collateralized debt obligation

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pages: 459 words: 118,959

Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff by Christine S. Richard

activist fund / activist shareholder / activist investor, Asian financial crisis, asset-backed security, banking crisis, Bernie Madoff, Blythe Masters, buy and hold, cognitive dissonance, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, family office, financial innovation, fixed income, forensic accounting, glass ceiling, Long Term Capital Management, market bubble, money market fund, moral hazard, old-boy network, Ponzi scheme, profit motive, short selling, statistical model, white flight, zero-sum game

Butler, Jack “Buying the Farm” (Gotham Partners / Ackman) Cadbury PLC, Cahn, Jordan Caldwell and Raymond Caliendo, Charles Callen, Michael Calyon Canadian Imperial Bank of Commerce Cantor, Richard Capital Asset Research Management business described “Caulis Negris” (“Black Hole”) deal Lehman Brothers and Moody’s and NYS attorney general’s office and NYS Insurance Department and Pershing Square / Ackman and SEC and videotape of board meeting Wall Street Journal and Capital Markets Management LLC, Capuano, Michael Carina CDO Limited Carpenter, Ben Cartwright, Brian Casey, Kathleen Cassano, Joseph Catholic University of America “Caulis Negris” (“Black Hole”) deal financial details Pershing Square / Ackman and properties described CDOs. See collateralized-debt obligations CDS Delivery Option (Boberski) CDSs. See credit-default swaps certificates of participation (COPS) Chadbourne & Parke Channel Reinsurance Chanos, Jim Chaplin, Chuck MBIA’s mark-to-market explained by “Charlie Munger on the Psychology of Human Misjudgment” (Munger) Cholnoky, Thomas CIFG Moody’s and mortgage crisis and rescue proposals for bond insurers and triple-A rating Citigroup Ambac, proposed investment in ARS and CDOs and CDSs and MBIA downgraded by mortgage crisis and Pershing Square / Ackman and rescue proposals for bond insurers and Class V Funding IV, CNBC Mad Money Squawk Box CNN collateralized-debt obligations (CDOs) ACA Capital and AIG and Ambac and Assured Guaranty and “BISTRO,” Broderick Buffett comments on Carina CDO Limited catastrophe bonds, similiarity to CDO-squareds Citigroup and Class V Funding IV, collateral not required commutations, defined Congress and defined 888 Tactical Fund Limited FGIC and Fitch Ratings and FSA and IKB and JPMorgan Chase and Lehman Brothers and MBIA and Merrill Lynch and mezzanine Moody’s and Morgan Stanley and mortgage crisis and Octonion CDO Limited Open Source Model (Credit Suisse) and Pinnacle Peak CDO Limited rating fees Ridgeway Court Funding II Ltd.

In other words, if MBIA was required to make payments on just 0.2 percent of the nearly half a trillion dollars of bonds it had insured, it risked losing its triple-A rating. By the time Ackman met with Mark Gold, who oversaw MBIA’s structured finance business, it was nearly 7 p.m. The fund manager from Neuberger Berman was long gone, and the building was nearly deserted on that summer evening. Ackman talked with Gold about the company’s business of guaranteeing collateralized-debt obligations (CDOs), a business that Budnick described as “booming.” CDOs were Wall Street’s favorite new asset class. The securities are built out of pools of securities rather than pools of loans. Otherwise, CDOs work on the same waterfall principle as simpler asset-backed bonds. MBIA was backing lots of CDOs at what it called “super-senior levels,” the most senior or highest levels of a CDO securitization.

Although the company never disclosed what assets it funded through the SPVs, Gotham had been able to identify about half of the $8 billion in loans. Companies selling assets to the SPVs included Onyx Acceptance Corporation, which made loans to credit-impaired borrowers to purchase used cars, and American Business Financial Services, a company that originated home-equity loans in the subprime market. Gotham also pointed out that MBIA was now entering into credit-default-swap (CDS) contracts as a way to guarantee collateralized-debt obligations (CDOs), despite a New York state prohibition on bond insurers backing derivatives. “LaCrosse transforms obligations that MBIA cannot guarantee directly into ones it believes it can guarantee indirectly,” the report said. A statement in MBIA’s most recent filing with the New York State Insurance Department, saying the company has not entered into any transactions classified as derivative instruments, “obscures the company’s true credit derivative exposure,” the report said.


pages: 422 words: 113,830

Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips

algorithmic trading, asset-backed security, bank run, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business cycle, buy and hold, collateralized debt obligation, computer age, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency peg, diversification, Doha Development Round, energy security, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, George Gilder, housing crisis, Hyman Minsky, imperial preference, income inequality, index arbitrage, index fund, interest rate derivative, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, large denomination, Long Term Capital Management, market bubble, Martin Wolf, Menlo Park, mobile money, money market fund, Monroe Doctrine, moral hazard, mortgage debt, Myron Scholes, new economy, oil shale / tar sands, oil shock, old-boy network, peak oil, plutocrats, Plutocrats, Ponzi scheme, profit maximization, Renaissance Technologies, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, Satyajit Das, shareholder value, short selling, sovereign wealth fund, The Chicago School, Thomas Malthus, too big to fail, trade route

With regulation all but suspended, competition to innovate, experiment, and return to the collusions of the 1920s became intense. And before the wax attaching their wings melted Icarus-like in 2007-2008, most of the top fifteen to twenty institutions had bet their fortunes on a host of new financial vehicles and instruments—structured investment vehicles (SIVs), special purpose acquisition companies (SPACs), mortgage securitization, collateralized debt obligations (CDOs), credit default swaps (CDSs), and the like. Although bountiful in their own right, fees for mergers and acquisitions soon paled alongside the larger benefits of bull markets, assets bubbles, and the uber-profitability of exotic financial instruments. Back in the late 1980s, Goldman Sachs estimated that a major portion of that decade’s stock market upsurge had come from anticipation of takeover bids or buyouts, and other analysts would make the same point about the later M&A floodtides in 2000 and 2006 (see p. 77).

Then, to assess real-world vulnerability, the BIS set what they called net risk at $14.5 trillion, and put a plausible gross credit exposure at $3.256 trillion.14 Abstract as these trillion-dollar references may seem to laypeople, global fears of a second wave of exotic financial implosions took shape during 2008. In 2007, mortgage-backed securities and mortgage-linked packages of collateralized debt obligations (CDOs), contaminated by subprime mortgage ingredients, had been the top sources of heartburn. By autumn 2008, financial institutions had already written off some $700 billion of these products. In the meantime, credit default swaps (CDSs), as well as the so-called Synthetic CDOS in which credit swaps also figured, had become the new front burner of crisis management. Commentators were identifying them as the next set of financial dominoes positioned for a costly tumble.

This contract extraordinaire permitted borrowers to themselves decide how much to pay, the length of the loan, and when they chose to convert from a fixed rate to a variable rate or back again.18 Who, you might wonder, could offer such a mortgage? In fact, there was a powerful new reason why banks and other lenders were offering such wide-ranging come-ons to get people to sign up for loans they probably couldn’t afford. That was the heavy demand from securitization shops and bank departments for new carloads of mortgage loans to repackage into mortgage-backed securities or collateralized debt obligations. With the help of misleading or even rigged ratings, these would then be sold for a fat fee to a pension fund in Baton Rouge or a savings bank in Bavaria. The fees were paid up front. It didn’t matter too much what quality of meat was being stuffed into the securitized sausages. In fact, it was often subprime. Financial writer Michael Lewis noted that “In 2000, there had been $130 billion in subprime mortgage lending, with $55 billion being repackaged as mortgage bonds.


pages: 257 words: 64,763

The Great American Stickup: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street by Robert Scheer

banking crisis, Bernie Madoff, Bernie Sanders, business cycle, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, facts on the ground, financial deregulation, fixed income, housing crisis, invisible hand, Long Term Capital Management, mega-rich, mortgage debt, new economy, old-boy network, Ponzi scheme, profit motive, Ralph Nader, Ronald Reagan, too big to fail, trickle-down economics

Until it all fell apart in such grand fashion, turning some of the most prestigious companies in the history of capitalism into bankrupt beggars, all the key players in the derivatives markets were happy as pigs in excrement. At the bottom, a plethora of aggressive lenders was only too happy to sign up folks for mortgages and other loans they could not afford because those loans could be bundled and sold in the market as collateralized debt obligations (CDOs). The investment banks were thrilled to have those new CDOs to sell, their clients liked the absurdly high returns being paid—even if they really had no clear idea what they were buying—and the “swap” sellers figured they were taking no risk at all, since the economy seemed to have entered a phase in which it had only one direction: up. Of course, this was ridiculous on the face of it.

However, some years before Glass-Steagall was dismantled, Phil’s wife played a key role, as a member of both the Reagan and the Bush I administrations, in shaping the rapid changes in the financial markets brought about by internationalization, computer-driven trading, and the introduction of a whole new discipline of “risk management,” whereby Wall Street wizards deployed complex mathematical models to create a vast array of new financial products, such as the now infamous credit default swaps and collateralized debt obligations. As was seen throughout the Reagan and later the Bush I and Bush II administrations, the Republicans had realized they could impose de facto deregulation of Big Business by appointing to influential federal commissions and agencies “watchdogs” who were sympathetic to the corporations they were supposed to be monitoring. Of course, this end run around congressional authority was probably not as satisfying or foolproof as wiping out the regulation altogether, yet it proved quite effective in pleasing CEOs, who had spent the 1970s complaining about red tape and overzealous government investigators.

Odd then, that when the deregulation of the Clinton years lessened the pressure on the banks to lend to poor people, Republicans after the banking meltdown of 2008 would attempt to blame the subprime mortgage mess on Democratic do-gooders forcing lenders to help out the underclass. In reality, the number of subprime mortgages previously had been steady and grew dramatically only after deregulation. The surge was not a consequence of increased pressure on the banks to make such loans; on the contrary, it was the desire to sell collateralized debt obligations, given “legal certainty” by deregulation that made shaky mortgages newly attractive to the banks. Why? Because whereas commercial banks previously had held mortgage-based debt obligations, now they were off-loading the long-term responsibility to others to either collect or foreclose on them. While some poor people certainly were eager to accept loans they would have trouble paying back, it was not their happiness the bank was worried about, but what would turn out to be a gushing profit well: the packaging of debt obligations as securities.


pages: 402 words: 110,972

Nerds on Wall Street: Math, Machines and Wired Markets by David J. Leinweber

AI winter, algorithmic trading, asset allocation, banking crisis, barriers to entry, Big bang: deregulation of the City of London, business cycle, butter production in bangladesh, butterfly effect, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, citizen journalism, collateralized debt obligation, corporate governance, Craig Reynolds: boids flock, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Danny Hillis, demand response, disintermediation, distributed generation, diversification, diversified portfolio, Emanuel Derman, en.wikipedia.org, experimental economics, financial innovation, fixed income, Gordon Gekko, implied volatility, index arbitrage, index fund, information retrieval, intangible asset, Internet Archive, John Nash: game theory, Kenneth Arrow, load shedding, Long Term Capital Management, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, market fragmentation, market microstructure, Mars Rover, Metcalfe’s law, moral hazard, mutually assured destruction, Myron Scholes, natural language processing, negative equity, Network effects, optical character recognition, paper trading, passive investing, pez dispenser, phenotype, prediction markets, quantitative hedge fund, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Renaissance Technologies, risk tolerance, risk-adjusted returns, risk/return, Robert Metcalfe, Ronald Reagan, Rubik’s Cube, semantic web, Sharpe ratio, short selling, Silicon Valley, Small Order Execution System, smart grid, smart meter, social web, South Sea Bubble, statistical arbitrage, statistical model, Steve Jobs, Steven Levy, Tacoma Narrows Bridge, the scientific method, The Wisdom of Crowds, time value of money, too big to fail, transaction costs, Turing machine, Upton Sinclair, value at risk, Vernor Vinge, yield curve, Yogi Berra, your tax dollars at work

This is informative on how responsible use of market technology might have avoided the crisis and can help avoid an even more dreadful sequel in the future. Technology errors of omission and commission have contributed to our present woes. Stock markets are almost perfectly transparent, with full information available to all, and the best electronic clearing and settlement in history. These technologies were omitted in building the skyscraper of cards (“house of cards” seems too mild) out of collateralized debt obligations (CDOs), credit default swaps (CDSs), synthetic collateralized debt obligations (SCDOs), and the rest. The Hall of Shame for those guilty of incompetent engineering features collapsing bridges, flaming dirigibles, exploding spacecraft, and melting reactors. We can add a new wing for overly complex derivatives, modeled in exquisite detail by myopic nerds with Ph.D.’s who got lost in the ever more complex simulations but ignored the basic principles, and their lavishly paid bosses who ignored the warnings from the best of them so they could be even more lavishly paid.

The legal and financial engineering hoops that are must be jumped through to do this are illustrated in Figure 12.5. 294 Nerds on Wall Str eet Synthetic Collateralized Debt Obligation (SCDO) Originator Underwriters Default Payment Asset 1 Asset 2 ... Asset M Loan 1 Loan 2 ... Loan N Investors Special Purpose Vehicles (SPVs) CDS Premium Senior Tranche Principal & Interest Secondary Tranche Trustees Mezzanine ... Junior Excess Spread High-Quality Assets 64 62 U 58 4 3 58 B 32 54 38 34 50 56 48 44 40 24 46 22 28 41 3 42 12 43 4 Figure 12.5 The upper panel is a simplified schematic of a synthetic collateralized debt obligation (SCDO) drawn based on various sources who for some reason seem reluctant to have their original work further exposed. The lower panel, taken from an actual U.S. patent for a “User Operated Amusement Apparatus for Kicking the User’s Buttocks” is a nonsimplified schematic of the effects of SCDOs on the world’s financial system.

See also data mining capital asset pricing model, 98–99 “Barr’s better beta”, 98–101 Bill Sharpe, 38 CAPM. See capital asset pricing model CDO. See collateralized debt obligation CDS. See credit default swaps Center for Innovative Financial Technology, 311 CERN, 37, 104 CFTC. See Commodity Futures Trading Commission Chicago Mercantile Exchange, 6–9, 72, 286 Chriss, Neil, 76–77 chromosome, 155, 184–186, 192–193 CI. See collective intelligence CIFT. See Center for Innovative Financial Technology CME. See Chicago Mercantile Exchange Codexa, xxxiv, 221, 235–249 GUI, 246–249 message counting, 237–241 whisper numbers, 241–246 collateralized debt obligation, 61, 318, 279, 283, 289 Fannie Mae, 295–298 lack of transparency, 284 collective intelligence, xl, 227–251 collective investing, 229–234 See also counting messages, whisper numbers collective investing, 229–234 iExchange, 230–231 Marketocracy, 232 Index Commodity Futures Trading Commission, 283–284 common factor analysis, 127 Computer Assisted Execution System, 66 computerized investing active management, 115–124 finding alpha, 124–128 indexing, 110–115 market neutral portfolios, 120–124 trading costs, 128–130 computers on Wall Street, early, 22–26 counting messages, 237–241, 261 Cox, Christopher, 60, 106, 218 credit default swaps, 61, 279 NABI on, 322–323 PWG on, 285–286 crossover in chromosomes, 184, 186, 192 D.E.


pages: 322 words: 77,341

I.O.U.: Why Everyone Owes Everyone and No One Can Pay by John Lanchester

asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black-Scholes formula, Blythe Masters, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, George Akerlof, greed is good, hedonic treadmill, hindsight bias, housing crisis, Hyman Minsky, intangible asset, interest rate swap, invisible hand, Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Kickstarter, laissez-faire capitalism, light touch regulation, liquidity trap, Long Term Capital Management, loss aversion, Martin Wolf, money market fund, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, new economy, Nick Leeson, Norman Mailer, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, South Sea Bubble, statistical model, The Great Moderation, the payments system, too big to fail, tulip mania, value at risk

That means that their debt gives a wonderfully high yield; and at a time when the yields of everything else are disappointingly low, that makes them the answer to capital’s whispered prayer. Somebody had long since worked out a way of making collateralized debt obligations out of mortgages, the same way that they had out of corporate debt and bonds and suchlike. Remember, a collateralized debt obligation is a pool of debt being paid back by a group of borrowers, which is added together and then sold on a set of bonds paying a range of different interest rates. Collateralized debt obligations, which had begun with corporate forms of debt, now moved into the area of mortgage holders paying off their mortgages. As always, there would be two streams of revenue, one from the fees to set up the deal and another from the repayments themselves.

Morgan had found a way to shift risk off its books, while simultaneously generating income from that risk and freeing up capital to lend elsewhere. It was magic. The only thing wrong with it was the name, BISTRO—standing for Broad Index Secured Trust Offering but making the new rocket-science financial instrument sound like a place you went to for a plate of steak frites. The market came to prefer a different term: “synthetic collateralized debt obligations.” Just to keep track of where we have got to with these new financial instruments, let’s translate it back into personal finance terms. Remember your arrangement to lend money to the Smiths for their loft—the one you got your other neighbors, the Joneses, to insure. That was a straightforward swap of risk. The deal went fine, and you fell to thinking about how it might be improved if another neighbor were to approach you.

This is a gigantic insurance company, worth $200 billion at its peak and definitely “too big to fail.” It was AIG which was, in effect, the Joneses. It was the company which underwrote all the insurance: it was the single biggest player in the CDS market. Entertainingly for fans of financial acronyms, AIG was done in by CDSs on CDOs. That’s to say, it took part in credit default swaps on collateralized debt obligations, the pools of subprime mortgages whose dramatic collapse in value in 2008 was the proximate cause of the financial crisis. When the investment bank Lehman Brothers imploded in September 2008, done in by its exposure to bad assets, there was a generalized panicked scramble to see who else was carrying similar risk. When it turned out that AIG was—and worse, that it was valuing those assets at much higher prices than Lehman Brothers had—investors freaked out and the company’s credit rating collapsed.


pages: 353 words: 88,376

The Investopedia Guide to Wall Speak: The Terms You Need to Know to Talk Like Cramer, Think Like Soros, and Buy Like Buffett by Jack (edited By) Guinan

Albert Einstein, asset allocation, asset-backed security, Brownian motion, business cycle, business process, buy and hold, 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, dogs of the Dow, equity premium, fixed income, implied volatility, index fund, intangible asset, interest rate swap, inventory management, London Interbank Offered Rate, margin call, 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

For example, if a person gets a mortgage, the collateral would be the house. In margin stock trading, the securities in the account act as collateral against the margin loan. 44 The Investopedia Guide to Wall Speak Related Terms: • Asset • Margin • Regulation T • Asset-Backed Security • Margin Call Collateralized Debt Obligation (CDO) What Does Collateralized Debt Obligation (CDO) Mean? An investment-grade security that is backed by a pool of bonds, loans, and other assets. CDOs represent various debt obligations but are often nonmortgage loans or bonds. Investopedia explains Collateralized Debt Obligation (CDO) Similar in structure to a collateralized mortgage obligation (CMO) or a collateralized bond obligation (CBO), CDOs are unique in that they represent different types of debt and credit risk. In the case of CDOs, these different types of debt often are referred to as tranches or slices.

See Current ratio Cash conversion cycle (CCC), 39 Cash flow, 39-40, 109-111, 182-183, 198-199, 208 Cash flow statement, 40-41, 208 Cash ratio. See Current ratio C-CPI-U. See Chained urban consumers, CPI (C-CPI-U) CDO. See Collateralized debt obligation (CDO) CDS. See Credit default swap (CDS) Certificate of deposit (CD), 41 Chained dollar GDP. See Nominal GDP Chained urban consumers, CPI (C-CPI-U), 48-49 Chapter 11, Bankruptcy Code, 19, 42 Characteristic line. See Security market line (SML) Chicago Board Options Exchange, 316 Churning, 307 CINS number, 63 Closed-end fund, 42-43, 195-196 CML. See Capital market line (CML) Coefficient of variation (CV), 43 COGS. See Cost of goods sold (COGS) Collateral, 43-44, 127 Collateralized debt obligation (CDO), 44, 290 Collateralized mortgage obligation (CMO), 44-45, 303 Commercial paper, 45 Commissions. See Load fund Commodity, 45-46, 107-108.

This country (if not the world) is guilty of some major financial mistakes. This isn’t just Main Street we’re talking about; Wall Street has made plenty of mistakes too. Therefore, we believe that the need for financial education among young people applies not only to those who might fall prey to adjustable-rate mortgages or credit card debt xii The Investopedia Guide to Wall Speak but also to the Wall Street set who staked their futures on collateralized debt obligations (CDOs), mortgage-backed securities (MBSs), and other creations of financial engineering that have emerged over the last few decades. Similarly, there has been no shortage of talk about the world’s “credit binge,” but this discussion rarely addresses what we view as the root cause: lack of education. Just look at the credit crisis: A general lack of knowledge extended all the way down the line, from the homeowner who didn’t read the details of his or her mortgage document, to the investment bank that sold it, to the institutional investor who bought it, to the credit rating agency that rated it, and to the politician who failed to regulate it.


pages: 311 words: 99,699

Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe by Gillian Tett

accounting loophole / creative accounting, asset-backed security, bank run, banking crisis, Black-Scholes formula, Blythe Masters, break the buck, Bretton Woods, business climate, business cycle, buy and hold, collateralized debt obligation, commoditize, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, easy for humans, difficult for computers, financial innovation, fixed income, housing crisis, interest rate derivative, interest rate swap, Kickstarter, locking in a profit, Long Term Capital Management, McMansion, money market fund, mortgage debt, North Sea oil, Northern Rock, Renaissance Technologies, risk tolerance, Robert Shiller, Robert Shiller, Satyajit Das, short selling, sovereign wealth fund, statistical model, The Great Moderation, too big to fail, value at risk, yield curve

Morgan’s proprietary name for the idea of creating CDOs out of credit derivatives. It was first launched in 1997 and was the forerunner of the synthetic CDO structure that later became widespread. Collateralized Debt Obligations (CDOs): A form of asset-backed security. They are typically created by bundling together a portfolio of fixed-income debt (such as bonds) and using those assets to back the issuance of notes. Such notes usually carry varying levels of risk. Cash CDOs are created from tangible bonds, bonds, or other debt; synthetic CDOs sare created from credit derivatives. Collateralized Debt Obligations of Asset Backed Securities (CDO of ABS): CDOs built out of asset-backed securities, which are usually (but not always) types of mortgage-backed bonds. Collateralized Loan Obligations: CDOs built out of loans, which are usually “leveraged loans” (those extended to companies whose debt is rated noninvestment grade).

Did they fail to see the flaws, or did they fail to care? This book explores the answer to the central question of how the catastrophe happened by beginning with the tale of a small group of bankers formerly linked to J.P. Morgan, the iconic, century-old pillar of banking. In the 1990s, they developed an innovative set of products with names such as “credit default swaps” and “synthetic collateralized debt obligations” (of which more later) that fall under the rubric of credit derivatives. The Morgan team’s concepts were diffused and mutated all around the global economy and collided with separate innovations in mortgage finance. These then played a critical role in both the great credit bubble and its subsequent terrible bursting. The J.P. Morgan team were not the true inventors of credit derivatives.

However, one more obstacle still stood in the way of the team unleashing its revolution, and it was a daunting one. They still had to find a way to process a high volume of deals rapidly; to industrialize the CDS trade, transforming it from a cottage industry into a mass-production business. The crucial, last piece of the puzzle that fell into place went by the strange name “BISTRO” (although bankers would later give the idea an even stranger tag, “synthetic collateralized debt obligations”). This brainchild emerged from months of heated debate and experimentation. By the mid-1990s, Hancock’s group had two views of how to make credit derivatives work large-scale. In London, Bill Winters was inclined to try to create what bankers call a “liquid market” in credit derivatives. That would entail finding a way to make credit derivatives as easy for clients and investors to buy and sell as stocks, and might even require setting up an exchange.


When Free Markets Fail: Saving the Market When It Can't Save Itself (Wiley Corporate F&A) by Scott McCleskey

Asian financial crisis, asset-backed security, bank run, barriers to entry, Bernie Madoff, break the buck, call centre, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, financial innovation, fixed income, information asymmetry, invisible hand, Isaac Newton, iterative process, Long Term Capital Management, margin call, money market fund, moral hazard, mortgage debt, place-making, Ponzi scheme, prediction markets, risk tolerance, shareholder value, statistical model, The Wealth of Nations by Adam Smith, time value of money, too big to fail, web of trust

Morgan, force fed by, 77 rating agency downgrade and tipping point, 5, 92 repos, 13–14 residential mortgage-backed securities (RMBSs), 3, 13–14 SEC as holding company for, 180 systemic risk, 2–6, 10, 13–14 toxic assets, difficult-to-price, 6 Berkshire Hathaway, 89 Bernanke, Chairman Benjamin, 29, 60, 78– 79 Bernie Madoff scandal, xxi, xxiii, 110, 112, 147, 176 British East India Company, xvi brokerage firms, 107, 116 Buffet, Warren, 89 C CCO. See Chief Compliance Officer (CCO) CDOs. See collateralized debt obligations (CDOs) CDSs. See credit default swaps (CDSs) Center for Capital Markets Competitiveness of the U.S. Chamber of Commerce, 130 Center for Economic and Policy Research (CEPR), 87–88 CEPR. See Center for Economic and Policy Research (CEPR) Certified Regulatory and Compliance Professional [FINRA], 151 CFPA. See Consumer Financial Protection Agency (CFPA) CFTC. See Commodity Futures Trading Commission (CFTC) Chief Compliance Officer (CCO), 110, 114, 151–52 civil liability, 27–28, 30, 92 CMBSs. See commercial mortgage-backed securities (CMBSs) Code of Conduct Fundamentals for Credit Rating Agencies, 140 collateralized debt obligations (CDOs), 11, 31, 42, 95–96 187 E1BINDEX 06/16/2010 188 11:28:9 n Page 188 Index commercial mortgage-backed securities (CMBSs), 31–32, 37, 40, 42.

& 11 One is that the financial system has become more complex than it was 5, 10, or 25 years ago. It is complex in that there are more institutions with more points of connection with each other, whether as counterparties in loans and transactions or by investing in each others’ commercial paper, swaps, and other securities. And the financial instruments that have been summoned into existence such as credit default swaps and collateralized debt obligations have made the connections more volatile and powerful. It is also complex because no one really sees all of the connections or the size of the exposures they create, and because they change from day to day (think of money market funds, for instance). At the same time, the number of connections and exposures has brought firms into closer proximity to each other. It used to be said that no actor was more than six degrees of separation from Kevin Bacon, but in the markets today it is likely that no firm is more than two or three degrees of separation away from any other firm.

It is hard to argue that innovations that were at the center of the financial crisis—namely mortgage-backed securities and credit default swaps—were good for anyone. Some distinguished economists and bankers put the case more strongly. Paul Volcker, Alan Greenspan’s predecessor as Fed chairman and never a man to express half an opinion, has made clear his views on unrestrained innovation: I hear about these wonderful innovations in the financial markets, and. . . . I can tell you of two—credit-default swaps and collateralized debt obligations—which took us right to the brink of disaster. Were they wonderful innovations that we want to create more of?1 1 ‘‘Paul Volcker: Think More Boldly,’’ Wall Street Journal, December 14, 2009. C05 06/16/2010 11:17:40 Page 43 Should Regulation Stifle Innovation? & 43 Put slightly differently, just because you can do something doesn’t mean you should do it. But the markets themselves impel the drive for innovation because successful ones are moneymakers.


pages: 430 words: 109,064

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson, James Kwak

American ideology, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, banking crisis, Bernie Madoff, Bonfire of the Vanities, bonus culture, break the buck, business cycle, buy and hold, capital controls, Carmen Reinhart, central bank independence, Charles Lindbergh, collapse of Lehman Brothers, collateralized debt obligation, commoditize, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Edward Glaeser, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, George Akerlof, Gordon Gekko, greed is good, Home mortgage interest deduction, Hyman Minsky, income per capita, information asymmetry, interest rate derivative, interest rate swap, Kenneth Rogoff, laissez-faire capitalism, late fees, light touch regulation, Long Term Capital Management, market bubble, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage tax deduction, Myron Scholes, Paul Samuelson, Ponzi scheme, price stability, profit maximization, race to the bottom, regulatory arbitrage, rent-seeking, Robert Bork, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, Satyajit Das, sovereign wealth fund, The Myth of the Rational Market, too big to fail, transaction costs, value at risk, yield curve

Warren Buffett, “Chairman’s Letter,” Berkshire Hathaway 2002 Annual Report, available at http://www.berkshirehathaway.com/letters/2002pdf.pdf. 52. Nassim Nicholas Taleb, Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life (New York: Texere, 2001). 53. Janet Tavakoli, Structured Finance and Collateralized Debt Obligations: New Developments in Cash & Synthetic Securitization, second edition (Hoboken, NJ: Wiley, 2008); originally published as Collateralized Debt Obligations and Structured Finance in 2003. 54. See John Cassidy, How Markets Fail: The Logic of Economic Calamities (New York: Farrar, Straus and Giroux, 2009), 212. 55. Brian Naylor, “Greenspan Admits Free Market Ideology Flawed,” NPR, October 24, 2008, available at http://www.npr.org/templates/story/story.php?storyId=96070766. 56.

When John Gutfreund became CEO of Salomon in 1978, all commercial banks together held $1.2 trillion of assets, equivalent to 53 percent of U.S. GDP. By the end of 2007, the commercial banking sector had grown to $11.8 trillion in assets, or 84 percent of U.S. GDP. But that was only a small part of the story. Securities broker-dealers (investment banks), including Salomon, grew from $33 billion in assets, or 1.4 percent of GDP, to $3.1 trillion in assets, or 22 percent of GDP. Asset-backed securities such as collateralized debt obligations (CDOs), which hardly existed in 1978, accounted for another $4.5 trillion in assets in 2007, or 32 percent of GDP.* All told, the debt held by the financial sector grew from $2.9 trillion, or 125 percent of GDP, in 1978 to over $36 trillion, or 259 percent of GDP, in 2007.13 Some of this growth was due to an increase in borrowing by the nonfinancial sector—the “real economy.” However, the expansion of the financial sector vastly outpaced growth in households and nonfinancial companies.

Reverse convertibles, for example, are structured notes where the investor gets either a fixed interest rate or a share of stock, depending not only on the final stock price but on the path it takes getting there; because of their complexity, few investors are able to value them accurately, making them prey to unscrupulous brokers and banks.49 (“I was told there was no risk with these,” said one retiree who lost over $90,000 on reverse convertibles.)50 The ideology of innovation had its skeptics. Warren Buffett famously labeled derivatives “financial weapons of mass destruction” in the Berkshire Hathaway 2002 annual report.51 In his 2001 book Fooled by Randomness, Nassim Taleb argued that modern financial technology underestimated the likelihood of extreme events, with potentially catastrophic implications.52 Janet Tavakoli’s 2003 book, Collateralized Debt Obligations and Structured Finance, discussed the potential problems involved in securitization, including the risk of fraud.53 And decades before, Hyman Minsky had pointed out the role of innovation in enabling financiers to increase their profits at the risk of destabilizing the economy.54 They could all be ignored as long as market conditions remained benign. But the Merton-Greenspan “risk unbundling” story was proven horribly wrong by the financial crisis that began in 2007—caused in part by innovative products that made it possible for financial institutions and investors to take on massive amounts of risk hidden inside AAA-rated securities that later plummeted in value.


pages: 280 words: 79,029

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better by Andrew Palmer

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, longitudinal study, 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 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, Thales of Miletus, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application

It is not the dash for risk that lands the world’s financial system in trouble; it is the hunt for safe returns. These new instruments are attended by risks that are different from those of the old ones they are substituting for, however. Putting money into AAA-rated Treasuries is a transparent bet on the full faith and credit of the US government. Putting money into highly rated “collateralized-debt obligations” (CDOs), which bundle up the lower tranches of existing securitizations, was an opaque bet that America would not suffer a national housing-market meltdown. Similarly, putting your money into a bank account is a decision that is informed by an explicit system of deposit insurance: you will get your money back because the government guarantees it. For many, investing in a money-market fund is also a bet on a promise, but this time by a private actor not to “break the buck”—in other words, to give a dollar back for each dollar invested.

Raising a multibillion-dollar fund is going to take a long time, but Lo is hopeful that a smaller proof-of-­concept fund, devoted to drugs for “orphan” diseases that affect fewer than two hundred thousand individuals, will come to fruition more quickly. Some people will be holding their heads in their hands at the thought of using securitization to take on cancer. Isn’t this the same sort of financial wizardry that created those infamous collateralized-­debt obligations that were stuffed with subprime loans during the mortgage boom? In an echo of these instruments, Lo and his colleagues have christened the proposed drug megafund “research-backed obligations.” Why invest hope in a technology that caused so much damage? For that matter, why aim for such a big amount? Couldn’t Lo make life easier for himself and aim for a smaller, simpler fund? The answer to that question tells you something about why financial engineering exists at all.

In fact, as a judgment about the likelihood that these instruments would default, the AAA standard performed better than you might think. One surprising statistic to come out of the subprime crisis is from a little-reported analysis by Sun Young Park, now an assistant professor at the Korea Advanced Institute of Science and Technology. She analyzed the actual performance of subprime tranches of mortgage-backed securities—not collateralized-debt obligations, but the preceding step in the securitization chain—­issued in the United States between 2004 and 2007 and looked at how many losses had actually been sustained. A total of $1.1 trillion in AAA-rated subprime MBS tranches were issued in that period, and Park identified a loss amount on these securities of $2.6 billion by August 2013. That amounts to a loss percentage of only 0.24 percent.


pages: 414 words: 101,285

The Butterfly Defect: How Globalization Creates Systemic Risks, and What to Do About It by Ian Goldin, Mike Mariathasan

"Robert Solow", air freight, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bretton Woods, BRICs, business cycle, butterfly effect, clean water, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, connected car, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, discovery of penicillin, diversification, diversified portfolio, Douglas Engelbart, Douglas Engelbart, Edward Lorenz: Chaos theory, energy security, eurozone crisis, failed state, Fellow of the Royal Society, financial deregulation, financial innovation, financial intermediation, fixed income, Gini coefficient, global pandemic, global supply chain, global value chain, global village, income inequality, information asymmetry, Jean Tirole, John Snow's cholera map, Kenneth Rogoff, light touch regulation, Long Term Capital Management, market bubble, mass immigration, megacity, moral hazard, Occupy movement, offshore financial centre, open economy, profit maximization, purchasing power parity, race to the bottom, RAND corporation, regulatory arbitrage, reshoring, Silicon Valley, six sigma, Stuxnet, supply-chain management, The Great Moderation, too big to fail, Toyota Production System, trade liberalization, transaction costs, uranium enrichment

A number of studies show how concentration in commodity networks also enables firms to exert control over suppliers, “making them captives.”21 The increasingly complex financial network expanded not only in terms of size but also in terms of sophistication. Drawing on increased processing power, financial traders have invented new ways to trade and to gain access to credit. Though marginal at the turn of the century, credit default swaps, collateralized debt obligations (see box 2.1 for a nontechnical explanation of these products), and the resale market for capital had all become ubiquitous operations by 2008. In less than a decade the over-the-counter derivative market expanded to 10 times global GDP, or roughly $600,000 billion. Put simply, “globally integrated markets and innovation … led to a transformation of the financial landscape.”22 Growing Complexity The rise of securitization and structured financial products was one of the most striking features of the Golden Decade.

Put simply, “globally integrated markets and innovation … led to a transformation of the financial landscape.”22 Growing Complexity The rise of securitization and structured financial products was one of the most striking features of the Golden Decade. Figure 2.1 shows the issuance of corporate debt and asset-backed securities between 1990 and 2009. Until 2002, banks issued more corporate debt than asset-backed securities. In 2005, however, banks issued almost twice as much in complex asset-backed securities as in corporate debt. The same trend can be observed when looking at the global issuance of collateralized debt obligations, which increased by a factor of five between 2002 and 2006 (see figure 2.2). Box 2.1. Glossary of Securitization Derivative: A financial product governed by a contract that specifies the conditions under which payments are made between the parties. Its price is based on expectations regarding the value of underlying assets. Securitization: The practice of consolidating and repackaging different types of debt (such as mortgage, loan, or credit card obligations) for passing on to investors.

Hedging transaction: A business deal that attempts to limit investment risk by ensuring that the profits or losses from one trade are offset by another. Special-purpose vehicle (SPV): A specially created company designed to have limited liability and insulate the ultimate beneficial owners from risks associated with investments and/or to obscure ownership of financial assets and liabilities. Sometimes known as a “special-purpose entity” or a “financial vehicle corporation” instead. Collateralized debt obligation (CDO): An investment security composed of a wide range of assets that is passed on to different classes or tranches of owners who face varying degrees of risk. Credit default swap (CDS): A financial swap agreement that transfers the credit link of a financial product between parties. It usually involves the seller compensating the buyer in return for a payoff in the event of a default.


pages: 394 words: 85,734

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, business cycle, 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, Kickstarter, 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, WikiLeaks, Yom Kippur War

A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data available ISBN 978 1 78032 646 7 Contents ABBREVIATIONS PREFACE TO THE NEW EDITION ACKNOWLEDGEMENTS 1 Introduction 2 Laboratories of the future 3 The Global Plan 4 The Global Minotaur 5 The beast’s handmaidens 6 Crash 7 The handmaidens strike back 8 The Minotaur’s global legacy: the dimming sun, the wounded tigers, a flighty Europa and an anxious dragon 9 A world without the Minotaur? POSTCRIPT TO THE NEW EDITION NOTES RECOMMENDED READING SELECT BIBLIOGRAPHY INDEX Abbreviations AC alternating current ACE aeronautic–computer–electronics complex AIG American Insurance Group ATM automated telling machine CDO collateralized debt obligation CDS credit default swap CEO chief executive officer DC direct current ECB European Central Bank ECSC European Coal and Steel Community EFSF European Financial Stability Facility EIB European Investment Bank EMH Efficient Market Hypothesis ERAB Economic Recovery Advisory Board EU European Union FDIC Federal Deposit Insurance Corporation GDP gross domestic product GM General Motors GSRM global surplus recycling mechanism IBRD International Bank for Reconstruction and Development ICU International Currency Union IMF International Monetary Fund LTCM Long-Term Capital Management (hedge fund) MIE military–industrial establishment NAFTA North American Free Trade Agreement NATO North Atlantic Treaty Organization OECD Organisation for Economic Co-operation and Development OEEC Organisation for European Economic Co-operation OMT outright monetary operations OPEC Organization of the Petroleum Exporting Countries RBCT Real Business Cycle Theory RBS Royal Bank of Scotland REH Rational Expectations Hypothesis RMB renminbi – Chinese currency SME small and medium-sized enterprise SPV Special Purpose Vehicle TARP Troubled Asset Relief Program For Danae Stratou, my global partner Preface to the new edition This book originally aimed at pressing a useful metaphor into the service of elucidating a troubled world; a world that could no longer be understood properly by means of the paradigms that dominated our thinking before the Crash of 2008.

Buyers cannot taste the ‘produce’, squeeze it to test for ripeness, or smell its aroma. They rely on external, institutional information and on well-defined rules that are designed and policed by dispassionate, incorruptible authorities. This was the role, supposedly, of the credit rating agencies and of the state’s regulatory bodies. Undoubtedly, both types of institution were found not just wanting but culpable. When, for instance, a collateralized debt obligation (CDO) – a paper asset combining a multitude of slices of many different types of debt4 – carried a triple-A rating and offered a return 1 per cent above that of US Treasury Bills,5 the significance was twofold: the buyer could feel confident that the purchase was not a dud and, if the buyer was a bank, it could treat that piece of paper as indistinguishable from (and not an iota riskier than) the real money with which it had been bought.

Meanwhile, in the two former US protégés, Germany and Japan (the two countries that were financing the Anglo-Celtic deficits through their industrial production, which the Anglo-Celtic countries were, in turn, absorbing), not only did house prices not increase but they actually dropped, at least in the case of Germany. The graphic correlation shown in the figure between the housing bubble and consumption-driven growth was reinforced by a famous instrument: securitized derivatives or collateralized debt obligations (those CDOs again). How did they link housing debt with consumption-driven growth? To answer this question, it is helpful to begin with a self-evident truth: the banks’ main principle has traditionally been never to lend to anyone unless they do not need the money. But this principle clashed with the urge to lend to those poor enough to be willing to pay higher interest rates than those who had other alternatives (i.e. the rich).


pages: 543 words: 157,991

All the Devils Are Here by Bethany McLean

Asian financial crisis, asset-backed security, bank run, Black-Scholes formula, Blythe Masters, break the buck, buy and hold, call centre, collateralized debt obligation, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Exxon Valdez, fear of failure, financial innovation, fixed income, high net worth, Home mortgage interest deduction, interest rate swap, laissez-faire capitalism, Long Term Capital Management, margin call, market bubble, market fundamentalism, Maui Hawaii, money market fund, moral hazard, mortgage debt, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative trading / quantitative finance, race to the bottom, risk/return, Ronald Reagan, Rosa Parks, shareholder value, short selling, South Sea Bubble, statistical model, telemarketer, too big to fail, value at risk, zero-sum game

Very short-term loans, allowing firms to conduct their daily business, backed by mortgages or other assets. Part of the “plumbing” of Wall Street. ABS: Asset-backed securities. Bonds comprising thousands of loans—which could include credit card debt, student loans, auto loans, and mortgages—bundled together into a security. AIG: American International Group. ARM: Adjustable-rate mortgage. CDOs: Collateralized debt obligations. Securities that comprise the debt of different companies or tranches of asset-backed securities. CDOs Squared: Collateralized debt obligations squared. Securities backed by tranches of other CDOs. CFTC: Commodities Futures Trading Commission. Government agency that regulates the futures industry. CSE: Consolidated supervised entities. An effort by the Securities and Exchange Commission in 2004 to create a voluntary supervisory regime to regulate the big investment bank holding companies.

For years, Wall Street had been churning out these securities. Many of them had triple-A ratings, meaning they were considered almost as safe as Treasury bonds. No firm had done more of these deals than Merrill Lynch. Calling in a favor from a friend in the finance department, Breit got ahold of a spreadsheet that listed the underlying collateral for one security on Merrill’s books, something called a synthetic collateralized debt obligation squared, or sythentic CDO squared. As soon as he looked at it, Breit realized that the collateral—bits and pieces of mortgage loans that had been made by subprime companies—was awful. Many of the mortgages either had already defaulted or would soon default, which meant the security itself was going to tumble in value. The triple-A rating was in jeopardy. Merrill was likely to lose tens of millions of dollars on just this one synthetic CDO squared.

Years later, by which time he was running FP—and not long before the first glimmers of the financial crisis could be seen on the horizon—Cassano spoke at an investment conference in which he boasted about being involved in that original BISTRO deal. “It was a watershed event in 1998 when J.P. Morgan came to us, who were somebody we worked with a great deal, and asked us to participate,” he said. “These trades were the precursors to what’s become the CDO market today.” CDO stood for collateralized debt obligation, which is what that BISTRO-type structure was eventually called. By 2007, when Cassano made those remarks, Wall Street churned them out as if they were coming off an assembly line. There was, however, one giant difference between the early BISTRO deals and the CDOs of 2007. At the heart of the early BISTRO deals was corporate debt. But at the heart of the CDO market of 2007 was something far more dangerous: mortgages. 6 The Wizard of Fed Inevitably, the nation’s first subprime boom ended badly.


pages: 566 words: 155,428

After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead by Alan S. Blinder

"Robert Solow", 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.

There is no agreed-upon definition of the shadow banking system, but the institutions involved on the eve of the crisis included nonbank loan originators; the two government-sponsored housing agencies, Fannie Mae and Freddie Mac; other so-called private-label securitizers; the giant investment banks (who were often securitizers, too); the aforementioned SIVs; a variety of finance companies (some of which specialized in housing finance); hedge funds, private equity funds, and other asset managers; and thousands of mutual, pension, and other sorts of investment funds. The markets involved included those for mortgage-backed securities (MBS), other asset-backed securities (ABS), commercial paper (CP), repurchase agreements (“repos”), and a bewildering variety of derivatives, including the notorious collateralized debt obligations (CDOs) and the ill-fated credit default swaps (CDS). (Sorry about the alphabet soup—explanations to come.) By most estimates, the shadow banking system was far larger than the conventional banking system. Imagine leaving all that financial activity almost totally unregulated—like a bunch of wild animals running around without zookeepers. Well, actually, you don’t have to imagine it.

The most junior tranche, which came to be called the “toxic waste,” would absorb, say, the first 8 percent of losses in the pool ($32 million)—no matter which mortgages defaulted. The middle, or “mezzanine,” tranche might absorb the next 2 percent ($8 million), leaving owners of the top-rated, or “senior,” tranche vulnerable only to losses above 10 percent ($40 million)—an event that seemed so unlikely as to be nearly impossible. Call the resulting three-tranche bundle of securities a CDO (collateralized debt obligation). This example is unrealistically simple, by the way. Typical CDOs had seven or eight tranches; some had more. Now, think about what happens to the various tranches of the CDO as losses on mortgages rise from negligible to monumental. As long as loan losses remain below 8 percent, only the owners of the toxic waste take any hit. Owners of the two higher tranches continue to receive full payment.


pages: 246 words: 74,341

Financial Fiasco: How America's Infatuation With Homeownership and Easy Money Created the Economic Crisis by Johan Norberg

accounting loophole / creative accounting, bank run, banking crisis, Bernie Madoff, Black Swan, business cycle, capital controls, central bank independence, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Brooks, diversification, financial deregulation, financial innovation, helicopter parent, Home mortgage interest deduction, housing crisis, Howard Zinn, Hyman Minsky, Isaac Newton, Joseph Schumpeter, Long Term Capital Management, market bubble, Martin Wolf, Mexican peso crisis / tequila crisis, millennium bug, money market fund, moral hazard, mortgage tax deduction, Naomi Klein, new economy, Northern Rock, Own Your Own Home, price stability, Ronald Reagan, savings glut, short selling, Silicon Valley, South Sea Bubble, The Wealth of Nations by Adam Smith, too big to fail

W.) administration, 19-21 on bailout, 116-17, 128 expanded homeownership, 23-24, 37-38, 41-42 "G.S.E.s-We Told You So," 36 "Hoover myth" of deregulation, 133 business cycle, government manipulation, 153-55 "Buttonwood" prediction, 14-15 buyer education program participation, 31 Calomiris, Charles, 65 "capitalism of adventures," 119 Cassel, Gustav, 103 Cayne, James, 56-57, 72, 80 CDOs. See collateralized-debt obligations (CDOs) central banks, 49-51, 152 role of, 10-15, 142 Chanos, James, 111 China, 16-17 Chrysler, 125 Cisneros, Henry, 23-25, 29-36 Citigroup, 57-58, 74, 76, 85 Klios, 57 citizens' and consumer groups, monitoring of loans, 34, 35 Clarkson, Brian, 60 Clinton, Bill, 20-21, 79, 85, 86 bureaucracy and, 132 expanded homeownership, 23-24, 26 real estate capital gains tax and, 6 Cole, Harold, 106 collateralized-debt obligations (CDOs), 48, 71 CDO-squared and CDO-cubed packages, 48-49 notching, 64 community lending cash-back opportunities to borrowers, 127-28 Community Reinvestment Act and, 26-28 creditworthiness requirements, 29-30 flexible underwriting of loans, 31-32, 43 housing bubble and, 70-75 housing policy and, 25-28 See also specific lenders Community Reinvestment Act, 26-28 constant-proportion debt obligation, 59-60 consumer spending, 9 increase in consumption, 11-12 Coolidge, Calvin, 102 Cooper, George, 14 Countrywide, 29, 41, 71-72, 83, 148 Cisneros scandal and corruption and, 32 special privileges for, 30 Cox, Christopher, 112 Cramer, Jim, 72, 113-14, 148 credit counseling program participation, 31 credit-default swaps, 86-91 credit ratings and credit-rating agencies, 46-49, 58-68, 141 faith in, 73 junk designation, 59 legislation, 65 mislabeling, 73 notching, 64 rating committees, 63-64 regulatory responsibilities, 133 Subprime XYZ package, 65-68 supervision, 141-42 creditworthiness requirements, 29-30 flexible underwriting of loans and, 31-32, 40, 43 low- and moderate-income earners, 70-71 crisis, current.

