London Whale

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pages: 257 words: 71,686

Swimming With Sharks: My Journey into the World of the Bankers by Joris Luyendijk

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activist fund / activist shareholder / activist investor, bank run, barriers to entry, Bonfire of the Vanities, bonus culture, collapse of Lehman Brothers, collective bargaining, corporate raider, credit crunch, Credit Default Swap, Emanuel Derman, financial deregulation, financial independence, Flash crash, glass ceiling, Gordon Gekko, high net worth, hiring and firing, information asymmetry, inventory management, job-hopping, light touch regulation, London Whale, Nick Leeson, offshore financial centre, regulatory arbitrage, Satyajit Das, selection bias, shareholder value, sovereign wealth fund, the payments system, too big to fail

Traders at a range of investment and megabanks were found to have manipulated crucial interest rates and foreign currency rates, resulting in the Libor and FX affairs. In spite of all the internal controls and risk limits, another rogue trader at the London headquarters of the Swiss bank UBS managed to lose his bank billions of pounds. The megabank HSBC was caught laundering drugs money while several banks were fined for ignoring sanctions against Iran and Sudan. In 2012, a trader known as the London Whale lost over $6 billion at JP Morgan. And for years now across Europe, small and medium-sized companies, pension funds, utilities, municipalities and other public institutions have been discovering that the complex financial products they bought from London-based investment bankers have turned ‘toxic’. The list of scandals gets longer with every passing year, and who knows what else has been kept under wraps?

My granddad was a diligent milkman and my dad a diligent policeman. I was just being diligent in an industry that throws its money around.’ Complexity vastly increases the scope for misuse and even abuse. Whether the crash of 2008 was ultimately down to that or to a huge misunderstanding – Dr No or Dr Nitwit – is still the subject of heated discussion. But no such controversy exists surrounding the scandal caused by the trader known now as ‘the London Whale’. In the spring of 2012, a trader at the London offices of JP Morgan by the name of Bruno Iksil managed with his small team to run up a $6.2 billion loss. The nickname refers to Iksil’s humongous positions – in other words he had put a vast amount of the bank’s capital at risk. Iksil was based in the City but JP Morgan is an American bank so the Senate’s Permanent Subcommittee on Investigations began to dig into this ‘monster loss’.

His answer was simple: ‘Sell the forward spread and buy protection on the tightening move, use indices and add to existing position, go long risk on some belly tranches especially where defaults may realise, buy protection on HY and Xover in rallies and turn the position over to monetise volatility.’ Could you tell us what this means? the committee members asked the JP Morgan risk managers. Nobody was able to do so. JP Morgan is considered the bank with possibly the best risk management in the world. In the year before his whale-like loss, Iksil’s pay came to $7 million. Iksil didn’t break any laws and has never been prosecuted. The London Whale cost JP Morgan a lot of money but banks can also use complexity as a deliberate tool for their own purposes. I spoke to a restructurer who advises small companies in financial difficulty so that they can meet their debt obligations to his bank. He often felt overwhelmed by the complexity of the products and instruments his bank had sold to ‘his’ companies. ‘Sometimes it looks like witchcraft to me,’ he said.


pages: 239 words: 64,812

Geek Sublime: The Beauty of Code, the Code of Beauty by Vikram Chandra

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Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, Apple II, barriers to entry, Berlin Wall, British Empire, business process, conceptual framework, create, read, update, delete, crowdsourcing, don't repeat yourself, Donald Knuth, East Village, European colonialism, finite state, Firefox, Flash crash, glass ceiling, Grace Hopper, haute couture, iterative process, Jaron Lanier, John von Neumann, land reform, London Whale, Norman Mailer, Paul Graham, pink-collar, revision control, Silicon Valley, Silicon Valley ideology, Skype, Steve Jobs, Steve Wozniak, supercomputer in your pocket, theory of mind, Therac-25, Turing machine, wikimedia commons, women in the workforce

Sebastopol, CA: O’Reilly Media, 2007. Kindle edition. Scheffer, Lou. “Programming in Malbolge.” Accessed June 11, 2013. http://www.lscheffer.com/malbolge.shtml. Schelling, Andrew. The Cane Groves of Narmada River: Erotic Poems from Old India. San Francisco: City Lights Books, 1998. Schlesinger, Jill. “JPMorgan Chase Earnings: ‘London Whale’ Cost $5.8 Billion.” CBS Money Watch, July 13, 2012. http://www.cbsnews.com/8301-505123_162-57471697/jpmorgan-chase-earnings-london-whale-cost-$5.8-billion/. Scott, Alec. “Lessons from Canada’s Silicon Valley Diaspora.” The Globe and Mail, February 23, 2012. http://www.theglobeandmail.com/report-on-business/rob-magazine/lessons-from-canadas-silicon-valley-diaspora/article535544/?service=print. Shulman, David. “The Buzz of God and the Click of Delight.” In Aesthetics in Performance: Formations of Symbolic Construction and Experience, edited by Angela Hobart and Bruce Kapferer, 43–63.

The trouble is that in Excel there is no way to trace where your data come from, there’s no audit trail (so you can overtype numbers and not know it), and there’s no easy way to test spreadsheets … The biggest problem is that anyone can create Excel spreadsheets—badly. Because it’s so easy to use, the creation of even important spreadsheets is not restricted to people who understand programming and do it in a methodical, well-documented way.27 Sloppy Excel-wrangling can lead to some very bad decisions, as in the “London Whale” trading disaster of 2012, which caused the financial services firm JPMorgan Chase a loss of approximately six billion dollars; the company’s internal investigation listed as one of the contributing factors a financial modeling process which required cutting and pasting data through a series of spreadsheets. One of these spreadsheets contained a formula dividing by the sum of some numbers instead of their average.28 The day that millions will dash off beautiful programs—as easily as with a pencil—still remains distant.

“Hype Cycle Research Methodology.” 21. “GitFaq—Git SCM Wiki.” 22. Wolfcore [pseud.], comment on “Git Is Simpler Than You Think.” 23. “Whatever Happened to Programming?” 24. Campbell, “Where Does One Go to Find the Current ‘Good’ Books to Read? (Or Blogs?)” 25. Ensmenger, The Computer Boys Take Over, 88. 26. Kwak, “The Importance of Excel.” 27. Ibid. 28. Ibid.; Schlesinger, “JPMorgan Chase Earnings: ‘London Whale’ Cost $5.8 Billion.” 29. Oliver, “Why I Still Love CQRS (and Messaging and Event Sourcing).” 30. Ibid. 31. Zihotki, “Raven & Event sourcing.” 32. Chakrabarti, “Arguing from Synthesis to the Self: Utpaldeva and Abhinavagupta Respond to Buddhist No-Selfism,” 203. 33. Ibid., 209. 34. Ibid., 211. Chapter 7: The Code of Beauty: Abhinavagupta 1. Gnoli and Abhinavagupta, The Aesthetic Experience According to Abhinavagupta, 55. 2.


pages: 320 words: 87,853

The Black Box Society: The Secret Algorithms That Control Money and Information by Frank Pasquale

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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

Murky accounting lets a mountain of leverage and misallocated capital accumulate. These dynamics persist. Consider, for instance, JP Morgan Chase’s “London Whale” trades, which lost the bank billions of dollars. In 2012, the bank’s Chief Investment Office (CIO) had about $350 billion in excess deposits to manage, and devoted some to a very risky synthetic credit portfolio (SCP). The CIO asserted that it had “five key metrics and limits to gauge and control the risks associated with its trading activities.” But when several of those metrics indicated unacceptable losses, managers decided to change the metrics.105 The Senate Report on the London Whale helpfully encapsulates just how suspect this practice was: The head of the CIO’s London office . . . once compared managing the Synthetic Credit Portfolio, with its massive, complex, moving parts, to flying an airplane.

Note, however, political scientist Daniel Carpenter’s contention that “there is value in studying a singular process not because it stands in for so many others, but because it influences so many others.”165 Given how wealthy the boom years made so many in finance, and how unscathed the bust has left them, few aspiring traders and bankers would think of them as a cautionary FINANCE’S ALGORITHMS 137 tale. And trades like the London Whale indicate that years after the crisis, critical models are just as manipulable (and regulators as feckless) as they were in the bubble years. Until fi nance practices in general are routinely as scrutinized as those prevalent in the bubble years, we have little reason to think matters have changed all that much. Indeed, they may even be getting worse. Moreover, it’s hard to credit demands for representativeness in a field as opaque as contemporary fi nance.

