts Institute of Technology (MIT) Masters, Blythe Mathematical Colloquium Mathematical Physics (Edgeworth) Maximum Utility, Theorem of May, George S.
ZeroZeroZero by Roberto Saviano
Berlin Wall, Bernie Madoff, call centre, credit crunch, double entry bookkeeping, Fall of the Berlin Wall, illegal immigration, Julian Assange, London Interbank Offered Rate, Mikhail Gorbachev, new economy, open borders, planetary scale, Ponzi scheme, Ronald Reagan, Skype, Steve Jobs, uranium enrichment, WikiLeaks
Even, one might think, hiring a man like Martin Woods to show their intention to rigorously respect all the rules of fair play. And yet in July 2012 the Royal Bank of Scotland suddenly broke the contract they had entered into with him. No explanation. Had they learned of Martin’s accusations against Wachovia? And just a few days later the LIBOR scandal broke, revealing that some leading banks, including the Royal Bank of Scotland, had for years been manipulating the London Interbank Offered Rate, the European reference rate for interbank loans. Martin refused to give up; he sued them. He lost. The British judge agreed with the bank that an employer-employee relationship had not yet been established, and therefore Woods had no right to demand redress to an employment tribunal. In the meantime Martin began consulting about financial crime for the information giant Thomson Reuters.
., 61, 96–97 Las Dos Erres, Guatemala, 84 La Spezia, Italy, 302 Las Ventanas (the Windows), 94 Latin America, 15, 34, 37, 52, 74, 80–91, 133–35, 157, 160, 187, 210, 230–32, 254, 283–84, 295, 306, 309, 322, 377–78 see also specific countries Laura (cocaine addict), 117 Lavormarmi, 175, 177 Lazcano Lazcano, Heriberto (El Lazca), 97–98 Lebanese Canadian Bank, 254–55 Lehman Brothers, 247–48 Léopold Sédar Senghor airport, 320–21 Levinson, Robert, 267 Libera, 204, 208–9 Liberia, 321 Lidl Italia supermarkets, 197 lidocaine, 119 Lima, Peru, 331 Limbadi quarries, 172 Linnet (yacht), 299–300 Lisbon, 317–25 Little Odessa, 262, 268, 274, 279, 289 “Little One” (Mara member), 352 Livorno, Italy, 198, 291, 327, 331, 346–47 llipta coke, 112–13 Loaiza Ceballos, Henry (The Scorpion), 130 loan sharks, 173, 181–85, 201 Locatelli, Pasquale Claudio (Mario; Diabolik), 211–13, 215, 216–27, 236–37, 238, 305 Locri, Italy, 170–71 Lombardy, Italy, 179, 193, 212, 216 London Interbank Offered Rate (LIBOR) scandal, 249 LOPAV S.p.A., 237 López, Griselda, 53 Los Aboytes, 62 Los Angeles, 145, 350, 352 Los Cadetes de Linares, 49 Los Halcones (the Falcons), 94 Los Leopardos (the Leopards), 94 Los Mañosos (the Clever Ones), 94 Los Mochis, Mexico, 102 Los Negros, 42–43 Los Niños Zetas, 96–97 Los Pepes (Persequidos por Pablo Escobar) (People Persecuted by Pablo Escobar), 140, 142 Los Zetas, 43, 48, 50, 64, 65–66, 69, 92–103, 185, 186, 252, 304, 368–70 Lo Zio (Uncle) (drug trafficker), 205 Lucà, Nicola, 193 Lucenti, Luigi (‘o Cinese; the Chinese), 340 Luciano, Charles (Lucky), 259 Macchia della Quartarella woods, 346 Macrì, Antonio (U Zi; Uncle), 214 Madoff, Bernard (Bernie), 246–47 Madrid, 222, 236, 237, 238, 239, 306, 308 Maersk Sealand, 179, 292 Maesano brothers, 330 Magnex 2000, 272 Málaga, Spain, 234 Malherbe de León, Óscar, 59 Mali, 318–19, 321 Mamadu (drug mule), 315–25 Manaus, Brazil, 180 Mancuso, Diego, 175 Mancuso, Vincenzo, 172 Mancuso family, 172–80, 183, 199 Mancuso Dereix, Gianluigi, 137, 143, 164 Mancuso D’Angiolella, Salvatore (don Salvador), 136, 137 Mancuso Gómez, Salvatore (El Mono; The Monkey), 133, 134, 136–40, 152, 153–54, 157, 160, 162–66, 172, 174–75, 187, 189, 200 Manzanillo, Mexico, 364–65 Mapello, Italy, 237 Mapu Lautaro, 350 Mara 13 (Mara Salvatrucha), 351 Mara 18, 351, 353, 355 Marando, Pasquale, 183, 184, 191, 215, 229 Marando, Rosario, 230 maras (El Salvadoran gangs), 304, 348–56 Mara Salvatrucha, 351–52 marble quarries, 172, 177–78, 180 marijuana, 20–24, 34, 38, 51, 65, 113, 194, 198, 282–83 Mariposa (yacht), 299–300 Mariposa cocaine, 118 Marmo Imeffe, 177, 179–80 Maronna ‘ra Muntagna (Madonna of the Mountain), 176 Marseilles, 215, 216 Más que nada (sailboat), 300 Massa Lombarda, Italy, 197 Massolino, Guido, 299 Master Endeavour (ship), 318 Matamoros, (Mexico) 30, 57, 59, 60, 91–92, 97, 100 Mata Zetas (Cártel de Jalisco Nueva Generación), 66–68 Matteotti, Giacomo, 346 Mauritania, 322 Mazara del Vallo, Italy, 230 Medellín cartel, 20–21, 33, 127–28, 131, 138, 139, 144, 145, 147, 149–50, 158, 160, 176, 189, 223, 256, 295, 311, 357–62 Mejía, Carlos Alberto (Pipe), 222–23 Mejía, Daniel (Danielito), 160, 161–62, 248 Melara, José Alejandro, 353 Melato, Alessandro, 297 Melato, Andrea, 297–98 Melato, Antonio, 298 “Memory of Silence,” 84 methamphetamines, 51, 63, 65 Mexico: armed forces of, 23–24, 44–45, 49, 60, 62, 69–70, 92 bribery and corruption in, 27, 31, 41, 44–45, 100 cartels of, 210, 243–46, 252–53, 255, 292–93, 302–7, 364–70; see also specific cartels cocaine trafficking in, 37–39, 126, 243–46 292–293, 306–7 Colombian operations in, 127–28, 129, 131, 152, 157, 158, 186 currency exchanges in, 243–46 drug enforcement in, 19–32, 64–65, 68, 69–71, 158 government of, 45, 49, 50–55, 64–65, 69–71, 92, 95, 99, 257 Italian operations in, 186, 190–91 legal system of, 70, 257 money laundering in, 252–57 narco-state of, 69–71, 131, 132 opium production of, 16–20 peasants in, 16–20, 23, 40, 58, 75–76 police force of, 25, 27, 31, 42, 48, 50, 59, 100, 293 U.S. border with, 20–22, 39–40, 44, 53, 57, 60, 61, 69–70, 102, 289–90, 328 U.S. relations with, 28, 31, 41, 58, 158, 366 see also specific cities and states Meza López, Santiago (El Pozolero), 367 M5 construction company, 196 MI-8 Soviet helicopters, 281–82 Miami, 148–51, 157–60, 224–25, 245, 273, 279, 360–61, 362 Miceli, Salvatore, 214, 220, 229, 230, 232, 233, 234 Michajlov, Sergej (Michas), 263, 268, 276–77 Michajlova, Ljudmila, 265–77 Michoacán, Mexico, 28, 62, 63, 64–66, 70 Michoacán Family, 61–66, 68, 95, 152 Middle East, 254–55 Mike (sniffer dog), 344 Milan, 179, 203, 205, 213, 215, 230, 298, 335–36 Milan–Malpensa Airport, 179 Millennium cartel, 67 Milošević, Slobodan, 257 Mirage II (ship), 231–32, 292 Miss Colombia pageant, 134–35, 150 “mobbing,” 244 Moby-Dick (Melville), 289 Mogilevic, Semën Judkovic (Brainy Don; Don Seva; Pàpa), 251, 259–78, 284–87 Molè family, 335 “Money Laundering: Latest Developments and Regulations” (Edwards), 250–52 monopolies, 127, 217, 291 Montalto, Tonino, 229 Montería, Colombia, 136–37, 139, 143, 165, 174 Monti, Maria ( undercover agent), 224–26 Montoya, Diego (the Cyclist), 295, 364 Morabito, Saverio, 213, 216 Morelia, Mexico, 63, 65 Moreno (Mara member), 352 Moreno González, Nazario (El Chayo; El Más Loco), 61–62 morphine, 18–19 Moscow, 260, 261, 262–63, 266, 267–68, 271, 276, 285 “mother ships,” 291–92, 299 motorboats, 296–97, 299 Movement for Peace with Justice and Dignity, 71 MP5 submachine guns, 93 Muerte a Secuestradores (Death to Kidnappers) (MAS), 139, 140, 142 murders, 40–41, 45–47, 56, 58, 59–60, 65–66, 78–90, 91, 95–100 Mussolini, Benito, 346 Muzak (ship), 231 Naftogaz Ukrainy, 285–86 Namibia, 234 Naples, 231, 237, 281, 291, 301, 328, 329, 337–47 narco-banners, 95 narcobloqueo (narco roadblock), 292–93 narco dollars, 205–6, 222–23 Narcotics Traffickers Rehabilitation Program, 159 NASDAQ, 132 National Crime Squad, British, 243 National Criminal Intelligence Service, British, 277 National Institute to Combat Drugs, Mexican, 45 Na Waie, Batista Tagme, 316 Nepomuceno Guerra, Juan, 59 Netherlands, 234–36, 291, 308, 312, 332 neurotransmitters, 35–36, 120 New York, N.Y., 5–15, 129, 185, 186, 262, 268, 273–74, 276, 359–60 New York Stock Exchange, 73 New Zealand, 195 Nicotera, Italy, 172, 199 Nieuwe Revu, 235 Nigeria, 322, 323, 334 Nigoline di Corte Franca, Italy, 219 No. 48 (‘O muorto che parla; dead man talking), 338 No. 62 (‘o muort’ acciso; death by murder), 338 Nollino, Andrea, 339, 340 norepinephrine, 36 Norte del Valle cartel, 131, 135, 152, 159, 160, 295, 302, 364 Northern Ireland, 154–55 Nuevo Laredo, Mexico, 42, 43, 98, 99–100, 328 obšcak (criminal fund), 265 Ochoa Restrepo, Fabio, 139, 158 Oct Challenger (ship), 298–99 Odyssey, The (Homer), 298 Office of Foreign Assets Control blacklist, 185–86 Office of the Attorney General, U.S., 38–39 Oficina de Envigado (Office of Envigado), 161–62, 165 Olive Tree Party, 170 omertà code, 340 Onorata Società (Honored Society), 170, 171, 175, 176, 187, 195 Onwumere, Peter Christopher, 323 Operación Leyenda (Operation Legend), 31–33 Operation Crimine-Infinito, 168, 193 Operation Dark Waters, 306 Operation Decollo (Take-Off), 178–81, 189, 192–94, 196, 197, 198, 199, 200 Operation Decollo bis, 192 Operation Decollo Money, 192–93, 198 Operation Decollo ter, 192, 197, 199 Operation Dinero, 222–26 Operation Magna Charta, 298 Operation Meta, 330 Operation Millennium, 158 Operation Overloading, 202 Operation