It goes without saying that this attracted players to the market like flies to a lamp. Increasingly sophisticated varieties of securitization also began to evolve. When large bunches of mortgages have been resold as securities, other investors can buy a few hundred such securities of different origins, for example medium-risk ones, and repackage them once more into a new kind of security, a "collateralized-debt obligation," or CDO. That will also be split into tranches depending on the level of risk that buyers are willing to take. The original idea of CDOs was to spread risk by including a wide variety of assets, but in 2003, Wall Street firms started to create CDOs backed exclusively by mortgages. Similar to an ordinary mortgage-backed security, the buyer who picks the riskiest tranches gets paid the most but also has to suffer the first loss if the CDO investments fail.

It is better for the bank to have someone living in the house, who may be able to pay back the loan in the longer term, than to be forced to take over the house and try to sell it just when prices are lowest. But the securitization of mortgages had led to an unexpected consequence: The original lender no longer owned the loan, because it had been repackaged and sold and then chopped up and sold as part of a collateralized-debt obligation. Households in default no longer had an individual lender to negotiate with, which made more and more of them just abandon their homes and either buy something cheaper or start renting. On July 24, 2007, the mortgage giant Countrywide held one of its regular conference calls with investors and analysts from Bear Stearns, Merrill Lynch, Morgan Stanley, and the rest of the Wall Street elite.


The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis by Tim Lee, Jamie Lee, Kevin Coldiron

active measures, Asian financial crisis, asset-backed security, backtesting, bank run, Bernie Madoff, Bretton Woods, business cycle, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, debt deflation, distributed ledger, diversification, financial intermediation, Flash crash, global reserve currency, implied volatility, income inequality, inflation targeting, labor-force participation, Long Term Capital Management, Lyft, margin call, market bubble, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, negative equity, Network effects, Ponzi scheme, purchasing power parity, quantitative easing, random walk, rent-seeking, reserve currency, rising living standards, risk/return, sharing economy, short selling, sovereign wealth fund, Uber and Lyft, uber lyft, yield curve

The standard narrative sees the global financial crisis as having been the result of excessively levered banks that had mispriced the risks inherent in mortgage financing, particularly subprime mortgages. At the heart of the mortgage bubble was a giant credit carry trade; high-risk mortgages were being financed out of low-cost funds. The “innovation” that allowed risks to be seriously mispriced was the burgeoning market in credit derivatives, particularly collateralized debt obligations (CDOs) and credit default swaps. CDOs (and collateralized loan obligations) bundle together a collection of loans or mortgages or mortgage-backed securities and divide the collection into tranches. The owners of the highest-rated tranche get first claim on the stream of interest payments that accrue to the bundle of loans or securities, while the owners of the lowest-rated tranche get whatever is left—and are therefore most at risk from defaults on the underlying debts.

In this case, if investors generally take the view that a bailout for creditors is likely, then the yield on the bank’s debt will be lower than it would be in a bailout-free world. Risk may not be mispriced from the perspective of investors, but it is mispriced relative to the free market counterfactual. Risk mispricing can occur in more complex ways. Credit derivatives and structured finance played a large role in the 2003–2007 carry-credit bubble. Collateralized debt obligations (CDOs) that bundled high-yielding debt or credit default swaps (CDS) and divided the bundles into tranches, with higher-rated tranches having the first claims on the income streams from the bonds or CDS and the lowest-rated tranches—known as the equity tranches—having the residual claims on the income streams, obscured the nature of risks. This became even more so as structures became more complex as the bubble went on.

See also currency carry trades bailouts of, 197, 198 central bank balance sheets as, 216–217 in commodities, 128–129 credit growth and, 37–42 in dollars, 14–23, 15f, 16f Euro-funded, 31 exchange rate stability and returns from, 52 INDEX by Federal Reserve, 103 government policies and returns from, 48 by hedge funds, 73–75 leverage in, 33–35 leveraged buyouts as, 78–80 as liquidity-providing trades, 35–36 measuring flow of, 41 non-currency forms of, 34 oil, 128–133 profit explanation attempts for, 48 sovereign wealth funds and, 75–76 S&P 500 as, 160–162 carry trades characteristics of, 3–5 defining, 2 risk of, 3, 5 sawtooth return pattern of, 4 short volatility of, 4 types of, 4 cash yields, 204 CBOE (Chicago Board Options Exchange), 57 CDOs (collateralized debt obligations), 36–37, 95, 135 CDS (credit default swap), 34, 36, 135 celebrity, 186, 187 central banks balance sheets of, as carry trades, 216–217 carry and, 5–8 carry regime and policies of, 86–89, 107, 208, 210 carry regime and power of, 123 carry regime collapses and, 215–216 carry regime weakening, 7 credit demand and, 13 deflationary pressures and, 115 foreign exchange markets and, 11, 13, 20 interventionist policies of, 201–202 liquidity and, 110–111 market stabilization by, 5–6 moral hazard and, 195, 200 volatility selling by, 101–105 Chicago Board Options Exchange (CBOE), benchmark indexes by, 57 China, 19 circular flow of dollars, 18–19, 18f classical equilibrium model of economy, 142 currency carry trade returns and, 10 223 collateralized debt obligations (CDOs), 36–37, 95, 135 Columbia MusicLab, 181–182, 184, 188 commodities, carry trade in, 128–129 compensation incentives hedge fund strategies and, 73 proprietary trading and, 77 constant leverage, 93 consumer price index, Turkey, 44 consumption utility, 100 corporations carry strategies by, 80–83 debt issuance by, 81–83, 82f, 83f share buybacks by, 82, 83f covered interest parity principle, 21, 22 credit Australia growth of, 40f, 41 availability of, 4 carry bubbles and demand for, 114 carry trades and growth of, 37–42 central bank influence on demand for, 13 debt levels and demand for, 114 interest rates and demand for, 110 moral hazard issues and, 199 credit booms, currency carry trades contributing to, 13 credit bubbles carry bubbles and, 37–38, 41 mid-2000s, 36 credit carry trades, risk mispricing and, 35–37 credit default swap (CDS), 34, 36, 135 credit demand, 13 credit derivatives, 135 cross-currency basis, 22 cryptocurrencies, 211, 212 cumulative advantage carry as, 181–184 evolution and, 188–190 self-perpetuation and, 186–188 currency carry trades, 9, 129 academic interest in, 47–49 covered interest parity principle and, 21–22 credit bubbles and, 36 credit creation by, 20 current account deficits and, 17 emerging markets and returns from, 55 equity carry correlation with, 56–59, 58f 224 currency carry trades (continued) equity volatility and returns from, 59 exchange rate risks of, 17 exchange rate stability and returns from, 52 expected returns, 10 global financial crisis of 2007-2009 and, 28–29 historical returns, 50–52, 50f, 51f, 53f history of, 23–31, 24f identifying, 11–12 interest rate differentials and returns from, 60–62 Japan and, 17–18 liquidity provision and, 88 liquidity swaps and, 104–105 market pricing efficiency and, 11 money supply effects of, 20–21 net claims as proxy for measuring, 41 portfolio for analyzing, 49–50 real economy links with, 56 United States and, 17–20 volatility signs of collapse in, 215 currency markets, 10 currency risk, 12 currency risk aversion, 13 currency volatility, 62 current account deficit of Thailand, 25 of United States, 17 debt.


pages: 435 words: 127,403

Panderer to Power by Frederick Sheehan

"Robert Solow", Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, British Empire, business cycle, buy and hold, call centre, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversification, financial deregulation, financial innovation, full employment, inflation targeting, interest rate swap, inventory management, Isaac Newton, John Meriwether, margin call, market bubble, McMansion, Menlo Park, money market fund, mortgage debt, Myron Scholes, new economy, Norman Mailer, Northern Rock, oil shock, Paul Samuelson, place-making, Ponzi scheme, price stability, reserve currency, rising living standards, rolodex, Ronald Reagan, Sand Hill Road, savings glut, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, stocks for the long run, supply-chain management, supply-chain management software, The Great Moderation, too big to fail, transaction costs, trickle-down economics, VA Linux, Y2K, Yom Kippur War, zero-sum game

Among them, the three banks held $2.5 billion of junk bonds by the end of 1984—which was equal to 35 percent of the amount held by all mutual funds.22 (William Seidman later wrote that of the more than 900 convictions initiated by RTC enforcement actions, those of the chairmen of Centrust, Columbia, and Charles Keating were “key.”23) Later in the decade, Seidman’s investigators discovered that Michael Milken had “rigged the market by operating a sort of daisy chain among the S&Ls to trade the bonds back and forth across his famous X-shaped trading desk at his headquarters in Beverly Hills. By manipulating the market, he maintained the facade that the bonds were trading at genuine market prices. . . . When he [Milken] was brought down, and his trading operation with him, so were the S&Ls that depended on the value of his bonds to stay afloat.”24 Of note: the in-house pricing of derivatives, such as collateralized debt obligations (CDOs), was essential to the current financial collapse. Between 1983 and 1984, Lincoln’s assets more than doubled, from $1.1 billion to $2.24 billion.25 From the time Keating took control of Lincoln in February 1984 through the end of the year, he “had switched virtually all of its activities to real estate development and speculative investments.”26 21 Ibid., p. 346. Wigmore includes one more “old hand” from “the merger wave of the late 1960s”: Meshulam Riklis and his Rabid American Corporation. 22 Ibid., p. 286. 23 Seidman, Full Faith and Credit, p. 226. 24Ibid., p. 236.

The date of Greenspan’s first broadside is interesting—one day after his ode to adjustable-rate mortgages. (This will be discussed in the next chapter.) An obvious interpretation is a Greenspan attempt to take business from the GSEs and move it to the banks. This might have been true earlier, but by 2004, the largest banks and brokerage houses needed the higher mortgage volume that flowed through the agencies to create more complicated and profitable securities, such as collateralized debt obligations (see “The Washington-New York Symbiosis” which follows).21 Testifying before the Senate Banking Committee, Alan Greenspan took up the cudgels and warned that “GSEs need to be limited in the issuance of GSE debt and in the purchase of assets, both mortgages and non-mortgages, that they hold.”22 Later the same year, the Office of Federal Housing Enterprise Oversight cited “numerous examples of accounting irregularities and managerial conflicts that OFHEO examiners contended were used to doctor Fannie’s earnings and inflate executive compensation.”23 Fannie Mae’s chairman, Franklin Raines, who had been Bill Clinton’s budget director, declared his innocence even as he was escorted out the door.

The GrammLeach-Bliley Act (its formal name: The Financial Services Modernization Act) became law on November 12, 1999.57 Rubin had left his treasury post to join Citicorp.58 Larry Summers, treasury secretary when the act passed, claimed: “This historic legislation will better enable American companies to compete in the new economy.”59 Greenspan, Rubin, and Summers played a major role ensuring that the wildest derivatives remained unregulated. To thrive, the mortgage machine needed such developments as collateralized debt obligations (CDO) and credit default swaps (CDS). The trio led the offense against regulation of over-the-counter derivatives. Deputy Treasury Secretary Larry Summers told Congress that any oversight would cast “a shadow of regulatory uncertainty over an otherwise thriving market.”60 Without the contributions of Greenspan, Rubin, and Summers, the credit bubble might have been a muted affair. Timothy Geithner, secretary of the treasury in 2009, served under both Robert Rubin and Larry Summers as undersecretary of the treasury for international affairs.


pages: 430 words: 140,405

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, business cycle, 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

Back home, where it was impossible to make money in bank accounts with a 2 percent rate, high-yield bonds were plainly the answer, and they became as fashionable as stock in dot-com companies had once been. But Wall Street had outsmarted everyone, and instead of the old-fashioned regular reliable bonds, investors now stampeded for residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), collateralized debt obligations (CDOs), collateralized loan obligations (CLOs), and structured investment vehicles (SIVs), paying around 5 to 8 percent. Securitization. What a stroke of pure genius. Turning those mortgage debts into tangible entities. Hardly anyone noticed the minor flaws that would, in time, bankrupt half the world. The year 2003 turned into 2004, and still the flame of my ambitions burned as strongly as ever.

And as the years went by, Dick Fuld had tightened his circle, shutting out more and more key people from the downstairs floors where the daily action seethed, where the trading battles ebbed and flowed, where more critical information flew around than anywhere else in the city. That was the place from which he had, to all intents and purposes, removed himself. In the process, he had become separated from the most modern technology and the ultramodern trading of credit derivatives—CDO (collateralized debt obligations), RMBS (residential mortgage-backed securities), CLO (collateralized loan obligations), CDS (credit default swaps), and CMBS (commercial mortgage-backed securities). Stories about long-departed commanders were legion. There were mind-blowing tales of the Fuld temper, secondhand accounts of his rages, threats, and vengeance. It was like hearing the life story of some caged lion. Tell the truth, I ended up feeling pretty darn glad I wasn’t meeting him.

In that bright fall of 2004, we were in the presence of gods, the new Masters of the Universe, a breed of financial daredevils who conjured Lehman’s billion-dollar profits out of one of the most complex markets ever to show its head above Wall Street’s ramparts. This was the Age of the Derivative—the Wall Street neutron that provided atomic power to one of the most reckless housing booms in all of history. Derivative number one was the fabled CDO, the collateralized debt obligation. This new “technology” was created and perfected in Wall Street’s investment banks, including Lehman but especially at Merrill Lynch.* Like most sensational ideas, this one was simple, and in a sense solidly based. The process began in the offices of large U.S. mortgage brokers, particularly in California, Florida, and Nevada, where the prospect of a fast buck has never antagonized the natives.


pages: 218 words: 62,889

Sabotage: The Financial System's Nasty Business by Anastasia Nesvetailova, Ronen Palan

algorithmic trading, bank run, banking crisis, barriers to entry, Basel III, Bernie Sanders, big-box store, bitcoin, Black-Scholes formula, blockchain, Blythe Masters, bonus culture, Bretton Woods, business process, collateralized debt obligation, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, distributed ledger, diversification, Double Irish / Dutch Sandwich, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, financial repression, fixed income, gig economy, Gordon Gekko, high net worth, Hyman Minsky, information asymmetry, interest rate derivative, interest rate swap, Joseph Schumpeter, Kenneth Arrow, litecoin, London Interbank Offered Rate, London Whale, Long Term Capital Management, margin call, market fundamentalism, mortgage debt, new economy, Northern Rock, offshore financial centre, Paul Samuelson, peer-to-peer lending, plutocrats, Plutocrats, Ponzi scheme, price mechanism, regulatory arbitrage, rent-seeking, reserve currency, Ross Ulbricht, shareholder value, short selling, smart contracts, sovereign wealth fund, Thorstein Veblen, too big to fail

When the American autoparts company Delphi Corp defaulted in 2005, the value of notional swaps on the company amounted to about $30bn, fifteen times its $2bn in bonds.22 By the end of 2007, CDSs had grown to more than $60tn in global business.23 The rest, as they say, is history. CDSs proved particularly toxic as they were sold to cover exotic financial instruments created during the subprime boom. As MBSs and collateralized debt obligations became nearly worthless, defaults were triggered across the system. The banks and hedge funds that were lured by easy fees, and had sold CDSs to others during the boom, now faced mounting costs. An element of the unknown added to the panic: as CDSs were traded over the counter, no one knew exactly the overall exposure to these products. In a quirk of financial complexity, it would turn out that in their great enthusiasm for these products many banks and hedge funds simultaneously bought and sold CDSs, and many were now lucky enough to ‘nett out’ their CDS positions.24 Not AIG, though.

Bewildered, she withdrew her business from Goldman and tried a few other big banks, encountering similar problems. She eventually settled on a smaller and less-known institution. Admired for smartness and innovation, Goldman may not need clients like our friend. It can go after banks and other institutions to develop new lines of business on a different scale. Goldman’s now well-known Abacus affair centred on a set of esoteric financial instruments known as synthetic collateral debt obligations (or CDOs). A very simplified explanation of what a synthetic CDO is was helpfully provided by Matt Levine of Bloomberg: 1. Some investors put money in a ‘pot’. 2. The pot writes a credit default swap to an investment bank – in this case, Goldman Sachs Group Inc. – insuring Goldman against the risk of default of some mortgage bonds (called the ‘reference portfolio’). 3. Goldman pays premiums for the credit default swap, and those payments are passed along to the CDO investors. 4.

But the evidence suggests that some banks and hedge funds, led by Goldman Sachs, not only refused to help with the bailout of Bear Stearns but may have triggered Bear’s troubles in the first place. Like many in the industry, Bear Stearns was unprepared for the impending crisis. In its 2006 annual report the bank bragged about its results: ‘We ranked number one for the third consecutive year in US mortgage-backed securities underwriting, secured the top spot in the securitization of adjustable-rate mortgages, and ranked in the top five of global collateralized debt obligations (CDO) market.’9 In reality, however, Bear’s balance sheet was deteriorating. Two of its in-house hedge funds, High Grade Fund and Enhanced Leverage Fund, ran by Ralph Cioffi and Matt Tannin, loaded up on MBSs at precisely the wrong moment. From 2003 Cioffi and Tannin had been losing money in each of their funds. By February 2007 they began to worry about their exposure to the subprime mortgage market.


pages: 297 words: 91,141

Market Sense and Nonsense by Jack D. Schwager

3Com Palm IPO, asset allocation, Bernie Madoff, Brownian motion, buy and hold, collateralized debt obligation, commodity trading advisor, computerized trading, conceptual framework, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, 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

Index Adjustable-rate mortgages (ARMs) Allocation bias Allocation decisions, future AMEX Internet Index Arbitrage Arbitrary investment rules ARM subprime mortgages Asness, Clifford Automatic selling Automatic trading Average maximum retracement (AMR) Average pair correlation Average return Back-adjusted return measures gain-to-pain ratio (GPR) MAR and Calmar ratios return retracement ratio (RRR) risk-adjusted return performance measures Sharpe ratio Sortino ratio strategy comparison symmetric downside-risk (SDR) Sharpe ratio tail ratio Backfilling bias Backwardation Bankrupt stocks Bear market of 2008 Bear market returns Bear markets vulnerability Behavioral biases Bernanke, Ben Best strategy risk for standard deviation Beta and correlation quantitative measures Black Monday (October 19, 1987) Black Tuesday (October 29, 1920) Bottoms-up allocation Brady commission Bubbles and crashes emotion-driven housing (mid-2000s) Internet market price tech timing and level Bubbles and crashes Bull market Bull market of 2009 Burn rate Calls Calmar ratio and MAR ratio Capital gains Capital losses Capital structure arbitrage Carve-out portfolio Catastrophe insurance Cause-and-effect relationship Church, George J. Clarity Portfolio Viewer Closet benchmarker Closet index fund CNBC Coincident negative return (CNR) matrix Collateralized debt obligations (CDOs) vs. commercial paper Commercial paper, vs. collateralized debt obligations (CDOs) Commodity Futures Trading Commission (CFTC) Commodity prices Commodity trading advisors (CTAs) Comparison pitfalls markets strategy style time period Conservative investment Contango Contrarian indicator Convergence strategies Convertible arbitrage Convertible bond prices Correlation among managers and beta beyond coefficient of determination definition down months focus linear relationships to managers misconceptions about plus beta within portfolios spurious Correlation assumptions Correlation coefficient Correlation matrix Correlations going to one event Costs Countertrend strategies Countrywide Cramer, Jim Credit arbitrage Credit default swaps Credit hedge funds Credit quality Credit rating agencies Credit risk Credit spreads Critical financial applications CTA approaches The Daily Show Data relevance Default risk Deficient market hypothesis.

There was no historical precedent for such low-quality mortgages. It is easy to see how the BBB tranche of a bond formed from these low-quality mortgages would be extremely vulnerable to a complete loss. The story, however, does not end there. Not surprisingly, the BBB tranches were difficult to sell. Wall Street alchemists came up with a solution that magically transformed the BBB tranches into AAA. They created a new securitization called a collateralized debt obligation (CDO) that consisted entirely of the BBB tranches of many mortgage bonds.2 The CDOs also employed a tranche structure. Typically, the upper 80 percent of a CDO, consisting of 100 percent BBB tranches, was rated AAA. Although the CDO tranche structure was similar to that employed by subprime mortgage bonds consisting of individual mortgages, there was an important difference. In a properly diversified pool of mortgages, there was at least some reason to assume there would be limited correlation in default risk among individual mortgages.

If conditions for the strategy are favorable, the risk of such leverage may not be readily evident in the track record other than through high returns. Another problem with leverage relates to the kind of leverage instrument used. A mismatch occurs when funds use short-duration leverage instruments to enhance the returns of a longer-duration asset, such as using short-term commercial paper to fund mortgage-backed collateralized debt obligations (CDOs). Here there is risk of not being able to roll over funding. Although excessive or unwarranted use of leverage is one of the main factors responsible for episodes of large losses by hedge funds, including those severe enough to result in the fund’s demise (blowups), it is important to note that leverage can also be used as a tool to reduce risk through hedging, as in the case of the classic Jones model hedge fund detailed in Chapter 10.


pages: 701 words: 199,010

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, business cycle, 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, Kickstarter, 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, Mitch Kapor, 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, Sam Peltzman, 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

See also Buffett, Warren Bernanke, Ben Black, Fischer Black-Scholes formula Blankfein, Lloyd Blasnik, Steve Bond arbitrage Born, Brooksley Box trade Brady Plan Brazilian C bonds Brendsel, Leland Broker-dealers Buffett, Warren Buoni del Tesoro Poliennali Buoni Ordinari del Tesoro Bush, George Butler, Angus Butterfly yield curve trades Callan, Erin Capital, contingency Capital adequacy ratio (CAR) Capital markets Capital ratio and leverage Capital-to-asset ratio Carhart, Mark Cash business Cassano, Joseph Caxton macro hedge fund Cayne, James E. (Jimmy) CDOs. See Collateralized debt obligations CDSs (credit default swaps) CDX index Central Bank of Russia Chow, Andrew Cioffi, Ralph Citadel hedge fund Citibank CLA (collateralized lending agreement) Clearinghouses Client services Clinton, Bill CMBS securities CMBX index CMOs (collateralized mortgage obligations) Collateral-backed bonds Collateralized debt obligations (CDOs): AIG and Basel Committee and Bear Stearns and overview of ratings agencies and Collateralized lending agreement (CLA) Collateralized mortgage obligations (CMOs) Commercial paper, trust in Commercial real estate Commodity Futures Modernization Act Compensation models Conflicts of interest: CDOs and financial crisis of 2008 and ratings agencies and Conforming loans Consolidated tape Convergence trades Copycat funds Copycat investors: definition of effects of Salomon Brothers Corporate debt securities and loans Correlation: copycats, puppies, and counterparties economics between LTCM strategies before and during crisis overview of pre- and during LTCM crisis short-term and long-term Corzine, Jon Counterparties: bankrupt firms and booking of derivative profits by confidence and due diligence of interaction of Lehman Brothers and LTCM and overview of Cox, Cristopher Cramer, Jim Crash of 1987, cause of Credit default swaps (CDSs) Credit risk Crockett, Andrew Crowds/crowding: crisis of desirability of effects of interconnected in 1998 in quant crisis Currency union.

The other fund, the High-Grade Structured Credit Strategies Enhanced Leverage Fund, launched in 2006 and, assuming more risk with a leverage ratio of twelve to one, had no investor capital left. The funds were designed for highly complex operations in the mortgage markets. Though the methods were complicated, the underlying profit plan was simple: Borrow a large amount of money to make big bets on the subprime mortgage-backed securities market. Cioffi thought collaterized debt obligations (CDOs) backed by subprime mortgages would start to increase in value over the longer term, following their recent decline.2 Bear Stearns was one of the biggest operators in the mortgage business, and with Cioffi’s reputation, it found fund money easy to come by. Some of the world's biggest finance companies, including Citigroup, Barclays, Merrill Lynch, Goldman Sachs, Deutsche Bank, Credit Suisse, and Bank of America, extended as much as $9 billion in credit to these funds.

The firm’s treasurer, Bob Upton, said that this window dressing was important for keeping creditors and rating agencies happy.11 Repo Power The repo system is the primary method that Wall Street firms use for maturity transformation and leverage.12 Among Wall Street firms, Bear Stearns had been one of the most heavily involved in the repo system. The repo mechanism is a way to borrow and invest. A repo is collateralized lending: one bank gives another a security in exchange for cash. The collateral typically takes a haircut, depending on how risky or liquid the security is. A loan might be 99% of a U.S. Treasury bond’s value, but just 95% of a mortgage security’s value. Bear Stearns bought mortgage-backed securities or collateralized debt obligations, then repo’d them immediately, effectively leveraging the investments. Suppose the MBS cost Bear $100,000. When the firm gave another bank the security in a repo, Bear received $95,000. Bear effectively bought the MBS with $5,000 of its own cash and $95,000 in borrowed cash, for a leverage ratio of 20. At the end of the repo transaction, Bear (or another repo party) returns the borrowed cash, plus interest at the repo interest rate,13 and the counterparty returns the security.


pages: 471 words: 124,585

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, business cycle, 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, Nelson Mandela, 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, stocks for the long run, 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, undersea cable, value at risk, Washington Consensus, Yom Kippur War

And all the time new financial life forms are evolving. In 2006, for example, the volume of leveraged buyouts (takeovers of firms financed by borrowing) surged to $753 billion. An explosion of ‘securitization’, whereby individual debts like mortgages are ‘tranched’ then bundled together and repackaged for sale, pushed the total annual issuance of mortgage backed securities, asset-backed securities and collateralized debt obligations above $3 trillion. The volume of derivatives - contracts derived from securities, such as interest rate swaps or credit default swaps (CDS) - has grown even faster, so that by the end of 2007 the notional value of all ‘over-the-counter’ derivatives (excluding those traded on public exchanges) was just under $600 trillion. Before the 1980s, such things were virtually unknown. New institutions, too, have proliferated.

The proximate cause of the economic uncertainty of 2008 was financial: to be precise, a spasm in the credit markets caused by mounting defaults on a species of debt known euphemistically as subprime mortgages. So intricate has our global financial system become, that relatively poor families in states from Alabama to Wisconsin had been able to buy or remortgage their homes with often complex loans that (unbeknown to them) were then bundled together with other, similar loans, repackaged as collateralized debt obligations (CDOs) and sold by banks in New York and London to (among others) German regional banks and Norwegian municipal authorities, who thereby became the effective mortgage lenders. These CDOs had been so sliced and diced that it was possible to claim that a tier of the interest payments from the original borrowers was as dependable a stream of income as the interest on a ten-year US Treasury bond, and therefore worthy of a coveted triple-A rating.

Instead of putting their own money at risk, they pocketed fat commissions on signature of the original loan contracts and then resold their loans in bulk to Wall Street banks. The banks, in turn, bundled the loans into high-yielding residential mortgage-backed securities (RMBS) and sold them on to investors around the world, all eager for a few hundredths of a percentage point more return on their capital. Repackaged as collateralized debt obligations (CDOs), these subprime securities could be transformed from risky loans to flaky borrowers into triple-A rated investment-grade securities. All that was required was certification from one of the two dominant rating agencies, Moody’s or Standard & Poor’s, that at least the top tier of these securities was unlikely to go into default. The lower ‘mezzanine’ and ‘equity’ tiers were admittedly more risky; then again, they paid higher interest rates.


pages: 316 words: 117,228

The Code of Capital: How the Law Creates Wealth and Inequality by Katharina Pistor

"Robert Solow", Andrei Shleifer, Asian financial crisis, asset-backed security, barriers to entry, Bernie Madoff, bilateral investment treaty, bitcoin, blockchain, Bretton Woods, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, colonial rule, conceptual framework, Corn Laws, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Donald Trump, double helix, Edward Glaeser, Ethereum, ethereum blockchain, facts on the ground, financial innovation, financial intermediation, fixed income, Francis Fukuyama: the end of history, full employment, global reserve currency, Hernando de Soto, income inequality, intangible asset, investor state dispute settlement, invisible hand, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, land reform, land tenure, London Interbank Offered Rate, Long Term Capital Management, means of production, money market fund, moral hazard, offshore financial centre, phenotype, Ponzi scheme, price mechanism, price stability, profit maximization, railway mania, regulatory arbitrage, reserve currency, Ronald Coase, Satoshi Nakamoto, secular stagnation, self-driving car, shareholder value, Silicon Valley, smart contracts, software patent, sovereign wealth fund, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, trade route, transaction costs, Wolfgang Streeck

Some still got out in time, but many others found themselves with assets that no one would take, except the central banks of select countries. Having identified the core modules of our complex financial system, I began to trace their roots back in time. I investigated the evolution of property rights, of simple debt instruments, the various forms of pledges and gages that were used to collateralized debt obligations, the evolution of the use and the trust, the corporate form and the ix x P r e fac e history of bankruptcy, the critical juncture when decisions over life and death in economic life are made. The more I read, the more I was convinced that what had started as an investigation into global finance had led me to the fountain of wealth, the making of capital. This book is the result of that journey.

As we have seen, NC2’s tranches ran the gamut from “AAA” all the way down to lower B ratings.19 Rating agencies used the same nomenclature they had used for decades to rate government or corporate bonds to rate MBS and their derivatives.20 This created the appearance to investors that the credit risk they were assuming was indeed comparable with these familiar assets, but in fact disguised the most important difference between these different assets. Whereas for government and most corporate bonds, historical data exist for m i nti n g d e Bt 87 many years, even decades, similar long-term data did not and could not exist for asset-backed securities (ABS) or collateralized debt obligations (CDOs), which had only recently seen the light of day. Any comparison was therefore misleading. Yet, rating agencies have largely escaped liability for the use of misleading labels, for their willingness to work closely with the sponsoring entity to ensure that the right mix of safe versus risky assets would emerge once they were done with their ratings, or for their failure to downgrade their ratings when markets began to turn.

However, in order to keep the securitization machine humming, all tranches in every securitization structure had to be sold. The finance industry came up with another ingenious solution: it cloned the missing buyers, another vehicle that would buy tranches in securitization vehicles, which had been shunned by most investors, and repackaged them to make them more attractive. This marked the birth of collateral debt obligations, or CDOs. The now largely defunct CDOs were financial assets that were issued by yet another SPV, which was created for the sole purpose of buying lower ranked tranches from NC2 and its likes.52 This new vehicle funded the purchases of these tranches by issuing fixed-income interests to investors who were seeking high returns and who were willing to believe that by repackaging mezzanine tranches in MBS structures, some tranches could be designated as safe enough to obtain a AAA or AA rating.


pages: 733 words: 179,391

Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew W. Lo

"Robert Solow", 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 cycle, business process, butterfly effect, buy and hold, capital asset pricing model, Captain Sullenberger Hudson, Carmen Reinhart, 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, longitudinal study, 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: Challenger O-ring, risk tolerance, Robert Shiller, Robert Shiller, Sam Peltzman, Shai Danziger, short selling, sovereign wealth fund, Stanford marshmallow experiment, Stanford prison experiment, statistical arbitrage, Steven Pinker, stochastic process, stocks for the long run, survivorship bias, Thales and the olive presses, 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

Under normal conditions, if the narrative is flawed and the metaphorical Rapture doesn’t occur on schedule, their counterparties will take their money without a second thought. We may feel moral qualms about the particular case of John Doe, but that’s because the narrative of our example has Finance Behaving Badly • 343 personalized him. He has a name and a motive; he’s been transformed into a “YOU.” Now let’s consider a financial setting. Imagine you’re the head of the collateralized debt obligation desk at a major investment bank. You issue collateralized debt obligations that, based on your proprietary models, are likely to default, but your potential buyers believe otherwise, and they’re eager to invest. As a broker-dealer of these instruments, is it ethical to sell them to these investors? Are you obligated to disclose your proprietary models? Those models were developed through countless research hours by dozens of highly trained financial analysts hired by and paid for by your firm at a cost of millions of dollars.

So let’s start with some basic facts. 298 • Chapter 9 FINANCIAL CRISIS 101 In the 1990s, a number of financial institutions besides traditional commercial banks began to participate in the housing market by underwriting mortgages directly to homeowners. These mortgage brokers then sold the loans they originated to the secondary (resale) market, where they were bought by government-sponsored enterprises like Fannie Mae and Freddie Mac, or by investment banks, which used the mortgages as raw material to create the alphabet-soup of new financial products such as ABSs (asset-backed securities) and CDOs (collateralized debt obligations). This ecological change didn’t take place in a political or a cultural vacuum. Politicians across the partisan spectrum encouraged mortgage lending to a variety of different buyers, many of whom had never considered owning a home before. Home ownership became part of the new American dream for more people. Lenders followed suit, and many even loosened their lending standards, encouraged by the so-called “ownership society” that a number of politicians espoused.

Lenders followed suit, and many even loosened their lending standards, encouraged by the so-called “ownership society” that a number of politicians espoused. During this time, there was an enormous amount of financial evolution at the speed of thought. There was an adaptive radiation of new mortgage types: adjustable-rate mortgages, “pick-a-payment” mortgages, and even the infamous NINJA loan (“No Income, No Job, no Assets”), evaluated and approved by automated loan-review programs. At the same time, investment banks issued collateralized debt obligations, which enabled large pools of mortgages to be packaged and chopped up into a variety of new securities, and sold with the blessings of the rating agencies. Ultimately, the credit default swap market emerged, in order to provide insurance on some of those new debt issues, which encouraged even more investors to participate in the markets. This process expanded the mortgage ecosystem’s size and reach.


pages: 342 words: 99,390

The greatest trade ever: the behind-the-scenes story of how John Paulson defied Wall Street and made financial history by Gregory Zuckerman

1960s counterculture, banking crisis, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, financial innovation, fixed income, index fund, Isaac Newton, Long Term Capital Management, margin call, Mark Zuckerberg, Menlo Park, merger arbitrage, mortgage debt, mortgage tax deduction, Ponzi scheme, Renaissance Technologies, rent control, Robert Shiller, Robert Shiller, rolodex, short selling, Silicon Valley, statistical arbitrage, Steve Ballmer, Steve Wozniak, technology bubble, zero-sum game

Banks like Lehman Brothers were eager to buy as many mortgages as they could get their hands on because the game of hot potato usually didn’'t stop with them. Wall Street used the mortgages as the raw material for a slew of “"securitized”" investments sold to investors. Indeed, one of the things the United States excelled at was slicing up mortgages and other loans into complex investments with esoteric names—--such as mortgage-backed securities, collateralized-debt obligations, asset-backed commercial paper, and auction-rate securities—--and selling them to Japanese pension plans, Swiss banks, British hedge funds, U.S. insurance companies, and others around the globe. Though these instruments usually didn’'t trade on public exchanges, and this booming world was foreign to most investors and home owners, the securitization process was less mysterious than it seemed.

He developed a new method to use “"statistical arbitrage”" to trade stocks, though he couldn’'t make much money with it. A stint at Tricadia Capital, a hedge fund founded by Michaelcheck’'s Mariner Investment Group, Inc., gave Pellegrini an education in the world of securitized debt and credit-default swaps (CDS), which the firm was heavily involved in. But Pellegrini didn’'t make many friends at Tricadia when he suggested that the firm find ways to short collateralized-debt obligations, even as others at the firm were buying and creating versions of these debts. After a derivative-focused company that Pellegrini hoped to set up for Tricadia failed to get off the ground, he began searching for a job once again. It was that development that led him to the interview that Paulson set up for him with two of Paulson’'s executives, Andrew Hoine and Michael Waldorf. The meeting started with Hoine and Waldorf asking Pellegrini for his views on various European industries.

Their actuaries produced sophisticated models that showed the chances of a housing meltdown were minimal. With a feat of financial and legal engineering, the subprime mortgage market had effectively grown by leaps and bounds, a fact that would come back to haunt both Wall Street and global economies. In the months ahead, the bankers created similar insurance contracts for securities backed by loans for commercial buildings and collateralized debt obligations. They’'d even create a CDS insurance contract for an index that tracked a group of subprime mortgages, called the ABX, a sort of a Dow Jones Industrial Average for risky home mortgages. Lippmann and the other bankers had no idea of the impact their change would have on Wall Street, the banks, and the entire global economy. They just wanted another product to sell to their clients.


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

"Robert Solow", 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, Blythe Masters, Bretton Woods, British Empire, business cycle, 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, different worldview, 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, Kickstarter, 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

Later in the 1990s, many fast-growing Asian countries, including Thailand, Indonesia, and South Korea, endured serious financial blowups. In 2007–2008, it was our turn again, and this time the crisis involved the big banks at the center of the financial system. For years, Greenspan and other economists argued that the development of complicated, little-understood financial products, such as subprime mortgage–backed securities (MBSs), collateralized debt obligations (CDOs), and credit default swaps (CDSs), made the system safer and more efficient. The basic idea was that by putting a market price on risk and distributing it to investors willing and able to bear it, these complex securities greatly reduced the chances of a systemic crisis. But the risk-spreading proved to be illusory, and the prices that these products traded at turned out to be based on the premise that movements in financial markets followed regular patterns, that their overall distribution, if not their daily gyrations, could be foreseen—a fallacy I call the illusion of predictability, the third illusion at the heart of utopian economics.

In the past couple decades, he reminded the audience, deregulation and technical progress had subjected banks to increasing competition in their core business of taking in deposits from households and lending them to other individuals and firms. In response, the banks had expanded into new fields, including trading securities and creating new financial products, such as mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs). Most of these securities the banks sold to investors, but some of them they held on to for investment purposes, which exposed them to potential losses should the markets concerned suffer a big fall. “While the system now exploits the risk-bearing capacity of the economy better by allocating risks more widely, it also takes on more risks than before,” Rajan said. “Moreover, the linkages between markets, and between markets and institutions, are now more pronounced.

THE PRISONER’S DILEMMA AND RATIONAL IRRATIONALITY As the problems of pollution and free riding make clear, many types of market failure come down to the fact of human interdependence. What I do affects your welfare; what you do affects mine. The same applies in business. When General Motors cuts its prices or offers interest-free loans, Ford and Chrysler come under pressure to match GM’s deals, even if their finances are already stretched. If Merrill Lynch sets up a hedge fund to invest in collateralized debt obligations or some other newfangled securities, Morgan Stanley will feel obliged to launch a similar fund so its wealthy clients don’t defect. Now, the chairmen of the Big Three automakers, despite all the criticism they have received recently, are presumably fairly rational, intelligent fellows who would rather coexist peaceably than get into damaging competition. (For now, we will set aside the mental capacities of Wall Street CEOs.)


pages: 726 words: 172,988

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, business cycle, 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, information asymmetry, 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

We use the term mortgage-related securities for a broad class of securities containing not only mortgage-backed securities (MBS) but also securities resulting from the securitization of MBS. MBS themselves might serve as collateral for collateralized debt obligations (CDOs) (see, for example, Das 2010, Chapter 9). The idea and the procedure are the same as those for the creation of a mortgage-backed security out of a package of mortgages except that the collateral consists of MBS or more general asset-backed securities (ABS) rather than mortgages. The resulting MBS CDOs or, more generally, ABS CDOs—collateralized debt obligations with MBS or ABS as collateral—might even be securitized further to create ABS CDOs2, CDOs whose collateral consists of ABS CDOs. For the loss estimates, see IMF (2008b). The estimated total losses of financial institutions from the financial crisis in this report are higher than just the losses on subprime-mortgage-related securities ($1.4 trillion), but this larger estimate already includes significant follow-on losses. 3.

At each stage, a package of junior (“mezzanine”) claims, with low credit ratings of BBB or worse, would be formed, and new claims, with different priorities, would be issued against the returns from this package. Under the assumption that credit risks on the different securities in a package of mezzanine mortgage-backed securities (MBS) were independent, the senior MBS collateralized debt obligations (CDOs) would be treated as almost riskless and given ratings of AAA. However, the assumption of independence of credit risks was unwarranted because all of the underlying mortgages depended on the factors driving U.S. real estate markets, such as the overall economy, the interest rate policy of the Federal Reserve, and the real estate bubble itself. McLean and Nocera (2010, 362) sarcastically ask: “Collateralized debt obligation? Synthetic securities? What had been the point of that?” The point was that banks responded to flawed regulations in their own interest; their actions had little to do with efficiency. 72.

See payouts cash reserve (reserve requirements): in balance sheets, 48; capital confused with, 6–7, 97–98, 234n23, 274n61, 275n2; versus capital requirements, costs and benefits of, 98; central banks funded by issuing, 272n41; costs of, to banks, 92; definition of, 6, 92, 97; interest on, 92, 271n41; international differences in, 272n41; liquidity coverage ratio and, 92; minimum requirements for, 272n41 CBO. See Congressional Budget Office CDOs. See collateralized debt obligations CDSs. See credit default swaps Cecchetti, Stephen G., 257n17 Center for Responsive Politics, 229n4, 326n60 central banks: banknotes issued by, 150, 151, 294n15; collateral accepted by, 157, 297n36, 297n39; as funding source for governments, 157–58, 200; implicit subsidies provided by, through bank borrowing, 137–38; and inflation, 157–58; interest rates paid by, 200, 297n37; as “lenders of last resort,” 63, 93, 297n35, 318n2; limitations on activities of, 157–58, 297n39, 318n2; liquidity injections by, 39–40, 63, 179, 256n13; in monetary policy, 298n39; money of, 151, 295n16; and public budget, 157; reserve requirements in funding of, 272n41; response to financial crisis of 2007-2009, 63, 137, 256n13; and sovereign debt, ban on funding, 298n39; and sovereign debt, European, 170, 302n4.


pages: 358 words: 106,729

Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram Rajan

accounting loophole / creative accounting, Andrei Shleifer, Asian financial crisis, asset-backed security, assortative mating, bank run, barriers to entry, Bernie Madoff, Bretton Woods, business climate, business cycle, Clayton Christensen, clean water, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, diversification, Edward Glaeser, financial innovation, fixed income, floating exchange rates, full employment, global supply chain, Goldman Sachs: Vampire Squid, illegal immigration, implied volatility, income inequality, index fund, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, knowledge worker, labor-force participation, Long Term Capital Management, longitudinal study, market bubble, Martin Wolf, medical malpractice, microcredit, money market fund, moral hazard, new economy, Northern Rock, offshore financial centre, open economy, price stability, profit motive, Real Time Gross Settlement, Richard Florida, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, school vouchers, short selling, sovereign wealth fund, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, Vanguard fund, women in the workforce, World Values Survey

An unflattering portrayal of Fuld has him holed up in his office on the 31st floor of Lehman’s headquarters with little knowledge of what was going on in the rest of the building.9 Indeed, in a tongue-in-cheek op-ed piece in the New York Times, Calvin Trillin argued that Wall Street’s problem was that it had undergone a revolutionary change in the quality of personnel over generations.10 In Trillin’s time in college, only those in the bottom third of their university class used to go on to Wall Street careers, which were boring and only moderately remunerative. But even while the dullards ascended to the top positions at the banks, Wall Street became a more exciting and challenging place, paying people beyond their wildest dreams. It started attracting and recruiting the smartest students in class, people who thought they could price CDO squared and CDO cubed (particularly egregious forms of securitization involving collateralized debt obligations) and manage their risks. As Trillin writes: “When the smart guys started this business of securitizing things that didn’t even exist in the first place, who was running the firms they worked for? Our guys! The lower third of the class! Guys who didn’t have the foggiest notion of what a credit default swap was. All our guys knew was that they were getting disgustingly rich, and they had gotten to like that.”11 The suggestion that bosses, recruited in a staid and regulated era, were of lower caliber than the employees they had recruited from the top of the class in a deregulated and high-paying era is not completely without foundation.

The right approach would be to reduce the various distortions to the pricing of risk that stem from actual and potential government intervention, as well as from herd behavior. We should not worry so much about rugged individualism as about undifferentiated groupthink, for that is the primary source of systemic problems. A competitive system is also likely to produce the financial innovation necessary to broaden access and spread risk. Financial innovation nowadays seems to be synonymous with credit-default swaps and collateralized debt obligations, derivative securities that few outside Wall Street now think should have been invented. But innovation also gave us the money-market account, the credit card, interest-rate swaps, indexed funds, and exchange-traded funds, all of which have proved very useful. So, as with many things, financial innovations span the range from the good to the positively dangerous. Some have proposed a total ban on offering a financial product unless it has been vetted, much as the Food and Drug Administration vets new drugs.

See firms business schools Calomiris, Charles W. Camdessus, Michel Canada, health care costs in capital: buffers contingent organizational physical requirements for banks venture See also human capital capitalism: competitive markets in crony, free-enterprise, relationship (managed) self-interest in Carville, James Cassano, Joseph Cayne, James CDOs. See collateralized debt obligations central banks: Chinese of developing countries objectives of purchases of dollar assets regulatory responsibilities of resources for managing crises See also Federal Reserve; interest rates; monetary policy chaebols Chanos, James charitable giving charter schools children: Chinese one-child policy development of health and nutrition of, See also education Chile, economic growth of China: consumption in economic growth of energy consumption in exchange-rate intervention by export-led growth strategy of exports of foreign reserves of interest rates in investment in middle class in one-child policy of reforms in savings in state-owned enterprises in Chrysler Citigroup: board members of CEO of off–balance sheet assets of risk managers of risks taken by salaries in stock price of climate change Clinton, Bill Clinton administration CLOs.


pages: 398 words: 105,917

Bean Counters: The Triumph of the Accountants and How They Broke Capitalism by Richard Brooks

accounting loophole / creative accounting, asset-backed security, banking crisis, Big bang: deregulation of the City of London, blockchain, BRICs, British Empire, business process, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Strachan, Deng Xiaoping, Donald Trump, double entry bookkeeping, Double Irish / Dutch Sandwich, energy security, Etonian, eurozone crisis, financial deregulation, forensic accounting, Frederick Winslow Taylor, G4S, intangible asset, Internet of things, James Watt: steam engine, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, light touch regulation, Long Term Capital Management, low cost airline, new economy, Northern Rock, offshore financial centre, oil shale / tar sands, On the Economy of Machinery and Manufactures, Ponzi scheme, post-oil, principal–agent problem, profit motive, race to the bottom, railway mania, regulatory arbitrage, risk/return, Ronald Reagan, savings glut, short selling, Silicon Valley, South Sea Bubble, statistical model, supply-chain management, The Chicago School, too big to fail, transaction costs, transfer pricing, Upton Sinclair, WikiLeaks

The risks from the increasingly toxic raw material being fed into the investment banking machine weren’t merely transferred from one set of financial institutions to another; they were multiplied. Where the 1980s bond traders had dealt in relatively straightforward bundles of loans – so-called ‘mortgage-backed securities’ – their twenty-first-century counterparts went one step further. They created the ‘collateralized debt obligation’ (CDO), in which the mortgage-backed bonds themselves were bundled up, often with other debts such as credit card bills or corporate bonds. The income from these CDOs could then be sold in ‘tranches’ carrying different risks. The riskiest would have to take the hit from defaults up to a certain amount, the next tranche up a subsequent loss and so on. A CDO could have up to fifteen tranches, each of which would be separately traded.

It would be ‘“on call” 24 hours a day, seven days a week, to offer you the immediacy your transaction demands and the responsiveness you require’. PwC claimed to be ‘clear-cut leaders in the securitization marketplace’. Deloitte had worked on ‘more than 14,000 securitized offerings with an aggregate principal amount of more than $5 trillion’. It served ‘leading players in the MBS [mortgage-backed securities], ABS [asset-backed securities], CDO [collateralized debt obligation] and CMBS [commercial-mortgage-backed security] markets’ with ‘state-of-the-art products and expert services in financial modeling, analytics, technology, operations, due diligence, accounting and tax’.17 Whatever Paul Sarbanes and Mike Oxley thought they had achieved in eliminating accountants’ conflicts of interests with their post-Enron legislation, a major new one had emerged in the form of the Big Four’s reliance on the financial markets.