When a CEO can step up to the witness stand and disclaim understanding of core actions of his own firm on the grounds of their complexity, it’s hard to imagine how basic legal principles of responsibility and fiduciary duty can endure. Some finance experts argue that the modeling of transactions has become so complex that disingenuous managers can always field a 174 THE BLACK BOX SOCIETY phalanx of quants to hide deals’ dangers. Moreover, algorithmic “control” systems, which are supposed to deter manipulation of risk models automatically, may be easier to manipulate than human experts— recall how JP Morgan Chase’s London Whale traders moved the goalposts to buy time for their risky strategies.125 But without actually reviewing the fine details of transactions, we’ll never even be able to have a coherent argument about such issues. Judge Rakoff actually tried to force such a review in one case. In 2011, he refused to accept a $285 million settlement proposed between Citigroup and the SEC regarding the bank’s role in promoting suspect securities.


pages: 479 words: 113,510

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America by Danielle Dimartino Booth

Affordable Care Act / Obamacare, asset-backed security, bank run, barriers to entry, Basel III, Bernie Sanders, break the buck, Bretton Woods, central bank independence, collateralized debt obligation, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, financial deregulation, financial innovation, fixed income, Flash crash, forward guidance, full employment, George Akerlof, greed is good, high net worth, housing crisis, income inequality, index fund, inflation targeting, interest rate swap, invisible hand, John Meriwether, Joseph Schumpeter, liquidity trap, London Whale, Long Term Capital Management, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, moral hazard, Myron Scholes, natural language processing, negative equity, new economy, Northern Rock, obamacare, price stability, pushing on a string, quantitative easing, regulatory arbitrage, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, short selling, side project, Silicon Valley, The Great Moderation, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, yield curve

CHAPTER 19: SPINNING FEDWIRE While admirers of capitalism: Binyamin Appelbaum, “Yellen’s Path from Liberal Theorist to Fed Voice for Jobs,” New York Times, October 10, 2013, www.nytimes.com/2013/10/10/business/economy/for-yellen-a-focus-on-reducing-unemployment.html. At the January 25, 2012: FR: FOMC Statement, January 25, 2012, www.federalreserve.gov/newsevents/press/monetary/20120125a.htm. In a historic vote: Ibid. A few months later, market: Jessica Silver-Greenberg and Nelson D. Schwartz, “‘London Whale’ Said to Be Leaving JP Morgan,” New York Times, May 16, 2012. Dimon at first: Stephen Gandel, “The 10 Stages of Jamie Dimon’s Blubbering London Whale Grief,” Fortune.com, April 11, 2013. But an investigation: Robert Lenger, “JPM Trade ‘Flawed, Complex, Poorly Reviewed, Executed, Monitored,’” Forbes.com, May 12, 2012. A report by the Fed’s: FR: Office of the Inspector General, “Evaluation Report: The Board Should Enhance Its Supervisory Processes as a Result of Lessons Learned from the Federal Reserve’s Supervision of JPMorgan Chase & Company’s Chief Investment Office,” October 17, 2014, oig.federalreserve.gov/reports/2015-0030_-_Document_To_Release.pdf.

That was like saying, okay guys, in addition to this straitjacket we’re already wearing—getting unemployment to a magic number—let’s strap on another one, even if we all agree that our inflation metrics are imprecise. Fisher argued against it. Bernanke got his way. In a historic vote, the FOMC set an official inflation target rate of 2 percent. A few months later, market watchers were puzzled by weird movements in some credit markets; gossip began circulating about a rogue trader everyone dubbed the London Whale for the large positions he was taking in credit default swaps. The mystery was solved in April, when JPMC, now the biggest bank in the United States, revealed that a trader in its little-known Chief Investment Office in London had made enormous bets on derivatives that triggered $2 billion in losses for the bank. (The price tag would ultimately total $6 billion.) The French-born employee, Bruno Iksil, became the perfect illustration of Fisher’s argument that nothing had changed.

The Obama administration had failed to do so but never explained why—probably because Yellen knew removing the power of bank supervision would dilute the Fair Chair’s power. LISCC was the compromise. Tarullo had lowered the hammer on New York Fed supervisors in 2009 for not pushing hard enough to compel Citigroup to repay $45 billion it borrowed during the financial crisis. Then, during the London Whale debacle, Tarullo had demanded to know how New York Fed supervisors had let such massive bets occur without their knowledge and oversight. So Tarullo was a logical choice to lead LISCC. At Bernanke’s direction Tarullo and a sixteen-person committee began looking at the Fed’s internal regulatory structure and practices. Tarullo’s team pulled most examiners out of banks and relocated them in a separate building near 33 Liberty Street.


The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory by Kariappa Bheemaiah

accounting loophole / creative accounting, Ada Lovelace, Airbnb, algorithmic trading, asset allocation, autonomous vehicles, balance sheet recession, bank run, banks create money, Basel III, basic income, Ben Bernanke: helicopter money, bitcoin, blockchain, Bretton Woods, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cashless society, cellular automata, central bank independence, Claude Shannon: information theory, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, complexity theory, constrained optimization, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, David Graeber, deskilling, Diane Coyle, discrete time, distributed ledger, diversification, double entry bookkeeping, ethereum blockchain, fiat currency, financial innovation, financial intermediation, Flash crash, floating exchange rates, Fractional reserve banking, full employment, George Akerlof, illegal immigration, income inequality, income per capita, inflation targeting, information asymmetry, interest rate derivative, inventory management, invisible hand, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, knowledge economy, labour market flexibility, large denomination, liquidity trap, London Whale, low skilled workers, M-Pesa, Marc Andreessen, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, natural language processing, Network effects, new economy, Nikolai Kondratiev, offshore financial centre, packet switching, Pareto efficiency, pattern recognition, peer-to-peer lending, Ponzi scheme, precariat, pre–internet, price mechanism, price stability, private sector deleveraging, profit maximization, QR code, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, Real Time Gross Settlement, rent control, rent-seeking, Satoshi Nakamoto, Satyajit Das, savings glut, seigniorage, Silicon Valley, Skype, smart contracts, software as a service, software is eating the world, speech recognition, statistical model, Stephen Hawking, supply-chain management, technology bubble, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Nature of the Firm, the payments system, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, trade liberalization, transaction costs, Turing machine, Turing test, universal basic income, Von Neumann architecture, Washington Consensus

That $1 Billion TransferWise Deal Is Exactly Why Mark Carney Worries About “An Uber-Type Situation In Financial Services.” Retrieved from Business Insider UK: http://uk.businessinsider.com/transferwise-mark-carneyand-uber-type-situation-in-banking-2015-1?r=US&IR=T 229 appendix a ■ Bibliography and References Forelle, C. (2012, May 11). What Beached the London Whale? Credit Indices. Retrieved from The Wall Street Journal: http://blogs.wsj.com/marketbeat/2012/05/11/more-onwhat-beached-the-london-whale-credit-indices/ Freeman, J. (2011 , March 19). Mega-Banks and the Next Financial Crisis. Retrieved from The Wall Street Journal: http://www.wsj.com/articles/SB100014240527487038997 04576204594093772576 Hellwig, A. A. (2013). The Bankers' New Clothes: What's Wrong with Banking and What to Do about It. Princeton University Press.

Although this is true to a certain extent, the stark fact is that banking innovations affect monetary and fiscal conditions on which the entire economy is girded, and thus changes in this sector affect the economic conditions to a greater degree. While large banks might offer greater efficiencies, their size also comes with more process, more redtape, increased amounts of opaqueness, and larger mistakes. Consider the case of the J.P. Morgan’s “London Whale” episode in 2012. As the traders executed their hedging strategy by entering into a series of derivative transactions involving credit default swaps (CDS), one of the JP Morgan traders, Bruno Iksil, accumulated outsized CDS positions in the market and began distorting the market with massive bets. As other traders in the CDS market began to notice this activity, they moved in the opposite direction and began to take positions that were contrary to the J.P.