Reckoning, 185–86, 191 Operation Sword, 277–78 Operazione Solare, 185–86, 191 opium, 16–21, 25, 28, 31, 34, 38–40, 62, 282–83 Opnor (ship), 321 Orange Revolution, 285 Orechovskaja group, 263 Oseguera Ramos, Nemesio (El Mencho), 67 Oslo Accords, 154–55 Osorio Chong, Miguel Ángel, 54, 70 Ospedaletto, Italy, 302 Overdose (sailboat), 300 Paderno Dugnano, Italy, 168, 193 Padua, Italy, 329 Palace of the Thousand and One Nights, 45 Palermo, Caterina, 220 Palermo, Giuseppe, 235 Palermo maxi-trial, 169 Palestine, 143 Palo Borracho, 329 Palo della Banda dell’Ortica, 212 Palombini Bar, 225 Panama, 150, 231, 319 Pannunzi, Alessandro, 218, 229, 230, 238 Pannunzi, Roberto (Bebè), 211, 213–22, 226, 227–36, 238–40, 305 Pannunzi, Simona, 218 Papp, Katalin, 269 Paraguay, 334 Paramaribo, Suriname, 335 paranoia, 36, 123, 374 Paris, France, 119, 314 Paris, Natalia, 133–36, 137, 140, 143–49, 151, 157–60 Parma, Italy, 238 Parrita (paramilitary), 138–39 Partido Revolucionario Institucional (PRI) (Institutional Revolutionary Party), 100 Paso Fino horses, 223 Pastrana, Andrés, 154–57, 158 PATRIOT Act (2001), 242, 254 Patrullas de Autodefensa Civil, 84 Pay de Limón (sniffer dog), 345 Pearl cocaine, 117–18 Pelle, Antonio (‘Ntoni Gambazza) , 202 Peña Nieto, Enrique, 54, 68, 70 Peru, 232 phencyclidine, 113 Picasso, Pablo, 223 Pictet Cie, 255–57 piedra muñeca marble, 177, 180 Ping ideogram, 304 Pinochet, Augusto, 350 Piraeus, Greece, 233 Piromalli, Francesco and Giuseppe (Roly-poly brothers), 230–31 Piromalli family, 172, 305 Pistoleros, 360 Pistone, Joe, 80 Pizza Connection, 255 Pizzata, Bruno, 202–3, 205 Plan Colombia, 155–57 plastic surgery, 45–46 plata o plomo (money or lead), 127, 130 Platì, Italy, 193, 194, 215, 216, 217, 218, 229, 230 Pocho (sniffer dog), 343–44 Poh Lin (ship), 332 Policía Federal Ministerial (PFM), Mexican, 101 Polsi, San Luca, Italy, 168, 186–87, 194 Ponte San Pietro, Italy, 237 Ponzi schemes, 273–74 Poptún training camp, 86–87 Porky’s strip club, 279–80 Portugal, 297, 317–25, 333 Posada, Rosa María, 154 Posadas Ocampo, Juan Jesús, 40–41 potassium carbonate, 75 Poveda, Christian, 348–56 Prague, 275–76, 277 Presidential Security Service, Russian, 269 Prestieri, Maurizio, 226–27 Progreso, Mexico, 98, 329 Project Coronado, 64–65 prostitution, 94, 135, 269–70 Puente Grande prison, 41 Puma, Commander (AFI commander), 101 Pupone (Big Baby) (real estate agent), 202 Putin, Vladimir, 285–86 racehorses, 223, 252–53 Ragal (sniffer dog), 345 Rambo (paramilitary), 188 Ramírez Treviño, Mario Armando (El Pelón; X20), 61 Ramiro (drug dealer), 184, 190 Reagan, Ronald, 29 Red Ribbon Week, 33–34 Resortito (clown), 95–96 Reta, Rosalío, 96–97 Revelation, Book of, 375 Rex (mule dog), 346 Reyes, Fernando, 47 Reynosa, Mexico, 60, 101 RHM Trust Bank, 222–23 Riina, Salvatore (Totò), 259 Rijeka, Croatia, 180 Rimini, Italy, 251 Rodríguez Orejuela brothers, 129, 142 Roizis, Griša (the Cannibal), 279–81 Romanò, Attilio, 339 Romano, Lino, 339, 340 Rome, 202, 215, 225, 227, 230, 232, 239–40, 300, 331 Romero Vázquez, Jesús Antonio, 100 Rosarno, Italy, 193, 202–3, 298 RosUkrEnergo, 285–87 Rotterdam, 291, 308, 332 Royal Air Maroc, 323–24 Royal Bank of Scotland, 249–50, 252 Rubens, Peter Paul, 223 Ruello, Nello, 204 Russia: arms trafficking in, 272, 273, 282, 283 arrests and imprisonment in, 260, 263, 275–76, 284–85 banking in, 270–71, 274 cocaine trafficking in, 279–82, 283, 287 drug addiction in, 282–83 economy of, 265–67, 270–71, 285–87 gas exports of, 285–87 mafia of, 251–52, 258–87, 289, 294 money laundering in, 251, 260, 268–69, 273, 276–78, 281, 283–84 prisons of, 260, 262, 265 prostitution in, 269–70 protection rackets in, 263–66 violence in, 263–68, 273, 285 see also Soviet Union sailing vessels, 296–300 St.
The Divide: American Injustice in the Age of the Wealth Gap by Matt Taibbi
banking crisis, Bernie Madoff, butterfly effect, collapse of Lehman Brothers, collateralized debt obligation, Corrections Corporation of America, Credit Default Swap, credit default swaps / collateralized debt obligations, Edward Snowden, ending welfare as we know it, fixed income, forensic accounting, Gordon Gekko, greed is good, illegal immigration, information retrieval, London Interbank Offered Rate, London Whale, naked short selling, offshore financial centre, Ponzi scheme, profit motive, regulatory arbitrage, short selling, telemarketer, too big to fail, War on Poverty
Involving thousands of transactions, hundreds of individuals, and somewhere between nine and sixteen of the world’s biggest banks, the LIBOR affair at the heart of the UBS settlement was, numerically speaking, probably the biggest financial scandal ever. At the time, it was both the biggest antitrust case and the biggest price-fixing case ever to surface (some serious competitors have since reared their heads). By working together to rig global interest rates through their manipulation of the London Interbank Offered Rate—a projection of the rate at which banks charge one another to borrow and lend money—banks like UBS, Barclays, the Royal Bank of Scotland, and perhaps as many as six other companies (according to British regulators) impacted the price of hundreds of trillions of dollars of financial products, everything from mortgages to credit cards to municipal bonds to swaps and even currencies. British and American regulators had UBS officers cold.
But in more than a few cases, you can draw a straight line from a cop being laid off or a union worker having his or her pension slashed back to the week of 2008 when a handful of Lehman executives took a payoff to mark down their own inventory. A few years after that deal, investigators in four different countries—the United States, Canada, Great Britain, and Japan—began investigating a series of banks, including Barclays, for manipulating the London Interbank Offered Rate, also known as LIBOR. As the benchmark rate that measures how much banks charge to lend to one another, LIBOR is the basis for almost every adjustable-rate investment vehicle on earth. Investigators later found emails from Barclays traders who discussed manipulating LIBOR so that they could make more money on a trade. In one particularly enlightening exchange, the Barclays LIBOR reporter, in cheerily bromantic language, tells the trader that he’s happy to oblige.
Financial Modelling in Python by Shayne Fletcher, Christopher Gardner
The libor rate constructor takes in the properties common to all observables plus the projection start and end date together with the projection basis. The projection period, define by the difference between the projection end date and start date, determines the period over which the LIBOR rate is to apply. As an example, for GBP LIBOR the projection period is six months. Furthermore, there is usually a 2 London Interbank Offer Rate – a daily reference rate on which banks in the London money market offer to lend each other unsecured funds. Data Model 71 lag between the date on which the rate is set and the beginning of the projection period. Once again, as an example, for GBP LIBOR the lag is two business days. from ppf.date time import year fraction from fixing import * from observable import * class libor rate(observable): def init (self , attributes , flow id , reset id , reset date , reset currency , proj start date , proj end date , proj basis , fix , spread=None): observable. init (self , attributes , flow id , reset id , reset currency , reset date , proj end date , fix , spread) self. proj start date = proj start date self. proj end date = proj end date self. proj basis = proj basis def proj start date(self): return self. proj start date def proj end date(self): return self. proj end date def proj basis(self): return self. proj basis def year fraction(self): return year fraction(self. proj start date , self. proj end date , self. proj basis) def str (self): s = "%d, " % self.flow id() s += "%d, " % self.reset id() s += "%s, " % self.reset currency() s += "[%s, %s], " % (self. proj start date, self. proj end date) s += "%s, " % day count basis strings[self. proj basis] fix = self.fix() if fix.is fixed(): s += "%f, " % fix.value() spread = self.spread() 72 Financial Modelling in Python if spread <> None: s += "%f, " % spread return s For completeness the libor rate class provides a method forward for determining the value of the LIBOR rate at a particular point in time. class libor rate(observable): def forward(self, t, curve): fix = self.fix() if fix.is fixed(): return fix.value() start = self. proj start date until = self. proj end date Ts, Te = (int(start - t)/365.0, int(until - t)/365.0) Ps, Pe = (curve(Ts), curve(Te)) dcf = year fraction(start, until, self. proj basis) forward = (Ps/Pe-1.0)/dcf return forward In practice, it is frequently necessary to generate collections of LIBOR observables.