DOUBLE STANDARDS Within a day of Lehman’s downfall, insurance giant American International Group (AIG) received the first taxpayer-funded bailout. Its AIG-FP financial products unit had badly misjudged the market by taking on huge exposures to the subprime market. Through the boom years it had been writing credit default swaps, insuring banks against losses on their holdings of subprime-laden collateralized debt obligations. When the CDOs began to falter and AIG’s own credit rating was marked down, it was forced to hand over increasing amounts of collateral, or upfront cash on account of any final payouts, to the banks on the other end of the credit default swaps. After another rating downgrade on the day of Lehman’s collapse, AIG’s collateral needs rose to the point where it could no longer raise the cash demanded of it.


pages: 1,073 words: 302,361

Money and Power: How Goldman Sachs Came to Rule the World by William D. Cohan

asset-backed security, Bernie Madoff, business cycle, buttonwood tree, buy and hold, 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

Cohen, Harold, 5.1, 5.2 Cohen, Jonathan Cohen, Laurie, 11.1, 15.1 Cohen, Roger Cohn, Gary, prl.1, 15.1, 15.2, 17.1, 19.1, 19.2, 19.3, 20.1, 20.2, 21.1, 21.2, 21.3, 21.4, 22.1, 22.2, 22.3, 22.4, 22.5, 22.6, 22.7, 23.1, 24.1, 24.2 Cole, Christopher Coles, Michael collateralized debt obligations (CDOs), prl.1, prl.2, prl.3, 19.1, 19.2, 19.3, 19.4, 20.1, 20.2, 20.3, 20.4, 21.1, 21.2, 21.3, 21.4, 21.5, 21.6, 21.7, 21.8, 22.1, 22.2, 22.3, 22.4, 22.5, 22.6, 22.7, 22.8, 23.1, 23.2 complexity of, prl.1, prl.2, 19.1 market volatility caused by synthetic, prl.1, prl.2, prl.3, prl.4, prl.5, 20.1, 20.2, 20.3, 20.4, 21.1, 21.2, 22.1, 23.1, 23.2, 24.1 tranches of, 19.1, 23.1 collateralized debt obligations (CDOs) squared, prl.1, 21.1, 21.2 collateralized mortgage obligations (CMOs), 18.1, 18.2 Collins, Timothy Commerce Department, U.S. Commercial Bank commercial banks, prevented from intermingling with investment banks, 2.1, 4.1, 10.1 Commercial Investment Trust commercial paper, 1.1, 1.2, 1.3, 1.4, 1.5, 1.6, 5.1, 7.1, 7.2, 7.3, 7.4, 7.5, 7.6, 7.7, 7.8, 7.9, 7.10, 7.11, 7.12, 9.1 see also IOUs Commodities Corporation commodities trading, 1.1, 1.2, 6.1, 9.1, 9.2, 12.1, 14.1, 16.1 see also specific trades Commodity Futures Trading Commission, prl.1, 17.1 Commodore Hotel “Compliance and Reputational Judgment” training COMSAT Congress, U.S.

I think it takes a toll on the people around me, which in turn takes a further toll on me.” —— THE FIRST ACID TEST for Blankfein came on April 16, 2010, when, after a 3–2 vote along party lines, the SEC sued Goldman Sachs and one of its vice presidents for civil fraud as a result of creating, marketing, and facilitating, in 2007, a complex mortgage security—known as a synthetic CDO, or collateralized debt obligation—that was tied to the fate of the U.S. housing market. The CDO Goldman created was not composed of actual home mortgages but rather of a series of bets on how home mortgages would perform. While the architecture of the deal was highly complex, the idea behind it was a simple one: If the people who took out the mortgages continued to pay them off, the security would keep its value. If, on the other hand, home owners started defaulting on their mortgages, the security would lose value since investors would not get their contracted cash payments on the securities they bought.

Of course, Goldman had no intention of keeping the mortgages itself but rather bought them for the sole purpose of packaging them together and selling them off to investors for a fee determined by the difference between the price it paid for them and the price it sold them for. In other words, pretty standard Wall Street practice. By the spring of 2006, Goldman was considered a respectable underwriter of mortgage-backed securities, ranking twelfth worldwide in 2005 in the underwriting of so-called structured finance deals—those for asset-backed securities, residential and commercial mortgage-backed securities, and collateralized debt obligations—worth $102.8 billion. By 2006, Goldman had moved up to tenth in the league tables—underwriting 204 deals globally, worth $130.7 billion—but still was far behind Lehman Brothers, Deutsche Bank, Citigroup, Merrill Lynch, and Bear Stearns. These other firms were coining money underwriting mortgage-backed securities and became so concerned about having access to a steady flow of mortgages to package up and sell that they all bought mortgage origination firms—Bear bought EMC Mortgage; Merrill bought First Franklin Financial Corp. from National City Bank in December 2006—at the top of the market—for $1.7 billion.


pages: 317 words: 84,400

Automate This: How Algorithms Came to Rule Our World by Christopher Steiner

23andMe, Ada Lovelace, airport security, Al Roth, algorithmic trading, backtesting, big-box store, Black-Scholes formula, call centre, cloud computing, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, Donald Trump, Douglas Hofstadter, dumpster diving, Flash crash, G4S, Gödel, Escher, Bach, High speed trading, Howard Rheingold, index fund, Isaac Newton, John Markoff, John Maynard Keynes: technological unemployment, knowledge economy, late fees, Marc Andreessen, Mark Zuckerberg, market bubble, medical residency, money market fund, Myron Scholes, Narrative Science, PageRank, pattern recognition, Paul Graham, Pierre-Simon Laplace, prediction markets, quantitative hedge fund, Renaissance Technologies, ride hailing / ride sharing, risk tolerance, Robert Mercer, Sergey Aleynikov, side project, Silicon Valley, Skype, speech recognition, Spread Networks laid a new fibre optics cable between New York and Chicago, transaction costs, upwardly mobile, Watson beat the top human players on Jeopardy!, Y Combinator

But the CDS market was, as we now well know, egregiously mispriced by the humans who traded the swaps and set the prices. Nevertheless, Wall Street embraced Li’s formula as stone-solid fact. The copula should have been one arrow in the quiver of analysts and rating agencies who examined and stamped their approval on mortgage-backed securities. Instead, it became the only arrow. The resultant boom in collateralized debt obligations and the housing market bubble came straight from bankers’ misuse of what should have been a harmless algorithm. Gaussian copulas are useful tools and are utilized in a number of fields, but the one thing they do not do is model dependence between extreme events, something humans excel at precipitating.33 PASCAL, BERNOULLI, AND THE DICE GAME THAT CHANGED THE WORLD Much of modern finance, from annuities to insurance to algorithmic trading, has roots in probability theory—as do myriad other businesses from casinos to skyscraper construction to airplane manufacturing.

Wadhwa eventually got away and founded Relativity Technologies, which made software to help companies migrate from older code bases to newer ones such as C++ and Java. He has since become one of the leading voices of tech education from positions not only at Duke but also at Emory and Stanford. As a new faculty member at Duke, Wadhwa watched as many of his brightest students ended up on Wall Street, conjuring up the very instruments that would lead the world to the brink of economic collapse—collateralized debt obligations, the Gaussian copula (a fine formula that was misused by the Street), and trading algorithms that could go wild at any moment. This was in 2007, the all-time height of the stock market. Financial-sector companies were pulling in cash like a vacuum sucks dust. To ensure their spot at the top of the heap, the finance firms needed two things: friends in Washington and the best quantitative brains money could buy.

The rate among experienced engineers, in fact, dropped by more than 60 percent since the early 1980s, when Wall Street started snatching up technical minds as fast as it could.5 The authors, Paul Kedrosky and Dane Stangler, write: The financial services industry used to consider it a point of pride to hire hungry and eager young high school and college graduates, planning to train them on the job in sales, trading, research, and investment banking. While that practice continues, even if in smaller numbers, the difference now is that most of the industry’s profits come from the creation, sales, and trading of complex products, like the collateralized debt obligations (CDOs) that played a central role in the recent financial crisis. These new products require significant financial engineering, often entailing the recruitment of master’s- and doctoral-level new graduates of science, engineering, math, and physics programs. Their talents have made them well-suited to the design of these complex instruments, in return for which they often make starting salaries five times or more what their salaries would have been had they stayed in their own fields and pursued employment with more tangible societal benefits.


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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, business cycle, 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, stocks for the long run, technology bubble, time value of money, transaction costs, yield curve

See capital asset pricing model caps cash and stock transaction cash available for debt repayment cash flow generation cash flow statement in LBO analysis cash flow sweep cash interest expense cash on hand funding source cash return CDO. See collateralized debt obligation funds certainty of closing/completion change of control CIM. See confidential information memorandum closest comparables closing, of transaction closing conditions club deal clubbing COGS. See cost of goods sold collar collateral collateral coverage collateralized debt obligation (CDO) funds commitment fee commitment letter commodity common stock comparable companies analysis . See also Contents key pros and cons Competition Bureau competitors compound annual growth rate (CAGR) confidential information memorandum (CIM) sample confidentiality agreement (CA) provisions consensus estimates .

A DCF is also critical when there are limited (or no) “pure play” peer companies or comparable acquisitions. Part Two: Leveraged Buyouts (Chapters 4 & 5) Part Two focuses on leveraged buyouts, which comprised a large part of the capital markets and M&A landscape in the mid-2000s. This was due to the proliferation of private investment vehicles (e.g., private equity firms and hedge funds) and their considerable pools of capital, as well as structured credit vehicles (e.g., collateralized debt obligations). We begin with a discussion in Chapter 4 of the fundamentals of LBOs, including an overview of key participants, characteristics of a strong LBO candidate, economics of an LBO, exit strategies, and key financing sources and terms. Once this framework is established, we apply our step-by-step how-to approach in Chapter 5 to construct a comprehensive LBO model and perform an LBO analysis for ValueCo.

Although there is often overlap between them, traditional bank lenders provide capital for revolvers and amortizing term loans, while institutional lenders provide capital for longer tenored, limited amortization term loans. Bank lenders typically consist of commercial banks, savings and loan institutions, finance companies, and the investment banks serving as arrangers. The institutional lender base is largely comprised of hedge funds, pension funds, prime funds, insurance companies, and structured vehicles such as collateralized debt obligation funds (CDOs).124 Like investment banks, lenders perform due diligence and undergo an internal credit process before participating in an LBO financing. This involves analyzing the target’s business and credit profile (with a focus on projected cash flow generation and credit statistics) to gain comfort that they will receive full future interest payments and principal repayment at maturity.


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Frequently Asked Questions in Quantitative Finance by Paul Wilmott

Albert Einstein, asset allocation, beat the dealer, Black-Scholes formula, Brownian motion, butterfly effect, buy and hold, 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, lateral thinking, 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

Although B, G and M have their names associated with this idea many others worked on it simultaneously. 2000 Li As already mentioned, the 1990s saw an explosion in the number of credit instruments available, and also in the growth of derivatives with multiple underlyings. It’s not a great step to imagine contracts depending of the default of many underlyings. Examples of these are the ubiquitous Collateralized Debt Obligations (CDOs). But to price such complicated instruments requires a model for the interaction of many companies during the process of default. A probabilistic approach based on copulas was proposed by David Li (2000). The copula approach allows one to join together (hence the word ‘copula’) default models for individual companies in isolation to make a model for the probabilities of their joint default.

Constant Maturity Swap (CMS) is a fixed-income swap. In the vanilla swap the floating leg is a rate with the same maturity as the period between payments. However, in the CMS the floating leg is of longer maturity. This apparently trivial difference turns the swap from a simple instrument, one that can be valued in terms of bonds without resort to any model, into a model-dependent instrument. Collateralized Debt Obligation (CDO) is a pool of debt instruments securitized into one financial instrument. The pool may consist of hundreds of individual debt instruments. They are exposed to credit risk, as well as interest risk, of the underlying instruments. CDOs are issued in several tranches which divide up the pool of debt into instruments with varying degrees of exposure to credit risk. One can buy different tranches so as to gain exposure to different levels of loss.

The pricing of these contracts requires a model for the relationship between the defaults in each of the underlying instruments. A common approach is to use copulas. However, because of the potentially large number of parameters needed to represent the relationship between underlyings, the correlations, it is also common to make simplifying assumptions. Such simplifications might be to assume a single common random factor representing default, and a single parameter representing all correlations. Collateralized Debt Obligation Squared (CDO2) is a CDO-like contract in which the underlyings are other CDOs instead of being the simpler risky bonds. Collateralized Mortgage Obligation (CMO) is a pool of mortgages securitized into one financial instrument. As with CDOs there are different tranches allowing investors to participate in different parts of the cashflows. The cashflows in a mortgage are interest and principal, and the CMOs may participate in either or both of these depending on the structure.


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The New Economics: A Bigger Picture by David Boyle, Andrew Simms

Asian financial crisis, back-to-the-land, banking crisis, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, Bretton Woods, capital controls, carbon footprint, clean water, collateralized debt obligation, colonial rule, Community Supported Agriculture, congestion charging, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, delayed gratification, deskilling, en.wikipedia.org, energy transition, financial deregulation, financial exclusion, financial innovation, full employment, garden city movement, happiness index / gross national happiness, if you build it, they will come, income inequality, informal economy, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, Kickstarter, land reform, light touch regulation, loss aversion, mega-rich, microcredit, Mikhail Gorbachev, mortgage debt, neoliberal agenda, new economy, North Sea oil, Northern Rock, offshore financial centre, oil shock, peak oil, pensions crisis, profit motive, purchasing power parity, quantitative easing, Ronald Reagan, seigniorage, Simon Kuznets, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, trickle-down economics, Vilfredo Pareto, Washington Consensus, wealth creators, working-age population

We also want to acknowledge the enormous patience of our families while we struggle away at the computer, now and always: Sarah, Robin and William (David’s family) and Rachel and Scarlett (Andrew’s family). Without them we couldn’t manage it or be who we are today. David Boyle Andrew Simms List of Acronyms and Abbreviations CDCU CDFI CDO CEO CHP CND Democs DIY DTQ EBCU Escos GDP GM GPI HPI IMF IP ISEW km Lets LM3 m MDGs MDP MDR-TB mph nef NHS RESOLVE SDRs community development credit union community development finance institution collateralized debt obligation chief executive officer combined heat and power Campaign for Nuclear Disarmament deliberative meeting of citizens do-it-yourself domestic tradable quota emissions-backed currency unit energy service companies gross domestic product genetically modified Genuine Progress Indicator Happy Planet Index International Monetary Fund intellectual property Index of Sustainable Economic Welfare kilometre Local exchange and trading systems Local Money 3 metre Millennium Development Goals Measure of Domestic Progress multi-drug resistant tuberculosis miles per hour New Economics Foundation National Health Service Research Group on Lifestyles Values and Environment special drawing rights xii SERs SIV SROI T-bills TEQ TOES TRIPS WEEE THE NEW ECONOMICS special emission rights structured investment vehicle social return on investment Treasury bills tradeable emissions quota The Other Economic Summit Trade-Related Aspects of Intellectual Property Waste Electrical and Electronic Equipment (Directive) 1 The Economic Problem Man talks of a battle with nature, forgetting that if he won the battle, he would find himself on the losing side.

Then they could lend money from the sale to more investors and so on. The disastrous model used by so many lenders meant bundling up their mortgages and selling them on, then using the proceeds to lend more. It meant that banks and other investors would buy the SIVs, getting the full value of the repayments over the years. The SIVs were then taken apart and reassembled into parcels called collateralized debt obligations (CDOs) and sold to hedge funds, which sold them on all over the world. Because these CDOs included debts from a range of different markets, they were believed to be insulated against risk: the mortgages might cause problems, but the other loans would offset the risk. That is how the credit ratings agencies Moodys and Standard & Poor saw it, giving them AAA ratings. 6 THE NEW ECONOMICS The trouble was that, once the truth about the sub-prime loans – M.

www.neweconomics.org Index absolute poverty 81, 81–2 advertising 46–7 agriculture 26, 34, 119, 138 aid 34, 113, 136 AIDS 70, 111, 135, 148 altruism 65, 72 Annan, Kofi 110–11 anti-trust action 89–90, 116, 133 Argentina 26, 57, 58, 139 assets 15, 60, 105, 136–7, 153 of African-Americans 141, 142 people as 15, 57–8, 128–9, 130, 131 Audi 101 authenticity 2, 73, 74, 74–5 bancor (currency) 61 Bangladesh 3, 112, 141, 143–4 banking system 6, 7, 58–9, 147 see also banks bankruptcy 147 banks 6, 120, 139, 142, 146, 153 breaking up 57, 90, 146 money creation by 56, 58–9, 84, 90, 138, 147 see also financial crises barriers to development 138–43 barter 58, 59, 60, 154 behaviour 15, 29, 35, 67–8, 71 Belloc, Hilaire 19–20, 21 berkshares 57, 151–2 Beveridge, Sir William 19, 127 Bhutan 43 big currencies 53, 54, 55–6, 58, 59 biocapacity 12, 114, 158 Black Hawk (Colorado) 14, 15, 152 ‘black money’ 81 Blair administration 9, 41 Blake, William 18 blood donation 65, 70 Boesky, Ivan 135, 142 borrowing by governments 49–50, 58, 62, 141 see also debt Bowling Alone (Putnam, 2001) 126–7 Breed, Colin 125 Bretton Woods 148 Buddhist economics 18, 21, 22 Buffett, Warren 7 built-in obsolescence 98, 100, 101 Bush, George W. 28, 96, 154 business 74, 156 Butler, R. A. (Richard Austen, ‘Rab’) 36, 38, 40 Cahn, Edgar 54, 58, 88, 123, 127, 131 Campaign for Real Ale 118 Canada 51–2, 57 capital 89 capitalism 20, 155 carbon emission entitlements 45, 90, 117–18, 148 carbon emissions 114, 117, 148 carbon taxes 117 caring 86–7, 89, 91, 92, 132 182 THE NEW ECONOMICS Carville, James 27 casinos 14–15 cathedrals 79, 81 CDOs (collateralized debt obligations) 5–6 Central America 32–3 charities 13, 58, 129 Charles, Prince of Wales 23, 100 Chesterton, G.K. (Gilbert Keith) 18, 20, 21, 81 Chicago (Illinois) 87, 127, 131 chief executives 19, 141, 142 children 4, 46–7, 82, 86, 87 Chile 51 China 28, 50, 60, 82, 100, 116, 154 CHP (combined heat and power) plants 102, 103 cities 3, 61, 75, 80, 105–6, 110, 116 and energy 102, 103 traffic speeds 65–6 citizen’s incomes 45, 58, 73, 91–2, 148 Clarke, Otto 21 classical economics 28–9, 34–5, 44, 67, 89, 123 assumptions 71, 72, 85 Cleveland (Ohio) 6 climate change 3–4, 40, 96, 112, 115 tackling 45, 90, 155, 157 Clinton, Bill 27, 52, 145 co-generation of energy 102, 103 co-production 88–9, 127–31, 132, 158, 159 Cobb, Clifford 39, 40–1 Cobb, John 22, 40–1 collateralized debt obligations (CDOs) 5–6 Colombia 33, 51 Columbus, Christopher 139 combined heat and power see CHP commodities 11, 57, 139 currencies based on 60, 90, 120 commons 79, 82, 113, 148 communications technologies 58, 59, 78, 158 communities 2, 27, 42, 43, 89, 92 assets 57–8, 106 investing in 118 money in 103–5, 107, 124, 151–2 Wal-mart and 124–5 community 32, 33, 54, 89, 158 community banks 26, 145 community land trusts 46, 73, 151 Community Way model 58 community-supported agriculture 26, 119 companies 74–5, 84, 137–8, 142–3 see also corporations comparative advantage 26, 75, 109, 116 competition 90 regulation 85, 113, 125, 126, 133 complementary currencies 26, 57–8, 59, 62, 154 consumerism 20, 44, 132 consumers 44, 67–8 consumption 11, 34, 39–40, 100, 158 ‘defensive’ 37 contributing, need for 128–9 conventional economics 10–12, 82, 97, 127 cooperatives 20, 26, 153 ‘core economy’ 54–5, 88, 89, 127, 158 corporate debt 84, 142–3 corporate power 20, 28, 85 corporate raiders 84, 142 corporate responsibility 26, 153–4 corporations 4, 8, 13, 82, 90, 116, 142, 158 tax gap 52, 137, 157 Costa Rica 99 Country Party 18 crashes 1, 51, 91 2008–9 crash 2, 3, 5, 6–7, 8, 15, 84, 85, 154–5 creativity 38, 46, 75, 79, 91 credit 91, 145–6 see also debt credit cards 84 credit crunch 3, 91, 144, 157 credit unions 26, 144, 145, 146 crime 10, 35, 37, 38, 87, 127, 128 crises, fundamental 3–5 Cuba 95–7, 101, 105 culture 43, 44, 111, 115, 127, 158 INDEX 183 currencies 26, 55, 56–8, 81 barter currencies 58, 59 based on commodities 60, 90, 120 based on emissions rights 90, 148 big 53, 54, 55–6, 58, 59 complementary 26, 57–8, 59, 62, 154 global 56, 61, 120, 147–8 local 26, 27, 56, 57, 58, 60, 151–2, 153 multiple 58, 59–60, 60, 90 regional 58, 59, 60 domestic tradeable quotas (DTQs) 117–18 Douthwaite, Richard 56–7, 148 Downs-Thomson Paradox 66 downshifting 2, 4–5, 11, 35, 69, 73 Drexel Burnham Lambert 142 drugs, generic 113, 116, 117 DTQs (domestic tradeable quotas) 117–18 Dublin (Ireland) 52, 106 DuPont 85 dynamic equilibrium 43, 44 Daly, Herman 22, 23, 40–1, 43, 97 Dawnay, Emma 71 debt 4, 7, 11–12, 81, 83–4 cancellation 137, 148 corporate 84, 142–3 and development 138–43 GM crops and 91, 119, 140 Malawi 135–6 medieval freedom from 79, 80–1 money creation 7, 8, 11, 56, 60, 84, 90, 138 national 49–50, 83, 84, 139, 141 personal 7, 36, 83–4, 91, 140, 141 repayments 90, 137 small-scale 143–4 see also sub-prime loans decentralized energy generation 102–3, 106, 114, 155 decision making 67–8, 71, 158 ‘defensive consumption’ 37 democracy 31, 55, 91, 141, 158 demurrage 57 depression 4, 10, 11, 35, 38, 68, 75, 83 deregulation 8, 12, 22, 28 developing countries 11, 81, 136–8, 143 development 24, 27, 116, 138–43 development projects 82 Dickens, Charles 36 Diggers 18 Disney 141 Distributism 19–21, 29 District of Columbia School of Law 131 diversity 82, 90, 152 Earth, Apollo pictures of 101–2 EBCU (emissions-backed currency unit) 148 ecological debt 113–14 ecological footprints 31, 33, 34, 112 ecological issues 3–4, 12, 25 economic activity 25, 148 economic development 24, 27, 116, 138–43 economic growth see growth economic indicators, alternative 26 economic institutions 29, 82, 153, 154 economic processes 97–8, 99 economic system 2, 11, 21–2, 23, 29, 112, 138 and poverty 13–14, 18, 29, 81–2, 154 economics 10–12, 18, 19, 29, 72–3, 98 assumptions 10, 25, 28, 29, 69, 71, 72, 82, 85, 97, 99, 115 medieval 78–80, 80–1 post-autistic 9–10, 71–2 and psychology 67–8, 71, 72–3 as a science 15, 34–5, 98, 152 and sustainability 24 see also classical economics; conventional economics; new economics economy 12, 26, 84–5, 158 creating poverty 13–14, 18, 29, 81, 154 ecosystems 99, 112, 114 Edison, Thomas 58, 90, 147 education 13, 33, 35, 46, 113 efficiency 4, 13, 99, 100, 123, 126, 131–2 E.F.


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What's Next?: Unconventional Wisdom on the Future of the World Economy by David Hale, Lyric Hughes Hale

affirmative action, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Bretton Woods, business cycle, capital controls, Cass Sunstein, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, debt deflation, declining real wages, deindustrialization, diversification, energy security, Erik Brynjolfsson, Fall of the Berlin Wall, financial innovation, floating exchange rates, full employment, Gini coefficient, global reserve currency, global village, high net worth, Home mortgage interest deduction, housing crisis, index fund, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Just-in-time delivery, Kenneth Rogoff, Long Term Capital Management, Mahatma Gandhi, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Network effects, new economy, Nicholas Carr, oil shale / tar sands, oil shock, open economy, passive investing, payday loans, peak oil, Ponzi scheme, post-oil, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, sovereign wealth fund, special drawing rights, technology bubble, The Great Moderation, Thomas Kuhn: the structure of scientific revolutions, Tobin tax, too big to fail, total factor productivity, trade liberalization, Washington Consensus, Westphalian system, WikiLeaks, women in the workforce, yield curve

These include: • Developing Country Debt Crisis (1983) • US Savings and Loan Crisis (1980s) • Resolution Trust Company, which created REITS (Real Estate Investment Trusts) (late 1980s) • The 1988 Basel Capital Accord (1988) • The beginning of derivatives (early 1990s) • Proliferation of derivatives and Special Purpose Entities (SPEs) (1990s) • Asian Financial Crisis (1997–1998) • Collapse of Long-Term Capital Management (LTCM) (1998) • The repeal of Glass-Steagall (1999) and the adoption of Gramm-Leach-Bliley Financial Modernization Act (GLBA) (1998) • The failure of dot-coms (2000) Causes of the Global Financial Crisis after SOX and Prior to September 18, 2008 It is also important to understand the events and economic climate after the July 31, 2002, passage of SOX and prior to September 18, 2008. These events include: • The increasing complexity of derivative products, including CDSs (Credit Default Swaps) and CDOs (Collateralized Debt Obligations)4 • The ascendancy of rating agencies • Alt-A subprime lending • Basel II (2005–2006) • The subprime housing crisis in the United States, including the rise of “NINJA” (no income, no jobs, no assets) financing • The rise of hedge funds • The oil crisis (2008) • The collapse of Bear Stearns, Fannie Mae, Freddie Mac, and Lehman Brothers (2008) Understanding the causes of the global financial crisis will go hand in hand with regulatory reform and increasing targeted global compliance and ethics programs.5 Why SOX Failed SOX was supposed to remedy the financial improprieties and excesses that existed prior to July 31, 2002.

These events include: • The increasing complexity of derivative products, including CDSs (Credit Default Swaps) and CDOs (Collateralized Debt Obligations)4 • The ascendancy of rating agencies • Alt-A subprime lending • Basel II (2005–2006) • The subprime housing crisis in the United States, including the rise of “NINJA” (no income, no jobs, no assets) financing • The rise of hedge funds • The oil crisis (2008) • The collapse of Bear Stearns, Fannie Mae, Freddie Mac, and Lehman Brothers (2008) Understanding the causes of the global financial crisis will go hand in hand with regulatory reform and increasing targeted global compliance and ethics programs.5 Why SOX Failed SOX was supposed to remedy the financial improprieties and excesses that existed prior to July 31, 2002. The debacles of WorldCom, Enron, Adelphia, and Tyco were only the last in a long series of financial abuses. Further, after SOX, despite the subprime mortgage crisis in the United States, rating services failed to calculate the risk of credit default swaps (CDSs), collateralized debt obligations (CDOs), and other financial abuses. Until September 18, 2008, there was no general sense that SOX had not alleviated the possibility of a global financial meltdown, or at least a US financial meltdown. No one seemed to question SOX’s ability to create greater transparency and integrity in the US financial market. However, SOX ultimately failed to deliver the kind of protection its framers anticipated.

If neuroeconomics provides such incontrovertible evidence relating to the making of flawed decisions, why are so many investors still “neuroskeptics”? Why is it that so very few investment companies have neuroeconomists or cognitive psychologists on their board, their trading floor, or their investment committee? Probably because neuroeconomics does not help to make better decisions; it only helps to avoid bad ones, which is much less noticeable. It pays more to sell a collateralized debt obligation to a client than to warn him or her about the hidden risks, many of which would be apparent if one ever paid attention to a bias as obvious as overconfidence. But the fundamental reason for which we still do not pay enough attention to the lessons of neuroeconomics may be simpler yet. On repeated occasions, I have asked renowned neuroeconomists why so very few investors pay for their services.


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The Quants by Scott Patterson

Albert Einstein, asset allocation, automated trading system, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, Black Swan, Black-Scholes formula, Blythe Masters, Bonfire of the Vanities, Brownian motion, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, centralized clearinghouse, Claude Shannon: information theory, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, Doomsday Clock, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, fixed income, Gordon Gekko, greed is good, Haight Ashbury, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, index fund, invention of the telegraph, invisible hand, Isaac Newton, job automation, John Meriwether, John Nash: game theory, Kickstarter, law of one price, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, merger arbitrage, money market fund, Myron Scholes, NetJets, new economy, offshore financial centre, old-boy network, Paul Lévy, Paul Samuelson, Ponzi scheme, quantitative hedge fund, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, risk-adjusted returns, Robert Mercer, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Sergey Aleynikov, short selling, South Sea Bubble, speech recognition, statistical arbitrage, The Chicago School, The Great Moderation, The Predators' Ball, too big to fail, transaction costs, value at risk, volatility smile, yield curve, éminence grise

But if a thousand subprime mortgages, each worth about $250,000, were pooled together and turned into a single security with a collective value of $250 million, the security could be divided into some number of shares. The potential loss caused by any one mortgage going into default would be offset by the fact that it represented only a tiny portion of the security’s total value. Parts of the securities, in many cases the lowest on the food chain, were often bundled into even more esoteric monstrosities known as collateralized debt obligations, which took into account the fact that some of the underlying mortgages were more likely than others to default. The more-likely-to-default bundles obviously carried greater risk, though along with that came its corollary, greater potential reward. Between 2004 and 2007, billions in subprime home loans were stuffed into these so-called CDOs. The CDOs were then sliced into tranches. There were high-quality slices, stamped AAA by rating agencies such as Standard & Poor’s, and there were poor-quality slices, some of which were so low in quality they didn’t even get a rating.

Often these investors never actually held the debt in the first place. Instead, they were gambling on the perception of whether a company would default or not. If all of this weren’t strange enough, things became truly surreal when the world of credit default swaps met the world of securitization. Brown had watched, with some horror, as banks started to bundle securitized loans into a product they called a collateralized debt obligation, or CDO. CDOs were similar to the CMOs (collateralized mortgage obligations) Brown had encountered in the 1980s. But they were more diverse and could be used to package any kind of debt, from mortgages to student loans to credit card debt. Some CDOs were made up of other pieces of CDOs, a Frankenstein-like beast known as CDO-squared. (Eventually there were even CDOs of CDOs of CDOs.)

His testimony provided little insight into the problems behind the meltdown, though it did offer a rare glimpse into Renaissance’s trading methods. “Renaissance is a somewhat atypical investment management firm,” he said. “Our approach is driven by my background as a mathematician. We manage funds whose trading is determined by mathematical formulas. … We operate only in highly liquid publicly traded securities, meaning we don’t trade in credit default swaps or collateralized debt obligations. Our trading models tend to be contrarian, buying stocks recently out of favor and selling those recently in favor.” For his part, Griffin sounded a note of defiance, fixing his unblinking blue eyes on the befuddled array of legislators. Hedge funds weren’t behind the meltdown, he said. Heavily regulated banks were. “We haven’t seen hedge funds as the focal point of the carnage in this financial tsunami,” said Griffin, clad in a dark blue jacket, black tie, and light blue shirt.


Firefighting by Ben S. Bernanke, Timothy F. Geithner, Henry M. Paulson, Jr.

Asian financial crisis, asset-backed security, bank run, Basel III, break the buck, Build a better mousetrap, business cycle, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Doomsday Book, financial deregulation, financial innovation, housing crisis, Hyman Minsky, income inequality, invisible hand, Kenneth Rogoff, labor-force participation, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, pets.com, price stability, quantitative easing, regulatory arbitrage, Robert Shiller, Robert Shiller, savings glut, short selling, sovereign wealth fund, special drawing rights, The Great Moderation, too big to fail

The systemic danger was that the securities they backed had come to underpin much of modern finance, which made the health of the entire financial system dependent on the perceived condition of the mortgage market in ways few people recognized at the time. That dependence would have been dangerous even if the securities had been straightforward, transparent, and traded on public exchanges. But “collateralized debt obligations,” “CDOs-Squared,” and other new products of financial engineering were often complex, opaque, and embedded with hidden leverage. These products were supposed to help reduce risk by spreading it around and customizing it to the needs of the investor, but, in the confluence of forces at the end of the long boom in credit, they made the overall system both more vulnerable to a crisis of confidence and harder to stabilize after the crisis began.

and expansion of crisis, 46 and expansion of emergency authorities, 79 and Fannie Mae/Freddie Mac conservatorship, 58, 59 and onset of financial crisis, 1 and politics of crisis management, 9 and TARP, 80, 93–94, 95, 105 capitalism, 36–37, 74, 110 capital levels capitalization strategies, 164 and current state of financial system, 6 and Fannie Mae/Freddie Mac conservatorship, 56, 59 and onset of financial crisis, 30 and policy responses to crisis, 174–82 and politics of crisis management, 126 and post-crisis reforms, 117 and shortcomings of U.S. regulatory regime, 25–26, 27 and TARP, 89–90 Capital Purchase Program (CPP), 163, 176, 177, 208 “CDOs-Squared,” 19 central banks and arsenal for dealing with future crises, 119–20, 123 and Bear Stearns rescue, 48–49 and coordinated interest rate cuts, 197 and Fed liquidity programs, 217n and Lehman failure, 69 and policy responses to crisis, 33, 103–4, 162, 163 and politics of crisis management, 126 and post-crisis reforms, 118 and quantitative easing, 104 and swap lines, 42–43, 196, 217n and TARP, 89 and theoretical approaches to financial crises, 34–36, 38 CEOs and executives of financial institutions, 40–41, 52, 73–74, 82, 91, 101 Chrysler, 95, 97, 105, 208 Citigroup and acceleration of crisis, 21 and federal asset guarantees, 178 government investment in, 176, 177 and Lehman failure, 69 management firings, 73 and policy responses to crisis, 97 private capital raised during crisis, 175, 181 and stress tests, 180 structured investment vehicles, 41 and TARP, 94–95, 96, 101 and taxpayer profit from rescue, 208 and Wachovia crisis, 81, 82 write-down of troubled assets, 40–41 collateral and acceleration of crisis, 20–22, 24 and AIG rescue, 72, 73 and arsenal for dealing with future crises, 118–19 and Bear Stearns rescue, 47, 52 collateralized debt obligations (CDOs), 19, 41 collateralized funding, 24 and Countrywide sale, 42 and Lehman failure, 62, 63, 68, 69 and TARP, 94 and Term Securities Lending Facility, 45 and triage process, 40 commercial banks, 5, 126–27, 173 Commercial Paper Funding Facility (CPFF), 88, 163, 168, 208 commercial paper market, 88 Commodity Futures Trading Commission (CFTC), 23, 116 complacency, 26, 146 Consumer Financial Protection Bureau, 116 consumer lending and debt, 94, 116, 120–21, 149, 169 Continuing Extension Act, 187 corporate bonds, 75 corporate financing, 22 Council of Economic Advisers, 28 Countrywide Financial and AIG rescue, 71 and Bear Stearns rescue, 48, 52 crisis and sale of, 38–40 and expansion of crisis, 46–47 management firings, 73 and onset of financial crisis, 31, 155 and oversight of nonbanks, 23 and post-crisis reforms, 115, 116 and spark of crisis, 18 creative destruction, 36–37 credit booms, 3–4, 12, 13, 16, 117, 150 credit crunch, 36, 108 credit default swaps (CDS) and AIG rescue, 72 and effect of stabilization efforts, 201 and expansion of crisis, 75 and Lehman failure, 69 and phases of financial crisis, 153 and policy responses to crisis, 173 currency exchanges, 42–43, 196 Darling, Alistair, 67–68 debt bank debt, 90 and causes of financial crisis, 3 collateralized debt obligations (CDOs), 19, 41 federal debt levels, 124 household debt levels, 16, 149 Latin American debt crisis, 37 and post-crisis reforms, 112 “runnable” forms of debt, 12, 112 and spark of crisis, 16, 19 and TARP, 87 Debt Guarantee Program, 217n defaults, 22 Defense Appropriations Act, 187 deficit spending, 104, 124–25, 128 Democratic Party, 5, 80, 83, 104–5, 129 deposit insurance, 14–15, 22–23, 34, 162, 163, 172 Deposit Insurance Fund, 81, 88 derivatives and acceleration of crisis, 24 and AIG rescue, 71–72 and Bear Stearns rescue, 48, 53 and Lehman failure, 63 and post-crisis reforms, 112, 114, 116–17 and roots of financial crisis, 13 and shortcomings of U.S. regulatory regime, 26, 28–29 and spark of crisis, 20 Diamond, Bob, 67 Dimon, Jamie, 50 discount window lending and acceleration of crisis, 22 and Countrywide sale, 39 failure to ease crisis, 42 and Fed liquidity programs, 217n and policy responses to crisis, 162, 166, 167 stigma associated with Fed borrowing, 40 and theoretical approaches to financial crises, 34, 35 dividends, 41 Dodd, Christopher, 56, 79–80 Dodd-Frank Wall Street Reform and Consumer Protection Act, 113–16, 120–21, 127, 172 “Doomsday Book,” 118 dot-com bubble, 21 Dugan, John, 91 E. coli effect, 31, 42 economic output, 207 Economic Stimulus Act, 185 electronic banking, 15 Emergency Economic Stabilization Act, 172 emergency powers arsenal for dealing with future crises, 118–25, 211 and Bear Stearns rescue, 49–51 and Countrywide sale, 39 expansion of emergency authorities, 78–83 and onset of financial crisis, 44–45 and TARP, 94 employment levels, 4, 92, 95, 108, 110, 141, 202 Enhanced Leverage Fund, 31 entitlement programs, 124 European banking, 91, 182 European Central Bank (ECB), 35, 42, 89, 196, 197 European recovery, 206 European sovereign debt crisis, 123 Exchange Stabilization Fund, 76–77 executive compensation, 80, 82 FAA Air Transportation Act, 187 failure of financial firms, 8, 36–37.

and expansion of crisis, 46 and expansion of emergency authorities, 79 and Fannie Mae/Freddie Mac conservatorship, 58, 59 and onset of financial crisis, 1 and politics of crisis management, 9 and TARP, 80, 93–94, 95, 105 capitalism, 36–37, 74, 110 capital levels capitalization strategies, 164 and current state of financial system, 6 and Fannie Mae/Freddie Mac conservatorship, 56, 59 and onset of financial crisis, 30 and policy responses to crisis, 174–82 and politics of crisis management, 126 and post-crisis reforms, 117 and shortcomings of U.S. regulatory regime, 25–26, 27 and TARP, 89–90 Capital Purchase Program (CPP), 163, 176, 177, 208 “CDOs-Squared,” 19 central banks and arsenal for dealing with future crises, 119–20, 123 and Bear Stearns rescue, 48–49 and coordinated interest rate cuts, 197 and Fed liquidity programs, 217n and Lehman failure, 69 and policy responses to crisis, 33, 103–4, 162, 163 and politics of crisis management, 126 and post-crisis reforms, 118 and quantitative easing, 104 and swap lines, 42–43, 196, 217n and TARP, 89 and theoretical approaches to financial crises, 34–36, 38 CEOs and executives of financial institutions, 40–41, 52, 73–74, 82, 91, 101 Chrysler, 95, 97, 105, 208 Citigroup and acceleration of crisis, 21 and federal asset guarantees, 178 government investment in, 176, 177 and Lehman failure, 69 management firings, 73 and policy responses to crisis, 97 private capital raised during crisis, 175, 181 and stress tests, 180 structured investment vehicles, 41 and TARP, 94–95, 96, 101 and taxpayer profit from rescue, 208 and Wachovia crisis, 81, 82 write-down of troubled assets, 40–41 collateral and acceleration of crisis, 20–22, 24 and AIG rescue, 72, 73 and arsenal for dealing with future crises, 118–19 and Bear Stearns rescue, 47, 52 collateralized debt obligations (CDOs), 19, 41 collateralized funding, 24 and Countrywide sale, 42 and Lehman failure, 62, 63, 68, 69 and TARP, 94 and Term Securities Lending Facility, 45 and triage process, 40 commercial banks, 5, 126–27, 173 Commercial Paper Funding Facility (CPFF), 88, 163, 168, 208 commercial paper market, 88 Commodity Futures Trading Commission (CFTC), 23, 116 complacency, 26, 146 Consumer Financial Protection Bureau, 116 consumer lending and debt, 94, 116, 120–21, 149, 169 Continuing Extension Act, 187 corporate bonds, 75 corporate financing, 22 Council of Economic Advisers, 28 Countrywide Financial and AIG rescue, 71 and Bear Stearns rescue, 48, 52 crisis and sale of, 38–40 and expansion of crisis, 46–47 management firings, 73 and onset of financial crisis, 31, 155 and oversight of nonbanks, 23 and post-crisis reforms, 115, 116 and spark of crisis, 18 creative destruction, 36–37 credit booms, 3–4, 12, 13, 16, 117, 150 credit crunch, 36, 108 credit default swaps (CDS) and AIG rescue, 72 and effect of stabilization efforts, 201 and expansion of crisis, 75 and Lehman failure, 69 and phases of financial crisis, 153 and policy responses to crisis, 173 currency exchanges, 42–43, 196 Darling, Alistair, 67–68 debt bank debt, 90 and causes of financial crisis, 3 collateralized debt obligations (CDOs), 19, 41 federal debt levels, 124 household debt levels, 16, 149 Latin American debt crisis, 37 and post-crisis reforms, 112 “runnable” forms of debt, 12, 112 and spark of crisis, 16, 19 and TARP, 87 Debt Guarantee Program, 217n defaults, 22 Defense Appropriations Act, 187 deficit spending, 104, 124–25, 128 Democratic Party, 5, 80, 83, 104–5, 129 deposit insurance, 14–15, 22–23, 34, 162, 163, 172 Deposit Insurance Fund, 81, 88 derivatives and acceleration of crisis, 24 and AIG rescue, 71–72 and Bear Stearns rescue, 48, 53 and Lehman failure, 63 and post-crisis reforms, 112, 114, 116–17 and roots of financial crisis, 13 and shortcomings of U.S. regulatory regime, 26, 28–29 and spark of crisis, 20 Diamond, Bob, 67 Dimon, Jamie, 50 discount window lending and acceleration of crisis, 22 and Countrywide sale, 39 failure to ease crisis, 42 and Fed liquidity programs, 217n and policy responses to crisis, 162, 166, 167 stigma associated with Fed borrowing, 40 and theoretical approaches to financial crises, 34, 35 dividends, 41 Dodd, Christopher, 56, 79–80 Dodd-Frank Wall Street Reform and Consumer Protection Act, 113–16, 120–21, 127, 172 “Doomsday Book,” 118 dot-com bubble, 21 Dugan, John, 91 E. coli effect, 31, 42 economic output, 207 Economic Stimulus Act, 185 electronic banking, 15 Emergency Economic Stabilization Act, 172 emergency powers arsenal for dealing with future crises, 118–25, 211 and Bear Stearns rescue, 49–51 and Countrywide sale, 39 expansion of emergency authorities, 78–83 and onset of financial crisis, 44–45 and TARP, 94 employment levels, 4, 92, 95, 108, 110, 141, 202 Enhanced Leverage Fund, 31 entitlement programs, 124 European banking, 91, 182 European Central Bank (ECB), 35, 42, 89, 196, 197 European recovery, 206 European sovereign debt crisis, 123 Exchange Stabilization Fund, 76–77 executive compensation, 80, 82 FAA Air Transportation Act, 187 failure of financial firms, 8, 36–37.


pages: 620 words: 214,639

House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William D. Cohan

asset-backed security, call centre, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Deng Xiaoping, diversification, Financial Instability Hypothesis, fixed income, Hyman Minsky, Irwin Jacobs, John Meriwether, Long Term Capital Management, margin call, merger arbitrage, money market fund, moral hazard, mortgage debt, mutually assured destruction, Myron Scholes, New Journalism, Northern Rock, Renaissance Technologies, Rod Stewart played at Stephen Schwarzman birthday party, savings glut, shareholder value, sovereign wealth fund, too big to fail, traveling salesman, Y2K, yield curve

Unlike Greenberg, who kept his seat on the trading desk and the one as head of the risk committee and to some degree his finger on the pulse of the markets, Cayne had no more than an intuitive feel for the markets or for their growing complexity. For sure, he could decide when to buy or sell a stock, but when it came to understanding the calculus of and risks inherent in, say, a CDO-squared (that is, a collateralized debt obligation backed not by a pool of bonds and loans but by CDO tranches), well, that was a bridge too far. (In this, he was most certainly not alone among top Wall Street executives.) And, not surprisingly for a man who learned by listening and not by reading, he was no writer of notes of exhortation. In the Cayne regime, the quaint Greenberg memos slowly petered out. Instead, like Joe Torre in his Yankees heyday, Cayne preferred to believe he was managing a team of hand-picked superstars, and he expected them to perform.

From 1989 to 1991, Cioffi was the New York head of fixed-income sales and then, for the next three years, served as global product and sales manager for high-grade credit products. “He was involved in the creation of the structured credit effort at Bear Stearns and was a principal force behind Bear Stearns' position as a leading underwriter and secondary trader of structured finance securities, specifically collateralized debt obligations and esoteric asset-backed securities,” according to a description of him on file with the SEC. “We all grew up with Ralph here,” explained Paul Friedman. “Ralph is one of the smartest guys I've ever met and was absolutely the best salesman I've ever met. When I was a trader, he was a salesman, a fabulous salesman. He was incredibly personable, incredibly smart, creative, and could get things done.”

“Every time Marin and the risk guys in BSAM would have a question with Ralph, Ralph would get Warren involved, and they'd all have this big meeting in Warren's office, and Warren would say to the BSAM, ‘You don't know what you're talking about. Leave Ralph alone. He's doing fine,' and eventually they came to largely ignore him. And that's a little harsh, but not entirely wrong, because none of them really understood what he did.” Explained Marin to the New York Times about Cioffi: “He had come up with an approach to trading those assets”—among others, mortgage-backed securities and collateralized debt obligations—“that people who are experts in that arena thought was a sound and interesting approach.” BY 2003, HEDGE funds were the rage of global finance, much as private equity funds had been a decade or so earlier. Whereas the best and the brightest bankers on Wall Street left to become private equity dons, the best and the brightest traders on Wall Street left to become hedge fund managers.


pages: 348 words: 99,383

The Financial Crisis and the Free Market Cure: Why Pure Capitalism Is the World Economy's Only Hope by John A. Allison

Affordable Care Act / Obamacare, American ideology, bank run, banking crisis, Bernie Madoff, business cycle, clean water, collateralized debt obligation, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, disintermediation, fiat currency, financial innovation, Fractional reserve banking, full employment, high net worth, housing crisis, invisible hand, life extension, low skilled workers, market bubble, market clearing, minimum wage unemployment, money market fund, moral hazard, negative equity, obamacare, Paul Samuelson, price mechanism, price stability, profit maximization, quantitative easing, race to the bottom, reserve currency, risk/return, Robert Shiller, Robert Shiller, The Bell Curve by Richard Herrnstein and Charles Murray, too big to fail, transaction costs, yield curve, zero-sum game

They were also misled by the artificial economic environment created by the Federal Reserve. In addition, as discussed earlier, they had a significant economic incentive to rate the bonds as highly as possible to increase their revenues. This is where the investment banks (Goldman Sachs, Morgan Stanley, Bear Stearns, Merrill Lynch, and Lehman Brothers) magnified the misallocation of credit to the housing market. They created a series of financial “innovations” (collateralized debt obligations [CDOs], derivatives, swaps, and others, which I discuss later) that leveraged an already overleveraged product. The explanation typically given for these ultimately very bad decisions by investment bankers is greed. However, there was plenty of greed on Wall Street before the bubble. In fact, in my almost 40-year career in banking, there has always been greed on Wall Street. There was no more or less greed on Wall Street during the bubble.