As per his interpretation, the investment office in London tried to sidestep capital regulation laws of risk management by fulfilling the bare minimums of regulatory requirements. Traders were thus given the incentive to score big, and therefore, instead of focusing on simplicities, the traders focused on the complexities of derivative markets and ignored the danger signals provided by the stress tests (Forelle, 2012). The London whale incident is just one of the many financial scandals that have involved the TBTF banks following the crisis. Since 2008, HSBC has been involved in the LIBOR scandal, Standard Chartered in money laundering transactions, and JP Morgan, Citigroup, Bank of America, RBS, Barclays, and UBS (also known as the “Bandits’ Club”) were all involved in rigging the Forex market (Independent, 2015). Between 2010 and 2015, Barclays, HSBC, the Lloyds Banking Group, and the Royal Bank of Scotland have together incurred costs of £55.8bn to cover conduct and litigation issues, after being penalized for rigging Libor and foreign exchange markets, and for the misselling payment protection insurance (PPI) incident (Treanor, 2016).


pages: 831 words: 98,409

SUPERHUBS: How the Financial Elite and Their Networks Rule Our World by Sandra Navidi

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activist fund / activist shareholder / activist investor, assortative mating, bank run, barriers to entry, Bernie Sanders, Black Swan, Bretton Woods, butterfly effect, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, commoditize, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversification, East Village, Elon Musk, eurozone crisis, family office, financial repression, Gini coefficient, glass ceiling, Goldman Sachs: Vampire Squid, Google bus, Gordon Gekko, haute cuisine, high net worth, hindsight bias, income inequality, index fund, intangible asset, Jaron Lanier, John Meriwether, Kenneth Arrow, Kenneth Rogoff, knowledge economy, London Whale, Long Term Capital Management, Mark Zuckerberg, mass immigration, McMansion, mittelstand, money market fund, Myron Scholes, NetJets, Network effects, offshore financial centre, old-boy network, Parag Khanna, Paul Samuelson, peer-to-peer, performance metric, Peter Thiel, Plutocrats, plutocrats, Ponzi scheme, quantitative easing, Renaissance Technologies, rent-seeking, reserve currency, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, rolodex, Satyajit Das, shareholder value, Silicon Valley, sovereign wealth fund, Stephen Hawking, Steve Jobs, The Future of Employment, The Predators' Ball, too big to fail, women in the workforce, young professional

Carney accepted his apology, which was lucky for Dimon because Carney subsequently became even more powerful as governor of the Bank of England and chairman of the Financial Stability Board. In interviews, Dimon can get belligerent as well, especially when arguing against financial reform and in favor of higher remuneration. Neither does Dimon have any qualms to openly fight for his power. After JPMorgan suffered its record $6 billion “London Whale” trading loss in 2012, investors opposed Dimon’s dual role as CEO and chairman, arguing that his overseeing himself obviously hadn’t worked so well. Amongst much media attention, Dimon threatened to resign if forced out of his chairman role and in the end prevailed against his critics. As Wall Street’s unofficial ambassador in Washington, Dimon also became the leader of the pack among big bank CEOs.

As Wall Street’s unofficial ambassador in Washington, Dimon also became the leader of the pack among big bank CEOs. He impressed the bureaucratic establishment with his business acumen and charm, quickly becoming the Beltway’s darling. For a long time, he was even considered to be President Obama’s favorite banker. The president repeatedly praised Dimon publicly, and the presidential cufflinks Dimon wore during his testimony at the Senate Banking Committee in connection with the London Whale loss were rumored to have been a present from the president himself. EQ: CONNECTING EMOTIONALLY One of the most indispensable skills leaders must possess is emotional intelligence. Finance is a Darwinian environment, where only the strongest survive. Most firms render similar services without any intellectual property to protect, and in general all top-level managers are smart, educated, and hard working.

See Financial leaders thought, 47–51 LeFrak, Richard, 129, 192 Legal norms, 222 “Legalized corruption,” 175–176 Lehman Brothers, 8, 20, 41, 56, 61, 157, 172, 177, 181–183, 205 Lending Club, 189 Lennon, John, 199 Levitt, Steven, 140 Leyne, Strauss-Kahn & Advisors, 195 Leyne, Thierry, 195 Liar’s Poker, 221 Liberia, 27, 171 Limits to Growth, The, 220 Links definition of, xxvi to hubs, 19 in human relationships, 19 system stability through, 215 Lipton, David, 165 Liversis, Andrew, 205 Lloyds, 137 Lobbying, 122 Lobbyists, 175 Loeb, Daniel, 91, 109 London, 43 London Business School, 48, 166, 175 London School of Economics, 16, 63, 142 “London Whale,” 57 Long Term Capital Management, 207–209 Loungani, Prakash, 50 Louvre, 132 Lowenstein, Roger, 208 Loyalty, 23 LTCM. See Long Term Capital Management “Lucky Sperm Club,” 137 Lutnick, Howard, 76 M Ma, Jack, 103 Macroeconomic trends, 70 Magic Mountain, The, 2 “Magic roundabout,” 134 Malloch-Brown, Lord Mark, 27 Manchurian Candidate, The, 67 Mankiw, Greg, 84 Mann, Thomas, 2 Mannesmann AG, 142–143 “Mansplaining,” 152–153 Marks, Howard, 90 Marrakech, 194 Marron, Donald, 209 Marx, Karl, 219 Massachusetts Institute of Technology, 36, 81, 84, 149, 185 Masters, Blythe, 156 “Matchers,” 104 Matrix Advisors, 184 “Matthew Effect,” 52 McDonough, William J., 209 McKinsey, 87, 115, 152 Meade, Michael, 201 Media scrutiny, 136–137 Meditation, 62, 70 Medley, Richard, 43 Mentoring gap, 154–155 Meritocracy, 71, 80, 83, 213 Meriwether, John, 207–209 Merkel, Chancellor Angela banker interactions with, 174 at Davos, 114 in Euro crisis, 177 general references to, 39, 61, 193 Josef Ackermann and, 142–144 Merrill Lynch, 56, 179, 183 Merton, Robert, 52, 208 Metropolitan Museum of Art’s Costume Institute Benefit, 76 Metzler, Jakob von, 136 Microsoft, 153 Middle East, 171 Milgram, Stanley, 18 Miliband, Ed, 137 Milken, Lowell, 191 Milken, Mike, 63–64, 129, 190–193 Milken Institute, 190, 192 Min Zhu, 27 Mindich, Eric, 109, 170 “Mind-reading,” 149 Minimum wage, 211 Minorities discrimination against, 148 integration of, 226 old boys’ network exclusion of, 82 Misinformation, 41 MIT.


pages: 77 words: 18,414

How to Kick Ass on Wall Street by Andy Kessler

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Andy Kessler, Bernie Madoff, buttonwood tree, call centre, collateralized debt obligation, family office, fixed income, hiring and firing, invention of the wheel, invisible hand, London Whale, margin call, NetJets, Nick Leeson, pets.com, risk tolerance, Silicon Valley, sovereign wealth fund, time value of money, too big to fail, value at risk

This is why firms put trading limits on traders or cumulatively trading desks. There is a firm-wide limit, known as VaR or Value at Risk – the most a firm could lose on any given day. The better you get trading, the higher your personal limit and the bigger chunk of the firm’s capital you get to play with and turn into more money (or end up as a smoking hole in the ground, see Nick Leeson and JP Morgan’s London Whale.) Bond trading is a little different, but not much. Again, trading government bonds and munis and corporate debt is mostly facilitating trades for clients. But there is no exchange. These are negotiated transactions. It’s you against the client, even though you are providing a service for the client. Your job is to get the best price for your firm. Some view this as screwing the client. Very confusing for outsiders.


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

However, delays at the FSA meant they couldn’t push the button until the Wednesday before Independence Day, when most people had one eye on their summer vacation. There was also the matter of geography. Despite the impact on the dollar and the involvement of a number of American institutions,this was the London interbank offered rate, Barclays was a U.K. bank, and the U.S. had enough problems of its own. Stories were starting to emerge about a huge, undisclosed loss at JPMorgan caused by a French trader known in the market as the London Whale on account of the huge positions he took.12 Libor slipped off the agenda, leaving U.S. investigators with little choice but to put their feet up and watch in amazement as events unfolded on the other side of the Atlantic. The Saturday after the settlement, those events were focused on a small, exclusive area to the west of central London, where Barclays’s two most senior bankers had homes within walking distance of each other.