The Internet of Money by Andreas M. Antonopoulos
AltaVista, altcoin, bitcoin, blockchain, clean water, cognitive dissonance, cryptocurrency, ethereum blockchain, financial exclusion, global reserve currency, litecoin, London Interbank Offered Rate, Marc Andreessen, Oculus Rift, packet switching, peer-to-peer lending, Ponzi scheme, QR code, ransomware, reserve currency, Satoshi Nakamoto, self-driving car, Skype, smart contracts, the medium is the message, trade route, underbanked, WikiLeaks, zero-sum game
"I can see a world in which we can smoothly move between currencies in a multimodal way." We already do this in financial markets. In fact, you can trade S&P 500. You’re not buying a single company; what you’re buying into is the aggregation of all of the different things that are in the stock market as an expression of the total value of the market. You can then use that meta-instrument in order to price transactions. For example, the London Interbank Offered Rate is used as a meta-interest rate to contractually tie things to a global set of interest rates. You don’t need to say, "I will buy this at whatever the Bundesbank says." You say, "I’ll buy this at LIBOR plus 2," and then you have a stable point of reference for transactions. I expect we’re going to see much of the same with currency. We’re probably going to see meta-currencies whose only purpose is to aggregate the value in all of our wallets for all of our currencies, and allow us to understand value as an abstraction that exists independently of the currencies in which it’s expressed. 7.6.
The Payoff by Jeff Connaughton
algorithmic trading, bank run, banking crisis, Bernie Madoff, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, desegregation, Flash crash, locking in a profit, London Interbank Offered Rate, London Whale, Long Term Capital Management, naked short selling, Neil Kinnock, Plutocrats, plutocrats, Ponzi scheme, risk tolerance, Robert Bork, short selling, Silicon Valley, too big to fail, two-sided market, young professional
[We must] build a financial system on a firmer foundation. The American economy cannot succeed unless we restore and maintain financial stability. Two years later, the largest European banks—the standard for why the United States needs its own megabanks to compete globally, senators opposed to Brown-Kaufman had said—are still in crisis, causing continued financial instability. And the London Interbank Offering Rate (LIBOR)–fixing scandal has shown how rotten big-bank culture had become. In time, Ted’s words have gained even more force. That summer of 2010, though, public outrage was focused more on Washington than Wall Street. In October 1994, while I served in the Clinton White House, I don’t remember anyone predicting a Republican blowout. This time, the only question was whether the hurricane blowing Democrats out of office would be a category four or five.
The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz
affirmative action, Affordable Care Act / Obamacare, airline deregulation, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, income inequality, income per capita, indoor plumbing, inflation targeting, information asymmetry, invisible hand, jobless men, John Harrison: Longitude, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, London Interbank Offered Rate, lone genius, low skilled workers, Marc Andreessen, Mark Zuckerberg, market bubble, market fundamentalism, mass incarceration, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, negative equity, obamacare, offshore financial centre, paper trading, Pareto efficiency, patent troll, Paul Samuelson, payday loans, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, wealth creators, women in the workforce, zero-sum game
When competition is so limited, prices are likely to be far in excess of competitive levels.41 That’s why the sector enjoys profits estimated to be more than $115 billion a year, much of which is passed along to its top officials and other bankers—helping create one of the major sources of inequality at the top.42 In some products, such as over-the-counter credit default swaps (CDSes), four or five very large banks totally dominate, and such market concentration always gives rise to the worry that they collude, albeit tacitly. (But sometimes the collusion is not even tacit—it is explicit. The banks set a critical rate, called the London Interbank Offered Rate, or Libor. Mortgages and many financial products are linked to Libor. It appears that the banks worked to rig the rate, enabling them to make still more money from others who were unaware of these shenanigans.) Of course, even when laws that prohibit monopolistic practices are on the books, these have to be enforced. Particularly given the narrative created by the Chicago school of economics, there is a tendency not to interfere with the “free” workings of the market, even when the outcome is anticompetitive.
., 187–206 alternative frameworks for, 188, 202 banks’ deception in, 198, 199, 200, 201, 373 burden of proof in, 199–200 contracts in, 197 corporate advantages in, 66, 132, 189–90, 191, 203, 272, 327, 374 costs in, 100, 189–90, 202 distributive consequences of, 190, 193, 271, 317, 370 economic bias in, 44 Federal Reserve accountability in, 252 financial crisis prosecution in, xv–xvi, 70, 119, 199, 372, 373 financial sector’s favoring in, 191–202, 203, 204–6 information asymmetries in, 271, 368 political influence in, 44, 190–91, 200 property rights in, 190, 194, 197, 198, 199 purpose of, 100, 188–91 reform of, 273 rent seeking in, 42, 43, 203, 273 and social responsibility, 121 unfairness in, 42, 43, 100, 189–90, 191–202, 203, 206, 368, 373, 375 Lehman Brothers, 253, 313, 390 Leme, Paulo, 353 Lenin, Vladimir, 354 Lessig, Lawrence, xxiv LG, 203 Lincoln, Abraham, 137 List, John, 347 lobbying, 48, 95, 101, 185, 196, 319, 324, 325, 338 Lockheed Martin, 210 London Interbank Offered Rate (Libor), 47 Longitude (Sobel), 109 Lula da Silva, Luiz Inácio, 5, 139, 353 Luxembourg, 183, 286 manufacturing: compensation shifts in, 65, 328 job losses in, 54, 56, 57, 232–33, 285, 321 societal impact of, 156 marginal productivity theory, 30, 33, 77, 267 marketing, 150–51, 160, 162, 357, 359 Marlboro Man, 151, 354 marriage, economic insecurity and, 15, 303 Marshall, Alfred, 102 Marx, Karl, 30, 292 Massachusetts, 200–201 McCarty, Nolan, xxiv McDonald’s, 381 media, 128–29, 134, 135, 136, 160, 163, 252, 272, 286, 335, 348, 349, 358 Medicaid, 14, 228, 277, 378 Medicare, 17, 48, 97, 147, 163, 176, 210, 228–29, 265, 320, 355, 364, 378, 380 Mexico, 16, 42, 64, 138, 176, 365 MF Global Holdings, 313 microcredit, 196–97 Microsoft, 42, 44, 45–46, 74, 203, 317, 318, 319 middle class, 54, 117, 137 assistance to, 29, 274 economic insecurity of, xvii, 12–14, 23, 26, 103, 265–66 globalization’s effect on, 63, 64 Great Recession’s effect on, 10 hollowing out of, 2, 9, 25, 38, 84, 133, 300 income of, 3, 4, 7, 8, 9, 14, 25, 54, 56, 57, 63, 72, 240, 297, 298, 300, 385 recovery of, 29, 225 tax deductions for, 222–24, 379 unfair policies toward, xv, xxii wealth sources of, 3, 8, 13–14, 91, 167 Middle East, 40 see also Arab Spring Mill, John Stuart, 368 monetarism, 257, 258–59 monetary policy, 85, 86, 88, 133, 177, 208, 234, 239–40, 248, 250, 251, 252, 254, 257–58, 259, 261, 262, 263–64, 380, 382, 385, 389, 392 distributive consequences of, 243–45, 264, 279 idea-shaping in, 256–63 monopolies 31, 32, 35, 39–47, 95, 97, 140, 213, 270–71, 274, 316, 318 moral hazard, 171, 229, 256, 362, 363 Mortgage Electronic Registry System (MERS), 198, 201, 374 mortgage fraud, 198, 201, 372, 373 mortgage restructuring, 169–72, 201–2, 284–85, 362, 363 mortgages, tax deductions for, 222, 223, 379 mortgage securities, 205 Mosaic, 318 motivation, 102, 103, 111–12 Motorola, 203 Mozilo, Angelo, 333 Mueller, Edward, 42 Mullainathan, Sendhil, 103 municipal bonds, 212, 378 National Academy of Sciences, 26 National Center for Supercomputing Applications, 318 National Commission on the Causes of the Financial and Economic Crisis in the United States, 357, 358 National Economic Council, 180 Netherlands, 19, 22 Netscape, 45–46, 318 New Deal, xiii, 88, 231 Newfoundland, 138 New York Times, 11, 119, 205 Nokia, 203 North American Free Trade Agreement, 141 Norway, 22, 23, 183, 220 NTP, Inc., 203 Obama, Barack, x, 352 deficit reduction by, 207 and ethanol subsidy, 51 Federal Reserve nominees of, 319 financial crisis response of, xv, 168, 169, 361 health care program of, 14, 163, 276 tax position of, 395 Obama administration, xiv, 67, 170, 171, 200, 250, 284, 362, 396 Occupy Wall Street, ix–xiv, xix–xxi, 102, 116, 118, 127, 134, 345 “Of the 1%, for the 1%, by the 1%” (Stiglitz), xi Olin Foundation, 44, 359 1 percent: definition of, xxii economic framework’s favoring of, xx, xxii, 31, 34, 62, 67, 91, 117, 131, 142, 173, 174, 189, 191, 204, 239, 244, 245–46, 264, 348, 354 economic security of, 18, 19, 25 globalization’s benefits to, 62, 64, 142 idea-shaping by, 129, 134, 137, 146–86, 211, 236, 256, 287 income of, 2, 4, 8, 25, 52, 72, 85, 215, 267, 294, 295, 297, 298, 299, 300, 315, 332, 335 legal framework’s favoring of, 188, 191, 202, 206, 273 media’s control by, 129, 134, 286 political power of, xix, 32, 67, 83, 86, 89, 101, 118, 119, 120–21, 129, 131–33, 134, 137, 138, 146, 191, 267, 285, 348, 351 public perception of, 20–21, 146, 154, 159, 358 reform aimed at, 29, 268–74 rent seeking by, 32, 38, 41–43, 77 saving by, 85, 88, 223, 275 small government preference of, 93 social contract violation by, xvi–xvii social contributions of, 27, 41, 77–78, 96, 266 social norms’ shaping by, 53 taxation of, 5, 38, 42–43, 62, 71–73, 74, 76, 77, 84, 86, 87–88, 114, 115, 116, 138, 142, 159, 167, 208, 209, 211, 212, 214–15, 218, 221, 223, 224, 225, 226, 256, 274, 275, 294, 312, 335, 344, 360, 383, 394 value change in, 288 wealth of, 2, 3, 8, 25, 32, 38, 56, 72, 73, 80, 84, 166–67, 295 see also corporations; financial sector Organization for Economic Cooperation and Development (OECD), 16, 185 Orshansky, Mollie, 305 Ostrom, Elinor, 322 overdrafts, 194, 370 Pager, Devah, 69 Papua New Guinea, 184 patents, 43, 202, 203, 316, 374, 375 see also intellectual property pension funds, 227–28 Personal Responsibility and Work Opportunity Reconciliation Act, 17 Pew Foundation, 20 pharmaceutical industry: government munificence toward, 40, 48, 97, 210, 211, 224, 228, 272, 276 research in, 97 see also health industry Pierson, Paul, xxiv Piketty, Thomas, xxiii, 114 Pinochet, Augusto, 258 polarization, 8–9 Polarized America (McCarty, Poole, and Rosenthal), xxiv police lineups, 149 police states, 125 politics, U.S.: cognitive capture in, 161–62 corporate influence in, 34, 37, 41, 47, 48, 50, 51, 61, 62, 95, 99, 101, 111, 131–32, 135, 136–37, 200, 202, 285, 286, 319, 324, 325, 338, 350 distributive consequences of, 31, 52, 58, 239, 277, 278, 322 economy’s linkage with, xi, xix–xx, xxiv, 34, 38–39, 47, 52–53, 59, 65, 66, 89, 118, 131, 135, 138, 151, 173, 266, 287, 288–89, 348 idea-shaping in, 129, 137, 148, 149, 151–52, 153–55, 159–62, 163, 166–72, 175, 180, 185, 186, 285 legal consequences of, 190–91 media’s role in, 129, 134, 135, 136, 160, 163, 286 reform of, 135–36, 267, 285–86 regulatory capture in, 47–48, 248, 249–50, 253, 264 societal factors in, 64 unfairness in, x, xi, xii, xviii–xx, 31–32, 39, 41, 83, 101, 114–15, 118, 119, 120–21, 127, 129, 131–33, 134, 135, 136–37, 138, 144, 146, 191, 196, 200, 202, 267, 285, 286, 319, 324, 325, 338, 348, 350, 351 voting in, 119–21, 129–31, 133, 134, 135, 137, 286, 288, 325, 345, 349, 350, 351, 355 see also democracy, U.S.; government, U.S.