You have probably flown on bankrupt airlines many times. It is true that financial institution bankruptcies are more complex and need to be planned in advance. Unfortunately, Lehman did not plan for a bankruptcy because it expected to be bailed out. What was the nature of some of the more interesting derivatives—that is, the “innovations” in financial products? These instruments include CDOs (collateralized debt obligations), CDO2s, SIVs (structured investment vehicles), and other such products. Because of the complexity of the subject and the risk of confusion, let’s focus on a conceptually simplified example: CDOs. CDOs have a reasonable history, as they were designed originally to reduce credit risk. A bank purchases a $500 million bond from General Electric. Even though General Electric is perceived to be a low risk, the bank does not want to have its risk this concentrated in one borrower, so it sells pieces of the bond totaling $400 million in the capital markets, which is a legitimate risk-management technique.

., and administration: action in financial panic, 161, 167 banking regulations, 133–136 economic proposals, 15 Patriot Act, 45, 46 regulation of Fannie Mae and Freddie Mac, 63 California, 21, 74, 90 CalPERS (California Public Employees’ Retirement System), 93, 116, 121, 131 Canada, 192 Capital: against GSE loans, 137 and leverage, 70–71 and loan loss reserves, 153 misinvestment of, 9–11, 14 wasting of, 159–160 Capital markets, 85–87, 101 Capital standards: for banks, 190 for loans, 51–52 and TARP, 170–171 Capitalism: crony, 6, 102, 129, 179 and freedom, 253–254 at universities, 231–233 Capitalism (Alan Greenspan), 32 Carter, Jimmy, 161, 179 Cash basis accounting, 110 Cash flows, 106–107, 115 Cato Institute, 201 CDOs (collateralized debt obligations), 124–126 CDSs (credit default swaps), 126–128 CEOs (Chief Executive Officers): behavior of, 2–3 decisions of Federal Reserve vs., 34 and rules-based accounting, 109 wage rates of, 210 China: currency standard, 77 demographics, 205 education, 230 GDP of U.S. vs., 183 government debt in, 200 manufacturing in, 10, 25–26, 161 market-based pricing in, 34 military spending in, 198 stimulus fund use, 181–182 trade with, 204–205 U.S. investment by, 29, 159 Chrysler, 130, 179–180 Citigroup: bailout of, 50, 104, 130, 177 CDOs of, 125–126 credit decisions, 238 crony capitalism, 6 funding of shadow banking system, 120 long-term debt of, 71 and panic during financial crisis, 163 pragmatism at, 217–218 reason at, 245 “too-big-to-fail” firms, 173 Clearing, 104 Clinton, Bill: lending reforms, 42–44, 56 subprime lending requirements, 58–60 Collateralized debt obligations (CDOs), 124–126 Colonial Bank, 47–48 Commercial real estate, 11, 97 Common good, 215–216 Community Reinvestment Act (CRA), 42, 55–57, 59 Compensation, 50, 83–84, 197–198 Confidence, 84–87, 184–185 Conservatives, 108 Consumer compliance, 193 Consumer Price Index (CPI), 26–27 Consumption: borrowing for, 57–58 housing as, 9–12, 54–55, 73–74 Contagion risk, 123 Corporate debt, 107 Counterparty risk, 123, 124 Countrywide: crony capitalism at, 6 and fair-value accounting change, 114, 118 and FDIC insurance, 39, 41, 46 necessary failure of, 159 pick-a-payment mortgages of, 91–93 subprime business at, 99 thrift history of, 98 CPI (see Consumer Price Index) CRA (see Community Reinvestment Act) Creativity, 7, 247 Credit default swaps (CDSs), 126–128 Credit rating agencies (see Rating agencies) Crony capitalism, 6, 102, 129, 179 Cross-guarantor insurance fund, 48–52 Cuba, 34, 247, 252 Cuomo, Andrew, 58 Currency, debasing, 22 Debt, 21–22, 107 Declaration of Independence, 220, 252 Defaults, 90–91, 126–128 Defense spending, 198–199, 227 Deflation, 22 Demand, supply and, 104, 185, 209, 210 Department of Housing and Urban Development (HUD), 15, 58 Deposits, disintermediation of, 120–121 Derivatives, 3, 120, 122–124 Disclosure requirements, 150–152 Dodd, Christopher, 7, 46, 61, 63, 64 Dodd-Frank Wall Street Reform and Consumer Protection Act: deficiencies of, 193 introduction of, 63–64, 183 as misregulation, 147 results of, 130 and TARP, 173, 174 Dollar, U.S., 77, 188, 229 Durbin amendment, 193 Earnings, operating, 103–106 East Germany, 34, 247 Eastern Europe, 34, 252 Economic cycles, 108, 189–193 Economic health, 159–161 Economic recovery, 1, 207–208 Economy, banking industry in, 67–69 Edison, Thomas, 19, 158–159 Education, 230–235, 247 Egypt, ancient, 230 Elitism, 7 Ely, Bert, 48 Employee Retirement Income Security Act (ERISA), 82, 149 Enron, 60, 109, 133, 149 Entitlement programs, reforms for, 199–204 Equal Credit Opportunity Act, 42, 55 ERISA (Employee Retirement Income Security Act), 82, 149 Ethical incentives, lending, 57–58 Euro, 189 European banking crisis, 51–52, 137 Expensing (stock options), 114–117 Experiential learners, 244–245 Fair Housing Act, 55 Fair-value accounting, 103–118 asset valuation in, 106–108 and expensing of stock options, 114–117 and losses on CDSs, 126–127 private accounting systems vs., 177–178 SEC involvement in, 151–152 for selling vs. servicing mortgages, 113–114 Fannie Mae: accounting scandal, 112–113, 149 in current environment, 251 and disintermediation of deposits, 121 failure of, 61–65, 164 and fair-value accounting, 118 in housing policy, 58–61 misallocation of resources by, 14 misleading of rating agencies by, 83 mortgage lending by, 97–101 reforms for, 190–192 selling mortgages to, 113–114 subprime lending by, 58, 99–101 FASB (see Financial Accounting Standards Board) FDIC (see Federal Deposit Insurance Corporation) FDIC insurance, 37–52 and bank liquidity, 171 and failing banks, 140 and fractional reserve banking, 68–69 and pick-a-payment mortgages, 91 reform of, 190 and S&L failures, 97 Federal Deposit Insurance Corporation (FDIC), 37–38 as external auditors, 134 and failing banks, 47–48 misallocation of resources by, 14 and pick-a-payment mortgages, 91 as regulator, 41–48, 143 take over of Washington Mutual, 75–77 Federal Housing Administration (FHA), 15, 190–192, 252 Federal Reserve, 22–23, 102, 189 antitrust policy, 174 bailouts by, 120–121, 190, 192 and banking industry reforms, 187–188 as external auditors, 134 and federal debt, 21–22 and leverage, 72 mathematical modeling by, 136 misallocation of resources by, 14, 208 misleading information from, 46, 83, 101, 125 monetary policy of, 17–20, 31–35, 96 overreaction by, 154 stimulus from, 152, 153, 208 and TARP, 165, 167–168, 171 and unemployment, 213 and Washington Mutual, 75 Federal Reserve Board, 18 Federal Reserve Open Market Committee, 31 Federal Savings and Loan Insurance Corporation (FSLIC), 37–38, 50, 96 FHA (see Federal Housing Administration) Financial Accounting Standards Board (FASB), 105, 106, 114–117 Financial crisis (2007-2009), 1–3, 251–254 banking industry in, 70–72 derivatives in, 122–124 Freddie Mac and Fannie Mae in, 65 free-market response to, 177–186 and Great Depression, 25 lessons from, 251–252 SEC role in, 154–155 Financial reporting requirements, SEC, 150–152 Financial Services Roundtable (FSR), 32, 61–62 First Horizon, 237 Fitch, John Knowles, 150 Fitch Ratings: investor confidence in, 84–87 misratings by, 82–84, 101, 125, 126 and SEC, 81–82, 149–150 Flat tax, 197 Forbes, Steve, 197 Ford, 179 Foreclosure laws, 77–80 Fractional reserve banking, 69–70 Frank, Barney, 7, 61, 63, 64 Fraud, 109–113 Freddie Mac: accounting scandal, 112–113, 149 current environment, 251 and disintermediation of deposits, 121 failure of, 61–65, 164 in housing policy, 58–61 misallocation of resources by, 14 misleading information from, 83 mortgage lending by, 97–101 reforms for, 190–192 selling mortgages to, 113–114 subprime lending by, 58, 99–101 Free markets: experimentation in, 19 justice in, 92, 177 market corrections in, 157–159 and monetary policy, 31–35 risk taking by banks in, 40–41 wage rates in, 210–211 Free trade, 204–205 Friedman, Milton, 20, 189 FSLIC (see Federal Savings and Loan Insurance Corporation) FSR (Financial Services Roundtable), 32, 61–62 GAAP accounting, 116, 117 Gates, Bill, 216 GDP, 183, 197–199 General Electric, 168, 169 General Motors (GM), 169, 178–180 General Theory of Employment, Interest and Money, The (Keynes), 181 Germany, 52 GM (General Motors), 169, 178–180 GMAC, 168, 169, 178–180 Gold standard: and deflation, 25–26 and economic future of U.S., 188–189 Greenspan’s view of, 32 Golden West, 39, 91, 92, 98, 159 Goldman Sachs, 71, 173 as AIG counterparty, 128–129 bailout of, 104, 164, 179 CDSs of, 126 counterparty risk at, 124 crony capitalism at, 6 financial “innovations” of, 101 Government policy: as cause of financial crisis, 1, 5–6, 251 and residential real estate bubble, 6 (See also Housing policy; Policy reforms) Government regulation, 5–8, 41–48, 204 Government spending, 180–183, 197–199 Government-sponsored enterprises (GSEs), 59, 64–65, 98, 137 (See also Fannie Mae; Freddie Mac) Great Depression: and avoidance of stock market, 74 banking industry in, 70–72 economic policies after, 161 and Federal Reserve, 19–20, 24, 188 and gold standard, 188 and government interference, 170 and Smoot-Hawley Tariff Act, 205 Great Recession, 1, 251–254 and Federal Reserve, 188 Freddie Mac and Fannie Mae in, 65 and interest-rate variation, 33 market corrections and depth of, 160 and monetary policy, 17 and residential real estate, 9–15 Great Society, 6, 55, 96 Greece, 51, 52, 137, 228 Greenspan, Alan, 23–30, 32, 33, 160 Gross domestic product, 183, 197–199 Hamilton, Alexander, 19 Harvard University, 43, 131 Hayek, Friedrich, 31 Health insurance, 201–202 High-net-worth shareholders, 93 Home Builders Association, 60 Home foreclosure laws, 77–80 Homeownership, 53–55 Hoover, Herbert, 24, 161, 205 Housing: as consumption, 9–12, 54–55, 73–74 government support of, 12 Housing policy, 53–65 HUD (Department of Housing and Urban Development), 15, 58 Human Action (von Mises), 238 Immigration, 19, 205–206 India, 10, 25, 205 IndyMac, 39, 75, 98 Inflation: CPI as indicator of, 26–27 and fair-value accounting, 103 and Federal Reserve, 21–22 and prices, 24–25 (See also Monetary policy) Initial public offerings, 150 Insurance: bond, 86–87 cross-guarantor, 48–52 FDIC (see FDIC insurance) health, 201–202 private deposit, 48–52 self-insurance at banks, 48–52 unemployment, 212–213 Interest rates, 26–27, 31–35 Inverted yield curves, 27–29 Investment banks: disclosure requirements for, 151 government bailout of, 162 “innovations” of, 101–102 leverage ratios of, 71–72 IPOs, 150 Iran, 198, 199, 227 Iraq, 198 Ireland, 77 Isaac, Bill, 107–108, 161–162 Italy, 51, 52 Japan, 159, 200, 205 Jefferson, Thomas, 19, 220 Johnson, Lyndon Baines, 6, 55, 96, 161, 188 JPMorgan Chase, 75 and Bear Stearns, 162 and shadow banking system, 120 as “too-big-to-fail” firm, 173 and Washington Mutual, 163 Keynes, John Maynard, 181 Labor: allocation of, 10–11, 14 minimum-wage laws, 209–212 Lehman Brothers, 71, 76, 101, 104, 129, 164 and Bear Stearns bailout, 162–163 corporate debt at, 107 counterparty risk at, 124 derivatives from, 123 Limited government, 182–183, 195, 231, 253 Liquidity: of banks, 68–69 and FDIC insurance, 171 and financial crises, 70–72 and housing prices, 74–75 and TARP, 171–172 Loan loss reserves accounting, 152–154 Loans: capital standards for, 51–52 qualified, 98 substandard, 140–141 Madoff, Bernie, 149, 225 March of Dimes, 241 Market corrections, 157–165 Federal Reserve’s prevention of, 23, 32 prevention of, 13 residential real estate, 78 and response to financial crisis, 177–180 Market discipline, 21, 38 Market-based monetary policy, 31–35 Market-clearing price, 209 Mathematical modeling: for loan loss reserves, 152–153 by ratings agencies, 82–83 for risk management, 136–138 MBIA, 86 Medicaid, 6, 55, 201 Medicare, 6, 8, 55, 201, 203 Meltdown (Michaels), 35 Merrill Lynch, 101, 124–125 Michaels, Patrick J., 35 Microsoft, 217 Military spending, 198–199, 227 Minimum-wage laws, 209–212 Mises, Ludwig von, 34, 238 Monetary policy, 17–35 of Bernanke, 27–31, 33, 35, 40, 125, 213 and federal debt, 21–22 and Federal Reserve, 17–23 of Greenspan, 23–27 market-based, 31–35 and unemployment, 208–209 Money market mutual funds, bailout of, 120–121, 192 Money supply, 21–22, 24, 189 Moody, John, 83, 150 Moody’s, 81–87 investor confidence in, 84–87 misratings by, 82–84, 101, 125, 126 and SEC, 81–82, 149–150 Morgan Stanley, 71, 101, 124, 173 Mortgage lending, 95–102 by Fannie Mae and Freddie Mac, 97–101 and investment bank innovations, 101–102 prime, 59, 97–99 by private banks, 97–99 savings and loan industry in, 95–97 subprime, 43, 56–57, 99–101 Mortgages: by BB&T Corporation, 97–98 jumbo, 62 pick-a-payment (see Pick-a-payment mortgages) selling vs. servicing, 113–114 Mozilo, Angelo, 46 Multiplier effect, 181 Naked shorting, 127–128, 151 Nationally recognized statistical rating organizations, 82 Negative real interest rates, 26–27 Neo-Keynesian response to financial crisis, 185–186 Neutral taxes, 197 New Deal, 53, 170, 232 Nixon, Richard, 96, 161, 188 North Korea, 34, 198, 227, 247, 252 NRSROs, 82 Obama administration, 142–144: and Dodd-Frank Act, 64 economic policies of, 15, 161 healthcare bill, 183, 201 and Patriot Act, 45 stimulus plan, 181–182 Office of the Comptroller of the Currency (OCC), 40, 154 Office of Thrift Supervision, 40, 41, 45–46 Operating earnings, 103–106 OTS, 40, 41, 45–46 Panics, 137–138, 161–165 Patriot Act, 45, 46, 48, 133–136, 147 Paulson, Henry: in 2008 panic, 164, 167 and AIG bailout, 128, 129 credibility of, 164 development of TARP, 76, 168–170, 172 Pick-a-payment mortgages, 89–93 borrowers using, 90–91 and FDIC, 91 and rise of Fannie Mae/Freddie Mac, 98 Policy reforms, 195–206 for entitlement programs, 199–204 and free trade, 204–205 and government regulations, 204 for government spending, 197–199 for immigration, 205–206 for political system, 206–207 and tax rate, 196–197 Politics: in banking regulation, 42–46 and crony capitalism, 129 and failure of Fannie Mae/Freddie Mac, 59–62 and Federal Reserve appointments, 18 policy reforms for, 206–207 Poor, Henry Varnum, 150 Portugal, 51 Price fixing, 31, 193 Price setting, 31–32 Prime lending, 59, 97–99 Prince, Charlie, 217 Principles-based accounting, 109 Privacy Act, 133, 135 Private accounting systems, 177–178 Private banks, 97–99, 187–188 Private deposit insurance, 48–52 Public schools, 228, 233–235 Racial discrimination (in lending), 42–45 Raines, Frank, 59 Rand, Ayn, 225, 231 Rating agencies, 81–87 investor confidence in, 84–87 mathematical modeling by, 136 and subprime mortgage bonds, 82–84 and “too-big-to-fail” firms, 173 and SEC, 81–82, 149–150 Real estate: commercial, 11, 97 residential (see Residential real estate market) Recessions, 28, 29, 160 Recovery (see Economic recovery) Reforms: banking industry (see Banking industry reforms) government policy (see Policy reforms) Regions Bank, 237 Regulation: of banking industry (see Banking regulation) by government (see Government regulation) Reporting, financial, 150–152 Reserve currency, U.S. dollar as, 77, 188, 229 Residential real estate market: economics of, 73–74 misinvestment in, 9–15 Residential real estate market bubble, 73–80 and government policy, 6 international impact of, 77 and job creation, 80 and state home foreclosure laws, 77–80 Risk: contagion, 123 counterparty, 123, 124 with derivatives, 122–124 diversification of, 67–69 and economic cycles, 189–193 and FDIC insurance, 38–41 and government regulation, 50–51 liquidity, 68–70 mathematical modeling for, 136–138 and “originate and sell” model, 100 systemic, 50–51 RMBS (residential mortgage-backed securities), 81 Roman empire, fall of, 230 Roosevelt, Franklin D., 24, 37, 103, 161 Rules-based accounting, 109 Russia, 198 Samuelson, Paul, 238 Sarbanes-Oxley Act, 133–134 and fair-value accounting, 106 and Fannie Mae/Freddie Mac, 99 misregulation by, 48, 147 and SEC, 150 violations of, 136 SARs (Suspicious Activity Reports), 136 Satchwell, Jack, 57 Savings and loan (S&L) industry, 95–97, 110, 191 Securities and Exchange Commission (SEC), 149–155 capital ratio guidelines, 71–72 and complexity of accounting rules, 116–117 and expensing of stock options, 114, 115 loan loss reserves accounting for, 152–154 misallocation of resources by, 14 and rating agencies, 81–82, 149–150 requirements for shorting stock, 127–128, 151 and rules-based accounting, 109, 110 and Sarbanes-Oxley Act, 150 Self-insurance, 48–52 Selgin, George, 189 Senate Banking Committee, 46 Shadow banking system, 119–131 and AIG bailout, 128–130 credit default swaps in, 126–128 and derivatives, 122–124 Federal Reserve’s role in, 30 losses from, 131 S&L industry, 95–97, 110, 191 Small businesses, 144–147, 183–184 Smoot-Hawley Tariff Act, 205 Social Security, 8, 199–204 South Financial, 237 South Korea, 247 Soviet Union, 34, 195–196, 252, 254 S&P (see Standard & Poor’s) Spain, 51, 52, 77 Spitzer, Eliot, 71, 134–135, 151 Stagflation, 181, 208 Standard & Poor’s (S&P), 81–87 investor confidence, 84–87 misratings by, 82–84, 101, 125, 126 and SEC, 81–82, 149–150 Standard of living, 6–7, 10, 161, 177 Start-up banks, 38–39 State home foreclosure laws, 77–80 Stimulus plan, 181–182 Stock options, expensing of, 114–117 Stocks, shorting, 127–128, 151 Stress tests, banks, 171 Subprime lending: and CRA, 56–57 by Fannie Mae and Freddie Mac, 99–101 and racial discrimination in lending study, 43 Subprime mortgage bonds, 82–87 Substandard loans, 140–141 SunTrust, 152, 237 Suspicious Activity Reports (SARs), 136 Tails (mathematical models), 137 TARP (see Troubled Asset Relief Program) Tax rate, 196–197 Tea Party Movement, 218, 231 Technology industry, 5 “Too-big-to-fail” firms, 130, 173, 193 Trader principle, 92, 223–224 Troubled Asset Relief Program (TARP), 167–175 and 2008 panic, 165 and FDIC, 37 Underwriters Laboratories, 117, 150 Unemployment, 207–213 in economic recovery, 207–208 and minimum-wage laws, 209–212 and misinvestment in residential real estate, 10–11 and monetary policy, 208–209 Unemployment insurance, 212–213 Unions, 179, 180, 212 United Auto Workers, 179, 180 United States: demographic problem in, 228 economic future of, 8, 227–230, 252–253 educational system of, 230–235 founding concepts of, 219–220 as free trade zone, 204–205 GDP of China vs., 183 mixed economy of, 5–6 public schools of, 233–235 university system of, 230–233 United Way, 224, 241 University system, 230–233 U.S.


Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America by Matt Taibbi

addicted to oil, affirmative action, Affordable Care Act / Obamacare, Bernie Sanders, Bretton Woods, buy and hold, 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

One has to do with the sales pitch of Tea Party rhetoric, which cleverly exploits Main Street frustrations over genuinely intrusive state and local governments that are constantly in the pockets of small businesses for fees and fines and permits. The other reason is obvious: the bubble economy is hard as hell to understand. To even have a chance at grasping how it works, you need to commit large chunks of time to learning about things like securitization, credit default swaps, collateralized debt obligations, etc., stuff that’s fiendishly complicated and that if ingested too quickly can feature a truly toxic boredom factor. So long as this stuff is not widely understood by the public, the Grifter class is going to skate on almost anything it does—because the tendency of most voters, in particular conservative voters, is to assume that Wall Street makes its money engaging in normal capitalist business and that any attempt to restrain that sector of the economy is thinly disguised socialism.

Even as she spends every day publicly flubbing political SAT questions, she’s always dead-on when it comes to her basic message, which is that government is always the problem and there are no issues the country has that can’t be worked out with basic common sense (there’s a reason why many Tea Party groups are called “Common Sense Patriots” and rally behind “common sense campaigns”). Common sense sounds great, but if you’re too lazy to penetrate the mysteries of carbon dioxide—if you haven’t mastered the whole concept of breathing by the time you’re old enough to serve in the U.S. Congress—you’re not going to get the credit default swap, the synthetic collateralized debt obligation, the interest rate swap. And understanding these instruments and how they were used (or misused) is the difference between perceiving how Wall Street made its money in the last decades as normal capitalist business and seeing the truth of what it often was instead, which was simple fraud and crime. It’s not an accident that Bachmann emerged in the summer of 2010 (right as she was forming the House Tea Party Caucus) as one of the fiercest opponents of financial regulatory reform; her primary complaint with the deeply flawed reform bill sponsored by Senator Chris Dodd and Congressman Barney Frank was that it would “end free checking accounts.”

Despite these legally questionable efforts of Rubin and Greenspan, Born did eventually release her paper on May 7 of that year, but to no avail; Greenspan et al. eventually succeeded not only in unseating Born from the CFTC the next year, but in passing a monstrosity called the Commodity Futures Modernization Act of 2000, which affirmatively deregulated the derivatives market. The new law, which Greenspan pushed aggressively, not only prevented the federal government from regulating instruments like collateralized debt obligations and credit default swaps, it even prevented the states from regulating them using gaming laws—which otherwise might easily have applied, since so many of these new financial wagers were indistinguishable from racetrack bets. The amazing thing about the CFMA was that it was passed immediately after the Long-Term Capital Management disaster, a potent and obvious example of the destructive potential inherent in an unregulated derivatives market.


pages: 265 words: 93,231

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

The deals with Goldman had gone down in a matter of months and required the efforts of just a few geeks on a Goldman bond trading desk and a Goldman salesman named Andrew Davilman, who, for his services, soon would be promoted to managing director. The Goldman traders had booked profits of somewhere between $1.5 billion and $3 billion--even by bond market standards, a breathtaking sum. In the process, Goldman Sachs created a security so opaque and complex that it would remain forever misunderstood by investors and rating agencies: the synthetic subprime mortgage bond-backed CDO, or collateralized debt obligation. Like the credit default swap, the CDO had been invented to redistribute the risk of corporate and government bond defaults and was now being rejiggered to disguise the risk of subprime mortgage loans. Its logic was exactly that of the original mortgage bonds. In a mortgage bond, you gathered thousands of loans and, assuming that it was extremely unlikely that they would all go bad together, created a tower of bonds, in which both risk and return diminished as you rose.

He'd draw a picture of several towers of debt. The first tower was the original subprime loans that had been piled together. At the top of this tower was the triple-A tranche, just below it the double-A tranche, and so on down to the riskiest, triple-B tranche--the bonds Eisman had bet against. The Wall Street firms had taken these triple-B tranches--the worst of the worst--to build yet another tower of bonds: a CDO. A collateralized debt obligation. The reason they'd done this is that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce 80 percent of the bonds in it triple-A. These bonds could then be sold to investors--pension funds, insurance companies--which were allowed to invest only in highly rated securities. It came as news to Eisman that this ship of doom was piloted by Wing Chau and people like him.

In turn this suggested what Grant already knew, that far too many people were taking far too many financial statements on faith. In early 2007 Grant wrote a series of pieces suggesting that the rating agencies had abandoned their posts--that they were almost surely rating these CDOs without themselves knowing exactly what was inside them. "The readers of Grant's have seen for themselves how a stack of non-investment grade mortgage slices can be rearranged to form a collateral debt obligation," one piece began. "And they have stared in amazement at the improvements that this mysterious process can effect in the credit ratings of the slices..." For his troubles, Grant, along with his trusted assistant, was called into S&P for a dressing-down. "We were actually summoned to the rating agency and told, 'You guys just don't get it,'" says Gertner. "Jim used the term 'alchemy' and they didn't like that term."


pages: 309 words: 95,495

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

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, business cycle, 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, lateral thinking, 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, Sam Peltzman, 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

The Fed was hardly alone in taking these preparatory measures. Numerous other central banks, and the International Monetary Fund, had been regularly publishing “financial stability reports” to highlight potential crisis threats. All suffered from the same problem: ignorance of the risks then propagating in the shadows of the financial system. The Fed knew that subprime mortgages and more exotic instruments such as collateralized debt obligations and credit default swaps existed, but as one study later found, rarely did any of these seem important enough to be mentioned in monetary policy makers’ regular meetings. So, by 2007, there was widespread awareness that homes were probably overvalued but little concern that this would produce a systemic crisis. Twenty-five years of experience and reform had moved most of the risks out of the banking system, provided new tools such as secured repo loans to contain risks, and slain inflation, the single biggest threat to financial stability anyone alive had ever known.

As mortgages were repaid, money went first to the owner of the top tranche. If any mortgages defaulted, it was the lowest tranches that took the loss. This meant that it would take a cataclysmic level of defaults before the top tranches sustained any losses. Those tranches were deemed so safe they deserved the highest credit ratings available: AAA or AA. Tranches were often pooled into a new security called a collateralized debt obligation (CDO), which was, itself, then sliced into tranches. AIG made a point of selling protection only on the highest-rated tranches of MBSs and CDOs. By 2006, AIGFP had begun to worry enough about the quality of underwriting that it stopped selling protection on subprime-backed MBSs and CDOs. Cracks appeared in the system as indexes tied to subprime mortgages began to fall. By 2007, those cracks spread and began to show in the market.

By walling off some of that supply, Goldman indirectly forces everyone else to hold less, and to hold riskier paper instead. This strategy, in other words, works if only Goldman follows it, but not if everyone does. Goldman protected itself from the subprime collapse in a similar way. It was a major player in the subprime frenzy, originating $100 billion in mortgage-backed securities and related collateralized debt obligations in 2006 and 2007. But at the end of 2006 it became nervous and decided to cut its exposure, and in early 2007 it switched to a short position, in other words a position that would go up in value if mortgage-backed securities fell. A few years earlier, Goldman and several other banks spotted a problem in the mortgage market. If you held a big position in stocks, you could protect yourself against a drop with an option or a futures contract.


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, business cycle, 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, Kickstarter, 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

Between 2007 and 2012, 30 4099.indd 30 29/03/13 2:23 PM Taking Progress for Granted approaching 500 US banks had failed (including the aptly named Cape Fear Bank in Wilmington, North Carolina). That compared with only 24 failures in the previous six years.17 Capital markets ultimately are responsible for linking savers with investors. Yet the financial crisis revealed that the linkages were often tenuous – person A put her savings in pension fund B, which then purchased a bundle of pieces of paper known as collateralized debt obligations from bank C, which had assembled the bundle via investments in mortgage-­backed securities – some of dubious quality – issued by banks D, E and F, which, in turn, had used the money raised to lend to homebuyers G, H and I, one or more of whom had a dubious credit history and, hence, was ‘subprime’. Person A had no direct connection with the homebuyers – indeed, the saver was likely to be thousands of miles away from the ultimate borrower – but the indirect connection was there, nevertheless.

Based on our collective belief in continuously rising living standards, we have spent the last half-­century watching our financial wealth and our political and economic ‘rights’ accumulate at an incredible pace. We all, directly or indirectly, own pieces of paper or rely on political promises that make claims on future economic prosperity. The pieces of paper range from cash through to government bonds, from equities through to property deeds and from asset-­backed securities through to collateralized debt obligations. 34 4099.indd 34 29/03/13 2:23 PM Taking Progress for Granted The language deployed may vary from the very simple to the incredibly complicated but these pieces of paper all have one thing in common: they represent claims on assumed future economic success. They are all manifestations of the same act of faith: namely that the future will be better than the present and vastly superior to the past.

As property portfolios went belly up, some institutions found access to the interbank market – the market that, on a daily basis, allows banks to deal with liquidity shortfalls and excesses – increasingly difficult. And, as interbank rates rose, so equity investors sold even more 130 4099.indd 130 29/03/13 2:23 PM Loss of Trust, Loss of Growth shares, believing that those operating in the interbank market might have had ‘inside knowledge’ of the state of an individual bank’s solvency. Meanwhile, the underlying investors who now owned huge amounts of collateralized debt obligations and the like began to realize they were sitting on a pile of toxic waste: and without the appetite to buy more of the stuff, banks lost a key source of funding for lending. Credit creation came to a grinding halt and so, too, did Western economies. This was yet another example of an age-­old banking problem. No bank ever has sufficient funds immediately available to be able to return cash to all of its depositors at once.


pages: 354 words: 92,470

Grave New World: The End of Globalization, the Return of History by Stephen D. King

9 dash line, Admiral Zheng, air freight, Albert Einstein, Asian financial crisis, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Sanders, bilateral investment treaty, bitcoin, blockchain, Bonfire of the Vanities, borderless world, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collateralized debt obligation, colonial rule, corporate governance, credit crunch, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, debt deflation, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, Edward Snowden, eurozone crisis, facts on the ground, failed state, Fall of the Berlin Wall, falling living standards, floating exchange rates, Francis Fukuyama: the end of history, full employment, George Akerlof, global supply chain, global value chain, hydraulic fracturing, Hyman Minsky, imperial preference, income inequality, income per capita, incomplete markets, inflation targeting, information asymmetry, Internet of things, invisible hand, joint-stock company, Kickstarter, Long Term Capital Management, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, moral hazard, Nixon shock, offshore financial centre, oil shock, old age dependency ratio, paradox of thrift, Peace of Westphalia, plutocrats, Plutocrats, price stability, profit maximization, quantitative easing, race to the bottom, rent-seeking, reserve currency, reshoring, rising living standards, Ronald Reagan, Scramble for Africa, Second Machine Age, Skype, South China Sea, special drawing rights, technology bubble, The Great Moderation, The Market for Lemons, the market place, The Rise and Fall of American Growth, trade liberalization, trade route, Washington Consensus, WikiLeaks, Yom Kippur War, zero-sum game

But Basel I was indifferent about the quality of lending within asset classes (prompting profit-maximizing banks to lend more in any one category to riskier customers, who would pay higher interest rate spreads) and it was overly dependent on the judgements of ratings agencies, which, on too many occasions, had no more understanding of the inherent riskiness of innovative financial assets – collateralized debt obligations, for example – than anybody else. The architects of Basel II, produced in 2004 but still not fully implemented as the global financial crisis got going, were more sceptical about the value that ratings agencies could add. Yet, remarkably, they preferred to rely on banks’ own internal risk models to gauge the riskiness of the activities banks were engaged in. Even without the inevitable conflict of interest this approach was still problematic: whether the models were internally constructed or independently generated, they were typically based on too limited a time period and thus said very little about the robustness of a particular institution in the event of, for example, a housing meltdown.

It stemmed from a combination of factors, each of which challenged what had become conventional thinking over the previous three decades. Markets themselves were failing, thanks in part to asymmetric information: the ultimate investors in US sub-prime mortgages were often blissfully unaware of the risks they were taking, largely because the underlying nature of their risky investments was typically camouflaged through the copious use of collateralized debt obligations and other innovative financial ‘disguises’.15 Incentives were badly skewed: those who made commission from selling risky products were typically able to pass the risk on to others – often thousands of miles away – using ‘pile ’em high and sell ’em cheap’ tactics. Excessive Chinese savings, a reflection of a poorly functioning domestic capital market, found their way into the US Treasury market, reducing the yield on treasuries and thus encouraging others to hunt for higher returns on – inevitably riskier – assets.

Recall from Chapter 4 that the ratio of foreign-held capital as a share of global income rose from little more than 5 per cent at the end of the Second World War to well over 200 per cent by the time of the global financial crisis, with much of the increase coming in the 1980s and beyond. In effect, there are now massive cross-border economic and financial claims made up of a vast number of pieces of paper and entries in electronic ledgers. Because these claims relate to capital markets, they essentially operate through time and space: when, for example, a German Landesbank buys a US collateralized debt obligation (CDO), it is essentially making a – legal – claim on future US economic output. The interest rate paid by the US issuer of the CDO to its proud owner will, in turn, reflect a combination of reward for consumption forgone, the perceived ‘riskiness’ of the underlying borrowers (to be precise, the danger that the borrowers will not be able to repay the principal in full), and the liquidity of the CDO (in other words, the ease with which it can be converted quickly into cash at little cost).


pages: 460 words: 122,556

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

California Callan, Erin capitalism Carroll, David Cassano, Joseph Cayne, James (Jimmy) CDOs. See collateralized debt obligations (CDOs) Cerenzie, Michael Chase Manhattan China China Investment Corporation Chrysler Citigroup acquisitions by n bailouts of capital raised by CDOs and corporate loans of dissent at Timothy Geithner and Glass-Steagall act repeal and history of mortgage bond insurance of international portfolio of job losses at leadership change at leverage of losses mortgage bubble and New York Federal Reserve and nonregulated subsidiaries of Hank Paulson and risk at annual letters to shareholders of stock price of subprime mortgages and Wachovia and Clinton, Bill Clinton, Hillary CNBC Cohen, H. Rodgin Cohn, Gary collateralized debt obligations (CDOs) AIG and amount invested in Bear Stearns and bond ratings for Citigroup and demand for Federal Reserve and insurance for Lehman Brothers and Merrill Lynch and squared synthetic UBS and yields on commercial banks/banking ascendancy of concentration of financial crisis and mortgage bubble and regulation of risk management by commercial paper commercial properties commissions, real estate Commodity Futures Modernization Act Commodity Futures Trading Commission compensation at AIG Congress and for failed executives Federal Reserve and at Goldman Sachs at Merrill Lynch public opinion on confidence Congress, U.S.

See credit/credit market; finance/financial markets; housing market; stock market Maughan, Deryck Mayo, Michael MBIA MDC Holdings Meltzer, Allan Merkel, Angela Merrill Lynch Bank of America’s negotiations with and acquisition of Bear Stearns and Ben Bernanke and board of capital raised by CDOs and change of leadership at come-to-Jesus moment for compensation at concern over Jamie Dimon and efforts to sell failure to pull back from mortgage-backed securities First Franklin acquired by Goldman Sachs and job losses at JPMorgan Chase and leverage of losses Morgan Stanley and mortgage bubble and Hank Paulson and stock price of Stuyvesant Town sale and Wachovia and Miller, Harvey Minsky, Hyman Mitsubishi UFJ money market crisis Ben Bernanke and Timothy Geithner and Lehman’s bankruptcy and Hank Paulson and Money Store Montag, Peter Moody, John Moody’s AIG and Lehman Brothers and moral hazard Morgan Stanley AIG and as bank holding company capital sought by credit default swaps and Timothy Geithner and government efforts to arrange a merger for hedge funds and history of insurance (credit default swap) premiums of job losses at JPMorgan Chase and leverage Merrill Lynch and Mitsubishi and panic and Hank Paulson and rumors about short selling against stock price of John Thain and Wachovia and mortgage-backed securities BBB rated Bear Stearns and checks on capital level for collapse of market for collateralized debt obligations. See collateralized debt obligations (CDOs) cooling of market for credit rating agencies and example of fall in prices of foreign-held Goldman Sachs and growth of insurance claims on Lehman Brothers and Merrill Lynch and mortgage bubble and payment waterfall prime risk taking and subprime mortgages and swimming pool metaphor for total amount floated in mortgage banking, as race to the bottom mortgage bubble banking regulators and banks’ late stage desperation in bursting of Citigroup and credit and developing disaster, evidence of Federal Reserve’s role in Freddie Mac and Fannie Mae and mass hallucination in Merrill Lynch and mortgage securitization and reasons for ripple effect of Wall Street and Washington Mutual and mortgage lenders.

If an investment bank assembled a package that, in its totality, was too risky, the investors would balk, and the bank would be stuck holding the BBB paper itself. This the bank did not want. Therefore, the presence of discriminating investors served as a check on the entire process. In the early 2000s, this delicate equilibrium was upset by a new, less-discriminating class of investor. These investors were collateralized debt obligations. CDOs were dummy corporations—legal fictions organized for the purpose of buying and selling bonds. Engineered by Wall Street banks and similar operators, the CDO introduced a second level of securitization. Instead of buying mortgages directly, the CDO was a security that invested in other, first-order securities that themselves had acquired mortgages. The CDO thus introduced an additional layer into the process, with the result that the ultimate investor was further removed, and less equipped to scrutinize, the quality of the underlying mortgages.


pages: 261 words: 64,977

Pity the Billionaire: The Unexpected Resurgence of the American Right by Thomas Frank

Affordable Care Act / Obamacare, bank run, big-box store, bonus culture, business cycle, collateralized debt obligation, collective bargaining, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Deng Xiaoping, financial innovation, housing crisis, invisible hand, Kickstarter, money market fund, Naomi Klein, obamacare, payday loans, profit maximization, profit motive, road to serfdom, Robert Bork, Ronald Reagan, shareholder value, strikebreaker, The Chicago School, The Myth of the Rational Market, Thorstein Veblen, too big to fail, union organizing, Washington Consensus, white flight, Works Progress Administration

We didn’t manufacture much anymore, but we could sure dream up awesome ways to securitize debt and slice up the risk in every imaginable situation. One testament to the zesty innovativeness of markets was the industry that had sprung up to supply credit to “subprime” borrowers, selling off the loans thus made to the investment banking industry on Wall Street. Then there were the geniuses at the next few steps of the process, who bundled those subprime mortgages into bonds and those bonds into collateralized debt obligations—and then sold credit default swaps to insure against the possibility of their failure.2 The gospel of deregulation, meanwhile, had become such an irresistible ideological juggernaut that no amount of real-world failure could call it into question. Under the guidance of this doctrine, our leaders removed certain derivatives from regulatory oversight; they watered down requirements that banks balance their risk with safe assets; they exempted credit default swaps from regulation as insurance products; they dialed back the Federal Reserve’s regulatory powers; and they struck down a rule that required hedge-fund advisers to register with the Securities and Exchange Commission.

They wouldn’t encourage it through artificially low interest rates, Fannie and Freddie, tax breaks, or a “Community Reinvestment Act,” but they wouldn’t discourage it either.* Rates would be set by market participants, based on risk, reward, and a clear understanding that making bad loans would result in bankruptcy.† Do you see how awesome that would be, reader? Without regulation, everyone would live in harmony with nature and the intent of the Founders, and nothing like collateralized debt obligations would ever be invented. Bubbles would never happen. Bankers would never build systems that rewarded them for making bad loans—their rational self-interest wouldn’t let them! To get back to Beck: But we’ve done the complete opposite of that. The housing market is manipulated by the government every step of the way. So while some may argue that we need more regulation to prevent those future “excesses,” I would argue that it’s the existing regulations that created those excesses in the first place.

See also free market Atlas Shrugged and crisis of 2008–9 and Depression and Right’s defense of utopian Capitalism (Beck) Capra, Frank Carender, Keli Carnegie, Dale Cato Institute Cheney, Dick Chicago, University of Chicago Board of Trade children’s literature Chile Chomsky, Noam Chrysler Churchill, Winston CIA Citibank Cleaver, Emanuel Clinton, Bill Clinton, Hillary Cloward, Richard CNBC coal miners Code Red rally Codevilla, Angelo collateralized debt obligations colleges and universities Commodity Futures Modernization Act communism Community Reinvestment Act (1977) compromise Conservative Action Project ConservativeHQ (website) Conservative Political Action Conference conservatives. See Right-wing revival construction industry consumer advocates Consumer Product Safety Commission Consumer Product Safety Improvement Act (2008) Continetti, Matthew Contract from America (2009–10) Contract with America (1994) Coolidge, Calvin Coughlin, Father Charles Council of Economic Advisers Cowley, Malcolm CPAC credit-card rules credit default swaps Crimes Against Liberty (Limbaugh) Crist, Don cronyism Culture of Corruption (Malkin) culture wars Daily Worker Daley, Bill Daschle, Tom “death panels” debt-ceiling debate debt securitization Declaration of Independence Dedication and Leadership (Hyde) deficit spending DeLay, Tom DeMint, Jim democracy Democratic Party bailouts and banks and Beck vs.


pages: 206 words: 70,924

The Rise of the Quants: Marschak, Sharpe, Black, Scholes and Merton by Colin Read

"Robert Solow", Albert Einstein, Bayesian statistics, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, discovery of penicillin, discrete time, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, floating exchange rates, full employment, Henri Poincaré, implied volatility, index fund, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Long Term Capital Management, Louis Bachelier, margin call, market clearing, martingale, means of production, moral hazard, Myron Scholes, Paul Samuelson, price stability, principal–agent problem, quantitative trading / quantitative finance, RAND corporation, random walk, risk tolerance, risk/return, Ronald Reagan, shareholder value, Sharpe ratio, short selling, stochastic process, Thales and the olive presses, Thales of Miletus, The Chicago School, the scientific method, too big to fail, transaction costs, tulip mania, Works Progress Administration, yield curve

Finance has not, and cannot, create Conclusions 181 a crystal ball to foresee the future. The world is uncertain because we never know how markets, economies, resources, or institutions will be abused or used in ways that could not have been broadly anticipated. The failure of Long Term Capital Management in 1999 and the credit crisis of 2008 brought about by a freezing-up of the derivatives market in credit default swaps and collateralized debt obligations demonstrates that, while risk can be hedged, it can never be reduced to zero. Notes 1 Introduction 1. John Maynard Keynes, “The General Theory of Employment,” Quarterly Journal of Economics, 51 (1937), 209–23, at p. 214. 3 The Early Years 1. www.newschool.edu/nssr/het/profiles/neisser.htm, date accessed January 23, 2012. 2. A. Cowles, “Can Stock Market Forecasters Forecast?” Econometrica, 1 (1933), 309–24. 5 The Theory 1.

Chicago Board of Trade (CBOT) – a commodity exchange established in 1848 that permitted the trading of financial and commodity contracts. Chicago School – a philosophy of economic and financial thought based on the premise that unfettered markets are the most efficient. Classical model – a microeconomic-based approach to economic decisionmaking that assumes that all actors are rational and maximize their selfinterest, and is driven by the principle that prices adjust to ensure supply is equal to demand. Collateralized debt obligations – investment-grade securities backed by a package of loans, mortgages, bonds, or other debt obligations. 188 Glossary 189 Consumption CAPM – an extension of the CAPM that includes future consumption preferences. Corporate finance – the study of financial decisions made by corporations to maximize shareholder value. Correlation – the statistical relationship between two variables, typically measured by demonstrating that the movement of one variable is associated with movement of the other.

Index Alpha, 67, 73, 110, 121 American options, 100, 101, 116, 123 Arrow, Kenneth, 23 Arrow-Pratt measure of risk aversion, 29 Beta, 66, 67, 69, 72, 73, 110, 111, 112, 121, 152 Binomial model, 122 Black-Scholes equation, 96, 97, 113, 117, 121, 122, 124, 125, 128, 150, 153, 158, 159, 160, 161, 163, 179, 180 Bond, 5, 33, 59, 96, 106, 121, 126, 140, 142, 154, 159, 160, 168, 169, 170, 185 Brownian motion, 32, 105, 113, 120, 155 Calculus of variations, 143 Call, 98, 99, 100, 101, 104, 106, 107, 108, 112, 114, 115, 116, 122, 123, 136, 151, 153, 160, 165, 166, 167, 185, 186 Capital allocation line, 63, 64, 67 Capital Asset Pricing Model (CAPM), 4, 41, 48, 49, 51–3, 57, 60, 61, 65–81, 87, 88, 89, 93, 94, 96, 106, 109–12, 118, 121, 124, 141, 150, 152, 158, 177, 179, 180 Chicago Board Options Exchange (CBOE), 100, 101, 102, 117, 118, 119, 120, 122, 125, 129, 158, 159 Chicago Board of Trade (CBOT), 100, 101, 109, 119, 156 Chicago School, 86, 120, 152, 153 Classical model, 17 Collateralized debt obligation, 181 Consumption, 23 Consumption CAPM, 72 Corporate finance, 32, 76, 81, 106, 127, 143, 144 Correlation, 23, 34, 36, 59, 62, 67, 73, 155 Coupon rate c, 168 Covariance, 23, 32, 34, 58, 59, 60, 62, 65, 66, 74, 93 Cowles Commission, 13, 14, 15, 18, 19, 23, 24, 25, 36, 55, 61, 69, 105, 141 Credit default swaps, 5, 129, 130, 160, 161, 181, 185 Debreu, Gerard, 23 Delta, 123, 124 Derivative, 5, 25, 26, 27, 29, 30, 81, 101, 106, 109, 121, 125, 128, 129, 130, 131, 142, 155, 159, 160, 162, 169, 173, 174, 175, 179, 181, 184 Differential equation, 111, 112, 113, 115, 121, 125, 127, 139, 142, 143, 148, 149, 152, 153, 154, 155, 157, 158, 179 Discount rate, 53, 58, 93, 106, 108, 111, 113 Diversification, 23, 32, 59, 66, 67, 76 Dynamic, 5, 14, 67, 68, 71, 114, 124, 143, 144, 145, 146, 147, 148, 149, 150, 151, 152, 153, 179 Econometric, 14, 19, 36, 39, 61, 78, 79, 141, 144, 150, 173 Efficient market hypothesis, 13, 32, 70, 72, 73, 94, 95, 111, 124 Elliptical distribution of return, 69 Equilibrium, 2, 13, 14, 17, 18, 23, 24, 36, 38, 56, 57, 61, 74, 77, 89, 119, 147, 150, 175, 183, 184 European option, 100, 101, 115, 116, 122 Face value F, 96 First moment, 23, 26, 70, 112, 177 Irving, 1 Friedman, Milton, 1 Full information, 14, 71 Fundamentals analysis, 33, 58, 158 193 194 Index Gamma, 124 Hicks, John, 21, 22 Homogenity, 65 Infinite time horizon, 25 Interest rate, 1, 58, 59, 96, 106, 110, 114, 115, 116, 126, 152, 153, 154, 168, 185 Intertemporal CAPM, 71 Intertemporal choice, 1, 69, 71, 75, 124, 125, 143, 150, 184, 186 Keynes, John Maynard, 1 Kurtosis, 121 Life cycle, 1, 76, 125, 143, 144, 149, 150 Life Cycle Model, 1, 125, 144, 150 Markov process, 116, 120, 126 Markowitz, Harry, 23, 63 Markowitz bullet, 63 Marschak, Jacob, 22, 23, 24 Martingale, 105, 120, 121, 185 Mean, 4, 20, 22, 23, 25, 26, 27, 28, 29, 31, 32, 33, 34, 35, 36, 41, 43, 48, 58, 59, 60, 63, 66, 69, 70, 72, 104, 118, 121, 126, 154, 155, 177, 179, 184 MIT School, 141, 142 Modern Portfolio Theory, 2, 3, 4, 19, 23, 24, 34, 41, 43, 44, 46, 48, 56, 57, 61, 64, 68, 69, 72, 73, 74, 76, 89, 95, 125, 177 Modigliani, Franco, 1 Monte Carlo simulation, 122 Mortgage-backed securities, 5 Naked short, 129 Normal distribution of return, 116, 161 Options pricing theory, 5, 32, 68, 71, 72, 77, 109, 111, 113, 115, 116, 120, 124, 180 Ordinal theory, 22 Ordinary least squares, 70 Perfect market, 71, 154 Personal finance, 76, 146, 175, 179 Price/earnings ratio, 58 Put, 100, 122, 123 Quadratic utility function, 26, 70 Ramsey, Frank Plumpton, 1, 24 Random walk, 13, 32, 103, 104, 105, 113, 161 Rational, 21, 23, 37, 38, 58, 66, 70, 151, 156 Regression, 67, 70, 75 Representative agent, 65, 73, 74, 111, 142, 143 Return, 2, 4, 22, 23, 25, 26, 27, 28, 53, 58, 59, 60, 61, 62, 63, 64, 65, 66–7, 68, 70, 79, 88, 92, 93, 104, 111, 112, 113, 114, 115, 118, 121, 122 Rho, 124 Risk aversion, 29, 31, 61, 107, 117 Risk-free asset, 2, 59, 62, 63, 65, 70, 73 Risk-free rate of return, 66, 67, 111, 112, 113, 114, 124, 153 Risk–reward trade-off, 46, 87 Savage, Leonard Jimmie, 23 Second moment, 4, 23, 26, 27, 28, 34, 43, 59, 69, 70, 105, 112, 177 Securities market line, 2, 140, 156 Security, 32–33, 35, 43–4, 57–8, 66–7, 96 St Petersburg Paradox, 20, 102 Static, 1, 5, 13, 68, 71, 143, 149, 152, 153, 179 Steinhaus, Hugo, 102 Stochastic calculus, 105, 120, 143, 157 Stochastic process, 126 Subjective probability, 24 Systematic risk, 2, 67, 70 Taylor’s series, 25, 27, 28 Theta, 124 Transactions cost, 66, 71, 75, 100, 101, 110 Uncertainties, 2, 20, 36, 53, 101 Uncertainty, 1, 2, 4, 15, 16, 19, 20, 21, 22, 23, 24, 25, 27, 29, 35, 36, Index 195 37, 38, 43, 47, 61, 68, 69, 79, 98, 137, 151, 157 Unsystematic risk, 2, 67 Variance, 4, 22, 23, 24, 25, 26, 27, 28, 29, 31, 32, 33, 34, 35, 36, 41, 43, 48, 57, 58, 59, 60, 61, 62, 63, 64, 65, 66, 67, 69, 70, 72, 93, 104, 111, 112, 121, 154, 177, 179, 184 Vega, 99, 124, 184 Volatility, 30, 32, 33, 59, 96, 113, 122, 123, 124, 126, 158, 160 Von Neumann, John, 22, 23 Warrant, 96, 97, 98, 99, 100, 107, 109, 111, 112, 118, 140, 142, 143, 149, 151, 156, 162, 185, 186 Weiner process, 104, 105, 154


pages: 468 words: 145,998

On the Brink: Inside the Race to Stop the Collapse of the Global Financial System by Henry M. Paulson

asset-backed security, bank run, banking crisis, break the buck, Bretton Woods, buy and hold, 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

Pension funds and other investors could buy securitized products tailored for the cash flow and risk characteristics they wanted. The distribution of the securities beyond U.S. banks to investors around the world acted as a buffer by spreading risks wider than the banking system. But there was a dark side. The market became opaque as structured products grew increasingly complex and difficult to understand even for sophisticated investors. Collateralized debt obligations, or CDOs, were created to carve up mortgages and other debt instruments into increasingly exotic components, or tranches, with a wide variety of payment and risk characteristics. Before long, financial engineers were creating CDOs out of other CDOs—or CDOs-squared. Lacking the ability of traditional lenders to examine the credit quality of the loans underlying these securities, investors relied on rating agencies—which employed statistical analyses rather than detailed studies of individual borrowers—to rate the structured products.