Deb Baran 159 Gibson Dunn & Crutcher 128 Gilmour, James 148, 168, 169 Glands, Paul 67 Godsell, Astley & Pearce 27, 29, 67 198 IN DEX Goldman Sachs 62, 66, 70, 72, 73, 81, 91, 92, 97, 137 Goodman, Colin 28–30, 31, 32, 37, 61, 62, 67, 78, 85, 117, 168, 169 Green, David 150, 159 Green, Stephen 58 Greenspan, Alan 71 Gulf International Bank 163 Icelandic banking system, collapse of 146 Interest-rate swaps 10, 16 International Monetary Fund (IMF) 95, 101, 118 International Organization of Securities Commission 74–5 IOSCO 109 Hall, Will 35, 148 Hawes, Neil 160, 161, 163 Hayes, Joshua (son) 130 Hayes, Nick (father of Tom Hayes) 5 Hayes, Robin (brother of Tom Hayes) 5 Hayes, Sandra (mother of Tom Hayes) 5 Hayes, Thomas Alexander William (Tom) xi, xii, 1–3 Asperger’s syndrome 2, 6, 22, 158, 164, 168 early trading 8–11 extravagances 67–8, 77 family and early years 5–6 life as trader 21–3 love of football 79 marriage 123 personal hygiene 80 personal wealth 130–1, 155 personality 20 sentence 166, 167–8 temper 7, 80, 82, 154 trial 157–66 HBOS 95 hedge funds 92 Herbert Smith 38 Heywood, Jeremy 96 Holder, Eric 103, 104, 149 Hoshino, Hayato 112, 114, 118, 119, 120, 121 HSBC 35–6, 58, 95, 96, 117 Huertas, Thomas 57–8, 75 Jamies Wine Bar 66 Japanese central bank 9 Japanese Financial Services Agency 130 Johnson, Peter 88, 89, 93, 99, 100 Jones Day 170 Jonson, Lydia 148 JPMorgan 47, 63, 66, 92, 137, 140, 174 ICAP xi, 3, 27, 28, 29, 37, 61, 65–8, 78, 79, 85, 112, 116, 168 Keiser, Rolf 80 Kengeter, Carsten 82, 161 King, Mervyn 55, 56, 57, 95, 96, 143–4 Knight, Angela 49, 51, 52, 54, 58, 59–60 Lampert, Eddie 72 Lawyers’ Christian Fellowship 158 Lazard 138 Lehman Brothers 1–3, 62, 75, 77, 81, 82, 94, 111, 112, 146 Leigh-Pemberton, James 139 Libor ix-x, xi, xii, 2–3, 9, 10–11 growth of 15–17 manipulation of 18, 23, 26–32, 33–8 origins of 14, 15 Lloyds 94, 96 Lloyds Banking Group 95 London interbank offered rate see Libor London Stock Exchange 138 London Whale (French trader) 140 Lowe, Gretchen 42–3, 44, 46, 74, 102, 135, 170 Lucas, Chris 134, 139 Lugar, Richard 45 Index Lukken, Walt 45, 74 Lynam, Moira 121 Madden, Luke 117 Major, John 54 Mandelson, Peter 137 Mann, John 145 Manufacturers Hanover 13 Marsh, Luke 104–5 Maxwell, Robert 105 McCappin, Brian 83, 114, 121, 122, 124 McDermott Will & Emery 75, 76, 106, 107 McGonagle, Vince 39, 41, 42–4, 45, 74, 135, 157, 169 McInerney, Denis 102 Meister, David 135, 136 Merchant, Jay 88 Merrill Lynch 64, 84, 92 Messina, Jim 69 Miller, Avery 107 Mocek, Greg 43, 74, 75–6, 87, 107 Mollenkamp, Carrick 40, 59–60 Morgan Stanley 91 Morton, Andrew 111–12, 120, 121, 124 MSCI 171 New York Fed 56, 57 New York Stock Exchange 167 Newsday 42 Nixon, Richard 13 Northern Rock 38, 49, 53, 95 Oakeshott, Matthew 136 Obama, Barack 69, 70, 103 Obie, Steve 42, 43, 73–6, 87, 89, 102, 107, 109, 135, 170, 173 Office of the Comptroller of the Currency 45 O’Leary, Peter (step-brother) 35–7 Osborne, George 106, 144 overnight indexed swaps 10 199 Pain, Jon 106 Park, Robertson 102 Paulson, Hank 72 Payment Protection Insurance misselling 137 Peng, Scott 43 Perry Capital 72 Perry, Richard 72 Peston, Robert 142, 143 Pieri, Mike 63, 81–3, 86, 119, 126, 130, 161 Pitt, Harvey 45 Platts 41 Porter, Chris 36, 37 Porter, Laurence 114, 115, 116, 118, 120 Prince, Chuck 116 private equity 92 Protium deal (2010) 137 Qatar Investment Authority 97 Rabobank xi, 64, 134 Rain Man 7 Rake, Mike 141, 143, 144 RBC 10 RBS xi, 66, 93, 94, 95, 96, 104, 118 Read, Darrell 27–30, 31, 33, 37–8, 61–2, 67, 77–8, 85, 112, 116, 117, 165, 168, 169 Reagan, Ronald 15 Reich, Ryan 88 relative value trading 22 Ricci, Rich 98, 134, 142 Richardson, Gordon 98 Risk Capital 44 Robb, Richard 17 Robson, Anthony 9 Rouse, Pete 69 Royal Bank of Canada 8 Royal Bank of Scotland 6, 10, 148, 174 RP Martin xi, 30, 31, 37, 63, 64, 65, 66, 79, 117, 148–9, 168 200 IN DEX Rubin, Robert 70, 71 Ruh, Joachim 80 Salomon Brothers 17 Sanders, Bernie 71 Sants, Hector 106, 142–3 Sarbanes-Oxley Act 70 Schapiro, Mary 69, 70 Schiliro, Phil 69 Schroders 92 Securities and Exchange Commission (SEC) 45, 69, 70, 120, 129 Senate Banking Committee 45 Serious Fraud Office (SFO) 148–52, 155, 158, 160, 161, 165, 168, 169 Serious Organised Crime and Police Act (SOCPA) (2005) (U.K.) 151 Shah of Iran 13 Shearman & Sterling 38 Shelton, Mark 127, 128 Sherrard, Charles 154 Smith New Court 92 “Special Liquidity Scheme” (U.K.) 55 Spencer, Michael 28, 30 “spoof offers” 32 Spratling, Gary 128–9 Sprinzen, Nicole 104 Standard Chartered 65, 94 Stevens, Ted 104 Steyer, Tom 72 Stone, Jonathan 99 Storey, Miles 51, 162, 163 subprime mortgage crisis (U.S.) 18, 53, 56, 103, 111 Sullivan & Cromwell 108, 134 Summers, Larry 69 swaps 7, 10 T.


pages: 481 words: 120,693

Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else by Chrystia Freeland

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activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, assortative mating, banking crisis, barriers to entry, Basel III, battle of ideas, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Branko Milanovic, Bretton Woods, BRICs, business climate, call centre, carried interest, Cass Sunstein, Clayton Christensen, collapse of Lehman Brothers, commoditize, conceptual framework, corporate governance, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Deng Xiaoping, don't be evil, double helix, energy security, estate planning, experimental subject, financial deregulation, financial innovation, Flash crash, Frank Gehry, Gini coefficient, global village, Goldman Sachs: Vampire Squid, Gordon Gekko, Guggenheim Bilbao, haute couture, high net worth, income inequality, invention of the steam engine, job automation, John Markoff, joint-stock company, Joseph Schumpeter, knowledge economy, knowledge worker, liberation theology, light touch regulation, linear programming, London Whale, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, Mikhail Gorbachev, Moneyball by Michael Lewis explains big data, NetJets, new economy, Occupy movement, open economy, Peter Thiel, place-making, Plutocrats, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, postindustrial economy, Potemkin village, profit motive, purchasing power parity, race to the bottom, rent-seeking, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, self-driving car, short selling, Silicon Valley, Silicon Valley startup, Simon Kuznets, Solar eclipse in 1919, sovereign wealth fund, stem cell, Steve Jobs, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tony Hsieh, too big to fail, trade route, trickle-down economics, Tyler Cowen: Great Stagnation, wage slave, Washington Consensus, winner-take-all economy, zero-sum game