The Making of Global Capitalism by Leo Panitch, Sam Gindin
accounting loophole / creative accounting, active measures, airline deregulation, anti-communist, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Big bang: deregulation of the City of London, bilateral investment treaty, Branko Milanovic, Bretton Woods, BRICs, British Empire, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collective bargaining, continuous integration, corporate governance, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, Deng Xiaoping, disintermediation, ending welfare as we know it, eurozone crisis, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, full employment, Gini coefficient, global value chain, guest worker program, Hyman Minsky, imperial preference, income inequality, inflation targeting, interchangeable parts, interest rate swap, Kenneth Rogoff, land reform, late capitalism, liberal capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, money market fund, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, new economy, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, seigniorage, shareholder value, short selling, Silicon Valley, sovereign wealth fund, special drawing rights, special economic zone, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, very high income, Washington Consensus, Works Progress Administration, zero-coupon bond, zero-sum game
This interbank market had become increasingly central to the operation of the global payments system, and with seven out of every ten transactions taking place in US dollars, it was the most important focus of the Fed’s monetary policy; a select few Wall Street banks, operating as “market makers,” were especially central in reallocating the liquidity provided by the Fed.34 Since the benchmark for the trading of wholesale funds was the London Interbank Offer Rate (LIBOR)—effectively the internationally “traded version” of the Fed’s interest rate—the increasing spread between the Federal funds rate and LIBOR (as banks feared that their loans to other banks might not be repaid) represented a near-freezing of the payment networks between the world’s largest financial institutions, and endangered the capacity of the Federal Reserve to manage the global financial system.
., 396n39 Huntington, Samuel, 163 Hussein, Sadam, 218 Hyman, Louis, 386n27 Hymer, Stephen, 113, 287, 429n51 IBM, 115, 139, 176, 202, 225, 289, 296 Ignatieff, Michael, 341, n.3 imperialism, 5–7, 12, 20–1, 37–41, 48, 67–8, 87. 195–6, 224, 342–3nn12–15, ‘by invitation’, 90, 232, 294 Import Substitution Industrialization (ISI), 32, 104–5, 195, 212–4, 217, 239 Income Tax Act (1913), 45 India, 36, 212–3, 217, 276–8, 287, 291, 293, 299, 326, 334 Indonesia, 105, 133, 256–7, 260–1, 281, 291, 293, 296, 328 inequality, 12, 52, 140, 216, 269, 277, 299, 306, 321, 338–9, 375n44, 434n105 inflation, 14, 87, 138, 152, 158–9, 163, 165–7, 170–1, 192, 204, 235, 244, 247, 304, 326, 329, 383n58, 387n33 informal empire, 1, 5–8, 11, 19. 25–6, 37–41, 47–8, 70, 90–1, 104, 107, 195–6, 226, 332, 342–3n.12, 348n.4 Ingham, Geoffrey, 53 intellectual property rights, 39, 225, 227, 229 Inter–American Bank, 72 interbank market, 153, 179, 206, 215, 249, 254, 311–4, 325–8, 334 Clearing House Interbank Payments System (CHIPS), 153 London Interbank Offered Rate (LIBOR), 312 Interest Equalization Tax (IET, 1963 ), 125 inter-imperial rivalry, 2, 5, 13–14, 43, 79, 134, 218 International Association of Securities Commissions, 235 International Monetary Fund (IMF), 9, 17, 72, 122, 145–6, 155–9, 197, 209, 214–8, 223, 235, 238–9, 248–52, 255–65, 277–81, 285, 302–4, 328, 335–6, 367n43, 367n52, 424n95, 435n8 and Asian Crisis, 255–61, 269, 277–80 and Britain, 157–9 conditionality, 91, 157–9, 220, 240–1, 243–4, 279, 371n12 establishment of, 78–80 and Latin America, 214–6 and Mexico, 253–4 protests against, 241, 271 surveillance, 155 and Turkey, 217, 434n7 US dominates, 155, 235, 271,428n37 voting power in, 76 See also Bretton Woods; structural adjustment International Center for the Settlement of Investment Disputes (ICSID), 117, 379n16, 414n42 Interstate Commerce Commission, 32–4 International Trade Organization (ITO), 73, 93–4, 226, 229, 372n15, 379n16 International Union for Protection of Industrial Property (1883), 37 Iraq, 218, 252, 332, 341n3 Iran, 12, 51, 167, 218 Italy, 70, 96, 97, 123, 142, 155, 200, 203, 276, 332, 338 See also, Europe; G7; Marshall Plan Jacobsson, Per, 97–8, 374n39 Jaffe, Amy Myers, 103 James, Harold, 416n72 Japan, 2, 10, 13–4, 17, 19, 33, 37, 40, 47, 54, 70, 91, 94, 106–7, 115, 123, 126, 131, 134, 141, 145–7, 154–5, 164–71, 179, 189–91, 195, 202–13, 224–6, 237, 249, 253–62, 276, 280–1, 288, 294–5 , 304, 321, 325–7, 377n79, 421n36 admitted to OECD, 406n44 Dodge Report, 377n80 financial liberalization, 206 integrated production, 115–6 lender of last resort, 256 See also, Bank of Japan; G7; Plaza Accord Jefferys, Steve, 379n10 Jefferson, Thomas, 26 Johnson, Chalmers, 346n32 Johnson, Lyndon B., 15, 127–9, 138 Jones, Geoffery G., 345n26 Justice, Department of (US), 86, 122 Kahler, Miles, 415–6n59, 418n1 Kalecki, Michael, 79 Kapstein, Ethan, 391n85, 391n91, 407n63, 410n101 Katz, Richard, 408n79 Kautsky, Karl, 25, 47, 343n13 Kennan, George, 95, 355n1 Kennedy, Edward, 166 Kennedy, John F.
The Concepts and Practice of Mathematical Finance by Mark S. Joshi
Black-Scholes formula, Brownian motion, correlation coefficient, Credit Default Swap, delta neutral, discrete time, Emanuel Derman, fixed income, implied volatility, incomplete markets, interest rate derivative, interest rate swap, London Interbank Offered Rate, martingale, millennium bug, quantitative trading / quantitative ﬁnance, short selling, stochastic process, stochastic volatility, the market place, time value of money, transaction costs, value at risk, volatility smile, yield curve, zero-coupon bond
Since the borrowing is collateralized, the riskiness is small but it is not non-existent and so the interest rates are higher. Thus the implied yields from the repo curve are higher and the discount factors correspondingly lower than for gilts. 13.4.4 The LIBOR curve The third main curve is the LIBOR curve and this is the most important one. (Remember that with this is the rate at which banks can freely borrow and lend 316 Interest rate derivatives to each other and that LIBOR is an abbreviation for London Interbank Offering Rate.) The short end of the LIBOR curve is constructed from the market rates for borrowing. However, LIBOR rates are not available for long-term borrowing - one cannot go to the LIBOR market and ask for a five-year loan. The longer-dated discounts are therefore inferred from the prices of other instruments, in particular from the prices of the most liquid of instruments, swaps. As interbank borrowing is riskier than collateralized borrowing, the LIBOR yield will be higher than the repo and gilt curves whilst the discount factors are lower.
Incomplete market A market in which is not complete. 432 Financial and mathematical jargon Knock-in option A derivative that pays off only if some reference level is passed. Knock-out option A derivative that pays off only if some reference level is not passed. Kurtosis The fourth moment of a random variable minus its mean divided by the variance squared: E ((X - E(X))4) Var(X)2 LIBID London Interbank Bid Rate. The rate at which the bank can deposit shortterm money in the interbank market. See also LIBOR. LIBOR London Interbank Offer Rate. The rate at which the bank can borrow short-term money in the interbank market. See also LIBID. Long A long position is a positive holding of an asset. Opposite to a short position. Market model A model for interest rates in which the movement of some market-observable rates are modelled directly. See also BGM, BGMlf. Martingale A random variable whose value is always equal to its expected future value.
Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew W. Lo
Albert Einstein, Alfred Russel Wallace, algorithmic trading, Andrei Shleifer, Arthur Eddington, Asian financial crisis, asset allocation, asset-backed security, backtesting, bank run, barriers to entry, Berlin Wall, Bernie Madoff, bitcoin, Bonfire of the Vanities, bonus culture, break the buck, Brownian motion, business process, butterfly effect, capital asset pricing model, Captain Sullenberger Hudson, Carmen Reinhart, Chance favours the prepared mind, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Daniel Kahneman / Amos Tversky, delayed gratification, Diane Coyle, diversification, diversified portfolio, double helix, easy for humans, difficult for computers, Ernest Rutherford, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, Fractional reserve banking, framing effect, Gordon Gekko, greed is good, Hans Rosling, Henri Poincaré, high net worth, housing crisis, incomplete markets, index fund, interest rate derivative, invention of the telegraph, Isaac Newton, James Watt: steam engine, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, margin call, Mark Zuckerberg, market fundamentalism, martingale, merger arbitrage, meta analysis, meta-analysis, Milgram experiment, money market fund, moral hazard, Myron Scholes, Nick Leeson, old-boy network, out of africa, p-value, paper trading, passive investing, Paul Lévy, Paul Samuelson, Ponzi scheme, predatory finance, prediction markets, price discovery process, profit maximization, profit motive, quantitative hedge fund, quantitative trading / quantitative ﬁnance, RAND corporation, random walk, randomized controlled trial, Renaissance Technologies, Richard Feynman, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Robert Shiller, Robert Shiller, short selling, sovereign wealth fund, statistical arbitrage, Steven Pinker, stochastic process, survivorship bias, The Great Moderation, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Triangle Shirtwaist Factory, ultimatum game, Upton Sinclair, US Airways Flight 1549, Walter Mischel, Watson beat the top human players on Jeopardy!, WikiLeaks, Yogi Berra, zero-sum game
There’s the biological analogy of the virgin soil epidemic, which takes place when a population encounters a new disease it has no resistance to, as in the case of smallpox, which devastated the indigenous peoples of the Americas after the arrival of Europeans in the sixteenth century. In recent years, the financial system has been preyed on by all sorts of fraudulent behavior, whether blatantly as in the case of the Madoff scandal; deliberate misrepresentation, as in Bankers Trust’s actions against Procter & Gamble (and cases currently under litigation related to the financial crisis); or the unbelievable manipulation of the London Interbank Offered Rate, possibly the largest financial scam in the history of markets. But what happens if we “trust, but verify?” Consider a scenario that should sound rather familiar. An institution takes in money from trusting investors and claims to use it to make investments. It allows investors to withdraw their money at will, but in reality, it uses new investor money to satisfy their withdrawals. On paper, it shows steady returns over time—maybe it even advertises its rates.
., 366, 367, 370 Levins, Richard, 171, 172 Lévy, Paul, 19 Lewis, James, 159 Lewontin, Richard, 171, 172 Li, William, 372 Liber de Ludo Aleae (Cardano), 17 Lieberman, Matthew D., 85–87 life-cycle funds, 398 life expectancy, 258 Lintner, John, 263 Linux, 372 liquidity spirals, 289–291, 297 literacy, 165, 416 Litterman, Bob, 295 Lo, Julia, 127 Lockheed Corporation, 13, 14, 15 Lockner, Bob, 311 Lodish, Harvey, 418–420 London Interbank Offered Rate (LIBOR), 344 longevity risk, 408 Long-Term Capital Management (LTCM), 230, 241–244, 292, 294, 316, 321, 376 Loomis, Carol, 233 loss aversion, 58, 61–62, 65, 69 Lotta-Volterra equations, 279 Lou Gehrig’s disease (amyotrophic lateral sclerosis), 409 Lucas, Debbie, 361 Lucas, Robert, 36, 37, 42, 181 “Lucas critique,” 37 Lucifer Effect, 347–348 “Lucy” (australopithecine ancestor), 150, 152 Lynch, Peter, 6 macaque, 110, 121–122 Macchiaroli, Michael, 308 Mackay, Charles, 5 MacKinlay, Craig, 47–51, 71–72, 74, 167, 244, 280, 285 macroeconomics, 36–37, 212, 313 madness of mobs, 5, 9, 11, 109, 232, 261, 420 Madoff, Bernard, 4–5, 332–335, 344, 349–351, 354, 387, 393 Maestro (Woodward), 7 magnetic resonance imaging (MRI), 77–78, 86, 88–89, 90, 101, 102, 186, 337, 338 magnetoencephalography (MEG), 78 maladaptation, 188–189 Malkiel, Burton, 5–6 Maloney, Michael T., 14, 24, 38 Malthus, Thomas, 8–9, 45, 215 manufacturing sector, 330, 331 “March Madness,” 64–65 Marcus, Jeff, 383 Maréchal, Michel André, 352–353 margin calls, 242, 290, 326 Index margin requirements, 256, 369.
Mathematics for Finance: An Introduction to Financial Engineering by Marek Capinski, Tomasz Zastawniak
Black-Scholes formula, Brownian motion, capital asset pricing model, cellular automata, delta neutral, discounted cash flows, discrete time, diversified portfolio, fixed income, interest rate derivative, interest rate swap, locking in a profit, London Interbank Offered Rate, margin call, martingale, quantitative trading / quantitative ﬁnance, random walk, short selling, stochastic process, time value of money, transaction costs, value at risk, Wiener process, zero-coupon bond
Exercise 10.17 Explain how a deposit of $50, 000 for six months can be arranged to start in six months and ﬁnd the rate if y(0, 6) = 6% and y(0, 12) = 7%, where 1 . τ = 12 In general, the initial forward rate f (0, M, N ) is an interest rate such that B(0, N ) = B(0, M )e−(N −M )τ f (0,M,N ) , so f (0, M, N ) = − 1 B(0, N ) ln B(0, N ) − ln B(0, M ) ln =− . τ (N − M ) B(0, M ) τ (N − M ) Note that this rate is deterministic, since it is worked out using the present bond prices. It can be conveniently expressed in terms of the initial term structure. Insert into the above expression the bond prices as determined by the yields, B(0, N ) = e−τ N y(0,N ) and B(0, M ) = e−τ M y(0,M ) , to get f (0, M, N ) = N y(0, N ) − M y(0, M ) . N −M (10.5) Exercise 10.18 Suppose that the following spot rates are provided by central London banks (LIBOR, the London Interbank Oﬀer Rate, is the rate at which money can be deposited; LIBID, the London Interbank Bid Rate, is the rate at which money can be borrowed): Rate 1 month 2 months 3 months 6 months LIBOR 8.41% 8.44% 9.01% 9.35% LIBID 8.59% 8.64% 9.23% 9.54% As a bank manager acting for a customer who wishes to arrange a loan of $100, 000 in a month’s time for a period of 5 months, what rate could you oﬀer and how would you construct the loan?
The Irrational Economist: Making Decisions in a Dangerous World by Erwann Michel-Kerjan, Paul Slovic
Andrei Shleifer, availability heuristic, bank run, Black Swan, Cass Sunstein, clean water, cognitive dissonance, collateralized debt obligation, complexity theory, conceptual framework, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, Daniel Kahneman / Amos Tversky, endowment effect, experimental economics, financial innovation, Fractional reserve banking, George Akerlof, hindsight bias, incomplete markets, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, iterative process, Kenneth Arrow, Loma Prieta earthquake, London Interbank Offered Rate, market bubble, market clearing, money market fund, moral hazard, mortgage debt, Pareto efficiency, Paul Samuelson, placebo effect, price discrimination, price stability, RAND corporation, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, source of truth, statistical model, stochastic process, The Wealth of Nations by Adam Smith, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, ultimatum game, University of East Anglia, urban planning, Vilfredo Pareto
This inefficiency is reflected in all of the government’s subprime mortgage bailouts. I thank Ken Froot for emphasizing for me this application of the debt overhang issue. 12 See Jaffee (2009). Chapter 20 Froot: Toward Financial Stability 1 I modify markets with dealer-centric to indicate the many dealer-intermediated markets that exist, and to contrast them from exchange-centric markets. 2 The London Interbank Offered Rate (LIBOR) is a daily reference rate based on the interest rates at which banks borrow funds from other banks in the London wholesale money market (or interbank market). Overnight index swaps (OIS) are instruments that allow financial institutions to swap the interest rates they are paying without having to refinance or change the terms of the loans they have taken from other financial institutions. 3 A credit default swap (CDS) is a credit derivative contract between two counterparties.
Tools for Computational Finance by Rüdiger Seydel
bioinformatics, Black-Scholes formula, Brownian motion, commoditize, continuous integration, discrete time, implied volatility, incomplete markets, interest rate swap, linear programming, London Interbank Offered Rate, mandelbrot fractal, martingale, random walk, stochastic process, stochastic volatility, transaction costs, value at risk, volatility smile, Wiener process, zero-coupon bond
A2 Financial Derivatives Derivatives are instruments to assist and regulate agreements on transactions of the future. Derivatives can be traded on specialized exchanges. Futures and forwards are agreements between two parties to buy or sell an asset at a certain time in the future for a certain delivery price. Both parties make a binding commitment, there is nothing to choose at a later time. 1 London Interbank Oﬀered Rate A comprehensive glossary of ﬁnancial terms is provided by www.bloomberg.com/analysis 2 A2 Financial Derivatives 241 For forwards no premiums are required and no money changes hands until maturity. A basic diﬀerence between futures and forwards is that futures contracts are traded on exchanges and are more formalized, whereas forwards are traded in the over-the-counter market (OTC).