It was the smallest of the big five investment banks, after Goldman Sachs, Morgan Stanley, Merrill Lynch, and Lehman Brothers. And while Bear hadn’t posted the massive losses of some of its rivals, its huge exposure to bonds and mortgages made it vulnerable. Bear had found itself in increasingly difficult straits since the previous summer, when, in one of the first signs of the impending crisis, it had been forced to shut down two hedge funds heavily invested in collateralized debt obligations. For all that, I also knew Bear as a scrappy firm that liked to do things its own way: alone on Wall Street it had refused to help rescue Long-Term Capital Management in 1998. Bear’s people were survivors. They had always seemed to find a way out of trouble. For months, Steel and I had been pushing Bear, and many other investment banks and commercial banks, to raise capital and to improve their liquidity positions.

Jeff was following up on a phone call from the week before when, just after the takeovers of Fannie Mae and Freddie Mac, he’d mentioned that GE was having problems in the commercial paper market. His report had alarmed me then. That market had been in distress since the onset of the credit crisis in August 2007. The worst of that had involved the asset-backed commercial paper market, which supported all those off-balance-sheet special investment vehicles filled with toxic collateralized debt obligations that banks had cooked up. I’d never expected to hear those troubles spreading like this to the corporate world, and certainly not to GE. Commercial paper is essentially an IOU that is priced on the credit rating of the borrower and generally backstopped by a bank line of credit. It’s usually issued for short periods of time—90 days or less. And it’s often bought by money market funds looking for a safe place to get a higher rate of return than they would earn from short-term government bills.


pages: 192 words: 75,440

Getting a Job in Hedge Funds: An Inside Look at How Funds Hire by Adam Zoia, Aaron Finkel

backtesting, barriers to entry, collateralized debt obligation, commodity trading advisor, Credit Default Swap, credit default swaps / collateralized debt obligations, discounted cash flows, family office, fixed income, high net worth, interest rate derivative, interest rate swap, Long Term Capital Management, merger arbitrage, offshore financial centre, random walk, Renaissance Technologies, risk-adjusted returns, rolodex, short selling, side project, statistical arbitrage, stocks for the long run, systematic trading, unpaid internship, value at risk, yield curve, yield management

These funds may also utilize derivatives to leverage returns and to hedge out interest rate and/or market risk. Because they invest in special situations, the performance of these funds is typically not dependent on the direction of the public stock market. Note: This is primarily an equity-based style. Fixed Income Strategies There are many different fixed income funds that invest in various types of debt instruments, including mortgage-backed securities (MBS), collateralized debt obligations (CDOs), collateralized loan obligations (CLOs), convertible bonds, high-yield bonds, municipal bonds, corporate bonds, and different types of global securities. There are diversified funds that may invest in a combination of these securities and also arbitrage funds that seek to profit by exploiting pricing inefficiencies between related fixed income securities while neutralizing exposure to interest rate risk.

c08.indd 100 1/10/08 11:09:05 AM Operations 101 Although pedigree is not as important, funds will pay close attention to undergraduate and graduate school GPAs and SAT scores and want to see excellence in both areas. In addition to academics, hedge funds look for specific product knowledge and will pay up for experience in the more sophisticated products such as derivatives, credit default swaps (CDS), collateralized debt obligations (CDOs), and collateralized loan obligations (CLOs). As with other hedge fund roles, it’s good to know the different hedge fund investment strategies. Hedge funds can be extremely picky when hiring, so whatever you can do to differentiate yourself and show you have additional skills will be helpful. We strongly suggest being very well versed in industry-specific systems. For example, if you are working in trade support or accounting you should get to know Advent/Axys, and if you are working with equities you will want to be proficient in trade support systems such as Eze Castle.

Just when I began the firm was creating an alternative investment group, and, luckily for me, I was placed into it. Right off the bat I got exposure to hedge funds. In fact, my first onsite audit was with a fund that specialized in mortgage-backed securities. Even though I worked like a dog and didn’t have much of a life, I gained a working knowledge of products, including mortgage-backed securities, collateralized debt obligations (CDOs), swaps, repurchase agreements, equities, and bonds. The job also opened my eyes to other opportunities and made me want to work doing investment banking or sales and trading. I wasn’t a big fan of the huge corporate atmosphere of the Big Four firms (they work you to the bone without the bonuses of investment banks), and after a couple of years I began to look at other opportunities.


pages: 270 words: 73,485

Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One by Meghnad Desai

"Robert Solow", 3D printing, bank run, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, correlation coefficient, correlation does not imply causation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, German hyperinflation, Gunnar Myrdal, Home mortgage interest deduction, imperial preference, income inequality, inflation targeting, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, market bubble, market clearing, means of production, Mexican peso crisis / tequila crisis, mortgage debt, Myron Scholes, negative equity, Northern Rock, oil shale / tar sands, oil shock, open economy, Paul Samuelson, price stability, purchasing power parity, pushing on a string, quantitative easing, reserve currency, rising living standards, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, seigniorage, Silicon Valley, Simon Kuznets, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, women in the workforce

Alan Greenspan, as Chairman of the Federal Reserve from 1987 to 2006, had presided over the financial revolution, globalization and the long boom. He believed in free markets and had accepted the theories emanating from the Chicago School of economics. Once the boom collapsed, he recanted. In his testimony to a committee of the US House of Representatives, he explained what happened. The exposition is illuminating: It was the failure to properly price such risky assets [mortgage backed securities and collateral debt obligations] that precipitated the crisis. In recent decades, a vast risk management and pricing system has evolved, combining the best insights of mathematicians and finance experts, supported by major advances in computer and communications technology. A Nobel Prize was awarded for the discovery of the pricing model that underpins much of the advance in derivative markets. This modern risk management paradigm held sway for decades.

There were more forex, bonds and equity markets now for the investors to put their money into. The market economy was globalized in other ways as well. The WTO was established, capital flows to developing economies accelerated and many governments began to borrow on global financial markets. Activities on the financial front exploded as many new stock markets opened up and many new instruments were innovated: credit default swaps (CDS) and collateralized debt obligations (CDO) being lately the most notorious. Much of this was the consequence of the pioneering work of Black and Scholes on options. Hedge funds and many other institutions of what became known as the shadow banking structure also proliferated. Transactions on the forex markets reached a level of trillions of dollars. (The collapse of Long-Term Capital Management, which invested in foreign bonds, was one example of the collateral damage caused by the implosion in global financial markets.)

(i) Butskellism (i) buying on margin (i) Cambridge University, Marshall’s influence (i) capital attracting (i) free movement (i) valuation (i) capital flows, growth of (i) capital markets, liberalization (i) capital migration (i), (ii) capital movement (i) benefits of (i) lifting of restrictions (i) and profit (i) restricted (i) capital–output ratio (i) capitalism as dynamic disequilibrium (i), (ii) Marx/Engels (i) Marxian view (i) Schumpeter’s model (i) capitalists (i), (ii) Carlyle, Thomas (i) cartels (i) Cassel, Gustav (i) Central Bank of Thailand (i) central banks (i), (ii), (iii) century of inflation (i) Chamberlain, Neville (i), (ii) chance events (i) checks, use of (i) Chicago School, research program (i) China (i), (ii), (iii), (iv) citizens, as rational agents (i) Civil War (i) Clark, J. M. (i) Clayton Act (i) Clinton Administration (i) closed economy (i), (ii), (iii), (iv), (v), (vi) Cobb, Charles (i) Cobb-Douglas Production Function (i), (ii) coincidence, vs.causation (i) Cold War (i) collateralized debt obligations (CDO) (i) colonization (i) Combinations (trade unions), as harmful (i) Committee on the Bank of England Charter (i) commodity markets price rises (i) regulation (i) Common Market (i) communications, advances in (i), (ii) companies, collapse of (i) comparative advantage (i) compatibility microeconomics/macroeconomics (i), (ii), (iii) unique static equilibrium/moving data (i) competition and efficiency (i) imperfect (i) theory of (Marshall) (i) computer technology development of (i), (ii); see also technological innovations stock markets (i) confidence, rise and fall (i) conflicting interests (i), (ii) Connally, John (i) consols (i) consumer credit (i) consumption function (i), (ii) contagion (i), (ii) control of money supply (i) convertibility (i) cooperation (i) correlation/coincidence, vs. causation (i) corruption (i) Countrywide Financial (i) Cournot, Antoine Augustin (i) Cowles, Alfred (i) Cowles Foundation (i) creative destruction (i) credit business dependence (i) cheap (i) as driver of investment (i) credit cards (i) credit default swaps (CDS) (i) crises beginnings of (i) developing countries (i) Juglar’s theory (i) Mexican (i) proliferation (i) as recurrent (i), (ii) as regular occurrences (i) ten year pattern (i) unpredictability (i) crisis of 1825 (i) crisis of profitability (i) Crosland, Anthony (i) The Future of Socialism (i) currency, convertibility (i) depreciation (i) pegging (i), (ii) cycles (i) banking system as root (i) combinations of (i) Goodwin (i), (ii) Juglar’s study (i) Keynes on (i) long (i) loss of interest in (i) Marx’s theories (i), (ii) measuring (i) origins (i) random events (i) reproduction by Keynesian models (i) rocking horse analogy (i) short (i) Wicksell’s theory (i) see also Frisch; Kondratieff cycles debit cards (i) Debreu, Gerard (i), (ii) debt crises (i) easy availability (i) levels (i) see also government debt debt-fueled boom (i) debts brokers (i) farmers’ (i) post-World War II (i) purchase of (i) decisions, patterns (i) deficits, endemic (i) deflation (i) deindustrialization (i), (ii) Deism (i) demand, factors in (i) demographics (i) demutualization (i) depreciation (i) advocacy of (i) Ricardo’s theory (i) value of goods (i) deregulation, banking (i) derivatives (i), (ii) Deserted Village, The (Oliver Goldsmith) (i) deutschmark (i) developing countries, Wicksellian boom (i) disequilibrium dynamic (i), (ii), (iii), (iv) stock (i) system, capitalism as (i) tradition (i) displacement effect, technological innovations (i) division of knowledge (i) division of labor (i), (ii) dollar purchasing power (i) as reserve currency (i), (ii) dollar exchange standard (i), (ii) dot.com boom (i) double deficits (i) Douglas, Paul (i), (ii) Dow Jones (i) Duménil, Gerard (i) durable goods (i) Dutch Disease (i) dynamic stochastic general equilibrium (DSGE) models (i), (ii) econometric modeling (i), (ii) Econometric Society (i), (ii) econometrics (i), (ii) economic activity, shift (i) economic analysis, applicability (i) economic cycles (i) Marx/Engels (i) see also Kondratieff cycles economic data, proliferation (i) economic growth, problems of (i) economic policy, activism (i) economic sectors, conflicting interests (i), (ii) economic slump, post-World War I (i) economic stagnation (i) economic theory (i) and individual lives (i) economic trajectories (i) economic vocabulary (i), (ii), (iii) economics background to (i) celebrated (i) changing scope of (i) as dismal science (i) professionalization (i) teaching of (i) “Economics and Knowledge” (Hayek) (i) economies, interconnections (i) economies of scale (i) economists, research methods (i) economy changing nature of (i) equilibrium/disequilibrium (i) visions of (i) efficiency, use of term (i) efficient market hypothesis (EMH) (i), (ii), (iii) Eisenhower, Dwight D.


pages: 840 words: 202,245

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick

accounting loophole / creative accounting, Asian financial crisis, bank run, Bretton Woods, business cycle, capital controls, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, John Meriwether, Kitchen Debate, laissez-faire capitalism, locking in a profit, Long Term Capital Management, market bubble, minimum wage unemployment, MITM: man-in-the-middle, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, new economy, North Sea oil, Northern Rock, oil shock, Paul Samuelson, Philip Mirowski, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Bork, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, shareholder value, short selling, Silicon Valley, Simon Kuznets, technology bubble, Telecommunications Act of 1996, The Chicago School, The Great Moderation, too big to fail, union organizing, V2 rocket, value at risk, Vanguard fund, War on Poverty, Washington Consensus, Y2K, Yom Kippur War

B1. 43 FEW ACCEPTED THE CLAIM: Congressional Oversight Committee, December Oversight Report, Taking Stock: What Has TARP Achieved?, December 9, 2009, http://cop.senate.gov/documents/cop-120909-report.pdf, p. 14. 44 THAT YEAR, THE CDOS PRODUCED: “Collateralized Debt Obligations Face Funding Woes,” New York Times, July 24, 2007, http://www.nytimes.com/2007/07/24/business/ worldbusiness/24iht-mortgage.1.6798554.html. 45 IN A YEAR WHEN: Among other sources, Lowenstein, The End of Wall Street, p. 75. 46 IN 2006, THE NEW YORK TIMES REPORTED: Louise Story, “On Wall Street, Bonuses, Not Profits, Were Real,” New York Times, December 17, 2008, http://www.nytimes.com/2008/12/18/business/18pay.html. 47 BY 2006, THROUGH AGGRESSIVE BORROWING: Tett, Fool’s Gold, pp. 133–36; “Collateralized Debt Obligations Face Funding Woes.” 48 AS THE MARKETS WEAKENED: Louise Story, “On Wall Street,” New York Times, http://www.nytimes.com/2008/12/18/business/18pay.html. 49 WITH WEILL GONE: Gasparino, The Sellout, p. 146. 50 LEVERAGE RATIOS SHOT UP: McDonald and Robinson, A Colossal Failure of Common Sense, p. 287. 51 IN NOVEMBER, HE WAS FORCED OUT: Lowenstein, The End of Wall Street, p. 110. 52 EARLY IN 2008: Tett, Fools’ Gold, p. 210. 53 RESIDENTIAL FORECLOSURES WERE DOUBLING: RealtyTrac, Foreclosure Activity Increases 12 Percent in August (September 12, 2008, www.realtytrac.com/contentmanagement/pressrelease.aspx?

But LTCM’s lenders were mostly caught unaware because the hedge funds were not required to make their loan positions known. In 1999, when arguing against the proposal of the head of the Commodities Futures Trading Commission to regulate financial derivatives, Greenspan claimed that unrestricted derivatives trading would stabilize finance, not disrupt it. He had no idea how dangerous the new mortgage-based collateralized debt obligations were, as we shall see, the principal source of overly risky investment in the 2000s. It never occurred to him that investment banks were now creating loans just like the commercial banks he oversaw, but this shadow banking system was not regulated by the one agency designed to make sure U.S. credit was strong, his own. Writing a letter in support of Keating, apart from the outrageous irresponsibility and suspiciously easy payday, was simply an ideological reflex of his at work.

Greenspan, based on his firm market principles, approved strongly of securitization and most derivative products as a way to spread risk—a view traditional market economists like Summers shared. But even when crisis struck in 2008, it was clear the Federal Reserve economists in Washington and New York did not understand how excessive and risky the borrowing now was. In particular, the relatively new collateralized debt obligations (CDOs), a way of packaging risky mortgages for investors willing to make only low-risk investments, was not understood or even investigated. Greenspan’s ultimately naive and dangerous faith in competitive markets showed itself nowhere as damagingly as in the Fed’s failure to be vigilant about the CDOs. Not only did his interest rate increases fail to dampen the financing, but they encouraged Wall Street to take more risks and mortgage brokers to write more bad loans because their profit margins had narrowed.


pages: 365 words: 88,125

23 Things They Don't Tell You About Capitalism by Ha-Joon Chang

"Robert Solow", affirmative action, Asian financial crisis, bank run, banking crisis, basic income, Berlin Wall, Bernie Madoff, borderless world, Carmen Reinhart, central bank independence, collateralized debt obligation, colonial rule, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, deskilling, ending welfare as we know it, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, full employment, German hyperinflation, Gini coefficient, hiring and firing, Hyman Minsky, income inequality, income per capita, invisible hand, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, light touch regulation, Long Term Capital Management, low skilled workers, manufacturing employment, market fundamentalism, means of production, Mexican peso crisis / tequila crisis, microcredit, Myron Scholes, North Sea oil, offshore financial centre, old-boy network, post-industrial society, price stability, profit maximization, profit motive, purchasing power parity, rent control, shareholder value, short selling, Skype, structural adjustment programs, the market place, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, Toyota Production System, trade liberalization, trickle-down economics, women in the workforce, working poor, zero-sum game

Index active economic citizenship xvi, xvii Administrative Behaviour (Simon) 173–4 Africa see Sub-Saharan Africa AIG 172–3 Air France 131 AOL 132–3 apartheid 214–16 Argentina education and growth 181 growth 73 hyperinflation 53–4 Austria geography 121 government direction 132 protectionism 70 balance of payments 97–100, 101 Baldursson, Fridrik 235 Bangladesh entrepreneurship 159–60 and microfinance 161–2, 163, 164 Bank of England 252 (second) Bank of the USA 68 Bank for International Settlements (BIS) 262 bankruptcy law 227–8 Barad, Jill 154 Bard College 172 Bateman, Milford 162 Baugur 233 Baumol, William 250 Bebchuk, Lucian 154 behaviouralist school 173–4 Belgium ethnic division 122 income inequality 144, 146 manufacturing 70, 91 R&D funding 206 standard of living 109 Benin, entrepreneurship 159 Bennett, Alan 214 Besley, Tim 246 big government 221–2, 260–61 and growth 228–30 see also government direction; industrial policy BIS (Bank for International Settlements) 262 Black, Eugene 126 Blair, Tony 82, 143, 179 borderless world 39–40 bounded rationality theory 168, 170, 173–7, 250, 254 Brazilian inflation 55 Britain industrial dominance/decline 89–91 protectionism 69–70 British Academy 246–7 British Airways 131 brownfield investment 84 Brunei 258 Buffet, Warren 30, 239 Bukharin, Nikolai 139 Bunning, Senator Jim 8 Burkina Faso (formerly Upper Volta) 121, 200 Bush, George W. 8, 158, 159, 174 Bush Sr, George 207 business sector see corporate sector Cameroon 116 capital mobility 59–60 nationality 74–5, 76–7 capitalism Golden Age of 142, 147, 243 models 253–4 capitalists, vs. workers 140–42 captains of industry 16 Carnegie, Andrew 15 Case, Steve 132–3 Cassano, Joe 172–3 CDOs (collateralized debt obligations) 238 CDSs (credit default swaps) 238 CEO compensation see executive pay, in US Cerberus 77–8 Chavez, Hugo 68 chess, complexity of 175–6 child-labour regulation 2–3, 197 China business regulation 196 communes 216 economic officials 244 industrial predominance 89, 91, 93, 96 as planned economy 203–4 PPP income 107 protectionism and growth 63–4, 65 Chocolate mobile phone 129 Chrysler 77–8, 191 Chung, Ju-Yung 129 Churchill, Winston 253 climate factors 120–21 Clinton, Bill 143 cognitive psychology 173–4 collateralized debt obligations (CDOs) 238 collective entrepreneurship 165 communist system 200–204 Concorde project 130–31 conditions of trade 5 Confucianism 212–13 Congo (Democratic Republic) 116, 121 consumption smoothing 163 cooperatives 166 corporate sector importance 190–91 planning in 207–9 regulation effect 196–8 suspicion of 192–3 see also regulation; transnational corporations Cotton Factories Regulation Act 1819 2 credit default swaps (CDSs) 238 Crotty, Jim 236–8 culture issues 123, 212–13 Daimler-Benz 77–8 Darling, Alistair 172 de-industrialization 91 balance of payments 97–100, 101 causes 91–6 concerns 96–9 deflation, Japan 54 deliberation councils 134 Denmark cooperatives 166 protectionism 69 standard of living 104, 106, 232–3 deregulation see under regulation derivatives 239 Detroit car-makers 191–2 developing countries entrepreneurship and poverty 158–60 and free market policies 62–3, 71–3, 118–19, 261–2 policy space 262–3 digital divide 39 dishwashers 34 distribution of income see downward redistribution of income; income irregularity; upward redistribution of income domestic service 32–3 double-dip recession xiii downward redistribution of income 142–3, 146–7 Dubai 235 Duménil, Gérard 236 East Asia economic officials 249–50 educational achievements 180–81 ethnic divisions 122–3 government direction 131–2 growth 42, 56, 243–4 industrial policy 125–36, 205 École Nationale d’Administration (ENA) 133 economic crises 247 Economic Policy Institute (EPI) 144, 150 economists alternative schools 248–51 as bureaucrats 242–3 collective imagination 247 and economic growth 243–5 role in economic crises 247–8 Ecuador 73 Edgerton, David 37 Edison, Thomas 15, 165, 166 education and enterprise 188–9 higher education effect 185–8 importance 178–9 knowledge economy 183–5 mechanization effect 184–5 outcome equality 217–18 and productivity 179–81 relevance 182–3 Elizabeth II, Queen 245–7 ENA (École Nationale d’Administration) 133 enlightened self-interest 255–6 entrepreneurship, and poverty 157–8 and collective institutions 165–7 as developing country feature 158–60 finance see microfinance environmental regulations 3 EPI (Economic Policy Institute) 144, 150 equality of opportunity 210–11, 256–7 and equality of outcome 217–20, 257 and markets 213–15 socio-economic environment 215–17 equality of outcome 217–20 ethnic divisions 122–3 executive pay and non-market forces 153–6 international comparisons 152–3 relative to workers’ pay 149–53, 257 US 148–9 fair trade, vs. free trade 6–7 Fannie Mae 8 Far Eastern Economic Review 196 Federal Reserve Board (US) 171, 172, 246 female occupational structure 35–6 Fiat 78 financial crisis (2008) xiii, 155–6, 171–2, 233–4, 254 financial derivatives 239, 254–5 financial markets deregulation 234–8, 259–60 effects 239–41 efficiency 231–2, 240–41 sector growth 237–9 Finland government direction 133 income inequality 144 industrial production 100 protectionism 69, 70 R&D funding 206 welfare state and growth 229 Fischer, Stanley 54 Ford cars 191, 237 Ford, Henry 15, 200 foreign direct investment (FDI) 83–5 France and entrepreneurship 158 financial deregulation 236 government direction 132, 133–4, 135 indicative planning 204–5 protectionism 70 Frank, Robert H 151 Franklin, Benjamin 65–6, 67 Freddie Mac 8 free market boundaries 8–10 and developing countries 62–3, 71–3, 118–19, 261–2 labour see under labour nineteenth-century rhetoric 140–43 as political definition 1–2 rationale xiii–xiv, 169–70 results xiv–xv, xvi–xvii system redesign 252, 263 see also markets; neo-liberalism free trade, vs. fair trade 6–7 Fried, Jesse 154 Friedman, Milton 1, 169, 214 Galbraith, John Kenneth 16, 245 Garicano, Luis 245 Gates, Bill 165, 166, 200 General Electric (GE) 17, 45, 86, 237 General Motors Acceptance Corporation (GMAC) 194, 237 General Motors (GM) 20, 22, 45, 80, 86, 154, 190–98 decline 193–6 financialization 237 pre-eminence 191–2 geographical factors 121 Germany blitzkrieg mobility 191 CEO remuneration 152–3 cooperatives 166 emigration 69 hyperinflation 52–4 industrial policy 205 manufacturing 90 R&D funding 206 welfare state and growth 228–9 Ghana, entrepreneurship 159 Ghosn, Carlos 75–6, 78 globalization of management 75–6 and technological change 40 GM see General Motors GMAC (General Motors Acceptance Corporation) 194, 237 Golden Age of Capitalism 142, 147, 243 Goldilocks economy 246 Goodwin, Sir Fred 156 Gosplan 145 government direction balance of results 134–6 and business information 132–4 failure examples 130–31 and market discipline 44–5, 129–30, 134 share ownership 21 success examples 125–6, 131–4 see also big government; industrial policy Grameen Bank 161–4 Grant, Ulysses 67 Great Depression 1929 24, 192, 236, 249, 252 greenfield investment 84 Greenspan, Alan 172, 246 Hamilton, Alexander 66–7, 69 Hayami, Masaru 54 Hennessy, Peter 246–7 higher education 185–8 Hirschman, Albert 249 History Boys (Bennett) 214 Hitler, Adolf 54 home country bias 78–82, 83, 86–7 Honda 135 Hong Kong 71 household appliances 34–6, 37 HSBC 172 Human relations school 47 Hungary, hyperinflation 53–4 hyperinflation 52–4 see also inflation Hyundai Group 129, 244 Iceland financial crisis 232–4, 235 foreign debt 234 standard of living 104–5 ICT (Information and Communication Technology) 39 ILO (International Labour Organization) 32, 143–4 IMF see International Monetary Fund immigration control 5, 23, 26–8, 30 income per capita income 104–11 see also downward redistribution of income; income inequality; upward redistribution of income income inequality 18, 72–3, 102, 104–5, 108, 110, 143–5, 147, 247–8, 253, 262 India 99, 121 indicative planning 205 indicative planning 204–6 Indonesia 234 industrial policy 84, 125–36, 199, 205, 242, 259, 261 see also government direction Industrial Revolution 70, 90, 243 infant industry argument 66–8, 69–70, 71–2 inflation control 51–2 and growth 54–6, 60–61 hyperinflation 52–4 and stability 56–61 Information and Communication Technology (ICT) 39 institutional quality 29–30, 112–13, 115, 117, 123–4, 165–7 interest rate control 5–6 international dollar 106–7 International Labour Organization (ILO) 32, 143–4 International Monetary Fund (IMF) 54–5, 57, 66, 72, 244, 262 SAPs 118 International Year of Microcredit 162 internet revolution 31–2 impact 36–7, 38, 39 and rationality 174 investment brownfield/greenfield 84 foreign direct investment 83–5 share 18–19 invisible reward/sanction mechanisms 48–50 Ireland financial crisis 234–5 Italy cooperatives 166 emigrants to US 103 Jackson, Andrew 68 Japan business regulation 196 CEO remuneration 152–3 deflation 54 deliberation councils 134 government direction 133–4, 135, 259 indicative planning 205 industrial policy 131, 135, 242–5 industrial production 100 production system 47, 167 protectionism 62, 70 R&D funding 206 Jefferson, Thomas 67–8, 239 job security/insecurity 20, 58–61, 108–9, 111, 225–8, 247, 253, 259 Journal of Political Economy 34 Kaldor, Nicolas 249 Keynes, John Maynard 249 Kindleberger, Charles 249 knowledge economy 183–5 Kobe Steel 42–3, 46 Kong Tze (Confucius) 212 Korea traditional 211–13 see also North Korea; South Korea Koufax, Sandy 172 Kuwait 258 labour free market rewards 23–30 job security 58–60 in manufacturing 91–2 market flexibility 52 regulation 2–3 relative price 33, 34 Latin America 32–3, 55, 73, 112, 122, 140, 196–7, 211, 245, 262 Latvia 235 Lazonick, William 20 Lenin, Vladimir 138 Levin, Jerry 133 Lévy, Dominique 236 LG Group 129, 134 liberals neo-liberalism xv, 60, 73 nineteenth-century 140–42 limited liability 12–15, 21, 228, 239, 257 Lincoln, Abraham 37, 67 List, Friedrich 249 London School of Economics 245–6 LTCM (Long-Term Capital Management) 170–71 Luxemburg, standard of living 102, 104–5, 107, 109, 232–3, 258 macro-economic stability 51–61, 240, 259, 261 Madoff, Bernie 172 Malthus, Thomas 141 managerial capitalism 14–17 Mandelson, Lord (Peter) 82–3, 87 manufacturing industry comparative dynamism 96 employment changes 91–2 importance 88–101, 257–9 productivity rise 91–6, 184–5 relative prices 94–5 statistical changes 92–3 Mao Zedong 215–16 Marchionne, Sergio 78 markets and bounded rationality theory 168, 173–6, 177, 254 conditions of trade 5 and equality of opportunity 213–15 failure theories 250 financial see financial markets government direction 44–5, 125–36 government regulation 4–6, 168–9, 176–7 participation restrictions 4 price regulations 5–6 and self-interest 44–5 see also free market Marx, Karl 14, 198, 201, 208, 249 Marxism 80, 185, 201–3 mathematics 180, 182–3 MBSs (mortgage-backed securities) 238 medicine’s popularity 222–4 Merriwether, John 171 Merton, Robert 170–71 Michelin 75–6 microfinance critique 162 and development 160–62 Microsoft 135 Minsky, Hyman 249 Monaco 258 morality, as optical illusion 48–50 Morduch, Jonathan 162 mortgage-backed securities (MBSs) 238 motivation complexity 46–7 Mugabe, Robert 54 NAFTA (North American Free Trade Agreement) 67 National Health Service (UK) 261 nationality of capital 74–87 natural resources 69, 115–16, 119–20, 121–2 neo-liberalism xv, 60, 73, 145 neo-classical school 250 see also free market Nestlé 76–7, 79 Netherlands CEO remuneration 152–3 cooperatives 166 intellectual property rights 71 protectionism 71 welfare state and growth 228–9 New Public Management School 45 New York Times 37, 151 New York University 172 Nissan 75–6, 84, 135, 214 Nobel Peace Prize 162 Prize in economics 170, 171–2, 173, 208, 246 Nobel, Alfred 170 Nokia 135, 259–60 North American Free Trade Agreement (NAFTA) 67 North Korea 211 Norway government direction 132, 133, 205 standard of living 104 welfare state and growth 222, 229 Obama, Barack 149 OECD (Organization for Economic Cooperation and Development) 57, 159, 229 Oh, Won-Chul 244 Ohmae, Kenichi 39 Opel 191 Opium War 9 opportunities see equality of opportunity Organization for Economic Cooperation and Development (OECD) 57, 159, 229 organizational economy 208–9 outcomes equality 217–20 Palin, Sarah 113 Palma, Gabriel 237 Park, Chung-Hee 129 Park, Tae-Joon 127–8 participation restrictions 4 Perot, Ross 67 Peru 219 PGAM (Platinum Grove Asset Management) 171 Philippines, education and growth 180, 181 Phoenix Venture Holdings 86 Pigou, Arthur 250 Pinochet, Augusto 245 PISA (Program for International Student Assessment) 180 Plain English Campaign 175 planned economies communist system 200–204 indicative systems 204–6 survival 199–200, 208–9 Platinum Grove Asset Management (PGAM) 171 Pohang Iron and Steel Company (POSCO) 127–8 pollution 3, 9, 169 poor individuals 28–30, 140–42, 216–18 Portes, Richard 235 Portman, Natalie 162 POSCO (Pohang Iron and Steel Company) 127–8 post-industrial society 39, 88–9, 91–2, 96, 98, 101, 257–8 Poverty Reduction Strategy Papers (PRSPs) 118 see also SAPs PPP (purchasing power parity) 106–9 Preobrazhensky, Yevgeni 138–40, 141 price regulations 5–6 stability 51–61 Pritchett, Lant 181 private equity funds 85–6, 87 professional managers 14–22, 44–5, 166, 200 Program for International Student Assessment (PISA) 180 protectionism and growth 62–3, 72–3 infant industry argument 66–8, 69–70, 71–2 positive examples 63–5, 69 PRSPs see Poverty Reduction Strategy Papers purchasing power parity (PPP) 106–9 R&D see research and development (R&D) Rai, Aishwarya 162 Rania, Queen 162 rationality see bounded rationality theory RBS (Royal Bank of Scotland) 156 real demand effect 94 regulation business/corporate 196–8 child labour 2–3, 197 deregulation 234–8, 259–60 legitimacy 4–6 markets 4–6, 168–9, 176–7 price 5–6 Reinhart, Carmen 57, 59 Renault 21, 75–6 Report on the Subject of Manufactures (Hamilton) 66 The Rescuers (Disney animation) 113–14 research and development (R&D) 78–9, 87, 132, 166 funding 206 reward/sanction mechanisms 48–50 Ricardo, David 141 rich individuals 28–30, 140–42 river transport 121 Rogoff, Kenneth 57, 59 Roodman, David 162 Roosevelt, Franklin 191 Rover 86 Royal Bank of Scotland (RBS) 156 Rubinow, I.M. 34 Ruhr occupation 52 Rumsfeld, Donald 174–5 Rwanda 123 Santander 172 SAPs (Structural Adjustment Programs) 118, 124 Sarkozy, Nicolas 90 Scholes, Myron 170–71 Schumpeter, Joseph 16, 165–7, 249 Second World War planning 204 (second) Bank of the USA 68 self-interest 41–2, 45 critique 42–3 enlightened 255–6 invisible reward/sanction mechanisms 48–50 and market discipline 44–5 and motivation complexity 46–7 Sen, Amartya 250 Senegal 118 service industries 92–3 balance of payments 97–100, 101 comparative dynamism 94–5, 96–7 knowledge-based 98, 99 Seychelles 100 share buybacks 19–20 shareholder value maximisation 17–22 shareholders government 21 ownership of companies 11 short-term interests 11–12, 19–20 shipbuilders 219 Simon, Herbert 173–6, 208–9, 250 Singapore government direction 133 industrial production 100 PPP income 107 protectionism 70 SOEs 205 Sloan Jr, Alfred 191–2 Smith, Adam 13, 14, 15, 41, 43, 169, 239 social dumping 67 social mobility 103–4, 220 socio-economic environment 215–17 SOEs (state-owned enterprises) 127, 132, 133, 205–6 South Africa 55, 121 and apartheid 213–16 South Korea bank loans 81 economic officials 244 education and growth 181 ethnic divisions 123 financial drive 235 foreign debt 234 government direction 126–9, 133–4, 135, 136 indicative planning 205 industrial policy 125–36, 205, 242–5 inflation 55, 56 job insecurity effect 222–4, 226, 227 post-war 212–14 protectionism 62, 69, 70 R&D funding 206 regulation 196–7 Soviet Union 200–204 Spain 122 Spielberg, Steven 172 Sri Lanka 121 Stalin, Josef 139–40, 145 standard of living comparisons 105–7 US 102–11 Stanford, Alan 172 state owned enterprises (SOEs) 127, 132, 133, 205–6 steel mill subsidies 126–8 workers 219 Stiglitz, Joseph 250 Structural Adjustment Programs (SAPs) 118, 124 Sub-Saharan Africa 73, 112–24 culture issues 123 education and growth 181 ethnic divisions 122–3 free market policies 118–19, 262 geographical factors 121 growth rates 73, 112, 116–19 institutional quality 123 natural resources 119–20, 121–2 structural conditions 114–16, 119–24 underdevelopment 112–13, 124 Sutton, Willie 52 Sweden 15, 21–2 CEO remuneration 152 income inequality 144 industrial policy 205 industrial production 100 per capita income 104 R&D funding 206 welfare state and growth 229 Switzerland CEO remuneration 152–3 ethnic divisions 122 geography 121 higher education 185–6, 188 intellectual property rights 71 manufacturing 100, 258 protectionism 69, 71 standard of living 104–6, 232–3 Taiwan business regulation 196 economic officials 244 education and growth 180 government direction 136 indicative planning 205 protectionism 69, 70 Tanzania 116 TARP (Troubled Asset Relief Program) 8 tax havens 258 technological revolution 31–2, 38–40 telegraph 37–8 Telenor 164 Thatcher, Margaret 50, 225–6, 261 Time-Warner group 132–3 TIMSS (Trends in International Mathematics and Science Study) 180, 183 Toledo, Alejandro 219 Toyota and apartheid 214 production system 47 public money bail-out 80 trade restrictions 4 transnational corporations historical debts 80 home country bias 78–82, 83, 86–7 nationality of capital 74–5, 76–7 production movement 79, 81–2 see also corporate sector Trends in International Mathematics and Science Study (TIMSS) 180, 183 trickle-down economics 137–8 and upward distribution of income 144–7 Trotsky, Leon 138 Troubled Asset Relief Program (TARP) 8 2008 financial crisis xiii, 144, 155–6, 171–2, 197–8, 233–4, 236, , 238–9, 245–7, 249, 254 Uganda 115–16 uncertainty 174–5 unemployment 218–19 United Kingdom CEO remuneration 153, 155–6 financial deregulation 235–6, 237 NHS 261 shipbuilders 219 see also Britain United Nations 162 United States economic model 104 Federal Reserve Board 171, 172, 246 financial deregulation 235–8 immigrant expectations 103–4 income inequality 144 inequalities 107–11 protectionism and growth 64–8, 69 R&D funding 206 standard of living 102–11 steel workers 219 welfare state and growth 228–30 United States Agency for International Development (USAID) 136 university education effect 185–8 Upper Volta (now Burkina Faso) 200 upward redistribution of income 143–4 and trickle-down economics 144–7 Uruguay growth 73 income inequality 144 USAID (United States Agency for International Development) 136 vacuum cleaners 34 Venezuela 144 Versailles Treaty 52 Vietnam 203–4 Volkswagen government share ownership 21 public money bail-out 80 wage gaps political determination 23–8 and protectionism 23–6, 67 wage legislation 5 Wagoner, Rick 45 Wall Street Journal 68, 83 Walpole, Robert 69–70 washing machines 31–2, 34–6 Washington, George 65, 66–7 Welch, Jack 17, 22, 45 welfare economics 250 welfare states 59, 110–43, 146–7, 215, 220, 221–30 and growth 228–30 Wilson, Charlie 192, 193 Windows Vista system 135 woollen manufacturing industry 70 work to rule 46–7 working hours 2, 7, 109–10 World Bank and free market 262 and free trade 72 and POSCO 126–8 government intervention 42, 44, 66 macro-economic stability 56 SAPs 118 WTO (World Trade Organization) 66, 262 Yes, Minister/Prime Minister (comedy series) 44 Yunus, Muhammad 161–2 Zimbabwe, hyperinflation 53–4

The creation of financial derivatives in the housing market, which was one of the main causes of the 2008 crisis, illustrates this point very well. In the old days, when someone borrowed money from a bank and bought a house, the lending bank used to own the resulting financial product (mortgage) and that was that. However, financial innovations created mortgage-backed securities (MBSs), which bundle together up to several thousand mortgages. In turn, these MBSs, sometimes as many as 150 of them, were packed into a collateralized debt obligation (CDO). Then CDOs-squared were created by using other CDOs as collateral. And then CDOs-cubed were created by combining CDOs and CDOs-squared. Even higher-powered CDOs were created. Credit default swaps (CDSs) were created to protect you from default on the CDOs. And there are many more financial derivatives that make up the alphabet soup that is modern finance. By now even I am getting confused (and, as it turns out, so were the people dealing with them), but the point is that the same underlying assets (that is, the houses that were in the original mortgages) and economic activities (the income-earning activities of those mortgage-holders) were being used again and again to ‘derive’ new assets.


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Finance and the Good Society by Robert J. Shiller

Alvin Roth, bank run, banking crisis, barriers to entry, Bernie Madoff, buy and hold, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, cognitive dissonance, collateralized debt obligation, collective bargaining, computer age, corporate governance, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Donald Trump, Edward Glaeser, eurozone crisis, experimental economics, financial innovation, financial thriller, fixed income, full employment, fundamental attribution error, George Akerlof, income inequality, information asymmetry, invisible hand, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, land reform, loss aversion, Louis Bachelier, Mahatma Gandhi, Mark Zuckerberg, market bubble, market design, means of production, microcredit, moral hazard, mortgage debt, Myron Scholes, Nelson Mandela, Occupy movement, passive investing, Ponzi scheme, prediction markets, profit maximization, quantitative easing, random walk, regulatory arbitrage, Richard Thaler, Right to Buy, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, self-driving car, shareholder value, Sharpe ratio, short selling, Simon Kuznets, Skype, Steven Pinker, telemarketer, Thales and the olive presses, Thales of Miletus, The Market for Lemons, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, Vanguard fund, young professional, zero-sum game, Zipcar

Mortgage Securitization The next step in the mortgage lending process, as we have seen, is that the mortgage originators sell their individual mortgages to a mortgage securitizer so that they can be bundled into a form that will allow them to be placed in investor portfolios. At this point there has often been another step in the process. The RMBSs will in turn be placed into a trust to allow a set of collateralized debt obligations (CDOs) to be issued based on the mortgage pool. The CDOs are divided up into pieces known as tranches, according to the perceived repayment ability of the holders of the underlying mortgages; in case of default on some of those mortgages, the senior tranche is paid rst, followed by the second tranche, the third tranche, and so on. The various tranches, with their di erent levels of risk and accordingly varying pricing, are designed to appeal to di erent kinds of investors.

See also financial capitalism Caplin, Andrew, 56 careers: as calling, 141–42; in finance, xiv, 11, 141–42, 159, 225; livelihood insurance, 67; personalities associated with, 135, 141; philanthropic motives, 125; skills needed, 10–11 Caribbean Catastrophe Risk Insurance Facility, 66 Carnegie, Andrew, 125–26, 164, 199 Carter, Franklin, 105 casinos, 160–61, 168. See also gambling caste systems, 232–33 Castor, Belmiro V. J., 83 Castro, Fidel, 190 Castro, Raúl, 190 catastrophe stories, 180 CDOs. See collateralized debt obligations celebrities, 188 Center for Research in Security Prices (CRSP), 169–70 central banks: economic forecasting errors, 113–14; future of, 118; monetary policy, 112–13, 117–18; roles, 112–13, 114. See also Bank of England; Federal Reserve centrally planned economies, 3, 181–83, 210–11 Central Provident Fund, Singapore, 214 CEOs. See chief executive officers Cha, Laura, 98–99 charitable contributions.

See nonprofit organizations; philanthropy Cheung, Meaghan, 96, 98 Chevalier, Judith, 31 Chicago Board Options Exchange, 79 Chicago Mercantile Exchange (CME), 62 chief executive officers (CEOs): accountants and, 101; charismatic, 25; founding, 20; reward systems, 20–26; risks taken, 23; roles and responsibilities, 19, 20, 100, 101, 133; succession, 19–20 chief financial officers, 100, 101 Chile, unidad de fomento, 147 China: Communist Party, 5; credit card debt, 154; economic policies, 3; elites, 233; Great Leap Forward, 182; home-ownership, 213; illegal emigration, 174; lawyers, 83; mortgages, 213; savings rates, 153–54; wealthy, 126 China Securities Regulatory Commission, 98–99 CHMC. See Canada Housing and Mortgage Corporation Christie’s, 136–37 Chubais, Anatoly, 3 Čihák, Martin, 114 class differences. See inequality; wealth climate exchanges, 70–71 CME. See Chicago Mercantile Exchange CME Group, 61 cognitive dissonance, 159, 162–63, 181, 191 Cohen, Jon, 59 collateral, 239 collateralized debt obligations (CDOs), 52, 54 commodity forward contracts, 75 commodity futures, 4, 61, 75, 246n6 (Chapter 9) Commodity Futures Trading Commission, 60 communication, complex, 10, 11, 231 communism, 4–5, 9, 25–26, 129, 181–83, 210–11 communities: effects of war, 183; imagined, 198, 228; national, 197–98; philanthropy and, 197–98, 205 community development financial institutions, 51 compensation. See executive compensation; rewards competition law, 217 Conant, Charles A., 168–69, 177 concentration limits, 217, 254n17 conflict management: by animals, 227; finance and, 228–29, 238, 239 Congress.


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Advanced Stochastic Models, Risk Assessment, and Portfolio Optimization: The Ideal Risk, Uncertainty, and Performance Measures by Frank J. Fabozzi

algorithmic trading, Benoit Mandelbrot, capital asset pricing model, collateralized debt obligation, correlation coefficient, distributed generation, diversified portfolio, fixed income, index fund, Louis Bachelier, Myron Scholes, p-value, quantitative trading / quantitative finance, random walk, risk-adjusted returns, short selling, stochastic volatility, Thomas Bayes, transaction costs, value at risk

Kolm Advanced Bond Portfolio Management: Best Practices in Modeling and Strategies edited by Frank J. Fabozzi, Lionel Martellini, and Philippe Priaulet Analysis of Financial Statements, Second Edition by Pamela P. Peterson and Frank J. Fabozzi Collateralized Debt Obligations: Structures and Analysis, Second Edition by Douglas J. Lucas, Laurie S. Goodman, and Frank J. Fabozzi Handbook of Alternative Assets, Second Edition by Mark J. P. Anson Introduction to Structured Finance by Frank J. Fabozzi, Henry A. Davis, and Moorad Choudhry Financial Econometrics by Svetlozar T. Rachev, Stefan Mittnik, Frank J. Fabozzi, Sergio M. Focardi, and Teo Jasic Developments in Collateralized Debt Obligations: New Products and Insights by Douglas J. Lucas, Laurie S. Goodman, Frank J. Fabozzi, and Rebecca J. Manning Robust Portfolio Optimization and Management by Frank J. Fabozzi, Peter N.