Rules are only as good as the supervisors who enforce them, and good supervisors look beyond the letter of the rules to their spirit.” Eight months later, Dimon inadvertently bolstered Carney’s case. On May 10, 2012, JPMorgan revealed that a trader known as the London Whale had made a bet on credit derivatives that went sour, leading to a loss of at least $2 billion, and which analysts close to the bank believed could rise to $6 billion. Wall Street, led by Dimon, had spent the previous three years warning that Washington’s regulatory overreach was stifling the financial system. The London Whale’s trades suggested that the real danger was still too much risk. As Congressman Barney Frank put it, “The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least $2 billion harder to make today

., 86, 93 Levchin, Max, 183 Levy, Frank, 17 Levy, Gus, 286–87 Lewis, Michael, 69, 129 Li, Stella, 32–33 Libya, 215 Lightyear Capital, 142 Lin, Alfred, 233–34 Lin, Jeremy, 140 Lincoln, Abraham, 39 Lincoln, William, 98 Linden, Greg, 24–26 Lindert, Peter, 12, 16, 43 Lindsay, Michael, 43 LinkedIn, 141, 183–85 LinkExchange, 234 Li Peng, 208 Lithuania, 149 Li Xiaolin, 208 Li Xiaopeng, 208 LLC Smart Group, 191 Lloyd W. Dinkelspiel Award, 181 lobbying, 222–24, 247, 260–62, 273 Loeb, Dan, 242 London, City of, 211, 214, 217, 218, 219, 227 London School of Economics, 227 London Whale, 260 Long Depression, 7, 9, 41 long tail, 100, 126–27 López-Calva, Luis-Felipe, 197 Lora, Eduardo, 31 Los Angeles Times, 76 lucky job club, 175–76 Luddites, 12–13, 96–97 Ludicorp, 172 Lu Guanqiu, 204 Lumière, Louis and Auguste, 98 Luxos, 46 luxury goods and services, 102, 104, 106 Mac 400 electrocardiograph, 157–58 Macpherson, Elle, 74 Maddison, Angus, 8–9, 16 Madonna, 107 Magna Carta, 148 Mail.ru, 66, 163 Maira, Arun, 201 Major, John, 148 Malaysia, 149 managerial class, 131–36, 138 Mankiw, Greg, 268 Manning, Alan, 24 Manny, The (Peterson), 1–2 Mantle, Mickey, 108–9 Maples, Mike, 165 Marron, Donald, 142 Marshall, Alfred, 50, 95–97, 99, 101, 105, 108–12, 116, 118–19, 123, 131 Marshall, George C., 181 Marshall Scholarship, 181–82 Martin, Bradley, 6–7, 8, 14, 36, 37, 114 Martin, Cornelia, 6–7 Martin, Paul, 216–17, 250–51 Martin, Roger, 116–17, 123, 135 Marx, Elisabeth, 63 Marx, Karl, 42, 75, 89, 118, 284 Marxism, 14 material power index (MPI), 81 Matthew, Saint, 122–23 Matthew effect, 123, 126, 127–28 Mazumdar-Shaw, Kiran, 33 McCartney, Paul, 109 McFaul, Mike, 144 McKinsey, 52, 60, 121 Bloomberg/Schumer report by, 211–15, 227 Global Institute, 165–66 Means, Gardiner, 131–34, 138 Mediaite, 164 Mellin, Joe, 172 Merrill Lynch, 102, 119, 214–16 Merton, Robert, 50, 123–24, 127, 175 Mexico, 193–98 Slim and, 195–96 Meyer, Christopher, 222 Microsoft, 171, 176, 191, 234, 280, 282, 283 middle class, 240–41, 285 Midler, Bette, 127–28 Milanovic, Branko, ix–x, 16, 26, 194–96 Mill, John Stuart, 43 Miller, Steve, 27 Milner, Yuri, 52, 163–64, 171 Mindich, Eric, 271 minimum wage, 17, 91 Mir Osman Ali Khan, 191 Mishra, Prachi, 222, 223 Missner, Marshall, 124 Mittal, Aditya, 59, 161–62 Mittal, Lakshmi, 161, 192 Mittal Steel, 161, 191–92 Mokyr, Joel, 16–17 Monaco, 63 Moneyball (Lewis), 129 Monitor Group, 222, 227 Morgan, J.


pages: 455 words: 138,716

The Divide: American Injustice in the Age of the Wealth Gap by Matt Taibbi

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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

Thus despite the existence of a nationwide epidemic of fraud and white-collar crime that could have and should have been investigated by powerful federal regulators like the OCC, the OTS, the Federal Reserve, the SEC, the CFTC, and other bodies, the first and only prosecution of a bank to take place in America came out of a simple report filed in a common city police station. Why Abacus? Why not, say, JPMorgan Chase? Jamie Dimon’s megabank was caught up in dozens of scandals during the same period covered by the Abacus investigation—everything from money laundering to energy price manipulation to mismanaging customer funds to robo-signing to antitrust violations to charging excess overdraft fees to hiding billions of dollars of losses in the infamous “London Whale” episode, in which the bank hid the fact that one of its lunatic traders in Europe had nearly destroyed the firm by doubling and tripling down on exotic bets on corporate credit. All told, in just the three years since Vera Sung stumbled into Ken Yu’s real estate closing, Chase—again, a Covington & Burling client—had paid out more than $16 billion in regulatory settlements. The $16 billion represented an incredible 12 percent of its net revenue during that time period.

Because, thanks to all these various factors, executives from giant multinationals simply don’t end up in the prison population, law enforcement soon starts to operate on the reverse principle, that those huge companies are not the places where jailable crimes take place. So even white-collar investigators start to look for targets elsewhere, like at smaller businesses. A commissioner for the SEC, Daniel Gallagher, even talked about this out loud, in April 2012, when he gave a speech in Denver, Colorado. This was right in the middle of the Chase “London Whale” story and just before the LIBOR story, the HSBC story, and a half-dozen other financial scandals of various degrees of horribleness blew up. Despite all this, Gallagher came out with an interesting take on where to look for white-collar crime. “It is critically important that our enforcement program be extremely efficient,” Gallagher said. “Recognizing that it is unrealistic to imagine we will ever achieve a one-to-one correspondence between incidents of misfeasance and SEC Enforcement staff, we’d better plan to do everything we can to increase our hit-rate per investigation opened, and should commit our staff resources carefully, which is to say, consciously.”

Holder also talked about raising the statute of limitations on Wall Street cases, to give themselves another shot at all the crimes they ignored in the last five years, warning that those who committed crimes are “not out of the woods yet.” Hedge fund villain Stevie Cohen is being put out of business. As this book goes to press, criminal cases are reportedly coming against the megabank Chase for the “London Whale” episode and perhaps other misdeeds, including some related to its status as Bernie Madoff’s banker. At the very least, on the federal level, officials seem to recognize the political necessity of saying these things out loud, and this has to be in very large part due to the public outrage over the lack of Wall Street prosecutions. Decisions like the HSBC settlement were blunt bureaucratic calculations, where the risk of losing and/or disrupting the economy was weighed against the benefit of receiving $1.9 billion in settlement money.


pages: 827 words: 239,762

The Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite by Duff McDonald

activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Albert Einstein, barriers to entry, Bayesian statistics, Bernie Madoff, Bob Noyce, Bonfire of the Vanities, business process, butterfly effect, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, Clayton Christensen, cloud computing, collateralized debt obligation, collective bargaining, commoditize, corporate governance, corporate raider, corporate social responsibility, creative destruction, deskilling, discounted cash flows, disintermediation, Donald Trump, family office, financial innovation, Frederick Winslow Taylor, full employment, George Gilder, glass ceiling, Gordon Gekko, hiring and firing, income inequality, invisible hand, Jeff Bezos, job-hopping, John von Neumann, Joseph Schumpeter, Kenneth Arrow, London Whale, Long Term Capital Management, market fundamentalism, Menlo Park, new economy, obamacare, oil shock, pattern recognition, performance metric, Peter Thiel, Plutocrats, plutocrats, profit maximization, profit motive, pushing on a string, Ralph Nader, Ralph Waldo Emerson, RAND corporation, random walk, rent-seeking, Ronald Coase, Ronald Reagan, Sand Hill Road, Saturday Night Live, shareholder value, Silicon Valley, Skype, Steve Jobs, survivorship bias, The Nature of the Firm, the scientific method, Thorstein Veblen, union organizing, urban renewal, Vilfredo Pareto, War on Poverty, William Shockley: the traitorous eight, women in the workforce, Y Combinator