Shortchanged: Life and Debt in the Fringe Economy by Howard Karger
big-box store, blue-collar work, corporate social responsibility, credit crunch, delayed gratification, financial deregulation, fixed income, illegal immigration, labor-force participation, late fees, London Interbank Offered Rate, low skilled workers, microcredit, mortgage debt, negative equity, New Journalism, New Urbanism, offshore financial centre, payday loans, predatory finance, race to the bottom, Silicon Valley, Telecommunications Act of 1996, telemarketer, underbanked, working poor
CHAPTER 4: THE CREDIT CARD INDUSTRY 1 Robert Manning, Credit Card Nation (New York: Basic Books, 2000). 2 Randy Martin, The Financialization of Daily Life (Philadelphia: Temple University Press, 2002). 3 Lloyd Klein, It’s in the Cards (Westport, CT: Praeger Publishers, 1999). 4 CNN, “Late Payments at 5-Year High, Past-Due Credit Card Debt Highest Since ‘97,” April 29, 2002.223 5 Manning, Credit Card Nation; the Motley Fool, “Industry Secrets, Scary Debt Stats,” 2003, www.motleyfool.com CNN Money, “Credit Card Noose Still Tight,” March 14, 2003, http://money.cnn.com/2003/03/13/pf/banking/creditcard_survey/ NFO WorldGroup, “Younger Consumers Paying the Piper for Excessive Credit Card Spending,” November 21, 2002; and Cardweb.com, “Foggy 2003,” www.cardweb.com/cardtrak/pastissues/jan03.html. 6 Coalition for Responsible Credit Practices, The Crisis of Growing Consumer Debt. 7 Source: Fair Isaac Corporation, 2004. 8 Source: Fair Isaac Corporation, 2004. 9 Consumerinfo.com, “Credit Scoring Made Simple,” 2003, www.consumerinfo.com/credit-scoring-simple.asp. 10 Merchant Bankcard Network, 2003. 11 U.S. Court of Appeals, Second Circuit, United States v. Visa U.S.A., Inc., Visa International Corp., and MasterCard International, Inc., Washington, DC, September 17, 2003. 12 Manning, Credit Card Nation. 13 The London Interbank Offered Rate Index (LIBOR) is an average of the interest rates that major international banks charge each other to borrow U.S. dollars in the London money market. 14 Patrick McGeehan, “The Plastic Trap: Soaring Interest Compounds Credit Card Pain for Millions,” The New York Times, November 21, 2004. 15 Consumer Action, Annual Credit Card Survey, San Francisco, CA, March 2003. 16 Ibid. 17 Ibid. 18 Consumers for Responsible Credit Solutions, “A New Report Issued by Consumers for Responsible Credit Solutions Carries Strong Warnings for Consumers Seeking Credit Counseling Services,” July 12, 2004, www.responsiblecredit.com/releases/071204.php. 19 McGeehan, “The Plastic Trap.” 20 Consumer Action, Annual Credit Card Survey, 2003. 21 Kathleen Day and Caroline Mayer, “Credit Card Penalties, Fees Bury Debtors,” The Washington Post, March 6, 2005. 22 Quoted in ibid. 23 Ibid. 24 Candace Heckman, “Lawmakers Mull Ban on Credit Card ‘Convenience Checks,’” Seattle Post-Intelligencer Reporter, February 12, 2003. 25 Quoted in Bonnie Rubin, “College Students Charge Right into Valley of Debt,” Chicago Tribune, August 16, 1998. 26 U.S.
Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed by Andrew Jackson (economist), Ben Dyson (economist)
bank run, banking crisis, banks create money, Basel III, Bretton Woods, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial exclusion, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, informal economy, information asymmetry, intangible asset, land reform, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, negative equity, Northern Rock, price stability, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, risk-adjusted returns, seigniorage, shareholder value, short selling, South Sea Bubble, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, unorthodox policies
The central bank incentivised banks to hit their reserve target by paying interest on reserves at the policy rate when they hit their target. By standing ready to lend reserves to banks at a higher rate of interest (than the policy rate), and pay interest on reserves deposited with it at a lower rate of interest (than the policy rate), the central bank controlled the interest rate at which private banks lent reserves to each other on the interbank market (known as the London Interbank Offered Rate, or LIBOR for short). This is because a bank looking to borrow reserves from another bank on the interbank market would not pay more than the interest rate at which it could borrow from the Bank of England. Similarly, a bank lending reserves would not accept a lower interest rate than that which it could receive by leaving its reserves in its own account at the Bank of England. These two interest rates created a ‘corridor’ around the interest rate at which the Bank of England wanted banks to lend to each other (the policy rate).
How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester
asset allocation, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamonds, Bretton Woods, BRICs, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, commoditize, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, financial innovation, Flash crash, forward guidance, Gini coefficient, global reserve currency, high net worth, High speed trading, hindsight bias, income inequality, inflation targeting, interest rate swap, Isaac Newton, Jaron Lanier, joint-stock company, joint-stock limited liability company, Kodak vs Instagram, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, negative equity, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Plutocrats, plutocrats, Ponzi scheme, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, trickle-down economics, Washington Consensus, wealth creators, working poor, yield curve
The complicating factor, though, is that there are very many legal contracts denominated in euro but set out in other jurisdictions, and it isn’t clear whether the courts will accept the principle of lex monetae. Will a German court, supervising a German contract between a German company and a Greek counterparty, a contract unambiguously stating that payment is in euro, accept payment in new drachma? This is one of the problems with the creation of a currency area that has no exit mechanism, i.e., the euro zone, and it has the potential to be a biggie. Libor The London Interbank Offer Rate is or was the single most important number in international financial markets, used as a reference point throughout the global financial system. Libor is the range of interbank lending rates, set after consultation between the British Bankers Association and more than three hundred participating banks. During the daily process, each bank is asked the rate at which it could borrow money from other banks, “unsecured,” in other words backed only by its own creditworthiness rather than by specific collateral.
When the Money Runs Out: The End of Western Affluence by Stephen D. King
Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, fixed income, floating exchange rates, full employment, George Akerlof, German hyperinflation, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, mass immigration, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, old age dependency ratio, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population
That, however, may be too cavalier a conclusion. Should a lack of trust prevent recovery from materializing, the cyclical argument would no longer hold. In 2012, that certainly appeared to be a valid interpretation. Five years after subprime entered the public consciousness, Bob Diamond, the high-profile chief executive of Barclays Bank plc, was forced to resign, thanks to an interest rate-rigging scandal affecting the London interbank offered rate (Libor) – the interest rate paid daily by banks for funds from other banks – which, during the financial crisis, became a key barometer of the health or otherwise of individual banks. Fiddling with Libor denied relevant information to investors about the solvency or otherwise of financial institutions, thus increasing the likelihood of inappropriate financial decisions. Barclays was hit with a fine of £290 million for its role in this unfortunate episode.
affirmative action, Affordable Care Act / Obamacare, Bernie Sanders, Bretton Woods, carried interest, clean water, collateralized debt obligation, collective bargaining, computerized trading, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, desegregation, diversification, diversified portfolio, Donald Trump, financial innovation, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, illegal immigration, interest rate swap, laissez-faire capitalism, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, medical malpractice, money market fund, moral hazard, mortgage debt, obamacare, passive investing, Ponzi scheme, prediction markets, quantitative easing, reserve currency, Ronald Reagan, Sergey Aleynikov, short selling, sovereign wealth fund, too big to fail, trickle-down economics, Y2K, Yom Kippur War
It was the AAA-rated tiers of the mortgage-backed deals that crushed America’s financial hull, thanks to an even more sophisticated and diabolical scam perpetrated by some of the wealthiest, most powerful people in the world. At around the same time Andy was doing his billion-dollar deal, another trader at a relatively small European bank—let’s call him Miklos—stumbled on to what he thought, at first, was the find of a lifetime. “So I’m buying bonds,” he says. “They’re triple-A, supersenior tranche bonds. And they’re paying, like, LIBOR plus fifty.” Jargon break: LIBOR, or the London Interbank Offered Rate, is a common reference tool used by bankers to determine the price of borrowing. LIBOR refers to the interest rate banks in London charge one another to borrow unsecured debt. The “plus” in the expression “LIBOR plus,” meanwhile, refers to the amount over and above LIBOR that bankers charge one another for transactions, with the number after “plus” referring to hundredths of a percentage point.
Liar's Poker by Michael Lewis
barriers to entry, Bonfire of the Vanities, cognitive dissonance, corporate governance, corporate raider, financial independence, financial innovation, fixed income, Home mortgage interest deduction, interest rate swap, Irwin Jacobs, John Meriwether, London Interbank Offered Rate, margin call, mortgage tax deduction, nuclear winter, Ponzi scheme, The Predators' Ball, yield curve
What. . . is ... he . . . doing: But he stopped before he reached the back. He picked out someone sitting on the edge of his seat in the middle of the room and asked, "What is your name?" "Ron Rosenberg," said the trainee. "Well, Ron," said Sangfroid, "what is LIBOR today?" LIBOR? LIBOR? A dozen back-row people whispered to the person next to them, "What the fuck is LIBOR?" LIBOR is an acronym for London interbank offered rate; it is the interest rate in London at which one bank lends to another; and it is available at 8:00 A.M. London time, or 3:00 A.M. New York time That gave the trainee four whole hours to find out the LIBOR rate before class began at 7:00 A.M. Along with every other fact in the bond markets, Sangfroid expected us to have LIBOR on the tips of our tongues. "This morning," said Ron, "LIBOR is seven-point-two-five percent, which puts it up twenty-five basis points from yesterday."
The Big Short: Inside the Doomsday Machine by Michael Lewis
Asperger Syndrome, asset-backed security, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, facts on the ground, financial innovation, fixed income, forensic accounting, Gordon Gekko, high net worth, housing crisis, illegal immigration, income inequality, index fund, interest rate swap, John Meriwether, London Interbank Offered Rate, Long Term Capital Management, medical residency, money market fund, moral hazard, mortgage debt, pets.com, Ponzi scheme, Potemkin village, quantitative trading / quantitative ﬁnance, Robert Bork, short selling, Silicon Valley, the new new thing, too big to fail, value at risk, Vanguard fund, zero-sum game
After all, the lender held the collateral of the house. As a rule of thumb, in the event of default, the lender collected roughly 50 cents on the dollar. And so roughly 16 percent of the borrowers in a mortgage pool needed to default for the pool to experience losses of 8 percent. * The story of how and why they did this has been painstakingly told by Financial Times journalist Gillian Tett, in her book Fool's Gold. * London Interbank Offered Rate--the interest rate at which banks will lend money to each other. Once thought more or less riskless, it is now, more or less, not. * Dear Reader: If you have followed the story this far, you deserve not only a gold star but an answer to a complicated question: If Mike Burry was the only one buying credit default swaps on subprime mortgage bonds, and he bought a billion dollars' worth of them, who took the other $19 billion or so on the short side of the trade with AIG?
The Blue Cascade: A Memoir of Life After War by Mike Scotti
Cash advance against the credit card. Down another three grand. Good. Take it all. Max out the other credit card. Call the bank. Make it last. Don’t stop. Off the rails. Please—take it. Everything I have left. I don’t care anymore. I don’t care about signing bonuses or networking or generally accepted accounting principles. About half-Windsor tie knots, proper Excel formatting, or the London interbank offered rate. Then a tap-tap-tap on my shoulder. “Sir, are you friends with that gentleman over there?” “Yes.” “I’m sorry, sir, but he is going to have to leave.” I didn’t bother to ask why. I just accepted it. Back on the road to Memphis in the early morning light. “What time is your flight, dude?” “I think it’s like nine twenty a.m.” “Mine’s at like nine thirty. We’re probably going to miss them.”