Gastineau Professional Perspectives on Fixed Income Portfolio Management, Volume 3 edited by Frank J. Fabozzi Investing in Emerging Fixed Income Markets edited by Frank J. Fabozzi and Efstathia Pilarinu Handbook of Alternative Assets by Mark J. P. Anson The Global Money Markets by Frank J. Fabozzi, Steven V. Mann, and Moorad Choudhry The Handbook of Financial Instruments edited by Frank J. Fabozzi Collateralized Debt Obligations: Structures and Analysis by Laurie S. Goodman and Frank J. Fabozzi Interest Rate, Term Structure, and Valuation Modeling edited by Frank J. Fabozzi Investment Performance Measurement by Bruce J. Feibel The Handbook of Equity Style Management edited by T. Daniel Coggin and Frank J. Fabozzi The Theory and Practice of Investment Management edited by Frank J. Fabozzi and Harry M. Markowitz Foundations of Economic Value Added, Second Edition by James L.

So, according to equation (13.3), the mean is computed as which is exactly 1/ λ as we know already from our coverage of the exponential distribution in Chapter 11.137 So, on average, we have to wait one hundreds of one year, or roughly 3.5 days, between the arrival of two successive claims. The time between successive defaults in a portfolio of bonds is also often modeled as an exponential random variable. The parameter λ is interpreted as the default intensity, that is, the marginal probability of default within a vanishingly small period of time. This procedure provides an approach in credit risk management to model prices of structured credit portfolios called collateralized debt obligations. Mean of the Normal Distribution Let’s compute the expected value of a stock price at time t = 1. From the perspective of time t = 0, the stock price at time t = 1 is given by a function of the random return r1 and the initial stock price S0 according toS1 = S0 ⋅ Moreover, the return may be given as a normal random variable with mean µ and variance σ2, that is, r1 ~ N(0,02).


pages: 293 words: 88,490

The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction by Richard Bookstaber

"Robert Solow", asset allocation, bank run, bitcoin, business cycle, butterfly effect, buy and hold, capital asset pricing model, cellular automata, collateralized debt obligation, conceptual framework, constrained optimization, Craig Reynolds: boids flock, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, dark matter, disintermediation, Edward Lorenz: Chaos theory, epigenetics, feminist movement, financial innovation, fixed income, Flash crash, Henri Poincaré, information asymmetry, invisible hand, Isaac Newton, John Conway, John Meriwether, John von Neumann, Joseph Schumpeter, Long Term Capital Management, margin call, market clearing, market microstructure, money market fund, Paul Samuelson, Pierre-Simon Laplace, Piper Alpha, Ponzi scheme, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, Richard Feynman, risk/return, Saturday Night Live, self-driving car, sovereign wealth fund, the map is not the territory, The Predators' Ball, the scientific method, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, tulip mania, Turing machine, Turing test, yield curve

Treasury secretary Henry Paulson, assuring a House Appropriations subcommittee that “from the standpoint of the overall economy, my bottom line is we’re watching it closely but it appears to be contained.” Less than three months later, this containment ruptured when two Bear Stearns hedge funds that had held a portfolio of more than twenty billion dollars, most of it in securities backed by subprime mortgages, failed, marking a course that blew through one financial market after another over the following six months—the broader mortgage markets, including collateralized debt obligations and credit default swaps; money markets, including the short-term financing of the repo (repurchase agreement) and interbank markets; and markets that seemed to be clever little wrinkles but turned out to have serious vulnerabilities, such as asset-backed commercial paper and auction-rate securities. In early 2008, as the market turmoil raged, Bernanke gave his semiannual testimony before the Senate Banking Committee.

In war, the key to victory is creating both complexity through the confusion sown by quick changes and the tight coupling that prevents successful adjustments to those changes. The objective is to move to unanticipated new environments, thereby creating endogenous uncertainty. In finance, we have seen this through the arms race of leapfrogging others in trading speed in high-frequency trading, and in adding the fog of complexity to the environment through derivatives. In the 2008 meltdown, that complexity could arrive in the form of things like synthetic collateralized debt obligations—derivatives based on derivatives. If we are going to use the analogy of war in economics and finance, the battlefield where Boyd’s dictum most applies is the realm of information. One tactic in this battlefield is to create informational asymmetries. If the market is becoming efficient, if information is immediately accessible to everyone at the same time, then either create new private information or else speed up your access to the public information.

To see this, look at the structured financial products coming out of a trading desk in the way petroleum products come out of the distillation tower in a refinery. There, crude oil comes in, and is separated or “cracked” into various grades of products, from heavy heating oil to light naphtha. The raw material for the structured products at the heart of the 2008 crisis was mortgage-backed securities (MBSs), and the distilled products are various grades or tranches of collateralized debt obligations (CDOs), where the grade is determined by the risk of default. Just as any product coming out of the distillation process depends on the crude oil that feeds the process, any CDO coming out of the securitization process will have the markings of the MBS that comprises the feedstock. If the feedstock is tainted or diluted, the structured products will be as well. If the feedstock includes subprime mortgages that rise in defaults, any security that comes out of the process, or that uses those products as its own raw material, will be affected.


pages: 279 words: 87,875

Underwater: How Our American Dream of Homeownership Became a Nightmare by Ryan Dezember

activist fund / activist shareholder / activist investor, Airbnb, business cycle, call centre, Cesare Marchetti: Marchetti’s constant, cloud computing, collateralized debt obligation, coronavirus, corporate raider, COVID-19, Credit Default Swap, credit default swaps / collateralized debt obligations, Donald Trump, Home mortgage interest deduction, housing crisis, interest rate swap, margin call, McMansion, mortgage debt, mortgage tax deduction, negative equity, rent control, rolodex, sharing economy, sovereign wealth fund, transaction costs

., and Riverbrooke Capital Partners Russo and Villages of Creekstone Barrack, Tom Beach Club resort beach highway beach houses beach mouse Beach PAC beach renourishment Bear Point Bear Stearns Bella Luna Bernanke, Ben Blackstone Group Bon Secour National Wildlife Refuge Bon Secour Village bankruptcy and condo towers in partnership of bonds borrowers, good-credit Brackin, Buddy Brackin, Julian Brett, Gene Brett/Robinson Brown, Jim Federal indictment of house built by land deal with bubble, in housing costs Buffett, Lucy Buffett, Warren bulk home buying burger joint Burns, John Burry, Michael Bush, George W. Butler, Steven Caribe Resort Carlyle Group Carrey, Jim CDOs. See collateralized debt obligations Cerberus Capital Management Chang, Oliver Chapter 7 bankruptcy charter fishing Christian Family Association PAC Chrysler bankruptcy Citigroup Clark, Clifford Edward, Jr. Clinton, Bill CMLTI 2006-NC2 security collateralized debt obligations (CDOs) colonial America Colonial Properties Colonnades commissions, on real estate computer programs Concerned Citizens of Orange Beach Inc. condominiums bankruptcies of Beach Club prices of in Bon Secour Village flipping of foreclosures influencing James, T., taking deposits on Lighthouse preconstruction sales of real estate crash and sales contracts for Shallow, B., selling stock prices compared to subdivision development over for Sunset Bay’s auctioning off Connors, Cristie conservation conspiracy theories CoreLogic corporate buyout firm (KKR) corruption charges Countrywide Financial courthouse auctions credit default swaps credit scores credit-rating firms Cypress Village data science Davidson, Jerry debt debt-to-income ratio deed filings Deepwater Horizon oil spill DeLawder, C.

In June 2007, a dozen anxious creditors gathered at a Park Avenue office tower to meet with executives from Bear Stearns, the venerable Wall Street investment bank. The creditors were worried about the faltering performance of two of Bear’s hedge funds, which had bet more than $20 billion on mortgages granted to home buyers with poor credit. Bear had launched one of the hedge funds in 2003 to invest primarily in collateralized debt obligations, or CDOs, which pooled large numbers of individual mortgages into single securities. They were mind-bogglingly complex, but the bottom line was simple: If borrowers paid their bills, investors made money. By August 2006, the fund had earned a 36 percent cumulative return as home prices soared, so Bear launched another fund that layered on even more borrowed money in hopes of boosting returns.


pages: 584 words: 187,436

More Money Than God: Hedge Funds and the Making of a New Elite by Sebastian Mallaby

Andrei Shleifer, Asian financial crisis, asset-backed security, automated trading system, bank run, barriers to entry, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, currency peg, Elliott wave, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, full employment, German hyperinflation, High speed trading, index fund, John Meriwether, Kenneth Rogoff, Kickstarter, Long Term Capital Management, margin call, market bubble, market clearing, market fundamentalism, merger arbitrage, money market fund, moral hazard, Myron Scholes, natural language processing, Network effects, new economy, Nikolai Kondratiev, pattern recognition, Paul Samuelson, pre–internet, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Mercer, rolodex, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical arbitrage, statistical model, survivorship bias, technology bubble, The Great Moderation, The Myth of the Rational Market, the new new thing, too big to fail, transaction costs

As to the division of junior from senior debt, Paulson had never seen anything quite like the feast that the mortgage industry served up. Lenders like Daniel Sadek generated mortgages that were sold to Wall Street banks; the banks turned these into mortgage bonds; then other banks bought the bonds, rebundled them, and sliced the resulting “collateralized debt obligation” into layers, the most senior ones rated a rock-solid AAA, the next ones rated AA, and so on down the line to BBB and lower—there might be eighteen tranches in the pyramid. If the mortgages in the collateralized debt obligation paid back 95 percent or more of what they owed, the BBB bonds would be fine, since the first 5 percent of the losses would be absorbed by even more junior tranches. But once non-payments surpassed the 5 percent hurdle, the BBB securities would start suffering losses; and since the BBB tranche was only 1 percent thick, a nonpayment rate of 6 percent would take the whole lot of them to zero.

This contrast points to a third reason why the banks fared poorly in the credit bubble: Those multiple profit centers distracted executives. The banks’ proprietary trading desks coexisted alongside departments that advised on mergers, underwrote securities, and managed clients’ funds; sometimes the scramble for fees from these advisory businesses blurred the banks’ investment choices. Again, the subprime story illustrated this problem. Merrill Lynch is said to have sold $70 billion worth of subprime collateralized debt obligations, or CDOs, earning a fee of 1.25 percent each time, or $875 million. Merrill’s bosses obsessed about their standing in the mortgage league tables: The chief executive, Stan O’Neal, was prepared to finance home lenders at no profit in order to be first in line to buy their mortgages.14 To feed their CDO production lines, Merrill and its rivals kept plenty of mortgage bonds on hand; so when demand for CDOs collapsed in early 2007, the banks were stuck with billions of unsold inventory that they had to take onto their balance sheets.

But in the summer of 2007, Griffin found his vacation impossible to enjoy. Every day began with phone calls back to Chicago and ended the same way, and by Friday morning, Griffin had had enough. “Don’t take this the wrong way,” he told his wife. “You can come or you can stay. I’m going.”19 That Friday, July 27, was the day when the subprime troubles morphed into a larger credit crisis. Loans from guys who catapulted Porsches, byzantine collateralized debt obligations with eighteen layers, the whole pyramid of side bets on the ABX index—until just recently, all could be dismissed as a mania confined to one corner of the markets. But that Friday a Boston-based hedge fund named Sowood Capital Management began to catch fire. Its $3 billion portfolio was down sharply, and it was starting to receive margin calls from brokers.20 The remarkable thing about this development was that Sowood had avoided subprime securities.


pages: 351 words: 102,379

Too big to fail: the inside story of how Wall Street and Washington fought to save the financial system from crisis--and themselves by Andrew Ross Sorkin

affirmative action, Andy Kessler, Asian financial crisis, Berlin Wall, break the buck, BRICs, business cycle, collapse of Lehman Brothers, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Emanuel Derman, 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, naked short selling, NetJets, Northern Rock, oil shock, paper trading, risk tolerance, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, savings glut, shareholder value, short selling, sovereign wealth fund, supply-chain management, too big to fail, value at risk, éminence grise

The stock would end the day up $14.74, or 46.4 percent, to $46.49, for the biggest one-day gain in the stock since it went public in 1994. William Tanona, an analyst with Goldman Sachs, raised his rating on Lehman to “buy” from “neutral.” When the session ended, the excitement at Lehman was palpable. Gregory rushed over to give Callan a big hug. Later, as she went down to the bond-trading floor, she passed by the desk of Peter Hornick, the firm’s head of collateralized debt obligation sales and trading. He held out his palm, and she slapped him a high five. For a brief, shining moment, all seemed well at Lehman Brothers. Outside Lehman, however, skeptics were already voicing their concerns. “I still don’t believe any of these numbers because I still don’t think there is proper accounting for the liabilities they have on their books,” Peter Schiff, president and chief global strategist of Euro Pacific Capital, told the Washington Post.

But that analysis did not take into account a number of other critical factors, such as the fact that the link between the housing market and the financial system was further complicated by the growing use of exotic derivatives. Securities whose income and value came from a pool of residential mortgages were being amalgamated, sliced up, and reconfigured again, and soon became the underpinnings of new investment products marketed as collateralized debt obligations (CDOs). The way that firms like a JP Morgan or a Lehman Brothers now operated bore little resemblance to the way banks had traditionally done business. No longer would a bank simply make a loan and keep it on its books. Now lending was about origination—establishing the first link in a chain of securitization that spread risk of the loan among dozens if not hundreds and thousands of parties.

She used the word ‘incredibly’ eight times,” he noted. “I would use ‘incredible’ in a different way to describe the report.” After that rhetorical flourish, he recounted how he had decided to call her. With a projection screen displaying the relevant figures behind him, he told how he had questioned Callan about the fact that Lehman had taken only a $200 million write-down on $6.5 billion worth of the especially toxic asset known as collateralized debt obligations in the first quarter—even though the pool of CDOs included $1.6 billion of instruments that were below investment grade. “Ms. Callan said she understood my point and would have to get back to me,” Einhorn relayed. “In a follow-up e-mail, Ms. Callan declined to provide an explanation for the modest write-down and instead stated that, based on current price action, Lehman ‘would expect to recognize further losses’ in the second quarter.


pages: 317 words: 106,130

The New Science of Asset Allocation: Risk Management in a Multi-Asset World by Thomas Schneeweis, Garry B. Crowder, Hossein Kazemi

asset allocation, backtesting, Bernie Madoff, Black Swan, business cycle, buy and hold, capital asset pricing model, collateralized debt obligation, commodity trading advisor, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, fixed income, high net worth, implied volatility, index fund, interest rate swap, invisible hand, market microstructure, merger arbitrage, moral hazard, Myron Scholes, passive investing, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, statistical model, stocks for the long run, survivorship bias, systematic trading, technology bubble, the market place, Thomas Kuhn: the structure of scientific revolutions, transaction costs, value at risk, yield curve, zero-sum game

In the 1970s, markets expanded to provide a range of risk management tools (currency futures, bond futures, and stock options, to name a few) that permitted managers to move significantly away from long only based portfolio analysis. In the 1980s, stock index futures and index options were developed. New forms of dynamic risk management, such as portfolio insurance, also came into existence. In the 1990s, new asset sectors such as mortgages, new approaches to asset management such as hedge funds, and a wider range of investment vehicles such as Collateralized Debt Obligations (CDOs) were developed. By 2000, financial engineers had come into their own, developing even more complex invest- xiv PREFACE ment instruments and vehicles, each designed to further cauterize and trade market risk. Unfortunately, few investors considered that each of these new investment forms or vehicles fundamentally changed the relationship between assets and how those assets would perform and respond in extreme economic environments.

To go beyond that point is to either enter the world of the absurd or court unintended consequences without preparation. In Chapter 3, we speak to this point as we examine certain theories that provide very real value within their parameters, but have been misused or are not allowed to die a proper death because they serve an unintended and sometimes misguided purpose. We have also seen this phenomenon at work in the current market. The Collateralized Debt Obligation (CDOs) is first and foremost an asset allocation product and was first designed by JP Morgan to assist its clients in securitizing certain obligations. In designing this program, the bank also designed risk control features that assured a workable understanding of the bank’s obligations as well as those of its clients. We have witnessed the awful destruction of wealth tied to this asset allocation product when discretion and proper risk controls are removed from its design.

See CAPM (Capital Asset Pricing Model) Capital International Stock Indices, 168 Capital Market Line (CML), 5–6 CAPM (Capital Asset Pricing Model), 4–6, 18, 62–63 acceptance of, 28 and efficient market hypothesis, 6–10 and market risk, 43 Cash flow, 98 Casualty insurance, 98 CISDM CTA indices, 149, 150, 261, 262 CISDM ELS index, 193 CISDM Fund of Fund indices, 267, 268 CISDM Hedge Fund indices, 55, 131, 142, 144, 145, 185 CISDM indices, 259, 260, 261, 262, 263 Clustering, volatility, 95 Collar strategy, 234 Collateralized debt obligations (CDOs), 228, 229 Commodities, 59, 61, 65, 129, 130, 143–148, 160–165 benchmarks, 179–185, 275 futures, 12 Index return and risk performance, 162–163 volatility, 182, 185 Commodity Futures Trading Commission (CFTC), 11 Commodity pool operators (CPOs), 143 Commodity Research Bureau, 265, 266 Commodity risk, 196 Commodity trading advisors. See CTAs (commodity trading advisors) Conditional model, 41 Conditional performance evaluation, 53–54 Constant proportional portfolio insurance (CPPI), 107 Convexity, 49–50 Core allocation, 110–133 Correlation analysis, 34, 116 Correlations, 24, 68–69, 214 between Barclays Capital U.S.


pages: 447 words: 104,258

Mathematics of the Financial Markets: Financial Instruments and Derivatives Modelling, Valuation and Risk Issues by Alain Ruttiens

algorithmic trading, asset allocation, asset-backed security, backtesting, banking crisis, Black Swan, Black-Scholes formula, Brownian motion, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, discounted cash flows, discrete time, diversification, fixed income, implied volatility, interest rate derivative, interest rate swap, margin call, market microstructure, martingale, p-value, passive investing, quantitative trading / quantitative finance, random walk, risk/return, Satyajit Das, Sharpe ratio, short selling, statistical model, stochastic process, stochastic volatility, time value of money, transaction costs, value at risk, volatility smile, Wiener process, yield curve, zero-coupon bond

Index 4-moments CAPM actual (ACT) number of days AI see Alternative Investments “algorithmic” trading Alternative Investments (AI) American options bond options CRR pricing model option pricing rho amortizing swaps analytic method, VaR annual interest compounding annualized volatility autocorrelation corrective factor historical volatility risk measures APT see Arbitrage Pricing Theory AR see autoregressive process Arbitrage Pricing Theory (APT) ARCH see autoregressive conditional heteroskedastic process ARIMA see autoregressive integrated moving average process ARMA see autoregression moving average process ask price asset allocation attribution asset swaps ATM see at the money ATMF see at the money forward options at the money (ATM) convertible bonds options at the money forward (ATMF) options attribution asset allocation performance autoregression moving average (ARMA) process autoregressive (AR) process autoregressive conditional heteroskedastic (ARCH) process autoregressive integrated moving average (ARIMA) process backtesting backwardation basket CDSs basket credit derivatives basket options BDT see Black, Derman, Toy process benchmarks Bermudan options Bernardo Ledoit gain-loss ratio BGM model see LIBOR market model BHB model (Brinson’s) bid price binomial distribution binomial models binomial processes, credit derivatives binomial trees Black, Derman, Toy (BDT) process Black and Karasinski model Black–Scholes formula basket options beyond Black–Scholes call-put parity cap pricing currency options “exact” pricing exchange options exotic options floor pricing forward prices futures/forwards options gamma processes hypotheses underlying jump processes moneyness sensitivities example valuation troubles variations “The Black Swan” (Taleb) bond convexity bond duration between two coupon dates calculation assumptions calculation example callable bonds in continuous time duration D effective duration forwards FRNs futures mathematical approach modified duration options physical approach portfolio duration practical approach swaps uses of duration bond futures CFs CTD hedging theoretical price bond options callable bonds convertible bonds putable bonds bond pricing clean vs dirty price duration aspects floating rate bonds inflation-linked bonds risky bonds bonds binomial model CDSs convexity credit derivatives credit risk exotic options forwards futures government bonds options performance attribution portfolios pricing risky/risk-free spot instruments zero-coupon bonds see also bond duration book value method bootstrap method Brinson’s BHB model Brownian motion see also standard Wiener process bullet bonds Bund (German T-bond) 10-year benchmark futures callable bonds call options call-put parity jump processes see also options Calmar ratio Capital Asset Pricing Model (CAPM) 4-moments CAPM AI APT vs CAPM Sharpe capitalization-weighted indexes capital market line (CML) capital markets caplets CAPM see Capital Asset Pricing Model caps carry cash and carry operations cash flows cash settlement, CDSs CBs see convertible bonds CDOs see collateralized debt obligations CDSs see credit default swaps CFDs see contracts for difference CFs see conversion factors charm sensitivity cheapest to deliver (CTD) clean prices clearing houses “close” prices CML see capital market line CMSs see constant maturity swaps Coleman, T. collars collateralized debt obligations (CDOs) color sensitivity commodities commodity futures backwardation contango market price non-financial producers/users trading calculations conditional swaps Conditional VaR (C-VaR) confidence levels constant maturity swaps (CMSs) contango continuous interest compounding continuous interest rates continuous time continuous variables contracts contracts for difference (CFD) contribution, performance convenience yield conversion factors (CFs) convertible bonds (CBs) bond floor CB premium conversion ratio Hard Call protection outcome of operation pricing graph risk premium stock price parity convexity adjustments see also bond convexity copper prices copulas correlation basket options credit derivatives implied Portfolio Theory Spearman’s coefficient VaR calculations volatility counterparty risk futures see also credit risk counter-value currency (c/v) Courtadon model covered period, FRAs Cox, Ingersoll and Ross model Cox–Ross–Rubenstein (CRR) model credit default swaps (CDSs) on basket cash settlement with defined recovery rate market operations variants credit derivatives CDSs credit risk main features valuation application example basket derivatives binomial model CDO pricing correlation measures credit risk models useful measures Merton model “credit events” credit exposure credit risk behind the underlying components data use dangers default rates Merton model models in practice quantification recovery rates credit VaR crossing CRR see Cox–Ross–Rubenstein model CRSs see currency rate swaps crude oil market CTD see cheapest to deliver cubic splines method currencies futures options performance attribution spot instruments currency rate swaps (CRSs) c/v see counter-value currency C-VaR see Conditional VaR D see discount factors DCF see discounted cash flows method decision-making deep ITM (DITM) deep OTM (DOTM) default rates default risk see credit risk delta delta-gamma neutral management delta-normal method, VaR derivatives credit valuation problems volatility Derman see Black, Derman, Toy process deterministic phenomena diff swaps diffusion processes Dirac functions dirty prices discounted cash flows (DCF) method discount factors (D) duration D forward rates IRSs risk-free yield curve spot rates yield curve interpolations discrete interest compounding discrete time discrete variables DITM see deep ITM DOTM see deep OTM drift duration of bonds see bond duration duration D dVega/dTime dynamic replication see delta-Gamma neutral management dZ Black–Scholes formula fractional Brownian motion geometric Wiener process martingales properties of dZ(t) standard Wiener process economic capital ED see exposure at default effective duration, bonds efficient frontier efficient markets EGARCH see exponential GARCH process EONIA see Euro Over-Night Index Average swaps equities forwards futures Portfolio Theory stock indexes stocks valuation EUR see Euros EURIBOR rates CMSs EONIA/OIS swaps FRAs futures in-arrear swaps IRSs quanto/diff swaps short-term rates Euro Over-Night Index Average (EONIA) swaps European options basket options bond options caplets CRR pricing model exchange options exotic options floorlets Monte Carlo simulations option pricing rho Euros (EUR) CRSs forward foreign exchange futures spot market swap rate markets volatility Euro Stoxx EWMA see exponentially weighted moving average process Excel functions MA process Monte Carlo simulations excess return exchange options exotic options basket options Bermudan options binomial pricing model Black–Scholes formula currency options exchange options interest rates Monte Carlo simulations options on bonds options on non-financial underlyings PFCs pricing methods see also second generation options exotic swaps see also second generation swaps expected credit loss expected return exponential GARCH (EGARCH) process exponentially weighted moving average (EWMA) process exposure at default (ED) fair price/value “fat tails” problem financial models ARCH process ARIMA process ARMA process AR process GARCH process MA process MIDAS process finite difference pricing methods fixed leg of swap fixed rate, swaps floating rate notes/bonds (FRNs) floating rates floorlets floors forecasting ARIMA ARMA process AR process MA process foreign exchange (FX) see currencies; forex swaps; forward foreign exchange forex (FX) swaps forward foreign exchange 1 year calculations forex swaps forward forex swaps forward-forward transactions forward spreads NDF market operations forward rate agreements (FRAs) forwards Black–Scholes formula bonds CFDs CRSs equities foreign exchange FRAs futures vs forwards prices options PFCs rates swaps volatility forward zero-coupon rate 4-moments CAPM fractional Brownian motion FRAs see forward rate agreements FRNs see floating rate notes/bonds futures bonds commodities currencies equities forwards vs futures prices IRR margining system market price option pricing pricing settlement at maturity short-term interest rates stock indexes theoretical price future value (FV) bond duration short-term rates spot rates zero-coupon swaps FX see foreign exchange; forex swaps gain-loss ratio (Bernardo Ledoit) gamma gamma processes GARCH see generalized ARCH process Garman–Klass volatility Gaussian copulas Gaussian distribution Gaussian hypothesis generalized ARCH (GARCH) process EWMA process I/E/MGARCH processes non-linear models regime-switching models variants volatility general Wiener process application fractional Brownian motion gamma processes geometric Wiener process Itô Lemma Itô process jump processes volatility modeling see also standard Wiener process geometric average geometric Wiener process German Bund see Bund (German T-Bond) global VaR Gordon–Shapiro method government bonds Greece Greeks see sensitivities Hard Call protection Heath, Jarrow and Morton (HJM) model Heaviside function hedging bond futures delta-gamma neutral management futures 129–30 immunization vs hedging money market rate futures stock index futures heteroskedasticity hidden layers, NNs high frequency trading “high” prices historical method, VaR historical volatility HJM see Heath, Jarrow and Morton model Ho and Lee model Hull and White model Hurst coefficient IGARCH see integrated GARCH process immunization implied correlation implied repo rate (IRR) implied volatility definition historical volatility surface volatility curves volatility smiles in-arrear swaps indexes basket options capitalization-weighted price/value-weighted see also stock indexes inflation-linked bonds inflation swaps Information Ratio (IR) initial margin in the money (ITM) caps convertible bonds deep ITM options innovation term, AR instantaneous returns integrated GARCH (IGARCH) process interbank rates see EURIBOR rates; LIBOR rates interest rate options BDT process Black and Karasinski model caps collars floors forward rates HJM model LMM model single rate processes swaptions yield curve modeling interest rates day counting discount factors futures FV/PV interest compounding IRSs options short-term spot rates term structure see also yield interest rate swaps (IRSs) bond duration and CRSs fixed/floating rates pricing methods prior to swap pricing method revaluation vanilla swaps yield curve see also constant maturity swaps intermediate period, FRAs International Swaps and Derivatives Association (ISDA) intraday margining settlements intraday volatility investor decision-making IR see Information Ratio IRR see implied repo rate IRSs see interest rate swaps ISDA see International Swaps and Derivatives Association ITM see in the money Itô process Itô’s Lemma Japanese yen (JPY) Jarrow, Robert A.

Coming back to modeling credit risk, if the credit derivative is about a basket of several underlyings, the degree of co-dependence, that is, a broader measure than the traditional correlation coefficient based on a linear regression, will significantly affect the credit risk premium. Indeed, the aim is to price a multivariate product (the default probability of each of the basket constituents) in a consistent way with the prices (over time) of several univariate products. Application to the Pricing of a CDO7 Basket CDSs (cf. Section 12.1.5) are also embedded into “synthetic securitizations”, often called collaterized debt obligations (CDO), for example the C*Star 1, 1999–2001 of Citibank (data 1999), shown in Figure 13.6. Figure 13.6 Example of a CDO In this example, the CDO involves the lower CDS in the figure, in bold (the upper one is a regular CDS with a bank). This second CDS transfers the credit risk to an entity (C*Star) called a special purpose vehicle (SPV), whose function is to pool the debts into several notes, called tranches, offered to investors.


pages: 304 words: 99,836

Why I Left Goldman Sachs: A Wall Street Story by Greg Smith

always be closing, asset allocation, Black Swan, bonus culture, break the buck, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, delayed gratification, East Village, fixed income, Flash crash, glass ceiling, Goldman Sachs: Vampire Squid, high net worth, information asymmetry, London Interbank Offered Rate, mega-rich, money market fund, new economy, Nick Leeson, quantitative hedge fund, Renaissance Technologies, short selling, Silicon Valley, Skype, sovereign wealth fund, Stanford marshmallow experiment, statistical model, technology bubble, too big to fail

I jumped in a cab and hustled back to the office at 200 West Street. Riding back downtown, I started reading the e-mails. I couldn’t believe it. It was the worst possible thing you could read. FOR IMMEDIATE RELEASE SEC Charges Goldman Sachs with Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages I read further… The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO. My immediate reaction: this must be a witch hunt.

I quickly went to my desk and pulled up my Bloomberg screen. Whenever Bloomberg News reports a vitally important story, the news scrolls up on the screen from bottom to top in red. It is not a frequent occurrence. My entire screen was red. What kind of misrepresentations was the SEC alleging? I started talking to my colleagues; everyone was trying to piece it together. The chatter on the floor was about one of our products built on CDOs (collateralized debt obligations, basically a sausage stuffed with subprime mortgages). Why now? Why us? Everyone, including me, was on the defensive. Ever since the federal government had bailed out the banks thanks to TARP, there had been murmurings in the world at large that someone needed to be held accountable for the crisis; for months there had been the sense of a gathering lynch mob. A series of big articles—in Rolling Stone, New York magazine, and Time, among others—castigated Wall Street in general, and Goldman Sachs in particular, for surviving and thriving on the backs of U.S. taxpayers, for using bailout money to make big bets, then using the winnings to award executives obscenely big bonuses.

Blown up: Description used for a trader who goes out of business or loses a significant amount of money because of a poorly timed trade. Buck: Wall Street slang for $1 million. “That hedge fund just traded five hundred bucks of silver futures without blinking.” “His loft in Tribeca cost eight bucks.” Call option: A type of derivative that gives the purchaser the right to buy an underlying security at a stipulated price in the future. CDO (collateralized debt obligation): A type of security that played a significant role in inflating the real estate bubble, the subsequent 2008 crash, and the downfall of Bear Stearns, Lehman, Merrill Lynch, Wachovia, and Washington Mutual. CDOs package mortgages together and serve to connect investor capital with the U.S. housing market. Significant fees accrue to the investment bank and everyone along the mortgage supply chain.


pages: 700 words: 201,953

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, business cycle, 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, Kickstarter, 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

Marieke de Goede, for example, characterizes money as “a system of writing that is firmly rooted in cultural history” (Goede 2005: xxv). 39 The prospect of a “comparison between the images of saints in different religions and the bank notes of different states” intrigued him, for example. 40 Agamben refers to the mark on a coin as a signature which “transforms a piece of metal into a coin, producing it as money” (Agamben 2009: 40). 41 Material monies—digital monies present a distinctive set of problems, as the recent history of Bitcoin testifies—need to be “read” quickly, validated by a glance. But the technology needed to make such a reading infallible (raised print, watermarks, holograms) is increasingly costly and complex, and difficult to read by sight alone. Finance is read differently, with its history of charts and graphs (Preda 2009), although it may have caught up with money in some respects. Credit ratings, too, are instantly legible, although those attached to collateralized debt obligations turned out to be tainted and their very legibility became a source of contagion (Carruthers 2010). Even here, a narrative is attached to the rating, which is unraveled whenever the rating shifts, or when various ratings agencies offer different grades for a particular financial product. 42 Bretton Woods refers to the international monetary system that was established in 1944, wherein countries agreed to adopt monetary policies aimed to ensure that their currencies maintained fixed rates of exchange against the U.S. dollar, which was in turn “pegged” to gold.

For Harvey, capital’s centralization through the credit system is integral to this idea because a credit crisis (the devaluation of capital) invariably leads to the destruction of money (inflation) (Harvey 2006: 328). In these terms, the policy whereby governments (via central banks) seek to stimulate effective demand by keeping interest rates low (or, recently, through quantitative easing) amounts to replacing privately created fictitious capital (such as collateralized debt obligations) with state-backed capital (or money). This additional money can be reinvested in production (leading to wage increases), channeled into speculative finance (leading to the creation of even more fictitious capital), or pumped into consumption (creating further upward pressure on wages). Either way, a crisis may be eased but cannot be averted; indeed, its symptoms are likely to be worse.

Token money was developed as a solution to this problem, bridging the time gap in the circulation of commodities and making up the shortfall whenever money as a medium of circulation is in short supply. Credit money, as we have seen, “springs” from this. But for Marx, credit money is not money; or rather, it answers only one requirement of money. Hence the proliferation of monies in modern capitalism—commodities, paper, coins, and various forms of credit, derivatives, collateralized debt obligations, and so on—has been driven by the attempt to reconcile the desire for a quality store of value with the requirement for a frictionless medium of exchange. Periodically, fixity inevitably comes into conflict with flow. There are two important points to be taken out of this discussion of Marx’s theory of money and credit. The first point concerns the connection between money and the real economy.


pages: 372 words: 107,587

The End of Growth: Adapting to Our New Economic Reality by Richard Heinberg

3D printing, agricultural Revolution, back-to-the-land, banking crisis, banks create money, Bretton Woods, business cycle, carbon footprint, Carmen Reinhart, clean water, cloud computing, collateralized debt obligation, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, David Graeber, David Ricardo: comparative advantage, dematerialisation, demographic dividend, Deng Xiaoping, Elliott wave, en.wikipedia.org, energy transition, falling living standards, financial deregulation, financial innovation, Fractional reserve banking, full employment, Gini coefficient, global village, happiness index / gross national happiness, I think there is a world market for maybe five computers, income inequality, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Kenneth Rogoff, late fees, liberal capitalism, mega-rich, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, naked short selling, Naomi Klein, Negawatt, new economy, Nixon shock, offshore financial centre, oil shale / tar sands, oil shock, peak oil, Ponzi scheme, price stability, private military company, quantitative easing, reserve currency, ride hailing / ride sharing, Ronald Reagan, short selling, special drawing rights, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, tulip mania, WikiLeaks, working poor, zero-sum game

In the manic days of 2002 to 2006, millions of Americans came to rely on soaring real estate values as a source of income, turning their houses into ATMs (to use once more the phrase heard so often then). As long as prices kept going up, homeowners felt justified in borrowing to remodel a kitchen or bathroom, and banks felt fine making those loans. Meanwhile, the wizards of Wall Street were finding ways of slicing and dicing sub-prime mortgages into tasty collateralized debt obligations that could be sold at a premium to investors — with little or no risk! After all, real estate values were destined to just keep going up. God’s not making any more land, went the truism. Credit and debt expanded in the euphoria of easy money. All this giddy optimism led to a growth of jobs in construction and real estate industries, masking underlying ongoing job losses in manufacturing.

Nearly everyone agrees that it unfolded in essentially the following steps: • In an attempt to limit the consequences of the “dot-com” crash of 2000, the Federal Reserve drastically lowered interest rates, enabling lenders across the country to provide easy credit to households and businesses who hadn’t been able to access it before. • This led to a housing bubble, which was made much worse by sub-prime lending. • Partly because of the prior deregulation of the financial industry, the housing bubble was also magnified by over-leveraging within the financial services industry, which was in turn exacerbated by financial innovation and complexity (including the use of derivatives, collateralized debt obligations, and a dizzying variety of related investment instruments) — all feeding the boom of a shadow banking system, whose potential problems were hidden by incorrect pricing of risk by ratings agencies. • A commodities boom (which drove up gasoline and food prices) and temporarily rising interest rates (especially on adjustable-rate mortgages) ultimately undermined consumer spending and confidence, helping to burst the housing bubble — which, once it started to deflate, set in motion a chain reaction of defaults and bankruptcies.

Decades earlier, bond credit ratings agencies had been paid for their work by investors who wanted impartial information on the credit worthiness of securities issuers and their offerings. Starting in the early 1970s, the “Big Three” ratings agencies (Standard & Poor’s, Moody’s, and Fitch) began to be paid instead by securities issuers. This eventually led to ratings agencies actively encouraging the issuance of high-risk collateralized debt obligations (CDOs). Also in the 1990s, the Clinton administration adopted “affordable housing” as one of its explicit goals (this didn’t mean lowering house prices; it meant helping Americans get into debt), and over the next decade the percentage of Americans owning their homes increased 7.8 percent. This initiated a persistent upward trend in real estate prices. The Internet as we know it today opened for business in the mid-1990s, and within a few years investors had bid up Internet-related stocks, creating a speculative bubble.


pages: 484 words: 104,873

Rise of the Robots: Technology and the Threat of a Jobless Future by Martin Ford

"Robert Solow", 3D printing, additive manufacturing, Affordable Care Act / Obamacare, AI winter, algorithmic trading, Amazon Mechanical Turk, artificial general intelligence, assortative mating, autonomous vehicles, banking crisis, basic income, Baxter: Rethink Robotics, Bernie Madoff, Bill Joy: nanobots, business cycle, call centre, Capital in the Twenty-First Century by Thomas Piketty, Chris Urmson, Clayton Christensen, clean water, cloud computing, collateralized debt obligation, commoditize, computer age, creative destruction, debt deflation, deskilling, disruptive innovation, diversified portfolio, Erik Brynjolfsson, factory automation, financial innovation, Flash crash, Fractional reserve banking, Freestyle chess, full employment, Goldman Sachs: Vampire Squid, Gunnar Myrdal, High speed trading, income inequality, indoor plumbing, industrial robot, informal economy, iterative process, Jaron Lanier, job automation, John Markoff, John Maynard Keynes: technological unemployment, John von Neumann, Kenneth Arrow, Khan Academy, knowledge worker, labor-force participation, liquidity trap, low skilled workers, low-wage service sector, Lyft, manufacturing employment, Marc Andreessen, McJob, moral hazard, Narrative Science, Network effects, new economy, Nicholas Carr, Norbert Wiener, obamacare, optical character recognition, passive income, Paul Samuelson, performance metric, Peter Thiel, plutocrats, Plutocrats, post scarcity, precision agriculture, price mechanism, Ray Kurzweil, rent control, rent-seeking, reshoring, RFID, Richard Feynman, Rodney Brooks, Sam Peltzman, secular stagnation, self-driving car, Silicon Valley, Silicon Valley startup, single-payer health, software is eating the world, sovereign wealth fund, speech recognition, Spread Networks laid a new fibre optics cable between New York and Chicago, stealth mode startup, stem cell, Stephen Hawking, Steve Jobs, Steven Levy, Steven Pinker, strong AI, Stuxnet, technological singularity, telepresence, telepresence robot, The Bell Curve by Richard Herrnstein and Charles Murray, The Coming Technological Singularity, The Future of Employment, Thomas L Friedman, too big to fail, Tyler Cowen: Great Stagnation, uber lyft, union organizing, Vernor Vinge, very high income, Watson beat the top human players on Jeopardy!, women in the workforce

Perhaps the most colorful articulation of this accusation came from Rolling Stone’s Matt Taibbi in his July 2009 takedown of Goldman Sachs that famously labeled the Wall Street firm “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”54 Economists who have studied financialization have found a strong correlation between the growth of the financial sector and inequality as well as the decline in labor’s share of national income.55 Since the financial sector is, in effect, imposing a kind of tax on the rest of the economy and then reallocating the proceeds to the top of the income distribution, it’s reasonable to conclude that it has played a role in a number of the trends we’ve looked at. Still, it seems hard to make a strong case for financialization as the primary cause of, say, polarization and the elimination of routine jobs. It’s also important to realize that growth in the financial sector has been highly dependent on advancing information technology. Virtually all of the financial innovations that have arisen in recent decades—including, for example, collateralized debt obligations (CDOs) and exotic financial derivatives—would not have been possible without access to powerful computers. Likewise, automated trading algorithms are now responsible for nearly two-thirds of stock market trades, and Wall Street firms have built huge computing centers in close physical proximity to exchanges in order to gain trading advantages measured in tiny fractions of a second. Between 2005 and 2012, the average time to execute a trade dropped from about 10 seconds to just 0.0008 seconds,56 and robotic, high-speed trading was heavily implicated in the May 2010 “flash crash” in which the Dow Jones Industrial Average plunged nearly a thousand points and then recovered for a net gain, all within the space of just a few minutes.

(Kaku), 247n capital individual endowments of, 273–275 taxes on, 277–278 Capital in the Twenty-First Century (Piketty), 275 capitalism, drive to automate and, 255–256 Car and Driver (magazine), 185 carbon-based materials, 70, 70n carbon nanotubes, 70n, 245 carbon tax, 272 Carr, Nicholas, 72, 254, 256, 257 cars, autonomous, xiii, 94, 176, 181–191 cause, big data and correlation vs., 102 CBE. See competency-based education (CBE) CBS News, 249 CDOs. See collateralized debt obligations (CDOs) Center for Economic and Policy Research, 171n Central Intelligence Agency, 46, 85 cervical cancer screening, 152–153 chargemaster prices, 160–161, 164 cheating, MOOCs and, 136–137 Cheney, Dick, 240 chess, 97–98, 122, 123 Chicago, data portal of city of, 87–88 China American consumer spending and, 54 college graduates overqualified for occupations in, 251 consumer demand in, 223–227 globalization and, 53 industrial automation in, 3, 10–11, 225–226 labor’s share of national income in, 41 offshoring and, 120 reshoring and, 9 saving rate in, 224–225 super-intelligence and, 236n China rebalancing, 224–225 Chomsky, Noam, 129, 236 Christensen, Clayton, 142 Chronicle of Higher Education (journal), 139 Chrysler, 76 Circuit City, 16 Cisco, 234 Citigroup, 103, 198 citizen’s dividend, 266–267 Cleveland Clinic, 102 Clifford, Stephanie, 8 climate change, xvii, 211–212, 282–283 Clinton, Bill, 242 cloud computing, 52, 104–107, 109 cloud robotics, 20–23 cobalt poisoning, 145–146 cognitive capability, global competition for jobs and, 120 cognitive computer chip, 72 cognitive computing, 96–104 collaboration software, 64 Collapse: How Societies Choose to Succeed or Fail (Diamond), x collateralized debt obligations (CDOs), 56 college-educated workers, 120–121, 126–128 college graduates, declining income and underemployment for recent, 48–49 College Unbound (Selingo), 140 college wage premium, 48n Colton, Simon, 112 “The Coming Technological Singularity” (Vinge), 233 community colleges, 276–277 comparative advantage, 73–75 compensation.

See collateralized debt obligations (CDOs) Center for Economic and Policy Research, 171n Central Intelligence Agency, 46, 85 cervical cancer screening, 152–153 chargemaster prices, 160–161, 164 cheating, MOOCs and, 136–137 Cheney, Dick, 240 chess, 97–98, 122, 123 Chicago, data portal of city of, 87–88 China American consumer spending and, 54 college graduates overqualified for occupations in, 251 consumer demand in, 223–227 globalization and, 53 industrial automation in, 3, 10–11, 225–226 labor’s share of national income in, 41 offshoring and, 120 reshoring and, 9 saving rate in, 224–225 super-intelligence and, 236n China rebalancing, 224–225 Chomsky, Noam, 129, 236 Christensen, Clayton, 142 Chronicle of Higher Education (journal), 139 Chrysler, 76 Circuit City, 16 Cisco, 234 Citigroup, 103, 198 citizen’s dividend, 266–267 Cleveland Clinic, 102 Clifford, Stephanie, 8 climate change, xvii, 211–212, 282–283 Clinton, Bill, 242 cloud computing, 52, 104–107, 109 cloud robotics, 20–23 cobalt poisoning, 145–146 cognitive capability, global competition for jobs and, 120 cognitive computer chip, 72 cognitive computing, 96–104 collaboration software, 64 Collapse: How Societies Choose to Succeed or Fail (Diamond), x collateralized debt obligations (CDOs), 56 college-educated workers, 120–121, 126–128 college graduates, declining income and underemployment for recent, 48–49 College Unbound (Selingo), 140 college wage premium, 48n Colton, Simon, 112 “The Coming Technological Singularity” (Vinge), 233 community colleges, 276–277 comparative advantage, 73–75 compensation. See wages competency-based education (CBE), 138 computers acceleration of power, xii–xiii, 68 (see also Moore’s Law) acquisition of skills by, xv–xvi increase in memory capacity, 63–64 innovation and improvements in, 69–73 predictions of impact of, 31–32, 33–34 S-curve of, 69, 70–71 construction industry, 3D printing and, 180–181 Consumer Price Index (CPI), 38n consumer robots, 197n consumers Chinese, 223–227 demand and, 196–197 permanent income hypothesis, 210–211 workers as, 193–194, 196–198, 221–222 consumer spending, 54 consumer spending/consumption, 200, 202n demand and, 196 guaranteed income and, 269–270 income inequality and, xvi–xvii, 198–202 Cornell University, Creative Machines Lab, 108 corporate profits financial sector, 55 recovery from Great Recession and, 39–40, 202, 203 as share of GDP, 40, 202, 203 correlation vs. cause, big data and, 88–89, 102 costs health care, 160–174 higher education, 140 Coursera, 133, 136 Cowen, Tyler, 65, 123, 126n CPI.


pages: 405 words: 109,114

Unfinished Business by Tamim Bayoumi

algorithmic trading, Asian financial crisis, bank run, banking crisis, Basel III, battle of ideas, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, buy and hold, capital controls, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, currency peg, Doha Development Round, facts on the ground, Fall of the Berlin Wall, financial deregulation, floating exchange rates, full employment, hiring and firing, housing crisis, inflation targeting, Just-in-time delivery, Kenneth Rogoff, liberal capitalism, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, market bubble, Martin Wolf, moral hazard, oil shale / tar sands, oil shock, price stability, prisoner's dilemma, profit maximization, quantitative easing, race to the bottom, random walk, reserve currency, Robert Shiller, Robert Shiller, Rubik’s Cube, savings glut, technology bubble, The Great Moderation, The Myth of the Rational Market, the payments system, The Wisdom of Crowds, too big to fail, trade liberalization, transaction costs, value at risk

He never regretted his decision to send out the press release, which he firmly believed had been the right thing to do. Tragically, he died of cancer in the spring 2009 at age 44. The press release underlined how problems initially seen as a minor blip in US mortgages were affecting the European as well as US banks. The “certain segments” of the mortgage market that were in distress were securities that bundled subprime mortgages or securities that put these assets together into more complex collateralized debt obligations (CDOs) or even into CDOs-squared (CDOs of CDOs). The roaring market in these products rapidly collapsed as it became apparent that US house prices were falling, something that the proponents of these products had assured investors had not happened on a national basis in the United States in the sixty years since World War II. This unexpected development undid a market in which subprime mortgages had increasingly been issued with minimal assessment of the creditworthiness of the borrowers on the happy assumption that continued house price increases would validate the loans.

As bonds began to be designed with the rating in mind, the investment banks aimed to achieve the maximum possible returns for a given rating by creating products that exploited weaknesses in the links between the rating agency models and the risk as assessed by market prices. In particular, they took advantage of the focus of some rating agencies on the likelihood of default rather than the losses to investors associated with a default. They did this by creating securitized assets as well as more complex derivatives such as collateralized debt obligations (CDOs) in ways that lowered the likelihood of default but increased the losses should default occur (called “waterfall” structures since if you fell, you fell a long way).24 The relatively favorable ratings on such structures allowed investment banks to sell risky loans on the cheap but had little or no social value as they simply reflected deficiencies in the rating system. That being said, this activity can be seen as a consequence of the natural to and fro between investment bankers creating new instruments and the ratings agencies.