In the years since, the firm has only solidified its position at the top of the industry, a fact reflected quite clearly in Dimon’s bank account: In 2015, he earned a reported $27 million.6 For a brief moment in time, it seemed the man could do no wrong, a sentiment expressed quite clearly in 2009’s Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase, written by the author of this book. But the moment didn’t last. In 2012, the firm revealed that a single trader in its London office—Bruno Iksil, nicknamed “the London Whale”—had incurred a trading loss of $2 billion, and the loss continued to grow thereafter, eventually reaching more than $6 billion. Dimon, who initially referred to reports about the loss as “a complete tempest in a teapot,” was pilloried in the media not just for the company’s failed internal risk controls, but for the mere fact that such a loss was even possible at a time when the American people were both reeling from the 2008–10 recession and angry that the country’s financial establishment had not only just avoided being punished for its crimes, but was indeed back to business as usual.

As the crisis unfolded, he threw huge piles of money at old friends from Goldman Sachs, and was fired after a surprise $15 billion loss shortly after the firm’s sale to Bank of America. Jamie Dimon (’82). The CEO of JPMorgan Chase, Dimon was first praised for the rescues of Bear Stearns and Washington Mutual and then raked over the coals for what critics saw as excessive risk taking during the whole London Whale episode. The many, many HBS grads at McKinsey & Company. There was a joke in the mid-1990s that since pretty much every bank of importance had hired McKinsey, you had fifty companies focused on the same thing—global strategy—at the exact same time.6 The same was true ten years later, raising an interesting issue of “systemic risk.” While the firm’s fingerprints were nowhere to be found in the detritus of the real estate collapse, they had been advisors to many of the companies who both inflated the bubble and collapsed as a result of it.

., 323 Hotta, Shozo, 205–6 “How Business Schools Lost Their Way” (Bennis and O’Toole), 224 “How Competitive Forces Shape Strategy” (Porter), 414 How Harvard Rules (Trumpbour), 432 Hubbard, Glenn, 405 Human Problems of an Industrial Civilization, The (Mayo), 88, 90 human relations movement, 37, 81–90, 93, 118, 286, 355 human resources movement, 61, 197–98 Huston, Darren, 531 IBM, 142, 209, 289, 301, 347; HBS grads hired by, 460; HBS partnership with, 154–55; HBS’s Executive Education and, 151; HBS’s MBAs required to buy computers and, 155; Kanter and, 404; layoffs at, 404, 492–93 Icahn, Carl, 367, 480, 481 Ignatius, Adi, 306 Iksil, Bruno (London Whale), 472, 548 Immelt, Jeffrey, 305, 531 “Impact Investing: Trading Up, Not Trading Off” (Bales), 7 INCADIS (Individual Case Discussion Simulator), 287 income inequality, 5, 10, 23, 56, 390, 426, 510, 539, 540–41; CEO compensation and, 165–66, 539, 544; concentration of wealth, 539; stock market and, 491; submerged state and, 542; wage stagnation and, 165, 426, 491 “Income Inequality in the United States, 1913–1998” (Saez), 540 India: business education in, 231, 233; Satyam Computer Services fraud, 408–9, 521 Indian Institute of Management–Ahmedabad, 230, 231, 236, 564–65 India Research Center, 234, 545 Individualized Corporation, The (Ghosal and Bartlett), 491 Industrial Bank of Japan, 153–54; endowment of HBS professorship, 153, 402 industrial organization (IO), 412–13 industrial psychology, 84–86 innovation, 557–58; disruptive, 303, 409, 422, 424, 572, 573; Doriot and wartime, 124; founder-inventors and, 60; MBAs and, 120–21; MBAs in Silicon Valley and, 10.


pages: 514 words: 152,903

The Best Business Writing 2013 by Dean Starkman

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Asperger Syndrome, bank run, Basel III, call centre, clean water, cloud computing, collateralized debt obligation, Columbine, computer vision, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, Erik Brynjolfsson, eurozone crisis, Exxon Valdez, factory automation, fixed income, full employment, Goldman Sachs: Vampire Squid, hiring and firing, hydraulic fracturing, income inequality, jimmy wales, job automation, John Markoff, late fees, London Whale, low skilled workers, Mahatma Gandhi, market clearing, Maui Hawaii, Menlo Park, Occupy movement, oil shale / tar sands, Parag Khanna, Pareto efficiency, price stability, Ray Kurzweil, Silicon Valley, Skype, sovereign wealth fund, stakhanovite, Steve Jobs, Stuxnet, the payments system, too big to fail, Vanguard fund, wage slave, Y2K, zero-sum game

The Tale of a Whale of a Fail Dealbreaker Certain things just can’t be explained in the mass-market press, and the London Whale trade that caused billions of dollars in losses for JP Morgan is one of them. For one thing, JP Morgan refused to offer any details about what its trading desk did—and for another, what its trading desk did was so mind-bendingly complex that few journalists could even understand it, and none could explain it in a way that the average newspaper reader could comprehend. This is where the blogosphere comes in. Matt Levine, an equity-derivatives geek turned blogger, understands complex concepts and can talk about them in a conversational and even funny way. This stuff isn’t easy. But for people who wanted to really get up to speed on a hugely important story, there was only one place to turn. Hi! Would you like to talk about the London Whale? Sure you would. The amount of misunderstanding of our poor beleaguered beluga is staggering, so I figured we could try to embark on a voyage of discovery together.


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

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Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, income inequality, index fund, inflation targeting, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, John Meriwether, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, money market fund, moral hazard, mortgage debt, Myron Scholes, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, Richard Feynman, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War

The house of Morgan, broken up by Congress in 1935, was once again a business spanning retail, commercial and investment banking activities. Dimon successfully steered his organisation away from the worst excesses of the years to 2007 and emerged with a reputation unparalleled in the industry. But in 2012 Dimon’s image would be tarnished when his bank was forced to disclose large losses on so-called hedging activities. Bruno Iksil, the ‘London whale’, had made huge and unsuccessful bets in derivative markets. Barclays’ Diamond would be engulfed by a scandal invoking false disclosure of his bank’s cost of funds – the LIBOR scandal – and the Bank of England enforced his resignation. Politicians and public began to suspect that the recurrent crises of the finance sector were not simply the result of unexpected and unpredictable events, but symptomatic of deep-seated problems with the culture of the financial services industry.

The term came into popular language after Nick Leeson, a 28-year-old employee in the Singapore office of the venerable London investment bank of Barings, vanished overnight from his desk. The losses he had incurred led to the bankruptcy of the bank, and jail for Leeson. More recent ‘rogue traders’ include Jérôme Kerviel, that former employee of the French bank Société Générale (now in jail), who was ordered to repay €4.9 billion, and J.P. Morgan’s ‘London whale’ (Bruno Iksil), whose irregular trading was said to have lost the US bank $6 billion. Perhaps the largest of such excesses were those reported by ‘Howie’ Hubler, a once respected trader at Morgan Stanley, whose activities in 2007 were reported to have resulted in losses of $9 billion.23 A rogue trader is one who has run out of money, or scared his employer, before his number came up. Hubler, like the other rogue traders, had followed a martingale strategy: he increased the size of his bets on collateralised debt obligations based on mortgage-backed securities in a collapsing market.