A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers by Lawrence G. Mcdonald, Patrick Robinson
asset-backed security, bank run, collateralized debt obligation, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, diversification, fixed income, high net worth, hiring and firing, if you build it, they will come, London Interbank Offered Rate, Long Term Capital Management, margin call, money market fund, moral hazard, mortgage debt, naked short selling, negative equity, new economy, Ronald Reagan, short selling, sovereign wealth fund, value at risk
(A CDO can contain many different types of financial assets, including mortgage-backed securities, corporate bonds, and credit card receivables.) *Amazingly AAA-rated CDOs yielded only 10 to 15 basis points more than U.S. Treasuries in July 2006. AA-rated CDOs yielded 20 to 25 basis points more. One hundred basis points is equal to 1 percent. *Lehman would be paid the $500 million, less the recovery rate on the bonds. †Beazer Homes’ five-year CDS spread in 2005 was on average 180 basis points over the London Interbank Offered Rate (LIBOR). When an investor buys $500 million of CDS on a corporation like Beazer Homes, unlike buying a bond, the CDS investor (our counterparty on the other side of the e-trade) does not have to put up $500 million in cash. We, as buyers of the CDS protection, are simply responsible for paying a premium (or cash flows above LIBOR to the counterparty) and can get paid as much as the face value if the corporation defaults.
The End of Wall Street by Roger Lowenstein
Asian financial crisis, asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, break the buck, Brownian motion, Carmen Reinhart, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fear of failure, financial deregulation, fixed income, high net worth, Hyman Minsky, interest rate derivative, invisible hand, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, Martin Wolf, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, Ponzi scheme, profit motive, race to the bottom, risk tolerance, Ronald Reagan, Rubik’s Cube, savings glut, short selling, sovereign wealth fund, statistical model, the payments system, too big to fail, tulip mania, Y2K
Gamble, one of the AIG lawyers, bristled over the terms, and asked Jester if the government could tweak them so that AIG would still have an incentive—some value left for the shareholders if it ever emerged from the ruins. Jester didn’t budge. The bankers and officials at the Fed were extremely tense; outside the bank’s stone walls the country’s financial problems were spreading, and in unforeseen directions. The one-month Libor (London Interbank Offered Rate)—a measure of what banks pay for thirty-day loans—surged a quarter of a point, suggesting that banks were having difficulty getting funding. The overnight Libor rate surged three percentage points, a record and altogether bizarre advance. Depositors began to pull assets from weaker banks, particularly WaMu. The board of another mortgage-era darling, Wachovia, opted to either raise capital or, failing that, look for a partner or even a buyer.16 Even funding for industrial companies weakened.
Affordable Care Act / Obamacare, algorithmic trading, Amazon Mechanical Turk, American Legislative Exchange Council, asset-backed security, Atul Gawande, bank run, barriers to entry, basic income, Berlin Wall, Bernie Madoff, Black Swan, bonus culture, Brian Krebs, call centre, Capital in the Twenty-First Century by Thomas Piketty, Chelsea Manning, Chuck Templeton: OpenTable, cloud computing, collateralized debt obligation, computerized markets, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, Debian, don't be evil, drone strike, Edward Snowden, en.wikipedia.org, Fall of the Berlin Wall, Filter Bubble, financial innovation, financial thriller, fixed income, Flash crash, full employment, Goldman Sachs: Vampire Squid, Google Earth, Hernando de Soto, High speed trading, hiring and firing, housing crisis, informal economy, information asymmetry, information retrieval, interest rate swap, Internet of things, invisible hand, Jaron Lanier, Jeff Bezos, job automation, Julian Assange, Kevin Kelly, knowledge worker, Kodak vs Instagram, kremlinology, late fees, London Interbank Offered Rate, London Whale, Marc Andreessen, Mark Zuckerberg, mobile money, moral hazard, new economy, Nicholas Carr, offshore financial centre, PageRank, pattern recognition, Philip Mirowski, precariat, profit maximization, profit motive, quantitative easing, race to the bottom, recommendation engine, regulatory arbitrage, risk-adjusted returns, Satyajit Das, search engine result page, shareholder value, Silicon Valley, Snapchat, Spread Networks laid a new fibre optics cable between New York and Chicago, statistical arbitrage, statistical model, Steven Levy, the scientific method, too big to fail, transaction costs, two-sided market, universal basic income, Upton Sinclair, value at risk, WikiLeaks, zero-sum game
For example, one way banks’ health was estimated was through their own daily reports of their estimated borrowing costs (for overnight, monthlong, and other loans) to the British Bankers’ Association (BBA). The BBA published the rates within an hour of submission. Just as a high credit card rate may indicate that a consumer is in financial distress, abnormally high borrowing costs could be a clue to a bank’s ill health. By throwing out high and low numbers and averaging the rest, the BBA also set benchmarks like the London interbank offered rate (Libor). This rate was (and remains) the benchmark for hundreds of trillions of dollars of financial instruments and transactions.86 Banks reported estimated rates on an “honor system,” approximating what they believed their borrowing costs to be.87 That practice created opportunities for manipulative traders to push Libor higher or lower to benefit their own positions. Traders (whose profitability would often depend on the rates put forward by “submitters”) were shameless in their manipulation.
Commodity Trading Advisors: Risk, Performance Analysis, and Selection by Greg N. Gregoriou, Vassilios Karavas, François-Serge Lhabitant, Fabrice Douglas Rouah
Asian financial crisis, asset allocation, backtesting, capital asset pricing model, collateralized debt obligation, commodity trading advisor, compound rate of return, constrained optimization, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, discrete time, distributed generation, diversification, diversified portfolio, dividend-yielding stocks, fixed income, high net worth, implied volatility, index arbitrage, index fund, interest rate swap, iterative process, linear programming, London Interbank Offered Rate, Long Term Capital Management, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, p-value, Pareto efficiency, Ponzi scheme, quantitative trading / quantitative ﬁnance, random walk, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, stochastic process, survivorship bias, systematic trading, technology bubble, transaction costs, value at risk, zero-sum game
From the monthly returns, “semi ex-ante” annual discrete returns were generated with a bootstrap-like methodology i.e., drawing 12 samples with replacement from the set of monthly data, using 1,000 repetitions for each fund. This bootstrapping methodology is in the vein of the technique applied by Ederington (1995). We used the Standard and Poor’s monthly return series as underlying. As proxy for the risk-free rate, we took the one-month U.S. Dollar (USD) London Interbank Offered Rate (LIBOR). RESULTS Nonnormality of Returns We test for nonnormality of returns with the Jarque and Bera (1987) test (see Greene 2000). Analyzing the samples, we find that the null hypothesis of normally distributed returns cannot be rejected at the 1 percent level for only 14 cases (11 percent of the observations) and at the 5 percent level for only 11 cases (8.7 percent). Clearly, the sample of CTA funds is highly nonnormal.
3D printing, additive manufacturing, Airbus A320, Albert Einstein, Amazon Web Services, Any sufficiently advanced technology is indistinguishable from magic, asset-backed security, augmented reality, barriers to entry, bitcoin, bounce rate, business intelligence, business process, business process outsourcing, call centre, capital controls, citizen journalism, Clayton Christensen, cloud computing, credit crunch, crowdsourcing, disintermediation, en.wikipedia.org, fixed income, George Gilder, Google Glasses, high net worth, I think there is a world market for maybe five computers, Infrastructure as a Service, invention of the printing press, Jeff Bezos, jimmy wales, London Interbank Offered Rate, M-Pesa, Mark Zuckerberg, mass affluent, Metcalfe’s law, microcredit, mobile money, more computing power than Apollo, Northern Rock, Occupy movement, optical character recognition, peer-to-peer, performance metric, Pingit, platform as a service, QR code, QWERTY keyboard, Ray Kurzweil, recommendation engine, RFID, risk tolerance, Robert Metcalfe, self-driving car, Skype, speech recognition, stem cell, telepresence, Tim Cook: Apple, transaction costs, underbanked, US Airways Flight 1549, web application
LCD: Liquid Crystal Display LED: Light Emitting Diode LOLA: A Siri-like technology (see Siri below) through the Internet and via voice. Low-Counter: Typically a desk station within a branch where the relationship manager can sit with customers and potential clients and advise them on available products and services. Lo-Fi Prototype: A simple method of prototyping products, interfaces or applications and testing with target customers or users. LIBOR: London Interbank Offered Rate LinkedIn: An online social network for business professionals. Metcalfe’s Law: Attributed to Robert Metcalfe, this law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system (n2). MFI: Microfinance Institution—an alternate form of bank found in developing countries which provides microcredit lending. MIRC: Magnetic Ink Character Recognition Mobile Portal: A website designed specifically for mobile phone interfaces and mini-browsers.
Investment: A History by Norton Reamer, Jesse Downing
activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Berlin Wall, Bernie Madoff, break the buck, Brownian motion, buttonwood tree, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, Gordon Gekko, Henri Poincaré, high net worth, index fund, information asymmetry, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, means of production, Menlo Park, merger arbitrage, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Network effects, new economy, Nick Leeson, Own Your Own Home, Paul Samuelson, pension reform, Ponzi scheme, price mechanism, principal–agent problem, profit maximization, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sand Hill Road, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, survivorship bias, technology bubble, The Wealth of Nations by Adam Smith, time value of money, too big to fail, transaction costs, underbanked, Vanguard fund, working poor, yield curve
It would not be given true statutory authority until the passage of the Companies Act in 2006, but the Guinness scandal was one piece of evidence that proponents of this statutory footing cited for years.118 LIBOR Scandal One crucial exception to the idea that market manipulation tends to be limited to small, illiquid markets is the LIBOR scandal. The scandal did not come to public light until 2012, though evidence suggests that LIBOR rate ﬁxing took place at least as early as 2005.119 LIBOR, the London Interbank Offered Rate, is intended to represent the interest rate major banks would charge each other for loans. The LIBOR system was implemented in 1986 by the British Bankers’ Association, in large part simply to provide a benchmark that banks could look at in the process of setting rates. Currently, there are a total of 150 different LIBOR rates published daily for ten different currencies and ﬁfteen different time horizons.120 The fundamental problem with LIBOR is that the number is calculated by a survey of the banking institutions themselves, not by analyzing actual transaction data.