., (i) business cycle, (i), (ii), (iii), (iv) California: house price fall, (i) Canada banking system, (i) in Basel Committee, (i) and Louvre Accord, (i) Case Shiller house price index, (i) central banks and effect of inflation, (i), (ii) failure to apologise for crisis, (i) and fiscal expansion, (i) independence, (i), (ii) and inflation targeting, (i) and monetary policy, (i), (ii) and quantitative easing, (i) responsibility for controlling macroeconomic fluctuations, (i) responsibility for delivering low inflation, (i) revive growth and inflation, (i) role, (i) see also European Central Bank Centre for Economic Policy Decisions, (i) Chaebol (South Korea), (i) Charlemagne, Emperor, (i) Chase Manhattan Bank (US bank), (i) Chemical Bank (US bank), (i) China currency depreciation, (i) Euro area trade with, (i) in G20 group, (i) investments in US, (i) joins World Trade Organization, (i), (ii) rise as economic power, (i) Citigroup (US bank), (i), (ii), (iii) assets, (i) banking model, (i) low capital buffer, (i) as national bank, (i) rescued, (i) strongly capitalized, (i) collateralized debt obligations (CDOs), (i), (ii) Collins amendment (US), (i) see also Dodd–Frank Act Commerzbank (German bank), (i), (ii), (iii) Commodity Futures Trading Commission (US), (i) Comptroller of the Currency (US) see Office of the Comptroller of the Currency Congressional Research Service (US), (i) Consolidated Supervision Entities (CSE), (i) Consumer Financial Protection Bureau (US), (i), (ii) Consumer Protection Act (US, 2010), (i) Continental Illinois Bank and Trust Company (US bank) Bank of America acquires, (i) failure (1984), (i), (ii) Copenhagen European leaders summit (1978), (i) copyright, (i) Council of Governors (Committee of Governors of the Central Banks; Europe), (i), (ii) Cox, Christopher, (i) Credit Agricole (French bank), (i), (ii) Credit Suisse First Boston (Swiss/US bank), (i), (ii) Cummings, Christine, (i) currency unions, (i), (ii) see also European Monetary Union Cyprus, (i) dealers see broker-dealers debt flows (international), (i), (ii) debts: repayment, (i) Declaration of Strengthening the Financial System (G20, 2009), (i) Delors, Jacques advocates strong franc, (i) Committee and Report, (i), (ii), (iii), (iv), (v), (vi), (vii), (viii) and common currency, (i) as President of European Commission, (i) Denmark accepts Basel capital rules, (i) and currency fluctuations, (i) invited to join European Economic Community, (i) rejects European Monetary Union, (i), (ii) in Scandinavian monetary union, (i) Depository Institutions Deregulation and Monetary Control Act (US, 1980), (i) deposits: uninsured, (i) derivatives, (i), (ii) Deutsche Bank (German bank) assets reduced, (i) backing, (i) branches abroad, (i) and capital buffers, (i) capital ratios, (i) competes with US major banks, (i) expansion, (i), (ii), (iii), (iv), (v) international scope, (i) power, (i), (ii) under pressure to accept reform, (i) Deutsche mark appreciates against dollar, (i) dominance, (i), (ii) revalued, (i) Dexia (French/Belgian bank), (i), (ii), (iii), (iv), (v) Dodd–Frank Act (US, 2010), (i), (ii), (iii), (iv) Doha round of trade talks (2001), (i) dollar appreciates (early 1980s), (i) devalued, (i) and fixed exchange rate system, (i), (ii) as central currency, (i) oil priced in, (i) value pegged to gold, (i) Draghi, Mario, (i), (ii), (iii) Duisenberg, Wim, (i), (ii) dynamic stochastic general equilibrium models (DSGE models), (i), (ii), (iii), (iv) East Germany: Ostmarks converted to Deutsche marks, (i), (ii) eastern Europe and labor market, (i) trade with Euro area, (i) economic models distort policymaking, (i), (ii) see also dynamic stochastic general equilibrium models ‘Economists’ (Euro area): differences from ‘Monetarists’, (i), (ii), (iii), (iv), (v) efficient market hypothesis, (i), (ii) Eichengreen, Barry, (i) Emergency Home Finance Act (US, 1970), (i) Emminger, Otmar, (i) employment: and fiscal and monetary policy, (i) Euro area (and Europe) accepts Basel 3 framework, (i) bank assets reduced since 2008, (i) bank internal risk models, (i), (ii) bank lending expansion, (i) bank resolution system (2014), (i) banking system expansion and transformation (1985–2002), (i), (ii), (iii) banking system in 2002, (i), (ii) banking system shrinks since 2009, (i) and banking union, (i) banks fund US housing bubble, (i) banks under ECB supervision, (i) banks’ overseas expansion, (i), (ii), (iii) bond yields, (i), (ii) borrowing rates converge, (i) business cycles, (i) capital gains, (i) causes of financial crisis, (i) causes of regional separation, (i) centralized bank regulation and support, (i), (ii), (iii), (iv) core and periphery banks, (i), (ii), (iii) debt breaks, (i) depression, (i) domestic (national) banking, (i) early national banking system (1980), (i) effect of post-crisis changes on banks, (i), (ii) and exchange rate instability, (i) failure to achieve integrated banking, (i) financial reform in, (i) fiscal deficits limited, (i), (ii), (iii) fiscal policies tightened, (i) foreign banks in, (i) foreign trade, (i) growth forecasts, (i) house prices, (i), (ii) inadequate fiscal buffers, (i), (ii) inflation rates, (i) institutional changes, (i) internal exchange rates, (i) investment spending, (i) labor markets and migration, (i) lends to US, (i), (ii) limited support for troubled banks, (i) mega-banks, (i), (ii), (iii), (iv), (v), (vi), (vii), (viii), (ix), (x), (xi) member countries, (i) monetary (currency) union, (i), (ii), (iii), (iv), (v), (vi), (vii) move to banking union, (i), (ii), (iii) move to economic integration, (i) need for area-wide bank support system, (i) and origins of World War I, (i) outflows, (i), (ii) output losses, (i), (ii) overbanked, (i) political divisions, (i) post 2002 financial boom, (i) product market, (i) and proposed leverage ratios, (i) residential spending, (i) resolution fund for insolvent banks, (i) responsibility for macroprudential policies, (i) single currency, (i), (ii), (iii), (iv), (v) spending boom, (i) stock market fall from 2007, (i), (ii) surveillance of members reduced, (i) trade balance, (i) universal bank expansion in US, (i), (ii) unprepared for crisis, (i) Euro (currency) as boost to integrated economy, (i), (ii) introduced (1999), (i), (ii), (iii), (iv) European Banking Authority (EBA), (i) European Central Bank (ECB) agreed by Delors Committee, (i) aided by expansion, (i) and bank supervision, (i), (ii), (iii) committed to low inflation, (i) effect of, (i) financial supervision centralized in, (i) and Greek debt crisis, (i) guiding principles, (i) ignores US financial problems, (i) injects liquidity into markets, (i) Joint Supervisory Team, (i) and Maastricht Treaty, (i) and move to banking union, (i) non-adoption of leverage ratio, (i) policy rate, (i) raises rates, (i) vets European Stability Mechanism, (i) weakness, (i) European Coal and Steel Community, (i) European Commission Brussels location, (i) confederated structure, (i) created, (i) European Capital Adequacy Directive, (i) and European integration, (i) Monetary Committee, (i) plans for integrated banking system, (i) and proposed monetary union, (i), (ii) rules on excessive debts, (i) Second Banking Directive, (i), (ii), (iii), (iv) and Stability and Growth Pact, (i) vets European Stability Mechanism, (i) European Community Council of Ministers (ECOFIN), (i) European Council, (i), (ii) European Currency Unit (ECU), (i), (ii) see also Euro European Economic Community Common Agricultural Policy, (i) currency fluctuations, (i) customs union, (i) fixed exchange rates, (i) formed, (i), (ii) and free movement of capital, (i) see also European Union European Financial Stabilisation Mechanism, (i) see also European Stability Mechanism European Financial Stability Facility, (i) see also European Stability Mechanism European Monetary Cooperation Fund, (i), (ii) European Monetary Fund, (i), (ii) European Monetary Union (EMU) and bank deposit insurance, (i) design, (i) and fall of interest rates, (i), (ii), (iii) future, (i), (ii) and increasing economic integration, (i) initial members, (i) long-term expectation, (i) Maastricht Treaty initiates, (i) positive effects, (i), (ii) principles and flaws, (i) reduces risk premiums, (i) trade and single currency, (i) European Reserve Fund, (i) European Stability Mechanism (ESM), (i), (ii) European System of Central Banks (ESCB), (i), (ii), (iii) European Union alterations at times of distress, (i) and banking regulation, (i), (ii), (iii), (iv), (v) commitment to closer (federated) union, (i) economy contracts, (i) and free movement of goods, services, labor and capital, (i) implements Basel (i), (ii) integrated banking system, (i), (ii) name adopted, (i), (ii) single currency (Euro), (i), (ii) on supervision of investment banking groups, (i) see also European Economic Community Evian, Switzerland, (i) Exchange Rate Mechanism (ERM) Balladur proposes reforms, (i) and Bretton Woods fixed exchange rate system, (i), (ii), (iii), (iv) crisis (1992-3), (i), (ii), (iii), (iv), (v) and Delors Committee, (i), (ii) and German reunification, (i) introduced, (i), (ii), (iii) suffers from speculative attacks, (i) exchange rates determined by private markets, (i) Europe introduces, (i) and floating exchange rate system, (i) and international debt flows, (i) Fannie Mae (government-sponsored enterprise, US) capital buffers, (i) collapses, (i) dominates securitization market, (i) expansion, (i) formed, (i) issues mortgage-backed securities, (i), (ii), (iii) nationalized, (i), (ii) profits squeezed, (i) upper loan limits, (i) Federal Deposit Insurance Corporation (FDIC, US), (i), (ii), (iii), (iv) Federal Deposit Insurance Corporation Improvement Act (US, 1991), (i) Federal Home Loans Banks (US), (i) Federal Reserve Bank see United States Federal Reserve Bank financial crises causes and effects, (i) and regulation reform, (i) see also North Atlantic crisis financial markets see markets (financial) Finançial Services Agency (UK), (i) Financial Stability Board (earlier Forum), (i) Financial Stability Oversight Council (FSOC, US), (i), (ii) Finland escapes crisis, (i) expansion in assets, (i) trade boost, (i) fiscal policy, (i), (ii), (iii), (iv), (v), (vi) FleetBoston Financial Corporation (US bank), (i) Ford, Gerald, (i) Fortis (Belgium/Netherlands bank), (i), (ii) France agricultural lobby, (i) aims for integrated Europe, (i) bank assets, (i) bank branches in other countries, (i) banking expansion, (i), (ii), (iii) banking system (2002), (i) banking system nationalized under President Mitterrand, (i), (ii) close economic ties with Germany, (i) differences with Germany over monetary union, (i), (ii), (iii), (iv), (v), (vi), (vii) and ERM crisis (1992), (i) in European Coal and Steel Community, (i) and European exchange rate system, (i), (ii) favours political control of central bank, (i) and financial crisis, (i) franc fort policy, (i) high inflation, (i), (ii), (iii), (iv) interest rates, (i) internal risk models, (i) leaves and rejoins snake, (i) and investment banking, (i) outflows, (i) reduces fiscal deficit, (i) and single currency, (i), (ii), (iii) status in European Commission, (i) suspends sanctions for high fiscal deficits, (i) Freddie Mac (government-sponsored enterprise, US) capital buffers, (i) dominates securitization market, (i) expansion, (i) mortgage-backed securities, (i), (ii) nationalized, (i), (ii) profitability, (i) upper loan limits, (i) Friedman, Milton, (i) funding corporations, (i) G7 leaders’ summits, (i) Hokkaido Toyako (2008), (i) Venice (1987), (i) G20 group Chengdu (2016), (i) London (2009), (i), (ii) Pittsburg (2009), (i) and fiscal stimulus, (i), (ii) and Financial Stability Board, (i) and policy cooperation, (i), (ii) and reform of banking system, (i) regular meetings, (i) Geithner, Timothy, (i) General Agreement on Tariffs and Trade (GATT), (i) General Motors: share value, (i) Genscher, Hans-Dietrich, (i), (ii) Germany accepts monetary union, (i) aims for integrated Europe, (i) bank assets, (i) bank branches in other countries, (i) banking expansion, (i), (ii), (iii) banking system (2002), (i) controls inflation, (i) debts move to, (i) differences with France over monetary union, (i), (ii), (iii), (iv), (v), (vi), (vii), (viii) dominance in monetary union, (i) Dutch exports to, (i) empire founded (1871), (i) enforces rules, (i) and European exchange rate system, (i) export-led economy, (i) favours independent central bank, (i) favours national bank supervision, (i) and financial crisis, (i) foreign banks in, (i) interest rates, (i), (ii), (iii) internal risk models, (i), (ii) Landesbanken, (i) and ERM crisis, (i) and investment banking, (i) reluctance to support periphery countries, (i) response to financial crisis, (i) reunification following fall of Berlin Wall, (i), (ii), (iii), (iv) and single currency, (i), (ii) small banks, (i) and snake, (i) status in European Commission, (i) strength of currency, (i) supply chain with eastern Europe, (i) suspends sanctions for high fiscal deficits, (i) tax reforms under Louvre Accord, (i) and value of currency, (i) warns of effect of Greek debt, (i) Giscard d’Estaing, Valérie, (i), (ii), (iii), (iv), (v), (vi) Glass–Steagall Act (US, 1933), (i), (ii), (iii), (iv), (v), (vi), (vii), (viii) Glicenstein, Gilles, (i) globalization, (i), (ii), (iii) gold and Long Depression, (i) standard, (i), (ii) and US dollar, (i), (ii) Gold Pool, (i) Goldman Sachs (US investment bank) applies for bank holding company status, (i) assets, (i) becomes regulated bank, (i) competes as investment bank, (i) and competition with European banks, (i) lightly capitalized, (i) as LTCM creditor, (i) as shadow bank, (i) government borrowing, (i) government-sponsored enterprises (GSEs, US), (i), (ii), (iii), (iv), (v), (vi) Graham–Leach–Bliley Act (US, 1999), (i) Great Depression (1930s), (i), (ii), (iii), (iv) great moderation, the, (i), (ii) Greece accepts Basel capital rules, (i) adopts Euro, (i) fall in interest rate, (i) in currency union periphery, (i) economic recovery program, (i) in Euro area, (i) European aid to, (i), (ii) excessive borrowing and debts, (i), (ii), (iii), (iv), (v), (vi), (vii) expansion in assets, (i) financial crisis in, (i), (ii), (iii) fiscal mismanagement, (i) high interest rates, (i) joins Euro area, (i) loans from other countries, (i) product market improvements, (i) reduces fiscal deficit, (i) role of central government, (i) Greenspan, Alan on bank supervision and regulation, (i), (ii) on bank regulation, (i) favors reform of Basel (i), (ii) and predictability of policies, (i) on risks posed by investment banks, (i) The Age of Turbulence, (i) Group of Ten, (i) GSEs, see government-sponsored enterprises Hawaii, (i) HBV (German bank), (i) hedge funds, (i), (ii) helicopter money, (i) Hoechst (corporation), (i) homo economicus, (i), (ii) Hong Kong: and Asian crisis, (i) house purchases and prices, (i), (ii) see also United States of America households: in economic theory, (i) houses: investment value, (i) Housing and Urban Development Act (US, 1968), (i) HSBC (UK bank): in US, (i) Hugo, Victor, (i) human beings fads and crazes, (i) sociability, (i), (ii) IFRB (accounting standards), (i) IKB Deutsche Industriebank AG (German bank), (i), (ii) Illinois (US state): state banking regulations, (i) incomes: stagnation, (i) Indonesia, (i), (ii), (iii) inflation rates, (i), (ii), (iii), (iv), (v), (vi), (vii), (viii) information technology and financial procedures, (i) and investment banks, (i) ING (Netherlands bank) accepts government capital injection, (i) expansion, (i), (ii), (iii), (iv), (v) Institute for International Finance, (i) insurance: and mortgage-backed assets, (i) interest rates and borrowing costs, (i) capped in US, (i), (ii), (iii) and exchange rate, (i) and inflation, (i) reduced to zero, (i) International Monetary Fund (IMF) and perceived anti-China measures, (i) on benefits from open capital markets, (i) and European Stability Mechanism loans, (i) and exchange rate, (i) funds increased, (i) support in Asia crisis, (i) loans available, (i) as model for European Monetary Fund, (i) output gaps, (i) resources fall behind increase in world trade, (i) on size of global economy, (i) international monetary system debt flows, (i) history of crises, (i) International Swaps and Derivatives Association, (i) Intesa Sanpaolo (Italian bank), (i), (ii), (iii) investment banking see also shadow banking benefit from nontraditional cash deposits, (i) funding, (i) and hedge funds, (i) and information technology, (i) regulation, (i) role and conduct, (i) Ireland accepts Basel capital rules, (i) bankers in, (i) banking expansion, (i), (ii) borrowing excesses, (i) as ‘Celtic tiger’, (i) and currency fluctuations, (i) in currency union periphery, (i) in Euro area, (i) European aid to, (i) invited to join European Economic Community, (i) expansion in bank assets, (i) financial crisis in, (i), (ii), (iii) foreign investments in, (i) ‘light touch’ regulation, (i), (ii), (iii), (iv), (v) reduces fiscal deficit, (i) successful effect of reforms, (i) Italy borrowing interest rate, (i) commercial loans, (i) connected firms in, (i) in currency union periphery, (i) debt ratio, (i) in Exchange Rate Mechanism, (i) expansion in bank assets, (i) financial crisis in, (i), (ii) high interest rates, (i) housing boom, (i) inflation rises, (i), (ii) joins European Coal and Steel Community, (i) large outflows, (i) leaves Exchange Rate Mechanism, (i) low growth, (i) and monetary union, (i) product market improvements, (i) reduces fiscal deficit, (i) supports suspension of sanctions for high fiscal deficits, (i) ten-year bonds, (i) see also lira ITT (corporation), (i) Japan banking system, (i) in Basel Committee, (i) controls inflation, (i) debts outflow to, (i), (ii) depression, (i) economic growth, (i) floating exchange rates, (i) and Louvre Accord, (i) Prime Minister Abe’s economic reforms (‘Abenomics’), (i), (ii), (iii) JP Morgan Chase (US bank), (i) acquires Bear Sterns, (i) assets, (i) banking model, (i) as national bank, (i), (ii) Keynes, John Maynard, (i), (ii) King, Mervyn, (i), (ii), (iii) Kohl, Helmut, (i), (ii), (iii), (iv), (v) Kohn, Donald L., (i) labor markets: Euro area versus US, (i) Lamfalussy, Alexandre, (i) Larosière, Jacques de, (i) Latin America: debt crisis, (i), (ii), (iii), (iv), (v), (vi) Latin League (1865), (i), (ii) Lawrence, T.E.


pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

"Robert Solow", accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Black Swan, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, market bubble, market clearing, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, Philip Mirowski, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, savings glut, short selling, structural adjustment programs, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, unorthodox policies, value at risk, Washington Consensus, zero-sum game

Mortgage-backed securities were already safe investments, but could that safety be maintained while enhancing returns? If you could figure this out, you could make a lot of money. This was achieved by the technique of “tranching the security,” which turned the simple mortgage-backed securities (the bucket of mortgage payments sold onto investors described earlier) into a contract called a “collateralized debt obligation” (CDO).15 The technique combined the mortgage payments of many different bits of real estate, from many different places, in the same security, but it kept them separate by selling different parts of the security to different people via different “tranches” (or tiers). Basically, you take a bit of the east side of Manhattan and blend that with a bit of Arizona suburb and a bit of Baltimore waterfront, and you pay the holders of the different tranches (usually called senior, mezzanine, or equity tranches) different interest rates according to how risky a tranche they bought.

Tales of Two Small European Countries,” (Giavazzi), 169, 170, 171, 176, 209–210 Canada fiscal adjustment in, 173 Capitalism, Socialism and Democracy, (Schumpeter), 128, 129 Cassel, Gustav, 191 central banks, independence of, 156–158 certificates of deposit (CDs), 234 Chin, Menzie, 11 China, 55 Chowdhury, Anis, 176 Churchill, Winston, 123 and the gold standard, 189 1929 budget speech, 124 Citigroup, 48 Clinton, Bill, 12 Clinton, Hillary, 218 Cochrane, John, 2, 239 Colander, David, 99 collateralized debt obligations, 28, 234 Congressional Research Group, 242 Considine, John, 208 Coolidge, Calvin, 120 Credit Agricole, 87 credit default swaps, 26, 29, 30 Daimler/Mercedes Benz, 132 Darwin’s Dangerous Idea (Dennett), 159 De Grauwe, Paul, 86 debt inflation, 150 default as a way out of financial crises, 183 mortgage, 41, 42, 44, 50 risk, 24 sovereign, 113, 210, 241 See also credit default swaps (CDSs) deflation, 240, 241 demand-side economics, 127 See also supply-side economics Denmark, 207, 209 as a welfare state, 214 austerity in, 17, 169–170, 170–171, 179 expansion, 205, 206, 209 fiscal adjustment in, 173 Dennett, Daniel Darwin’s Dangerous Idea, 159 derivatives, 27–30 credit default swaps, 27–30 special investment vehicles, 29 See also mortgages; real estate Deutsche Bank, 83 devaluation and hyperinflation, 194 as a way out of financial crises, 75, 173, 208, 213 of currency, 76, 77, 147, 169, 171, 188, 191, 197 Diamond, Peter, 243 disintermediation, 23, 49, 232 Dittman, Wilhelm, 195 Dow Jones Industrial Average, 1, 2–3 Duffy, James, 208 Eatwell, John, 42 Economic and Financial Affairs Council of the European Council of Ministers (ECOFIN), 173, 175, 176 economics Adam Smith, 109 Austrian school of, 31, 144 demand-side, 127 Frieburg school of, 135 Germany’s Historical school of, 143 Keynesian, ix, 39, 54 liberal, 99 London School of, 31, 144 macro, 40 neoclassical, 41 neoliberal, 41, 92 public choice, 166 supply-side, 111 zombie, 10, 234 Economics of the Recovery Program, The, (Schumpeter), 128 Economist, The, 69, 166, 216 efficient markets hypothesis, 42 Eichengreen, Barry, 183, 231 Einaudi, Luigi, 165, 167 Eisenhower, Dwight, 243 Englund, Peter, 211 Estonia austerity in, 18, 103, 179, 216–226, 217 fig. 6.1 Eucken, Walter, 135–136 centrally administered economy, 135–136 transaction economy, 135–136 Euro, 74–75, 77 success or failure of, 78–81, 87–93 European banks austerity and, 87 fall of, 84–87 “too big to bail”, 6, 16 European Bond Market, 1 European Central Bank, 54, 55, 84 and austerity, 60, 122 and bailouts, 71–73 and loans to Ireland, 235 and the success of the REBLL states, 216 emergency liquidity assistance program, 4 limitations of, 87–93 long-term refinancing operation, 4, 86 Monthly Bulletin, June 2010, 176 See also Trichet, Jean Claude European Commission, 122 and austerity, 221 and loans to Ireland, 235 and the success of the REBLL states, 216 European Economic Community, 62–64 European Exchange Rate Mechanism, 77 European Union and austerity, 221 and bailouts, 71–73, 208, 221 influence on Europe, 74–75 Eurozone and current economic conditions, 213 current account imbalances, 78 fig. 3.1 ten-year government bond yields, 80 fig. 3.2 exchange-traded funds (ETFs), 234 Fama, Eugene, 55 Fannie Mae, 121 Farrell, Henry, 55 Federal Deposit Insurance Corporation (FDIC), 24 Feldstein, Martin, 55, 78 Ferguson, Niall, 72 Figaro, Le, 201 financial repression, 241 Financial Stability Board, 49 Financial Times, 60 Fisher, Irving, 150 Fitch Ratings, 238 Flandin, Pierre-Étienne, 202 fractional reserve banking, 110 France, 4 and Germany’s nonpayment of Versailles treaty debt, 57 and John Law, 114 and the gold standard, 185, 204 assets of large banks in, 6 austerity in, 17, 126, 178–180 and the global economy in the 1920s and 1930s, 184–189 bond rates in, 6 depression in, 201–202 Eurozone Current Account Imbalances, 78 fig. 3.1 Eurozone Ten-Year Government Bond Yields, 80 fig. 3.2 war debts to the United States, 185 See also Blum, Leon; Flandin, Pierre-Étienne; Laval, Pierre; Poincaré, Raymond Freddie Mac, 121 free option, 29 Freiberg school of economics, 135, 136, 138–139 Frieden, Jeffry, 11 Friedman, Milton, 103, 155, 156, 165, 173 G20 2010 meeting in Toronto, 59–62 Gates, Bill, 7, 8, 13 Gaussian distribution, 33, 34 General Theory (Keynes), 126, 127, 145 Gerber, David, 136 Germany, 2, 16 and repayment war damage in France, 200–201 and the gold standard, 185 and the Treaty of Versailles, 185 as an economic leader, 75–78 austerity in, 17, 25, 57, 59, 101–103, 132–134 and the global economy in the 1920s and 1930s, 178–180, 184–189, 186, 193–197 Bismarkian patriarchal welfare state, 137 Bundesbank, 54, 156, 172, 173 capital drain after World War I, 186 Center Party, 194 Christian Democrats, 137, 139 competition, 137–138 economic ideology of, 56–58, 59–60 entrance into world economy, 134–135 Eurozone Current Account Imbalances, 78 fig. 3.1 Eurozone Ten-Year Government Bond Yields, 80 fig. 3.2 fiscal prudence of, 2, 17, 54 founder’s crisis, 134 German Council of Economic Advisors Report, 169 gold standard and, 196 Historical school of economics, 143 hyperinflation in the 1920s, 56–57, 185, 194, 200, 204 industry in, 132–134 See also BASF, Daimler/Mercedes Benz, Krups, Siemens, ThyssenKrupp ordoliberalism in, 101, 131, 133 origins of, 135–137 order-based policy, 136 National Socialists, 194–195 Nazi period in, 136, 196 Social Democratic Party, 140, 194, 195, 204 social market economy, 139 Stability and Growth Pact, 92, 141 stimulus in, 55–56 See also Freiburg school of economics stop in capital flow from United States in 1929, 190, 194 unemployment in, 196 WTB plan, 195, 196 Giavazzi, Francesco, 179, 205, 206 “Can Severe Fiscal Contractions be Expansionary?

See risk-management techniques Portugal, 3, 4 bailout in, 71–73 Eurozone Current Account Imbalances, 78 fig. 3.1 Eurozone Ten-Year Government Bond Yields, 80 fig. 3.2 government debt 2006–2012, 47 fig. 2.3 slow growth crisis, 68–71 “Positive Theory of Fiscal Deficits and Government Debt in a Democracy, A” (Alesini), 167 Posner, Richard, 55 Prescott, Edward, 55, 157 President’s Conference on Unemployment, 120 Prices and Production (Hayek), 144 Principles of Political Economy (Mill), 116 Quiggin, John, 55 and Australian expectations-augmented austerity, 209 “zombie economics”, 10, 234 Rand, Ayn Atlas Shrugged, 130 rational expectations hypothesis, 42 Real Business Cycle school, 157 real estate “collateralized debt obligation”, 28 “tranching the security”, 28, 30–31 equity, 28 mezzanine, 28 senior, 28 “uncorrelated within their class”, 27–28 REBLL alliance, 103, 178–180, 179–180, 205, 216–226, 217 fig. 6.1 GDP and consumption growth in 2009, 221 table 6.1 See also names of countries recapitalization, 45, 52 Reinhardt, Carmen, 11, 73, 241 Ricardian equivalence, 41, 49 Ricardo, David, 115–117, 117–119, 171 in Germany, 195 risk-management techniques, 49 hedging, 32 long position, 32 options, 32 portfolio diversification, 31 short sell, 32 Ritschl, Albrecht, 193 Road to Serfdom, The (Hayek), 144 Robins, Lionel, 144 Robinson, Joan, 122, 126 Rodrik, Dani, 162, 163 Rogoff, Kenneth, 11, 73 Romania austerity in, 18, 103, 190, 216–226, 217 fig. 6.1, 221 Romney, Mitt, 243 Roosevelt, Franklin Delano, 126 administration policies, 128 balancing the budget, 188 Röpke, Wilhelm, 138 Rothbard, Murray, 148 Sachs, Jeffrey, 60 Saez, Emanuel, 243 Say’s law, 137 Sbrancia, M.


Global Financial Crisis by Noah Berlatsky

accounting loophole / creative accounting, asset-backed security, banking crisis, Bretton Woods, capital controls, Celtic Tiger, centre right, circulation of elites, collapse of Lehman Brothers, collateralized debt obligation, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, Doha Development Round, energy security, eurozone crisis, financial innovation, Food sovereignty, George Akerlof, God and Mammon, Gordon Gekko, housing crisis, illegal immigration, income inequality, market bubble, market fundamentalism, mass immigration, moral hazard, new economy, Northern Rock, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, South China Sea, structural adjustment programs, too big to fail, trade liberalization, transfer pricing, working poor

Nevertheless, many commentators argue that significant risks remain for property prices in Australia. The US Banking Crisis Hurt Australia When it came to the second phase of the crisis, Australia was not so lucky. Many investors held securities with direct exposure to the ailing US subprime mortgage-backed market. Two prominent casualties were high-yield funds managed by Basis Capital and Absolute Capital. Mortgage-backed securities that had been repackaged in the form of collateralized debt obligations (CDOs) had also been widely distributed to so-called middle market investors: local councils, universities, schools and hospitals. Non-bank mortgage lender RAMS also found itself in trouble. RAMS was heavily reliant on short-term funding, much of which it sourced from US investors who 88 Effects of the Global Financial Crisis on Wealthier Nations Australia’s Foreign Debt, 1998–2007 net foreign debt (% GDP) 70% 60% 50% 40% 30% 20% 10% -0 7 Ju n -0 6 Ju n -0 5 Ju n -0 4 Ju n -0 3 Ju n -0 2 Ju n -0 1 Ju n -0 0 Ju n -9 9 Ju n Ju n -9 8 0% TAKEN FROM: Sean Carmody, “Australia and the Global Financial Crisis,” A Stubborn Mule’s Perspective, October 25, 2008. www.stubbornmule.net.

See Liquidity crises Cato Institute, 202–203 “Celtic Tiger” phenomenon, 94 Charitable agencies, 76–77, 123– 124, 137 Chauzy, Jean-Philippe, 133–134 Chávez, Hugo, 184 Index Chile, 161–162 China, 22–26, 65–71, 108–120, 135–142, 143–149 blames U.S. policies for crisis, 22–26 could use crisis to become responsible world power, 143–149 crisis may worsen poverty, 135–142 economic growth and success, 136–137, 144, 145 G-20 role, 145, 146 investment, U.S., 18, 24, 144, 147 migrant workers, 110, 116, 130 must join with U.S. to control crisis, 65–71 stimulus packages, 19, 135, 140, 141–142, 144–145 trade with Africa, 195 trade with U.S., 65, 66, 70–71, 144, 147 unrest, 19, 25, 108–120, 139– 140 Clearinghouse regulations, 49–50 Climate change policy, 26, 163 Collateralized debt obligations (CDOs), 50, 88 Colombia, 161–162, 180, 182, 183, 184 Common Cause, 205–206 Communist Party, China, 110, 114–116, 139–140 Comparative advantage, 192–193 Competitiveness, financial, 48–49 Congress business subsidies, 202, 203, 204, 205–206 hearings, 175 predatory lending, 206 protectionism and trade agreements, 181, 182, 184 Construction industry, 34, 130, 131, 133 Consumer confidence, 63, 91, 100, 208, 213, 216 Corporate welfare, 201, 202–206 See also Bailouts Cox, Pamela, 158–159 Credit default swaps (CDSs), 17, 28, 29, 50, 175–176, 215 Credit derivatives.


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, business cycle, 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

I imagined my fellow Wall Streeters going to the cathedral in my neighborhood and lighting candles. Thanks be to God and Greenspan. In August 2000, my firm, DLJ, was purchased by Credit Suisse for $11.5 billion. By January 2001, when we were all called in for that companywide meeting, the Swiss company’s stodgier, more regimented culture had already collided with DLJ’s entrepreneurial spirit. The bankers began describing their new product: a $340 million collateralized debt obligation (CDO), essentially a bond composed of home mortgages sliced into various tranches that produced income streams. Each tranche had been rated by Moody’s, Standard & Poor’s, and Fitch Ratings, the three most important ratings agencies. The AAA rating stood at the top, then AA, and so on down the ratings ladder until the bottom, the “equity” tranche. The highest-rated tranches paid out first, as much as 10 percent, significantly higher than the average yield on a corporate bond with the same rating; the last to pay out was equity.

., 86, 109, 142 Callan, Erin, 130–31 Carney, Mark, 260 “Cash for Clunkers” plan, 176 Cashin, Arthur, 200–201, 220, 251 Cassano, Joseph J., 137–38 Cayne, James E., 105–7, 112, 115 central banking, 260–61 Chase Manhattan, 14 China, 208, 261 Chomsky, Noam, 9 Chrysler Financial, 169 Citigroup, 53, 110, 121, 128, 166, 168 Cleveland Fed, 36 Clinton, Bill, 16, 86 Clinton, Hillary, 260 “Closing the Gap” (Boston Fed), 21–22 CNBC, 25–26, 107 collateral agents, 127 collateralized debt obligations (CDOs), 15–18, 27–28, 57, 124 Collins, Nancy, 68 Commercial Paper Funding Facility (CPFF), 167, 169 commercial paper market, 141–42 commodity bubble, 216 “From Complacency to Crisis” (Duca, Rosenblum, & DiMartino Booth), 74–75 core PCE inflation rate, 77–78, 83, 247 Corrigan, Gerry, 53 Corzine, Jon, 109 counterparty risk, 108 Countrywide, 100 Courage to Act, The (Bernanke), 251–52 Cox, Michael, 62, 63 creative destruction, 63 credit default swaps (CDSs), 94–95, 98, 105, 124 Credit Suisse, 15 crude oil, 247 Dallas Fed, 36–38, 62–65, 70–73, 82 Dallas Morning News, 18, 21, 31 Dealey, George Bannerman, 44 debt, 9–10, 24–25, 251 Decherd, Robert, 18 “Deflation: Making Sure ‘It’ Doesn’t Happen Here” (Bernanke), 150–51 derivatives, 14, 15–18, 51, 52, 126–29 AIGFP insurance policies for, 137–38 Born’s attempt to regulate, 16–17 CDOs, 15–18, 27–28, 57, 124 Deutsche Bank, 168 Diamond, Peter, 194–95 Dimon, Jamie, 29, 110–12, 114, 134, 135, 226 discount window, 118 District Banks, 36–38, 43–45, 67, 70–72.

., 109 Stiglitz, Joseph, 199, 260 stock buybacks, 7 Stockman, David, 196 stock market Bernanke’s “additional stimulus” speech in August 2010 and, 193 Black Monday, 64–65 end of QE2 and, 217–18 flash crash, 189–90 low conviction rallies, 2010, 185, 188 9/11 terrorist attacks impact on, 223–24 percentage of U.S. adults invested in, 8–9 rally of, in April–May 2009, 174 reaction to bad news, late 2009, 181, 184 record lows, in March 2009, 171 TARP bailout bill and, 143 VIX and, 187, 188 Stockton, David, 194 Stress Test (Geithner), 52 stress tests, 170–71 Strong, Benjamin, 53 structured investment vehicles (SIVs), 123–24 subprime mortgages, 21, 22, 27, 28 Summers, Larry, 15–17, 53, 95, 234–35 Supervisory Capital Assessment Program (SCAP), 171 synthetic collateralized debt obligations, 124 systemic risk, 26, 28, 252 System Open Market Account (SOMA), 29, 52 taper tantrum, 233 Tarullo, Daniel, 43, 211, 258–59 Taylor, John, 82, 198 Term Asset-Backed Securities Loan Facility (TALF), 167, 168 Term at the Fed, A (Meyer), 153 Term Auction Facility (TAF), 168 Term Securities Lending Facility (TSLF), 154 Tett, Gillian, 192 Thain, John, 135, 136, 146 Tice, David, 21 Time, 15, 182 Tishman Speyer, 133 Tobin, James, 85–86 Toyota, 241 tri-party repo agreements, 127 troubled asset relief program (TARP), 142–43 Trump, Donald, 9 Tyco, 107 UBS, 120, 168 unemployment, 171, 192, 195, 210 Vasiliauskas, Vitas, 261 Verizon, 169 Vitner, Mark, 40 VIX, 187, 188 Volcker, Paul, 48, 53, 60, 62, 93, 187–88, 219–20, 238 Volcker Rule, 226 Von Mises, Ludwig, 88 Wachovia, 121 Waldman, Maryanne, 222 Wall Street Journal, 106, 119, 167, 175, 177, 217 Warren, Elizabeth, 246, 258 Warsh, Kevin, 113, 181, 193, 197–98, 211, 234 Washington Mutual, 121, 143 wealth effect, 6–7 Wealth of Nations, The (Smith), 125–26 Weill, Sanford, 29, 110 Weintraub, Robert E., 60 Wells Fargo, 178 “When Does Narcissistic Leadership Become Problematic?”


pages: 399 words: 114,787

Dark Towers: Deutsche Bank, Donald Trump, and an Epic Trail of Destruction by David Enrich

Affordable Care Act / Obamacare, anti-globalists, Asian financial crisis, banking crisis, Berlin Wall, buy low sell high, collateralized debt obligation, commoditize, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Donald Trump, East Village, estate planning, Fall of the Berlin Wall, financial innovation, forensic accounting, high net worth, housing crisis, interest rate derivative, interest rate swap, Jeffrey Epstein, London Interbank Offered Rate, Lyft, Mikhail Gorbachev, NetJets, obamacare, offshore financial centre, post-materialism, Ralph Waldo Emerson, Renaissance Technologies, risk tolerance, Robert Mercer, rolodex, sovereign wealth fund, too big to fail, transcontinental railway, yield curve

., 162, 164 Business Executives for National Security, 334–35 BuzzFeed, 324 Byrne, Richard, 114–16, 119, 175–77, 274–75 Callable interest rate swaps, 34 Capital ratio, 182–83, 192 Carbon-emissions permits, 150–51, 191–92 Carney, Mark, 209 Casablanca (movie), 20–21 CDOs (collateralized debt obligations), 127, 136–37, 138–40, 154 Central Presbyterian Church (New York City), 229 Cerberus Capital Management, 347 Charles de Gaulle Airport, 300 Cherednichenko, Alexander, 213–15, 216–17 Chicago Mercantile Exchange, 194 Chicago Sun-Times, 214 Chrysler Building (New York City), 76 Cicero (magazine), 263 Citigroup (Citicorp), 74, 120, 147, 167–68, 270 Citron, Robert, 40–41 Claremont McKenna College, 31, 31n Clarke, Stuart, 174 Cleopatra (movie), 254 Climate change, 150–51 Clinton, Bill, 164 Clinton, Hillary, 307, 309 Cloete, Alan, 129, 262, 262n Cohan, William, 74, 275 Cohen, Michael, 357 Cohn, Gary, 320 Cohrs, Michael, 92, 102–103 Colby College, 27 Collateralized debt obligations (CDOs), 127, 136–37, 138–40, 154 Colony Capital, 272–73 Columbia Business School, 69 Commerzbank, 82, 347–48 Commodity Futures Trading Commission, 194 Concorde, 45, 47, 88 Consumer Financial Protection Bureau, 343 Continental Illinois, 32–33 Cook County Juvenile Court, 214, 215 Cooper Horowitz, 75–76 Coppola, Francis Ford, 254 Craig, Sue, 307–308, 308n Credit Suisse, 97, 106–107 Croatia, 122–23 Crossman, Alex, 142 Crow Indians, 13 Cryan, John, 298–99 appointment as CEO, 266–68 background of, 267 replacement as CEO, 345 Trump and, 307–308, 314 Cypriot banking, 231–33, 338–39 Daimler-Benz, 23 Daisy (dog), 4, 123, 220, 221, 223, 225, 230, 243, 286 Dartmouth College, 28 Davis, Sidney, 244 Davis, Steven, 105, 105n DB Pace Acquisitions, 275 DBTCA.

He moved to London with Merrill, and four years later, in 1997, Jain hired him at Deutsche to be a top sales executive. Misra, with slicked-back hair and sad brown eyes, kept getting promoted, and he eventually became the bank’s head of credit trading (bonds, currencies, interest rates, and the like). There he would make his mark in part by pushing his team into the nascent field of collateralized debt obligations. The essence of a CDO was that you smushed together a bunch of securities—often they were bonds made up of mortgages—and then carved that mass up into lots of slices, some riskier than others, which you would sell as new. Under Misra’s leadership, Deutsche became one of the planet’s most prolific peddlers of these suddenly hot instruments. Investors—many of them unsophisticated European banks, pension plans, and municipalities—took Deutsche’s advice and bought truckloads of them.


pages: 305 words: 69,216

A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression by Richard A. Posner

Andrei Shleifer, banking crisis, Bernie Madoff, business cycle, collateralized debt obligation, collective bargaining, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, diversified portfolio, equity premium, financial deregulation, financial intermediation, Home mortgage interest deduction, illegal immigration, laissez-faire capitalism, Long Term Capital Management, market bubble, money market fund, moral hazard, mortgage debt, Myron Scholes, oil shock, Ponzi scheme, price stability, profit maximization, race to the bottom, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, savings glut, shareholder value, short selling, statistical model, too big to fail, transaction costs, very high income

Leverage increases risk, but it also increases expected return, and it is not irrational to accept that tradeoff within limits that in the latest bubbles were not thought to have been exceeded, because of the new financial instruments that were believed to minimize risk. Indeed they, along with the magical combination of low interest rates with low inflation, were the key innovations that made the era seem new, along with one I haven't mentioned yet—the special investment vehicle. A bank that created a risky asset, say some form of collateralized debt obligation (a more complicated version of a mortgage-backed security), might place it in a separate entity, created to hold the asset, rather than keeping it on its books, so that if the asset crashed the bank's capital would not be impaired. As long as the bank disclosed in advance that it was not guaranteeing any losses sustained by the entity, investors could not complain; they would be taking a risk with their eves wide open.

But I have acknowledged that there are political problems with pricking asset-price bubbles, and the Federal Reserve cannot maintain its political independence if it ruffles too many political feathers. Not enough economists noticed (or at least remarked) the relation between executive compensation practices and risky lending, or appreciated the riskiness of mortgage-backed securities, other collateralized-debt obligations, and credit-default swaps, or connected the decline in personal savings to the danger that such lending posed to the economy. Not enough seem to have realized that the crisis of the banking industry, when it hit, was a crisis not of (or at least not mainly of) illiquidiry but of insolvency. Not only were warning signs ignored until too late, but when the economics profession finally woke up we learned that neither government economists like Bernanke nor private economists had prepared any contingency plans for dealing with a depression.


pages: 1,088 words: 228,743

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, Bernie Madoff, Black Swan, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, G4S, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, London Interbank Offered Rate, Long Term Capital Management, loss aversion, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, performance metric, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, Robert Shiller, savings glut, selection bias, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, stocks for the long run, survivorship bias, systematic trading, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond, zero-sum game

Index AAA/AA/A-rated bonds absolute valuation academic investors active investing active risk puzzle (Litterman) active strategies adaptive markets hypothesis (Lo) advisors, CTAs agriculture alpha—beta barbell alpha—beta separation alphas CAPM currency carry hedge funds long horizon investors portable alpha alternative assets assets list commodities hedge funds liquidity momentum strategies PE funds premia real estate risk factors alternative betas AM see arithmetic mean ambiguity aversion Amihud, Yakov announcement days arbitrage behavioral finance CRP front-end trading equity value strategies term structure models Argentina arithmetic mean (AM) art investing asset classes 1990—2009 alternative assets “bad times” performance currency carry derivatives foreign exchange forward-looking indicators growth sensitivities historical returns inflation long history momentum strategies performance 1990—2009 profitable strategies risk factors style diversification traditional trend following understanding returns value strategies volatility selling world wealth assets 1968—2007 asset richening AUM Berk—Green management model cyclical variation empirical “horse races” ERPC feedback loops forward-looking measures growth illiquidity liquidity long-horizon investors market relations multiple asset classes prices/pricing privately held real assets risky assets seasonal regularities survey-based returns tactical forecasting tail risks time-varying illiquidity premia volatility see also asset classes assets under management (AUM) asymmetric information asymmetric returns asymmetric risk at-the-money (ATM) options seasonal regularities tail risks volatility selling attention bias AUM see assets under management BAB see betting against beta backfill bias backwardation “bad times” carry strategies catastrophes crashes crises inflation rare disasters bank credibility Bank of England Barcap Index BBB-rated bonds behavioral finance applications arbitrage biases cross-sectional trading heuristics historical aspects macro-inefficiencies micro-inefficiencies momentum over/underreaction preferences prospect theory psychology rational learning reversal effects speculative bubbles value stocks BEI see break-even inflation benchmarks, view-based expected returns Berk—Green asset management model Bernstein, Peter betas alpha—beta barbell BAB currency carry equity hedge funds long-horizon investors risk time-varying betting against beta (BAB) biases attention behavioral finance confirmation conservatism currency carry downgrading extrapolation forward rate hedge funds heuristic simplifications high equity premium hindsight historical returns learning limits memory momentum overconfidence overfitting overoptimism reporting representativeness reversal tendencies self-attribution self-deception survey data terminology volatility selling binary timing model Black—Litterman optimizers Black—Scholes (BS) option-pricing formula Black—Scholes—Merton (BSM) world blind men and elephant poem (Saxe) bond risk premium (BRP) approximate identities bond yield business cycles covariance risk cyclical factors decomposed-year Treasury yield drivers ex ante measures historical returns inflation interpreting BRP IRP macro-finance models nominal bonds realized/excess return safe haven premium supply—demand survey-based returns tactical forecasting targets terminology theories YC bonds AAA/AA/A-rated balanced portfolios BBB-rated credit spreads ERPB government historical records HY bonds IG bonds inflation-linked long-term nominal non-government relative valuation stock—bond correlation top-rated yields see also bond risk premium; corporate bonds booms break-even inflation (BEI) Bretton Woods system BRIC countries BRP see bond risk premium BSM see Black—Scholes—Merton bubbles absolute valuation memory bias money illusion real estate Shiller’s four elements speculative Buffet, Warren building block approach business cycles asset returns economic regime analysis ex ante indicators realized returns buybacks B-S see Black—Scholes option-pricing formula C-P BRP see Cochrane—Piazzesi BRP forward rate curve calls seasonal regularities tail risks volatility selling Campbell, John Campbell—Cochrane habit formation model Capital Asset Pricing Model (CAPM) alphas carry strategies Consumption CAPM covariance with “bad times” disagreement models ERP Intertemporal CAPM liquidity-adjusted market frictions market price equation multiple risk factors risk factors risk-adjusted returns risk-based models skewness stock—bond correlation supply—demand volatility Capital Ideas (Bernstein) capitalism capitalization (cap) rate CAPM see Capital Asset Pricing Model carry strategies 1990—2009 active investing asset classes business cycles credit carry currency ERP financing rates foreign exchange forward-looking indicators forward-looking measures generic proxy role historical returns long-horizon investors non-zero yield spreads real asset investing roll Sharpe ratios 2008 slide tactical forecasting cash, ERPC cash flow catastrophes see also “bad times” CAY see consumption/wealth ratio CCW see covered call writing CDOs see collateralized debt obligations CDSs see credit default swaps central banks Chen three-factor stock returns model China Citi (Il—)Liquidity indices Cochrane—Piazzesi BRP (C-P BRP) forward rate curve see also Campbell—Cochrane collateral return collateralized debt obligations (CDOs) comfortable approaches commodities characteristics equity value strategies excess returns expected returns expected risk premia futures historical returns inflation momentum return decomposition returns 1984—2009 supply—demand seasonals term structure trading advisors value indicators commodity momentum performance rational stories simple strategies trend following tweaks when it works well why it works see also momentum strategies commodity trading advisors (CTAs) composite ranking cross-asset selection models compound returns conditioners confirmation bias conservatism constant expected returns constant relative risk aversion (CRRA) Consumption CAPM consumption/wealth ratio (CAY) contemporaneous correlation contrarian strategies blunders feedback loops forward indication approach see also reversal convenience yield corporate bonds credit spreads CRP forward-looking indicators front-end trading IG bonds liquidity sample-specific valuation tactical forecasting correlation asset returns correlation premium correlation risk default correlations equities implied risk factors tail risks costs control currency carry enhancing returns taxes trading costs country-specific vulnerability indices covariance with “bad times” covariance risk risk factors covered call writing (CCW) crashes markets see also “bad times” credit default swaps (CDSs) credit-pricing models credit risk credit risk premium (CRP) analytical models attractive opportunities business cycles credit default swaps credit spreads decomposing credit spread default correlations emerging markets debt front-end trading historical excess returns IG bonds low ex post premia mortgage-backed securities non-government debt portfolio risk reduced-form credit-pricing models reward—risk single-name risk swap—Treasury spreads tactical forecasting terminology theory credit spreads AAA/AA/A-rated bonds BBB-rated bonds business cycles CRP cyclical effects decomposition empirical “horse races” forward-looking indicators high-yield bonds rolling yield top-rated bonds volatility yield-level dependence credit and tactical forecasting creditworthiness crises 2007—2008 crisis currency carry liquidity money markets see also “bad times” cross-asset selection forecasting models cross-sectional market relations cross-sectional trading CRP see credit risk premium CRRA see constant relative risk aversion CTAs see commodity trading advisors currency base of returns carry empirical “horse races” equity value strategies inflation see also foreign exchange currency carry baseline variants combining carry conditioners costs diversification emerging markets ex ante opportunity financial crashes foreign exchange historical returns hyperinflation indicators interpreting evidence maturities pairwise carry trading portfolio construction ranking models regime indicators seasonals selection biases strategy improvements “timing” the strategy trading horizons unwind episodes why strategies work cyclical effects credit spreads growth seasonal regularities see also business cycles D/P see dividend yield data mining see also overfitting; selection bias data sources of time series data series construction day-of-the-week effect DDM see dividend discount model debt supercycle default correlations, CDOs default rates, HY bonds deflation delta hedging demand see supply—demand demographics derivatives Dimson, Elroy direct hedge funds disagreement models discount rates discounted cash flows discretionary managers disinflation disposition effect distress diversification currency carry drawdown control long-horizon investors return risk factors style diversification return (DR) dividend discount model (DDM) equities ERP forward-looking indicators growth rate debates dividend growth dividend yield (D/P) DJCS HF index dollars base of returns cost averaging currency carry foreign exchange downgrading bias downside beta DR see diversification return drawdown control duration risk duration timing dynamic strategies equity value strategies portfolio construction risk factors E/P see earnings/price ratio earnings E/P ratio EPS equity returns forecasts growth rates yield see also earnings/price ratio earnings-per-share (EPS) earnings/price (E/P) ratio absolute valuation drivers forward-looking indicators measures choices relative valuation value measures economic growth see also growth efficiency behavioral finance macro-inefficiencies market inefficiency micro-inefficiencies efficient markets hypothesis (EMH) elephant and blind men poem (Saxe) EMBI indices emerging markets carry strategies currency carry debt equity returns future trends growth EMH see efficient markets hypothesis empirical multi-factor finance models endogenous return and risk feedback loops market timing research endowments energy sector commodity momentum trend following volatility selling enhancing returns costs horizon investors risk management skill EPS see earnings per share equilibrium accounting equilibrium model equities 1990—2009 business cycles carry strategies correlation premium empirical “horse races” forward-looking indicators inflation long history momentum sample-specific valuation tactical forecasting ten-year rolling averages value strategies see also stock . . .