pages: 515 words: 132,295

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

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3D printing, accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, additive manufacturing, Airbnb, algorithmic trading, Alvin Roth, Asian financial crisis, asset allocation, bank run, Basel III, bonus culture, Bretton Woods, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, commoditize, computerized trading, corporate governance, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial intermediation, Frederick Winslow Taylor, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, information asymmetry, interest rate derivative, interest rate swap, Internet of things, invisible hand, John Markoff, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, knowledge economy, labor-force participation, labour mobility, London Whale, Long Term Capital Management, manufacturing employment, market design, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, Paul Samuelson, pensions crisis, Ponzi scheme, principal–agent problem, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Satyajit Das, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, sovereign wealth fund, Steve Jobs, technology bubble, The Chicago School, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund, zero-sum game

He added, “or, do I understand that lobbying is eternal, and by 2017 or beyond, the expectation can be fostered that the law itself can be changed?”13 Indeed, the Volcker Rule was changed, thanks to the financial lobby, to allow for what’s called “portfolio hedging,” meaning that banks can still do risky trades, as long as they are in the interest of protecting their existing assets rather than making new money. The problem is how to tell the difference. Even the heads of the banks often can’t. Remember the 2012 “London Whale” trading debacle, in which J.P. Morgan suffered a $6 billion loss when synthetic derivatives trades went awry? The write-down represented a major loss of face for Jamie Dimon, who had been nicknamed “the Teflon banker” for his reputation for managing risk and had lobbied hard against reregulation after 2008, particularly against the Volcker Rule. (J.P. Morgan executives and representatives met with federal regulators twenty-seven times on the issue between July 2010 and October 2011.)14 Famous for his command of banking detail, Dimon was forced to eat a huge helping of humble pie following the incident, which he had at first dismissed as no big deal, admitting only later that the offending trade had been “flawed, complex, poorly reviewed, poorly executed and poorly monitored.”

Morgan executives and representatives met with federal regulators twenty-seven times on the issue between July 2010 and October 2011.)14 Famous for his command of banking detail, Dimon was forced to eat a huge helping of humble pie following the incident, which he had at first dismissed as no big deal, admitting only later that the offending trade had been “flawed, complex, poorly reviewed, poorly executed and poorly monitored.” It’s hard to believe that J.P. Morgan’s chief investment office, which made the trades, wasn’t designed to be a profit center, given that its head, who was let go from the bank following the London Whale event, earned $15 million a year. But even if you buy that claim, the case underscores that any kind of portfolio hedging carries what’s known as basis risk. In the case of a huge bank like JPMorgan Chase, which is several times as big as the world’s largest hedge funds, its very size is bound to create a market-moving event when it takes a position large enough to protect itself. “If you are the market,” one risk expert told me, “you can’t hedge it.”15 A MERRY-GO-ROUND FOR THE 1 PERCENT The power of the financial industry within our political system isn’t exerted only through direct and indirect lobbying on the part of bankers and those they employ, but also via regulators and administration officials themselves, many of whom go through the revolving door between Wall Street and Washington multiple times throughout their careers.


pages: 200 words: 54,897

Flash Boys: Not So Fast: An Insider's Perspective on High-Frequency Trading by Peter Kovac

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bank run, barriers to entry, bash_history, Bernie Madoff, computerized markets, computerized trading, Flash crash, housing crisis, index fund, locking in a profit, London Whale, market microstructure, merger arbitrage, prediction markets, price discovery process, Sergey Aleynikov, Spread Networks laid a new fibre optics cable between New York and Chicago, transaction costs, zero day

Today’s trading algorithms evaluate the risk of a position before the trade is made, while the trade is executing, and every millisecond thereafter. Many firms have multiple redundant systems checking risk at all times. The “traders” are actually risk managers, continually responding to mini alarms that signal the slightest anomaly. There are no hidden positions – like the ones that caused the $6 billion “London Whale” loss for JPMorgan – because all the trades automatically flow into these risk management systems, instantly double-checked against redundant data feeds from the exchanges. Rogue traders have no room to hide risky positions. Unlike banks trading opaque financial instruments that only a few insiders understand, high-frequency firms transact in liquid, well-understood exchange-traded securities.


pages: 202 words: 66,742

The Payoff by Jeff Connaughton

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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

New research suggests that high-frequency trading exacerbates volatility. But whatever the causes of the Dow’s daily rollercoaster ride, millions of Americans are getting off it. Ordinary investors withdrew more than $135 billion from domestic stock mutual funds in 2011. Now, as I write in the spring of 2012, the azaleas and banking scandals are in bloom, including J. P. Morgan for failing to supervise complex derivatives positions by the “London Whale,” one of its traders, leading to billions of dollars in losses. And worse, Barclays and other banks have been exposed for manipulating LIBOR, which sets rates for trillions of dollars of financial instruments, leaving the credibility of the banking community in tatters. In the summer of 2012, the stock markets went haywire again when Knight Capital was battered by its own software glitch and in 45 minutes lost $440 million.


pages: 304 words: 80,965

What They Do With Your Money: How the Financial System Fails Us, and How to Fix It by Stephen Davis, Jon Lukomnik, David Pitt-Watson

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activist fund / activist shareholder / activist investor, Admiral Zheng, banking crisis, Basel III, Bernie Madoff, Black Swan, centralized clearinghouse, clean water, computerized trading, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crowdsourcing, David Brooks, Dissolution of the Soviet Union, diversification, diversified portfolio, en.wikipedia.org, financial innovation, financial intermediation, fixed income, Flash crash, income inequality, index fund, information asymmetry, invisible hand, Kenneth Arrow, light touch regulation, London Whale, Long Term Capital Management, moral hazard, Myron Scholes, Northern Rock, passive investing, performance metric, Ponzi scheme, principal–agent problem, rent-seeking, Ronald Coase, shareholder value, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, Steve Jobs, the market place, The Wealth of Nations by Adam Smith, transaction costs, Upton Sinclair, value at risk, WikiLeaks

Consider, for example, the list of major regulatory challenges faced by JP Morgan Chase that were announced in just one month, August 2013. The Federal Housing Finance Agency sued the bank, alleging it fraudulently claimed that the loans behind some $33 billion in mortgage derivatives met underwriting guidelines. The Securities and Exchange Commission and the US Attorney’s Office were prosecuting the bank for its public statements about a $6 billion trading loss fancifully nicknamed “the London whale” after the market heft of the trader who caused the blowup. The SEC also was investigating how the bank came to hire the children of well-connected Chinese in a potential bribery scheme. The US Attorney continued to explore the bank’s potential manipulation of the energy markets, even after the bank paid a $410 million settlement to the US energy regulator, but did not admit or deny criminality in that situation.


pages: 375 words: 105,067

Pound Foolish: Exposing the Dark Side of the Personal Finance Industry by Helaine Olen

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asset allocation, Bernie Madoff, Cass Sunstein, Credit Default Swap, David Brooks, delayed gratification, diversification, diversified portfolio, Donald Trump, Elliott wave, en.wikipedia.org, estate planning, financial innovation, Flash crash, game design, greed is good, high net worth, impulse control, income inequality, index fund, London Whale, Mark Zuckerberg, money market fund, mortgage debt, oil shock, payday loans, pension reform, Ponzi scheme, quantitative easing, Ralph Nader, RAND corporation, random walk, Richard Thaler, Ronald Reagan, Saturday Night Live, too big to fail, transaction costs, Unsafe at Any Speed, upwardly mobile, Vanguard fund, wage slave, women in the workforce, working poor, éminence grise

After all, many men are quite conservative with money (I know, I’m married to one of them) while many women are quite capable of engaging in risky investment strategies, being greedy, and committing out-and-out theft. This is something many women’s cheerleaders would rather not acknowledge. But how then to account for Lehman Brothers CFO Erin Callan, who went on television less than a week before the venerable bank crashed to assure investors that all was right with her books; JPMorgan Chase’s Ina Drew, the supervisor of the infamous “London Whale” trader who lost the bank billions of dollars; or alleged Bernard Madoff accomplice Sonja Kohn who, according to a lawsuit filed against her by Madoff bankruptcy trustee Irving Picard, “masterminded a vast illegal scheme”? Embracing theories about women, money, emotion, and risk also ignores women who are good with money in ways traditionally viewed as male, such as Mary Anne and Pamela Aden, two sisters who made their reputation as stars of the commodities trading world with astute but risky calls on gold over a period of decades.