Albert Einstein, Asian financial crisis, asset allocation, asset-backed security, backtesting, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business process, capital asset pricing model, capital controls, central bank independence, collateralized debt obligation, commoditize, Commodity Super-Cycle, commodity trading advisor, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, diversification, diversified portfolio, equity premium, family office, fiat currency, fixed income, follow your passion, full employment, George Santayana, Hyman Minsky, implied volatility, index fund, inflation targeting, interest rate swap, inventory management, invisible hand, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, market microstructure, moral hazard, Myron Scholes, North Sea oil, open economy, peak oil, pension reform, Ponzi scheme, prediction markets, price discovery process, price stability, private sector deleveraging, profit motive, purchasing power parity, quantitative easing, random walk, reserve currency, risk tolerance, risk-adjusted returns, risk/return, savings glut, selection bias, Sharpe ratio, short selling, sovereign wealth fund, special drawing rights, statistical arbitrage, stochastic volatility, survivorship bias, The Great Moderation, Thomas Bayes, time value of money, too big to fail, transaction costs, unbiased observer, value at risk, Vanguard fund, yield curve, zero-sum game
See also Hyper-Great Macro Experiment explanation (Drobny) success Great Moderation Bernanke opinion Greenspan, Alan actions blame Conundrum speech Gunslinger fund manager Hang Seng, shorting Harvard University, endowments annual long-term performance assets, decline equity returns, contrast portfolio (2010) problems Headline inflation, core inflation (contrast) Hedge funds assets, growth business, Equity Trader outlook downside protection managers cash, availability prop trader, contrast transportation money allocation lending loss management, Commodity Trader perspective one-dimensional managers Plasticine Macro Trader complaint playing problems (2008) prop desk, contrast real money, differentiation redemptions running, worries space, Professor perspective stocks, contrast usage, Plasticine Macro Trader perspective Hedges, purchase Hendry, Hugh HFRI Macro Index Historical asset class, indicator Historical correlations, usage Historical events, examination Hoover, Herbert House, The business entry Human bias, impact Human Development Index (HDI) Hyper-Great Macro Experiment Hyperinflation impact risk scenario worry Hypothecation Hypotheses falsification, absence running Hypothesis testing, preference Ideas source trading Illiquid assets allocation avoidance inexpensiveness overinvestment Illiquid investments Illiquidity appearance cost, calculation increase needs, consideration premium, Pensioner measurement process risk premium, exposure Illiquidity assets risk value Illiquidity risk hedge process location mitigation recognition Illiquid positions, ownership Illiquid private deals, impact Illiquid strategies, investor engagement Incentive structures, change (process) India FDI GDP investment change Industrial production (IP) Inflation approach Commodity Trader perspective control deflation, contrast feeding, absence fiscal stimulus, impact hedge active commodity manager, impact impact increase persistence presence pressure psychological element quantitative easing, impact risk, increase risk premium volatility, reduction Inflation (1980-2000) Inflation-linked bonds Inflation-linked investment Inflation protected government bonds, purchase Inflection points, awareness Information arbitrage definition filtration flow, absence inundation Inside the House of Money (Drobny) Institutional investors impact leverage, usage (preclusion) money, loss outside advisors, usage Institutional money management, change Institutional real money mandates, Plasticine Macro Trader advice Insurance protection Intellectual property, anchor Intercontinental Exchange (ICE) Interest rates (1980-2000) increase trades weakness zero level International diversification, importance Investment account, volatility flow alternatives approach, defense committees, challenge human bias, impact hypotheses/positions, running losses rear view mirror process vehicles, usage Investment grade bonds (IG8) Investment Management Association (IMA) Investors base, impact complacency decisions, manager track record basis losses mistakes purchases, crisis risk management IOU papers/obligations Japan bullishness (Plasticine Macro Trader) economic malaise inflation-protected bonds inflation scenario performance (1990) rolling 10-year inflation stagnation Jobs, saving/creation (Obama phrase) Jones, Paul Tudor (success) JPMorgan Chase (2009) Keynes, John Maynard commodity belief Knowledge gap, reduction Latam-type bond defaults Latam-type financial crisis Latin America, performance Lehman Brothers government bond leverage change saving Leitner, Jim analysis, awareness interview lessons Leitner Center for International Law and Justice Leverage cash, relationship contrast efficient frontier, relationship function impact presence reduction usage Pensioner prediction Limited partnerships, leverage Liquidity crisis crisis (2008), leverage impact excess focus importance management, problem measurement process overvaluation perspective Predator definition premium provider risk excess scarcity valuation quantitative models, usage value example lesson Liquid markets mentality Livermore, Jesse London Interbank Offered Rate (LIBOR) basis, problem futures, ownership increase (2007) LIBOR-OIS basis (2008) three-month LIBOR Long-dated out-of-the-money equity index call options, purchase Longer-dated nominal bonds Long-only investments Long-term bonds, usage Long-Term Capital Management (LTCM) crisis problem Long-term fair value, departure Long-term fixed income assets Long-term historical correlations impact usage Long-term historical returns, usage Long-term horizon, irresponsibility Long-term inflation hedging investor nervousness Long-term money Long-term time horizon, advantage M2 (money supply measurements) Macroeconomics environment, creation imbalances pricing Macro factors examination risk Macro fund, running Macro hedge fund community Macro principles Macro risk management Macro scenario, preparation Macro traders, profits Macro trading Major Market Indices (2007) Managers, investor base (impact) Margin-to-equity, limits Markets Bond Trader viewpoint change conditions, improvement environment, identification functioning, understanding fundamentals/psychology, impact outguessing positioning, importance psychological game psychology, understanding zero-sum game Markets to fundamentals Marshall Plan Maximum Sharpe Ratio (MSR) portfolio construction goal Medium-term bonds, usage Medium-term theme projects Merrill Lynch saving (Thundering Herd) Microeconomic imbalances Mines, Commodity Investor purchase Minsky moment Misery index, peak Mishkin, Frederic S.
affirmative action, Asian financial crisis, Berlin Wall, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Fall of the Berlin Wall, fear of failure, fixed income, Goldman Sachs: Vampire Squid, housing crisis, indoor plumbing, invisible hand, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, Mikhail Gorbachev, money market fund, moral hazard, NetJets, Northern Rock, oil shock, paper trading, risk tolerance, rolodex, Ronald Reagan, savings glut, shareholder value, short selling, sovereign wealth fund, supply-chain management, too big to fail, value at risk, éminence grise
If Washington was going to take Wall Street off the hook, the government wanted to make certain that at least the old stakeholders didn’t profit in any untoward fashion. “Paulson is handling this the same way he did Fannie, Freddie, and Bear Stearns—if the government steps in, the shareholders will pay for it,” Cohen observed. The Fed loan also came with a signific ant debt burden. AIG would have to pay at a rate based on a complex formula—the London interbank offered rate, a benchmark for short-term loans between banks, which then came to about 3 percent—plus an extra 8.5 percentage points. Based on that day’s rate, the interest the company would have to pay soared to more than 11 percent, which at the time was considered usurious. The loan would be secured by all AIG’s assets, and the government would have the right to veto payments of dividends to both common and preferred shareholders.
Stress Test: Reflections on Financial Crises by Timothy F. Geithner
Affordable Care Act / Obamacare, asset-backed security, Atul Gawande, bank run, banking crisis, Basel III, Bernie Madoff, Bernie Sanders, break the buck, Buckminster Fuller, Carmen Reinhart, central bank independence, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, David Brooks, Doomsday Book, eurozone crisis, financial innovation, Flash crash, Goldman Sachs: Vampire Squid, housing crisis, Hyman Minsky, illegal immigration, implied volatility, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, Nate Silver, negative equity, Northern Rock, obamacare, paradox of thrift, pets.com, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, RAND corporation, regulatory arbitrage, reserve currency, Saturday Night Live, savings glut, selection bias, short selling, sovereign wealth fund, The Great Moderation, The Signal and the Noise by Nate Silver, Tobin tax, too big to fail, working poor
For example, if company A owes $100 to company B and after going into bankruptcy repays only $80 of that loan, company B is said to have received a “haircut” of 20 percent. Five: The Fall 1 “TED spread”: The three-month Treasury-Eurodollar, or TED, spread measures the difference in borrowing costs on three-month Treasury bills and the cost that banks pay to borrow from each other for three months, as reflected in the London Interbank Offered Rate (LIBOR). 2 prime money market funds: There are three primary types of money market funds: Treasury and government funds that buy Treasury and agency securities; tax-exempt funds, which invest in short-term municipal securities; and prime funds, which typically pay higher rates of interest by investing in a broader range of riskier securities, including unsecured commercial paper and asset-backed commercial paper.
The Social Life of Money by Nigel Dodd
accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial exclusion, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, German hyperinflation, Goldman Sachs: Vampire Squid, Hyman Minsky, illegal immigration, informal economy, interest rate swap, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liberal capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, negative equity, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer, peer-to-peer lending, Ponzi scheme, post scarcity, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative ﬁnance, remote working, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Satoshi Nakamoto, Scientific racism, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Veblen good, Wave and Pay, Westphalian system, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond
This era would have spanned the entire post–World War II period, during which the Wall Street system was transforming capitalism, leading to a succession of Minsky moments, as well as a financial system in which fraudulent activity was increasingly being seen as part of “normal” business practice. This was a period culminating not just in the subprime crisis, but also in the LIBOR affair (a series of fraudulent actions connected to the LIBOR, London Interbank Offered Rate, and also the resulting investigation and reaction). For some time, Minsky had been warning of the growth of “megabanks” that were predatory and inefficient, and more generally, of the emergence of “money manager capitalism” (Minsky 1993a), arguing that this emergence was fueling the development of an excessively leveraged economy.42 As part of this analysis, Minsky specifically addressed the practice of securitization in a memo written in 1987 that he used for teaching monetary theory.
Money and Power: How Goldman Sachs Came to Rule the World by William D. Cohan
asset-backed security, Bernie Madoff, buttonwood tree, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, fear of failure, financial innovation, fixed income, Ford paid five dollars a day, Goldman Sachs: Vampire Squid, Gordon Gekko, high net worth, hiring and firing, hive mind, Hyman Minsky, interest rate swap, John Meriwether, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, mega-rich, merger arbitrage, moral hazard, mortgage debt, Myron Scholes, paper trading, passive investing, Paul Samuelson, Ponzi scheme, price stability, profit maximization, risk tolerance, Ronald Reagan, Saturday Night Live, South Sea Bubble, time value of money, too big to fail, traveling salesman, value at risk, yield curve, Yogi Berra, zero-sum game
You just get it kind of in four years.” Goldman was trying—it seemed to him—to distinguish his pay from that of his peer group. “They were doing their job and paid me just enough to keep me around,” he said. In 2001, he came up with another new innovation: something he called “CMM,” for constant maturity mortgage, a kind of interest-rate product tied to mortgage rates, instead of LIBOR (for London Interbank Offered Rate). A CMM was “an attempt to simplify the trading of mortgage price risk by transforming the most liquid portion of the mortgage market into a rate-based market” and can “be used to hedge for mortgage products that are sensitive to changes in mortgage rates.” Regardless of whether mere mortals understood the new product (or not), Birnbaum’s point about it was “that it was another innovation that did well and made good money doing it,” of around $100 million a year or so.