pages: 402 words: 98,760

Deep Sea and Foreign Going by Rose George

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Admiral Zheng, air freight, Airbus A320, Albert Einstein, bank run, cable laying ship, Captain Sullenberger Hudson, Costa Concordia, Edward Lloyd's coffeehouse, Exxon Valdez, failed state, Filipino sailors, global supply chain, Google Earth, intermodal, London Whale, Malacca Straits, Panamax, pattern recognition, profit maximization, Skype, trade route, UNCLOS, UNCLOS, urban planning, William Langewiesche

List of items accessed December 2012 via http://www. scran.ac.uk/packs/ exhibitions/learning_materials/webs/ 40/articles.htm 5 75 per cent of right whales have been or are entangled Scott D. Kraus and Rosalind M. Rolland, (eds.), The Urban Whale: North Atlantic Right Whales at the Crossroads, Cambridge, MA: Harvard University Press, 2007, p.382. 6 Enormous Carnivores, Microscopic Food Ibid., p.140. 7 A whale sailed through the middle of London Euan Ferguson, ‘After a day of struggles, the London whale dies a lonely death’, Observer, 22 January 2006. – 67 right whale carcasses Kraus and Rolland, op. cit., p.410. 8 A foghorn-like signal Michael Jasny, ‘Sounding the Depths: The rising toll of sonar, shipping, and industrial ocean noise on marine mammals’, Natural Resources Defense Council (NRDC), November 2005, p.3. – 800 species of fish use hearing ‘In 1962,’ Slabbekoorn writes, ‘Rachel Carson wrote about a “silent spring” in the context of the detrimental impact of the use of pesticides on singing birds.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

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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

In September 2013, Jamie Dimon, chief executive of JPMorgan Chase, America’s biggest bank, sent a memo to staff revealing that the bank had added a whopping 3,000 employees to bolster controls, devoted 500 people to fulfilling the Federal Reserve’s stress tests, and given staff 750,000 hours of training on compliance matters. Whether all this effort will be productive is moot. A failure of internal controls at JP Morgan that led in 2012 to the loss of around $6 billion in a London trading operation – the so-called London whale scandal – demonstrated that neither Jamie Dimon nor his fellow top executives knew what was going on inside the bank. Given that Mr Dimon is generally reckoned to be the most accomplished banker of his generation, there could be no clearer indication that today’s financial behemoths are too big and too complex to manage. 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.


pages: 309 words: 95,495

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe by Greg Ip

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Affordable Care Act / Obamacare, Air France Flight 447, air freight, airport security, Asian financial crisis, asset-backed security, bank run, banking crisis, break the buck, Bretton Woods, capital controls, central bank independence, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Daniel Kahneman / Amos Tversky, diversified portfolio, double helix, endowment effect, Exxon Valdez, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, global supply chain, hindsight bias, Hyman Minsky, Joseph Schumpeter, Kenneth Rogoff, London Whale, Long Term Capital Management, market bubble, money market fund, moral hazard, Myron Scholes, Network effects, new economy, offshore financial centre, paradox of thrift, pets.com, Ponzi scheme, quantitative easing, Ralph Nader, Richard Thaler, risk tolerance, Ronald Reagan, savings glut, technology bubble, The Great Moderation, too big to fail, transaction costs, union organizing, Unsafe at Any Speed, value at risk, William Langewiesche, zero-sum game

Unlike lenders or depositors, shareholders know their investment isn’t safe and they don’t panic if its value declines. The beauty of capital is that it works no matter what causes the loss. Banks’ risk management seeks to protect against adverse movements in financial prices, excessive exposure to particular borrowers, a counterparty reneging on a deal, rogue traders and criminals. Yet it regularly fails. In 2012, J.P. Morgan Chase & Co. learned that a trader nicknamed “the London whale” had taken on huge derivatives positions in what seemed to be a flawed attempt to hedge the bank’s positions. The loss eventually grew to a staggering $6.2 billion. Yet the loss never threatened J.P. Morgan’s survival, thanks to the billions of dollars in capital it already had, some of it raised under pressure by regulators. Capital has, correctly, become the central tool in regulators’ drive to reinforce the financial system against another crisis.


pages: 261 words: 86,905

How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

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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

One of the quick fixes sometimes suggested for the excessive risks in modern banking is to make the banks unlimited liability partnerships. That wouldn’t work for retail banking, where there is a strong social interest in keeping banks lending, but it might be a viable structure for investment banks, and would certainly make their risks more in line with their rewards. The British bank C. Hoare and Co. is unusual in being an unlimited liability bank, wholly owned by one family. London Whale The nickname of Bruno Iksil, the trader at J. P. Morgan’s London branch who was paid $7.32 million in 2010 and $6.76 million in 2011, and then in 2012 lost $6.2 billion betting on credit default swaps. The first response of Jamie Dimon, chairman and CEO of J. P. Morgan, was to describe the affair as “a tempest in a teacup,” until the scale of the losses became apparent. The thing that’s interesting about his nickname is that “whale” is a term from gambling: a whale is a punter who gets free hospitality from casinos because he (usually a he) bets such huge sums.


pages: 413 words: 117,782

What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences by Steven G. Mandis

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activist fund / activist shareholder / activist investor, algorithmic trading, Berlin Wall, bonus culture, BRICs, business process, collapse of Lehman Brothers, collateralized debt obligation, commoditize, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, disintermediation, diversification, Emanuel Derman, financial innovation, fixed income, friendly fire, Goldman Sachs: Vampire Squid, high net worth, housing crisis, London Whale, Long Term Capital Management, merger arbitrage, Myron Scholes, new economy, passive investing, performance metric, risk tolerance, Ronald Reagan, Saturday Night Live, Satyajit Das, shareholder value, short selling, sovereign wealth fund, The Nature of the Firm, too big to fail, value at risk

Financial interdependence and personal liability—forcing those in the partnership to disproportionately share in fines, settlements, compliance or risk management failures, or certain losses with shareholders—might make risk management and ethical standards a higher priority and reemphasize a social network of trust while creating an environment for dissonance.7 In discussing the ramifications of the personal liability of executives having been limited, a retired Goldman partner rhetorically questioned, why is it that when one person or a handful of senior persons at the firm does something bad that costs the shareholders and possibly puts the public at risk, that one person gets fired (maybe with some clawbacks of compensation) but the managing directors of the entire firm don’t have their compensation significantly affected? Another person I interviewed suggested that if Goldman partners collectively had to disproportionately pay the $550 million settlement with the SEC out of their bonus pool, or if J.P. Morgan had a partnership structure and the partners together had to disproportionately pay the losses from the “London whale,” perhaps they collectively would take stronger action to prevent such behavior. He pointed out that when Goldman paid settlements related to Robert Maxwell, all the partners paid, not just the one responsible for the relationship, and the firm went back retroactively to those who were partners at the time for payments. Enacting individual clawbacks that hold one person accountable has taken away the emphasis on organizational elements of financial interdependence and social networks of trust by which the executives could be holding each other accountable and self-regulating.


pages: 475 words: 155,554

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge by Faisal Islam

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Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, British Empire, capital controls, carbon footprint, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, G4S, ghettoisation, global rebalancing, global reserve currency, hiring and firing, inflation targeting, Irish property bubble, Just-in-time delivery, labour market flexibility, light touch regulation, London Whale, Long Term Capital Management, margin call, market clearing, megacity, Mikhail Gorbachev, mini-job, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, Pearl River Delta, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, Right to Buy, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, working-age population, zero-sum game

To put that in context, he was suggesting that occurrences that his financial model suggested would only happen once in a period of many trillions of lifetimes of the universe, were actually happening every day. The ‘fatal flaw’ of VaR, as Haldane argues, is that it is silent about the tail risk. A trader could be given a so-called 99 per cent VaR limit of $10 million, but VaR would be blind to the trader’s construction of a portfolio that gave a 1 per cent chance of a $1 billion loss. J. P. Morgan itself discovered in May 2012 that the ‘London Whale’ corporate credit portfolio that was assessed with a 95 per cent VaR of $67 million in early 2012 had lost them $2 billion within weeks. In its February 2008 annual results, RBS calculated a 95 per cent VaR on its trading book at £45.7 million. The disastrous purchase of the toxic asset-laden ABN Amro had increased that measure by just £6 million. A footnote did warn: ‘VaR using a 95 per cent confidence level does not reflect the extent of potential losses beyond that percentile.’