Antti Ilmanen Bad Homburg, November 2010 Abbreviations and acronyms AM Arithmetic Mean ATM At The Money (option) AUM Assets Under Management BEI Break-Even Inflation BF Behavioral Finance B/P Book/Price, book-to-market ratio BRP Bond Risk Premium, term premium B-S Black–Scholes C-P BRP Cochrane–Piazzesi Bond Risk Premium CAPM Capital Asset Pricing Model CAY Consumption wealth ratio CB Central Bank CCW Covered Call Writing CDO Collateralized Debt Obligation CDS Credit Default Swap CF Cash Flow CFNAI Chicago Fed National Activity Index CFO Chief Financial Officer CMD Commodity (futures) CPIyoy Consumer Price Inflation year on year CRB Commodity Research Bureau CRP Credit Risk Premium (over Treasury bond) CRRA Constant Relative Risk Aversion CTA Commodity Trading Advisor DDM Dividend Discount Model DJ CS Dow Jones Credit Suisse DMS Dimson–Marsh–Staunton D/P Dividend/Price (ratio), dividend yield DR Diversification Return E( ) Expected (conditional expectation) EMH Efficient Markets Hypothesis E/P Earnings/Price ratio, earnings yield EPS Earnings Per Share ERP Equity Risk Premium ERPB Equity Risk Premium over Bond (Treasury) ERPC Equity Risk Premium over Cash (Treasury bill) F Forward price or futures price FF Fama–French FI Fixed Income FoF Fund of Funds FX Foreign eXchange G Growth rate GARCH Generalized AutoRegressive Conditional Heteroskedasticity GC General Collateral repo rate (money market interest rate) GDP Gross Domestic Product GM Geometric Mean, also compound annual return GP General Partner GSCI Goldman Sachs Commodity Index H Holding-period return HF Hedge Fund HFR Hedge Fund Research HML High Minus Low, a value measure, also VMG HNWI High Net Worth Individual HPA House Price Appreciation (rate) HY High Yield, speculative-rated debt IG Investment Grade (rated debt) ILLIQ Measure of a stock’s illiquidity: average absolute daily return over a month divided by dollar volume IPO Initial Public Offering IR Information Ratio IRP Inflation Risk Premium ISM Business confidence index ITM In The Money (option) JGB Japanese Government Bond K-W BRP Kim–Wright Bond Risk Premium LIBOR London InterBank Offered Rate, a popular bank deposit rate LP Limited Partner LSV Lakonishok–Shleifer–Vishny LtA Limits to Arbitrage LTCM Long-Term Capital Management MA Moving Average MBS (fixed rate, residential) Mortgage-Backed Securities MIT-CRE MIT Center for Real Estate MOM Equity MOMentum proxy MSCI Morgan Stanley Capital International MU Marginal Utility NBER National Bureau of Economic Research NCREIF National Council of Real Estate Investment Fiduciaries OAS Option-Adjusted (credit) Spread OTM Out of The Money (option) P Price P/B Price/Book (valuation ratio) P/E Price/Earnings (valuation ratio) PE Private Equity PEH Pure Expectations Hypothesis PT Prospect Theory r Excess return R Real (rate) RE Real Estate REITs Real Estate Investment Trusts RWH Random Walk Hypothesis S Spot price, spot rate SBRP Survey-based Bond Risk Premium SDF Stochastic Discount Factor SMB Small Minus Big, size premium proxy SR Sharpe Ratio SWF Sovereign Wealth Fund TED Treasury–Eurodollar (deposit) rate spread in money markets TIPS Treasury Inflation-Protected Securities, real bonds UIP Uncovered Interest Parity (hypothesis) VaR Value at Risk VC Venture Capital VIX A popular measure of the implied volatility of S&P 500 index options VMG Value Minus Growth, equity value premium proxy WDRA Wealth-Dependent Risk Aversion X Cash flow Y Yield YC Yield Curve (steepness), term spread YTM Yield To Maturity YTW Yield To Worst Disclaimer Antti Ilmanen is a Senior Portfolio Manager at Brevan Howard, one of Europe’s largest hedge fund managers.

Other studies show that correlation risk is priced in the cross-section of equity returns (stocks with higher sensitivity to rising correlation need to offer higher long-run returns) and in time series (the aggregate market has higher returns following higher average correlations). There is a large literature that goes beyond equities and focuses on implied default correlations based on collateralized debt obligation (CDO) tranche prices in liquid credit default swap (CDS) indices. The manufacturing of CDOs involves two steps: first, many securities are pooled into a diversified portfolio (special purpose vehicle or SPV), then the resulting cash flows are redistributed to tranches of varying seniority within the CDO. Tranches are typically assigned credit ratings from AAA to BBB, except for the unrated, most junior (equity) tranche, which takes the first default losses; higher yield spreads compensate lower seniorities.


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

activist fund / activist shareholder / activist investor, algorithmic trading, Berlin Wall, bonus culture, BRICs, business process, buy and hold, 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

Earlier theories, Dekker argues, have been tripped up by their tendency to explain instances of failure in complex environments by blaming flawed components rather than the workings of the organizational system as a whole.2 Dekker concludes, by contrast, that failure emerges opportunistically, nonrandomly, from the very webs of relationships that breed success and that are supposed to protect organizations from disaster. Dekker also observes that systems tend to drift in the direction of failure, gradually reducing the safety margin and taking on more risk, because of pressures to optimize the system in order to be more efficient and competitive. We are able to build complex things—deep-sea oil rigs, spaceships, collateralized debt obligations—all of whose properties we can understand in isolation. But with complex systems in competitive, regulated societies—like most organizations—failure is often primarily due to unanticipated interactions and interdependencies of components and factors or forces outside the system, rather than failure of the components themselves. The interactions are unanticipated, and the signals are missed.

Goldman experiments with e-mail (C). 1997: Paulson says Goldman’s policy of not advising on hostile takeovers is no longer in the firm’s interest, but Corzine resists any change that might damage Goldman’s image. They compromise on an experiment with a test case outside the United States, and Goldman advises Krupp in a successful hostile take-over of Thyssen (O, C). J.P. Morgan develops a proprietary product that helps banks clean up their balance sheets using credit default swaps—the first synthetic collateralized debt obligations (CDOs) (T, C). Morgan Stanley merges with Dean Witter Reynolds, the financial services business of Sears that serves retail clients (C). The acquisition extends Morgan Stanley’s ability to sell stock offerings and makes Morgan Stanley larger. Travelers Group, run by Sandy Weill, purchases Salomon Brothers, a major bond dealer and investment bank, for $9 billion (C). Bankers Trust purchases Alex Brown for $2.1 billion (C).

FINRA says Goldman did not have the proper procedures in place to make sure that this disclosure was made (R). 2011: In March, former Goldman board member Rajat Gupta is charged by the SEC with insider trading for passing information to the hedge fund Galleon Group that he learned in his capacity as a board member. Six months later he is arrested on criminal charges, soon after the SEC charges another Goldman employee with insider trading. In April, Senator Carl Levin (D.-Mich.) releases the 650-page report of the Senate investigation into the credit crisis (R). It concludes that Goldman misled clients and Congress about the collateralized debt obligations that helped cause the financial crisis. The report urges regulators to identify any violations of law in the activities of Goldman leading up to the financial crisis. The report asserts that conflicts of interest led Goldman to place its financial interests before those of its clients. The report is the result of a two-year probe by the Permanent Subcommittee on Investigations. In May, the report is referred to the Department of Justice and the SEC.


pages: 550 words: 124,073

Democracy and Prosperity: Reinventing Capitalism Through a Turbulent Century by Torben Iversen, David Soskice

Andrei Shleifer, assortative mating, augmented reality, barriers to entry, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, centre right, cleantech, cloud computing, collateralized debt obligation, collective bargaining, colonial rule, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, deskilling, Donald Trump, first-past-the-post, full employment, Gini coefficient, hiring and firing, implied volatility, income inequality, industrial cluster, inflation targeting, invisible hand, knowledge economy, labor-force participation, liberal capitalism, low skilled workers, low-wage service sector, means of production, mittelstand, Network effects, New Economic Geography, new economy, New Urbanism, non-tariff barriers, Occupy movement, offshore financial centre, open borders, open economy, passive investing, precariat, race to the bottom, rent-seeking, RFID, road to serfdom, Robert Bork, Robert Gordon, Silicon Valley, smart cities, speech recognition, The Future of Employment, The Great Moderation, The Rise and Fall of American Growth, too big to fail, trade liberalization, union organizing, urban decay, Washington Consensus, winner-take-all economy, working-age population, World Values Survey, young professional, zero-sum game

The origins of the crisis are by now quite well understood, and we have discussed them in detail elsewhere (Iversen and Soskice 2012; Carlin and Soskice 2014). One key trigger was the difficulty of HFLI to cover their losses once prices on risky assets they owned by borrowing against equity started to fall. Greatly complicating the situation was the expansion of two financial instruments which had radically reduced the riskiness of individual assets: one was collateral debt obligation (CDOs) that bundled loans such as mortgages, credit card debt, student loans, and bank loans, and thus minimized individual default risk, and cut the securitized packages into different risk tranches. The other was credit default swaps (CDSs) that “insured” assets against a wide range of defaults. These instruments were not new—in some form or other they had always existed—but they had expanded in a massive and increasingly complex way over the previous two decades.

., 260 Bryson, Alex, 105 Caminada, Koren, 133 Canada: British North American Act and, 87–88; democracy and, 38, 56–57, 61, 62, 87, 283n15; Earl of Durham report on, 87; Fordism and, 106; Gini coefficients and, 25, 36; knowledge economies and, 147–48, 150, 154, 166, 221, 233, 236, 242, 245; median income and, 25; populism and, 245; Tories and, 87 Cantwell, John, 193, 279n1 capitalism: artificial intelligence (AI) and, 260–72; colocation and, 159, 261, 266–72; competition and, 1, 6, 11–12, 16, 26, 30–31, 33, 40, 122, 128, 131, 139, 152, 163, 177, 182, 186, 218, 258, 261; decentralization and, 39, 49, 122, 152, 186, 275; decommodification and, 9; democratic politics’ strengthening of, 30–35; Denmark and, 39, 148, 203; economic geography and, 2–3, 7–8, 18, 20, 31, 48, 147, 159, 185, 192; education and, 7, 10, 12, 20, 26–28, 31, 37–38, 45, 54, 60, 102, 128, 131, 143, 159, 161, 165, 225, 228, 234, 237, 250–51, 257; financial crisis and, 177, 206–14; France and, 17, 148, 182; Germany and, 4, 10–11, 17, 49, 55, 77; growth and, 2–3, 8, 13, 16, 30–32, 38, 79, 97, 125, 156, 163, 218, 247, 261; industrialization and, 4, 37–38, 53, 58, 60, 101, 124, 203; inequality and, 1, 5, 9, 20, 22, 24–26, 40–41, 125, 139, 261, 268, 273–74, 282n22; inflation and, 253, 285n9; Information and Communication Technology (ICT) and, 261, 266, 276; innovation and, 2, 6–12, 19, 31–34, 47, 128, 131, 157, 206, 258, 281n18; institutional frameworks and, 31–34, 47–49, 128–29, 131, 146; Italy and, 4, 77, 148; Japan and, 4, 11, 49, 55, 148, 282n2; labor market and, 1, 6, 12, 31, 38, 46–47, 122, 125, 128, 152, 186, 229, 258; liberalism and, 1–2, 32, 49, 60, 97, 100–1, 137, 143, 213–14, 228; low-skilled labor and, 265–66; majoritarianism and, 22; managerial, 103; manufacturing and, 2, 14, 33, 142, 203; middle class and, 2–3, 20, 22, 41, 53, 97, 101, 162, 225, 227, 257–58, 273; mobility and, 8, 16, 30, 35, 50, 145, 280n11; nation-states and, 4–13, 30, 46–50, 77, 136, 139, 159, 161, 206, 249, 261, 267–68, 272, 279n4; political economy and, 2–9, 12, 17, 24, 34, 45–48, 97, 112, 129, 131, 137, 160, 167, 214, 227, 251, 275; as political force, 139; politics of future and, 272–77; puzzle of rise of, 35–38; puzzle of varieties of, 38–40; redistribution and, 1, 18–20, 31–32, 35, 37, 39–40, 47, 51, 55, 124, 128–31, 137, 261, 273; research and, 2, 10, 12, 37, 48, 139, 159, 165, 234; semiskilled labor and, 261; shocks and, 6, 10, 30, 54, 125, 136, 138, 140, 156, 159, 214; skill clusters and, 2, 7, 49, 145, 185, 192, 261; skilled labor and, 2–3, 6–8, 12–15, 19–20, 30–34, 37–38, 47–50, 53–54, 58, 60, 97, 101–2, 128, 137, 139, 144–47, 157–58, 172, 185–86, 192, 218, 250–51, 258, 261, 280n6; South Korea and, 4, 26, 148; specialization and, 2, 6, 8, 17, 40, 139, 145, 147, 161, 192, 258, 267, 270–71, 276–77; Sweden and, 19, 39, 49, 148; symbiotic forces and, 5–9, 14, 20, 32, 53–54, 102, 130–31, 159, 165, 206, 249–53, 258, 259, 270, 272; taxes and, 16–17, 24, 34–35, 40, 51, 73, 167, 206, 261, 280n12; unemployment and, 51, 117, 172, 282n22; United Kingdom and, 10, 13, 19, 32, 38, 148, 152, 172, 206, 209; United States and, 13, 16–17, 24–25, 38, 47, 148, 152, 186, 209, 275, 277; voters and, 11–14 (see also voters); weakened democratic state and, 1, 30, 93–94, 124–25, 128; welfare and, 8, 16–19, 31, 39–40, 46, 122, 125, 128, 131, 137, 167, 234, 261, 279n5, 282n22 Catholicism, 56, 61, 63, 68, 77, 83, 87, 92, 94–95 causal identification, 280n7 Cavaille, Charlotte, 220, 237 central banks, 121–22, 142, 151–52, 170, 172, 176, 207 centralization: democracy and, 53, 58, 63, 66–67, 69, 70, 73, 96, 99, 101, 276, 283n8; Fordism and, 103–10, 113, 116–21; knowledge economies and, 146, 151–52, 156, 173, 186, 202, 209, 231, 243, 252; populism and, 231, 243, 252; skilled labor and, 53, 58, 67, 69, 96, 99, 101, 110, 119–20, 173, 186; unions and, 49, 53, 58, 63, 67, 69–70, 73, 96, 99, 101, 105, 107–10, 113, 116, 119, 122–23, 152, 156, 172, 174, 283n8; United Kingdom and, 49 centrism, 100, 113, 128 Chandlerian corporations, 5, 7, 15, 17–18, 37, 103, 267 China, 26, 27, 142, 209, 211, 223, 279n3 Chirac, Jacques, 183 Christian democratic parties, 44, 63, 92–95, 114–14, 116, 124–32, 221, 229, 251 Clayton Act, 153 Cohen, Yinon, 119 Cold War, 78, 111 collateral debt obligations (CDOs), 209–10 collective bargaining, 67, 69, 73, 92, 103, 107, 137, 176, 179 Collier, Ruth Berins, 56, 57, 85, 282n3 colocation: artificial intelligence (AI) and, 261, 266–72; capitalism and, 159, 261, 266–72; economic geography and, 2–3, 7–8, 15–16, 159, 185–88, 261, 266–72; education and, 2, 7, 261, 272; knowledge economies and, 159, 185–88; knowledge-intensive businesses (KIBs) and, 187–88, 190; reputation and, 267; skill clusters and, 2–3, 7, 15–16, 185, 261, 272; technology and, 266–72 communism, 5, 49, 55, 79, 115, 182, 186, 218 comparative advantage, 31, 49, 51, 128, 131, 268 competition: barriers to, 18, 154, 285n5; capitalism and, 1, 6, 11–12, 16, 26, 30–31, 33, 40, 122, 128, 131, 139, 152, 163, 177, 182, 186, 218, 258, 261; decentralized, 18, 96, 122, 146–49, 152, 163, 186, 190, 217; democracy and, 89, 96, 254, 257–58, 261; education and, 12, 21, 26, 31, 52, 80, 89, 119, 128, 131, 156, 166, 177, 181, 194, 198, 222–23, 257, 285n9; Fordism and, 115, 119, 122, 128, 131; foreign, 14, 173, 177, 194, 223, 285n5; globalization and, 1, 28, 50, 156; growth and, 16, 31, 115, 162–63, 170, 177, 218, 261, 285n9; innovation and, 6, 10–12, 31–35, 47, 128, 131, 173, 182–83, 258, 285; intellectual property and, 31, 128, 131; knowledge economies and, 139, 146, 149, 152–56, 162–63, 166–69, 173, 177, 181–82, 186, 194, 198, 208, 218, 222–23, 226, 236, 285n5, 285n6, 285n9; labor market and, 1, 6, 12, 31, 70, 122, 128, 152–56, 177, 183, 186, 190, 223; for land, 89; low-wage countries and, 18, 28, 119, 181, 222; market rules and, 6, 12, 21, 40, 163, 173; multinational enterprises (MNEs) and, 154; outsourcing and, 118, 193–94, 222; politics and, 1, 11–12, 29–30, 96, 139, 169, 181, 223, 236, 257–58, 285n9; populism and, 218, 222–23, 226, 236; product market, 152–56; skilled labor and, 6, 12, 18, 21, 30–34, 66, 96, 119, 128, 146, 157, 181, 186, 194, 198, 218, 222–23, 258; socialism and, 11; trade and, 26, 31, 128, 131, 153–55, 218, 285n5, 285n9; unions and, 6, 33, 66, 68, 80, 96, 119, 152, 169–72, 177, 181, 186; welfare and, 31, 40, 52, 122, 128, 131, 223, 285n6; World Values Survey (WVS) and, 168, 235–36, 245; zero-sum games and, 222–23 Comprehensive and Progressive Agreement for Trans-Pacific Partnership, 155–56 Confederation of British Industry (CBI), 169–70 conservatism: democracy and, 58, 72–85, 88–90, 98; education and, 38, 79, 83, 89, 98, 219; Fordism and, 115, 121, 124, 128, 134; institutional frameworks and, 32; knowledge economies and, 169–72, 218–19; landowner influence and, 38; populism and, 218–19; United Kingdom and, 32 Coordinated Market Economies (CMEs): Denmark and, 171–76; flexicurity and, 174; Fordism and, 102–4, 123, 125, 127; Germany and, 176–81; knowledge economies and, 152, 169, 171–81, 198, 232; populism and, 232; reforms and, 171–81 cospecificity: advanced capitalist democracies (ACD) and, 14–17; artificial intelligence (AI) and, 261–66; electoral systems and, 280n6; location, 14–17; skilled labor and, 7–15, 20, 37, 47–50, 69, 99, 101, 115, 123, 196, 259, 261; specialization and, 14–17; technology and, 7, 12, 14, 20, 37, 48, 50, 103, 159, 261–62; wages and, 49–50; welfare and, 49–50 Crafts, 32–33 credit default swaps (CDSs), 209–10 Crouch, Colin, 58–59, 62, 67 Czechoslovakia, 4, 36 DA, 66 Danish Social Democrats, 74, 77 debt, 15, 121, 172, 209 decentralization: analytic skills and, 186; authoritarianism and, 99; capitalism and, 39, 49, 122, 152, 186, 275; competition and, 18, 96, 122, 146–49, 152, 163, 186, 190, 217; democracy and, 96, 262, 275–76; Fordism and, 122–23; Germany and, 94, 283n11; Information and Communication Technology (ICT) and, 3, 163, 186, 190, 276; knowledge economies and, 3, 18, 138, 144, 146–52, 156, 163, 172–74, 180, 183–84, 186, 190, 193, 196, 212, 217, 225, 234, 275; populism and, 217, 225, 234; skilled labor and, 96, 123, 138, 144, 146, 148, 172, 183–86, 190, 193, 212, 225, 262, 276; United States and, 49 decommodification, 9 deficits, 113, 121, 172, 286n10, 286n12 deindustrialization, 18, 43, 103, 117–20, 124, 134–35, 180, 203, 224 democracy: aristocracy and, 53–54, 64, 67, 72, 74, 81, 83, 86–87, 90, 98; aspirational, 6, 12–13, 20–21, 32, 167, 214, 219, 272; Australia and, 38, 56–57, 61, 62, 88–89, 283n8, 283n9; Austria and, 56, 59, 61, 62–63, 77, 99; Belgium and, 56, 57, 61, 62–63; Canada and, 38, 56–57, 61, 62, 87, 283n15; centralization and, 53, 58, 63, 66–67, 69, 70, 73, 96, 99, 101, 276, 283n8; class conflict and, 54; coevolving systems and, 46–52; communism and, 5, 49, 55, 79, 115, 182, 186, 218; competition and, 89, 96, 254, 257–58, 261; by concession, 72–79; conservatism and, 58, 72–85, 88–90, 98; decentralization and, 96, 262, 275–76; decommodification and, 9; Denmark and, 56, 57, 61, 62–63, 66, 71, 74–76, 78; deregulation and, 96, 98; economic geography and, 92, 268, 274, 276–77; education and, 12, 14, 20, 24–27, 37–38, 41, 45, 53–55, 60, 70–72, 79–83, 88, 90, 94–101, 131, 138, 143, 158–61, 165, 181, 225, 228–29, 235, 247, 250–51, 257–62, 265–66, 270–77, 283n11, 283n13; egalitarian, 30, 81–82, 96, 120, 139, 163, 239; electoral systems and, 90–97, 100–1; elitism and, 53–61, 67, 70–71, 75–76, 79–90, 96–101; Fordism and, 274, 277; France and, 54, 56, 57, 59, 61, 62–63, 70, 81, 83, 87, 94–95, 283n9; fundamental law of, 158, 168; Germany and, 55–56, 57, 61, 62–68, 71–91, 94, 99, 382n11; globalization and, 258, 267, 272; growth and, 8, 68, 78–79, 92, 97, 261, 267, 276; human capital and, 53, 58, 101; immigrants and, 88–89, 275; income distribution and, 56; industrialization and, 4, 37, 53–62, 65–66, 79, 83, 88–92, 98, 101; Information and Communication Technology (ICT) and, 261, 266, 276; innovation and, 87, 258, 262, 267, 271; institutional frameworks and, 97; Ireland and, 62, 282n2; Italy and, 77, 91, 99, 276, 282n2; labor market and, 64, 66, 96–98, 260, 266, 268, 273; liberalism and, 56–62, 67–71, 79–90, 96–101, 282n3, 283n14; literature on, 55–60; low-skilled labor and, 97–98, 265–66; majoritarianism and, 60, 71, 91–93, 97–98, 100–1; manufacturing and, 80; middle class and, 3, 20, 22–23, 35, 44, 53–55, 60, 63, 71–74, 84–85, 90, 96–101, 115, 158, 163, 168, 257–58, 273–74; mobility and, 59, 258, 275–76; modernization and, 55, 57, 66, 70, 79–83, 87, 89, 98; multinational companies (MNCs) and, 267–68, 271; nation-states and, 4–5, 8, 13, 46, 136, 159, 161, 213, 215, 249, 261, 267–68, 272, 279; Netherlands and, 56, 57, 61, 62–63; Norway and, 56, 57, 61, 62, 282n3; party system and, 93, 101; political economy and, 59, 97; politics of future and, 272–77; populism and, 13, 45, 129, 136, 215, 217, 226, 228, 248–51, 275; production and, 54, 60, 64–66, 69, 72–73, 83, 93–94, 258, 262–63, 267–71; proportional representation (PR) systems and, 19, 34, 44–45, 60–61, 91, 93, 97, 100–1, 112–13, 125–28, 132, 134, 135, 212, 217, 229, 251; protocorporatist countries and, 59–79, 82–83, 89–92, 98–101, 228, 283n11; public goods and, 54, 60, 79–90, 98, 258, 275; puzzle of rise of, 35–38; redistribution and, 1, 8, 18–20, 32, 35, 37, 40, 55–56, 60, 69–71, 74–79, 90–91, 95–100, 115, 124, 158, 221, 259, 261–62, 273–74, 282n3, 284n2; research and, 55, 66–67, 72, 262, 264, 268, 287n1; semiskilled labor and, 61, 64–65, 68–69; shocks and, 54; skilled labor and, 3, 6, 8, 12, 20, 31, 37–38, 44, 53–54, 58–71, 79, 84–85, 90, 96–101, 115, 158, 185–86, 250, 258–62, 265–68, 271–72, 276–77; socialism and, 11, 56, 61–63, 68, 71, 75, 94, 97, 100, 137, 181–82, 215, 218; social networks and, 258, 261, 268, 270–71, 274–75; South Korea and, 78; specialization and, 67, 258, 267, 270–71, 276–77; state primacy of, 46–48; strengthening of capitalism by, 30–35; Sweden and, 56, 57, 61, 62, 67, 71–76, 78; Switzerland and, 56, 57, 61, 62–63, 282n3; symbiotic forces and, 5–9, 14, 20, 32, 53–54, 102, 130–31, 159, 165, 206, 249–53, 258, 259, 270, 272; taxes and, 73, 261, 267–68, 271; technology and, 70, 92, 259–63, 267–72, 277; trade and, 258, 267; unemployment and, 74–77, 92, 96; unions and, 53, 58–80, 90–92, 95–101, 274, 282n3, 283n8; United Kingdom and, 38, 54–65, 73, 80–90, 277, 283n9; United States and, 13, 24, 38, 55–57, 59, 62–64, 70, 83, 88, 96, 107, 147–48, 186, 215, 220, 275, 277; unskilled workers and, 62–63, 67–71, 96–97, 101; upper class and, 35; voters and, 75, 81, 90, 96–100, 111–13, 125, 129–30, 133, 260, 272–73; wages and, 266, 268, 273; weakened democratic state and, 1, 30, 93–94, 124–25, 128; welfare and, 94, 96, 261, 273; working class and, 53–79, 81, 83, 89–92, 96–101, 282n3, 283n9 Democrats, 226 Denmark: British disease and, 172; capitalism and, 39, 148, 203; Coordinated Market Economies (CMEs) and, 171–76; democracy and, 56, 57, 61, 62–63, 66, 71, 74–76, 78; Fordism and, 106, 120, 129; Gini coefficients and, 25, 36; Information and Communication Technology (ICT) and, 175; knowledge economies and, 147–48, 150, 154, 166, 169, 171–76, 181, 203, 221, 233, 245; median income and, 25; populism and, 221, 233, 245; segregation and, 203; taxes and, 17 deregulation: competition and, 1, 6, 12, 31, 70, 122, 128, 152, 177, 183, 186, 190, 223; democracy and, 96, 98; Fordism and, 120, 122; globalization and, 1; knowledge economies and, 145, 173, 183; labor market and, 1, 96, 122, 183 Deutsch, Franziska, 37, 55 Deutsch, Julian, 37, 55 dictatorships, 273, 281n18 Disraeli, Benjamin, 81, 85, 96 Dollfuss, Engelbert, 77, 279n2 Douglas, Roger, 171 Downs, Anthony, 112 dualism, 282n25 Due, Jesper, 63, 66 Earth Is Flat, The (Friedman), 188 Ebert, Friedrich, 75–76 EC Internal Market, 173 economic geography: capitalism and, 2–3, 7–8, 18, 20, 31, 48, 147, 159, 185, 192; colocation and, 2–3, 7–8, 15–16, 159, 185–88, 261, 266–72; democracy and, 92, 268, 274, 276–77; education and, 2–3, 7, 52, 138, 140, 161, 195, 197, 200–6, 224, 274, 276; Fordism and, 109, 116; growth and, 3, 31, 116; knowledge economies and, 138, 140, 144–47, 159, 161, 185, 188, 191–92, 195–97, 200–6, 224; location cospecificity and, 14–17; mobility and, 2, 8, 18, 20, 39–40; multinational enterprises (MNEs) and, 2–3, 40, 192, 279n1; political economy and, 2–3, 8, 48–49, 140; populism and, 224; rebirth of cities and, 224–27; skilled labor and, 2–3, 7–8, 15, 20, 31, 48, 109, 116, 144–47, 185, 191–92, 195–96, 276–77; social networks and, 48–49, 185, 195, 274; specialization and, 8, 14–17, 39, 144, 146–47, 192, 276–77 Economist, The (journal), 180 education: ability grouping and, 230; Asia and, 26–27; big-city agglomerations and, 194–200; capitalism and, 7, 10, 12, 20, 26–28, 31, 37–38, 45, 54, 60, 102, 128, 131, 143, 159, 161, 165, 225, 228, 234, 237, 250–51, 257; church control over, 87; colocation and, 2, 7, 261, 272; competition and, 12, 21, 26, 31, 52, 80, 89, 119, 128, 131, 156, 166, 177, 181, 194, 198, 222–23, 257, 285n9; conservatism and, 38, 79, 83, 89, 98, 219; democracy and, 12, 14, 20, 24–27, 37–38, 41, 45, 53–55, 60, 70–72, 79–90, 94–101, 131, 138, 143, 158–61, 165, 181, 225, 228–29, 235, 247, 250–51, 257–62, 265–66, 270–77, 283n11, 283n13; economic geography and, 2–3, 7, 52, 138, 140, 161, 195, 197, 200–6, 224, 274, 276; elitism and, 30, 38, 53–54, 60, 70–71, 79, 83–84, 89–90, 98, 101, 141, 179, 184, 214, 235, 243, 248, 251; Ferry reforms and, 87; Fordism and, 104, 109–11, 118–19, 127–31, 143; Forster Elementary Education Act and, 86; France and, 70, 81, 83, 94, 104, 166, 177, 233; Germany and, 80, 82, 87, 89, 166, 179, 181, 232, 283n11; higher, 14, 31, 41–44, 55, 70, 89, 119, 128, 131, 139–43, 146, 156, 163–65, 174–80, 184–86, 192, 195–97, 214, 219, 225, 228–32, 238–41, 252, 255–56, 265, 272–77, 284n2, 284n4, 285n9, 286n11; immigrants and, 45, 89, 194, 217, 223, 226, 283n13; income and, 14, 24, 41–42, 55, 89–90, 139, 167–68, 181, 192, 217, 228, 231–32, 238, 240, 246, 252, 271–74, 284n4, 286n12; investment in, 10, 12, 20–21, 37, 52, 54, 98, 101–4, 109–11, 119, 146–48, 159, 163, 181, 186, 234, 252, 257, 266, 271, 283n13, 284n4, 285n9; Italy and, 166, 248; Japan and, 166, 232, 241, 284n4; knowledge economies and, 138–48, 156–68, 174–81, 184–86, 191–200, 204, 214, 217, 219, 222–25, 228–47, 250–52, 255–56, 284n2, 284n4, 285n9, 286n11, 286n12, 287n1; labor market and, 12, 28, 31, 41, 53–54, 60, 70, 72, 83, 89–90, 96, 98, 104, 128, 165, 174, 177, 191, 223, 225, 229, 260; liberalism and, 45, 60, 71, 79, 82–83, 89–90, 101, 104, 138, 143, 156, 175, 208, 212–14, 228–29, 232, 241, 243, 284n3, 286n11; middle class and, 3, 20, 24, 41–43, 53–55, 60, 71, 84, 90, 98, 101, 128, 158, 168, 203, 222–25, 235, 238–40, 243–44, 249, 251, 257–58, 273–74, 286n11, 287n1; politics of future and, 272–77; populism and, 217, 219, 222–25, 228–47, 250–52, 287n1; private spending and, 231–32; research and, 10, 12, 20–21, 28, 48, 55, 72, 146, 159, 165, 234, 262; school quality and, 231; Scotland and, 283n12; segregation and, 43, 119, 140, 161, 192, 195, 197, 200–6, 214, 231; skill clusters and, 2–3, 7, 139, 141, 145, 148, 185, 190–95, 198, 223, 261; skilled labor and, 7, 12, 20–21, 31, 37–38, 41, 54, 60, 70–71, 79, 84, 90, 101–4, 119, 127–30, 139, 142, 158, 174–76, 179–81, 184–85, 191–95, 198, 217, 222–25, 228–35, 238–40, 246, 250–52, 266; social networks and, 2, 51–52, 139, 145, 185, 191–99, 204–5, 217, 225, 234, 261, 270–71, 274–75; South Korea and, 26, 28, 166, 232, 241, 284n4; specialization and, 14, 191, 271; student tracking and, 230–31; training and, 7, 10, 14, 31, 44, 82, 89–90, 101, 104, 109, 111, 128, 131, 174, 176, 179, 181, 204, 223, 228–29, 232–33, 241–43, 252, 257, 275, 277, 280n10; United Kingdom and, 38, 130, 166, 177, 231–32, 277; United States and, 24, 38, 55, 70, 83, 109, 127, 130, 166, 177, 195, 223, 230–32, 241, 275; upper class and, 43; VET system and, 176, 179–80; vocational, 31, 44, 68, 82, 89, 92, 104, 109, 113, 127–28, 131, 174, 176, 179, 228–30, 233, 242–43, 251–52, 257; voters and, 12–13, 21, 38, 45, 90, 158, 164, 167–68, 219, 234, 247, 273; welfare and, 31, 42, 45, 52, 94, 96, 116, 128, 131, 146, 167, 223, 234, 261, 287n1; women and, 87, 116, 141, 151, 174, 184, 195, 238 Education Act, 89 egalitarianism, 30, 81–82, 96, 120, 139, 163, 239 electoral systems: choice of, 90–97; coevolving systems and, 46; cospecificity and, 280n6; democracy and, 90–97, 100–1; Fordism and, 103, 111, 124–25; knowledge economies and, 163–68, 212, 217–18, 228; populism and, 217–18, 228, 251; voters and, 22 (see also voters) Elgin, Lord, 88 elitism: aristocracy and, 53–54, 64, 67, 72, 74, 81, 83, 86–87, 90, 98; bourgeoisie and, 60, 72, 83–84, 283n7; democracy and, 53–61, 67, 70–71, 75–76, 79–90, 96–101; education and, 30, 38, 53–54, 60, 70–71, 79, 83–84, 89–90, 98, 101, 141, 179, 184, 214, 235, 243, 248, 251; Fordism and, 111; knowledge economies and, 9, 141, 158, 179, 184, 214, 216, 226, 235, 243–44, 248–51, 287n3; landowners and, 38, 57, 80–89, 95, 98, 158; modernization and, 38, 57, 79–80, 83, 89, 98; monarchies and, 72–73, 81, 87; populism and, 216, 226, 235, 243–44, 248–51, 287n3; projects of, 56–60, 90; working class and, 53–60, 67, 71, 79, 83, 90, 96, 98–101, 226 Elkins, Zachary, 161 Elkjaer, Mads Andreas, 167–68, 281n14 encapsulation, 227, 243, 249 enfranchisement, 84–90 Engerman, Stanley L., 80, 84, 89 Entrepreneurial Politics in Mid-Victorian England (Searle), 85 entrepreneurs, 42, 65, 85, 183, 217, 275 Esping-Andersen, Gösta, 1, 30, 93–94, 124–25, 128 ethnic issues, 52, 91, 160, 205, 275, 277, 280n8 European Central Bank, 122 European Monetary System (EMS), 122 European Union (EU), 51, 122, 145, 153, 170–71, 177, 245, 248, 250 exchange rates, 121–22, 148, 152, 209, 212 Facebook, 155 factory workers, 61, 65–66, 70 feeder towns, 108–9, 224 Ferry reforms, 87 financial crisis: collateral debt obligations (CDOs) and, 209–10; credit default swaps (CDSs) and, 209–10; export-oriented economies and, 211–12; Great Depression and, 45, 99, 214, 218, 247; Great Moderation and, 151, 207; Great Recession and, 206, 214, 247, 250, 276; high leveraged financial institutions (HLFIs) and, 207–13; Keynesianism and, 207; knowledge economies and, 177, 206–14; liberalism and, 207–13; value-added sectors and, 206–9 financialization, 149–51 Finland: Fordism and, 106; Gini coefficients and, 36; knowledge economies and, 147–48, 150, 154, 166, 221, 233, 236, 241, 242, 245; median income and, 25; taxes and, 17 Fioretos, Orfeo, 10–11 Five Star Movement, 248, 276 flexicurity, 174 Foot, Michael, 169 Ford, Martin, 260 Fordism: advanced sector and, 130–31; assembly lines and, 104, 108; Austria and, 106; Belgium and, 106, 121; big-city agglomerations and, 194; centralization and, 103–10, 113, 116–21; Chandlerian corporations and, 5, 7, 15, 17, 103, 267; compensation and, 123–29; competition and, 115, 119, 122, 128, 131; conservatism and, 115, 121, 124, 128, 134; Coordinated Market Economies (CMEs) and, 102–4, 123, 125, 127; decentralization and, 122–23; democracy and, 274, 277; Denmark and, 106, 120, 129; deregulation and, 120, 122; economy of, 103–17; education and, 104, 109–11, 118–19, 127–31, 143; electoral systems and, 103, 111, 124–25; elitism and, 111; fall of, 117–30, 277; Finland and, 106; France and, 104–5, 106, 181–82; Germany and, 106, 107, 121, 129; growth and, 109–16, 125, 133, 135; industrialization and, 103, 108, 117–20, 124, 134–35; inequality and, 107, 116–20, 125, 213; inflation and, 120–21; Information and Communication Technology (ICT) and, 102; innovation and, 104, 128, 131; institutional frameworks and, 128–31; Ireland and, 106, 121; Italy and, 106, 120–21, 132; Japan and, 106, 109, 284n4; knowledge economies and, 140–43, 146–49, 152, 154, 160, 169, 181–82, 189, 192, 194, 200–1, 214–25, 237–40, 248–49, 277; labor market and, 103, 118, 122–28, 152; liberalism and, 103–5, 115, 125, 127; Liberal Market Economies (LMEs) and, 103, 112, 125, 127–29; low-skilled labor and, 119–20, 126; macroeconomic policies and, 120–23; majoritarianism and, 103, 112–13, 124–32; manufacturing and, 103, 108–9, 118; mass production and, 43, 104, 108; middle class and, 43, 112, 115, 117, 123, 125, 128, 142, 160, 201, 219, 222–25, 238, 248; mobility and, 16, 118, 124, 221; modernization and, 104, 109, 114; national champions and, 154; Netherlands and, 106, 121; Norway and, 106, 130; OECD countries and, 107, 117, 125, 133; party system and, 113, 123–24; populism and, 113, 130, 216, 218–25, 237–40, 248–49; production and, 43, 103–4, 108–11, 115–17, 123, 127; proportional representation (PR) systems and, 112–13, 124–28; public goods and, 113; redistribution and, 103, 111–12, 115, 123–25, 128–29; reputation and, 112–13; research and, 103, 108, 110; second-order effects and, 129–30; segmentation and, 123–24; segregation and, 109, 119; semiskilled labor and, 12, 102–5, 112, 115, 118–20, 123–24, 127, 129; shocks and, 125–27, 132–35; skilled labor and, 12, 14, 16, 102–5, 109–12, 115–30, 222–25, 277; social protection and, 123–29; specialization and, 108; Sweden and, 106, 107, 117, 120, 129; symbiotic forces and, 102, 130–31; taxes and, 110–13, 124; technology and, 5, 7, 14–15, 50, 102–6, 109, 117–19, 124, 127–28, 131, 140–43, 154, 192, 194, 222, 277; trade and, 114, 128, 131; unemployment and, 105, 107, 110, 117, 120–21, 124–27, 133, 135, 284n2; unions and, 105–16, 119–23, 127, 284n3; United Kingdom and, 105–8, 120, 123, 130; United States and, 105–9, 117–20, 123, 127, 130; unskilled workers and, 104–5, 118; wages and, 104–24, 127, 284n2; welfare and, 110–11, 115–28, 131; women and, 116–17; working class and, 109, 115, 129, 131 foreign direct investment (FDI): globalization and, 40, 198; Helpman-Melitz model and, 284n3; knowledge economies and, 139, 145, 147, 148, 154, 163, 193, 198–99, 200, 284n3, 285n5, 285n9; skilled labor and, 3, 139, 145, 147, 193, 198; trade and, 154, 163, 285n5, 285n9 Forster Elementary Education Act, 86 France: capitalism and, 17, 148, 182; Chirac and, 183; democracy and, 54, 56, 57, 59, 61, 62–63, 70, 81, 83, 87, 94–95, 283n9; education and, 70, 81, 83, 94, 104, 166, 177, 233; Fordism and, 104–5, 106, 181–82; Gini coefficient for, 36; guild system and, 59, 63; Information and Communication Technology (ICT) and, 182; knowledge economies and, 147–48, 150, 154, 166, 169, 177, 181–83, 202, 221, 233, 236, 239, 242, 245, 248; Le Chapelier laws and, 59; Legitimists and, 86; Macron and, 183; Mitterrand and, 182; mobility and, 59; Orleanists and, 86; Paris Commune and, 86; polarized unionism and, 62; populism and, 183, 221, 233, 236, 239, 242, 245, 248; postwar, 11; protocorporatist countries and, 59, 62; Third Republic and, 57, 81, 86–87 Freeman, Christopher, 5 free riders, 127 free trade, 17, 155 Frey, Carl Benedikt, 260 Friedman, Thomas, 145, 188 Galenson, Walter, 63–65, 73 game theory, 188–89, 222–23 gender, 116–17, 129, 192, 225, 238, 255–56, 280n8, 287n1 General Agreement on Tariffs and Trade (GATT), 114 geographic segregation, 109, 140, 161, 185, 195, 197, 200–6 German Democratic Party (DDP), 77 German People’s Party (DVP), 77 Germany: authoritarianism and, 4, 74, 99, 279n1; banking sector of, 176–77; Bismarkian welfare state and, 176; capitalism and, 4, 10–11, 17, 49, 55, 77; Coordinated Market Economies (CMEs) and, 176–81; decentralization and, 94, 283n11; democracy and, 55–56, 57, 61, 62–68, 71–91, 94, 99, 382n11; education and, 80, 82, 87, 89, 166, 179, 181, 231–32, 283n11; electoral system and, 91; Fordism and, 106, 107, 121, 129; Gini coefficents for, 25, 36; Grand Coalition governments of, 177; Harz reforms and, 178–79; Hitler and, 77, 99, 219; Information and Communication Technology (ICT) and, 176, 180; knowledge economies and, 142, 147–48, 150, 154, 166, 169, 176–81, 191, 207, 209, 219, 221, 230, 232, 233, 236, 242, 245; Kohl government and, 178; Kulturkampf and, 94–95; Landesbanken and, 176–77; median income and, 23, 25; Mittelstand and, 68, 92, 95, 179, 191; Nazism and, 75, 77, 99, 219, 279n2; October Revolution and, 75–76; populism and, 181, 219, 221, 230, 232, 233, 236, 242, 245; protocorporatist countries and, 62–63, 65, 68, 71, 74, 77, 99, 238n11; Schroeder government and, 178; Social Democratic Party (SDP) and, 68, 74, 76–77, 78; Socialist Republic of Bavaria and, 75; Sparkassen and, 176–77; VET system and, 176, 179–80; Weimar Republic and, 75–77; working class pressure in, 74–79; World War I and, 4, 56; World War II and, 4, 55–56, 76 Ghent system, 78 Gilens, Martin, 22, 24, 167–68 Gini coefficients: Australia and, 36; Austria and, 36; Belgium and, 36; Denmark and, 25, 36; disposable income and, 22–23, 25; Finland and, 36; Ireland and, 36; Netherlands and, 25, 36; Norway and, 25, 36; redistribution and, 22–23, 25, 36, 117, 118, 141, 221; South Korea and, 36; Spain and, 36; Sweden and, 25, 36; taxes and, 22, 141; United Kingdom and, 25, 36 globalization: advanced capitalist democracies (ACD) and, 38–40; capitalism and, 2–3, 7–8, 18, 20, 31, 48, 147, 159, 185, 192; competition and, 1, 28, 50, 156; democracy and, 258, 267, 272; deregulation and, 1; foreign direct investment (FDI) and, 40, 198; inequality and, 1, 3, 22, 26; Information and Communication Technology (ICT) and, 3, 143, 156, 175, 198; knowledge economies and, 137, 142–44, 148–49, 151, 156, 198, 206, 234, 245; liberalism and, 1, 51, 142–43, 155, 162–63, 208, 213; liberalization and, 1; multinational enterprises (MNEs) and, 2–3, 15, 18, 25, 28, 40, 139, 154, 192, 279n1; populism and, 234, 245; privatization and, 1; production and, 5, 40, 51, 258; Rodrik on, 22; specialization and, 3, 8, 17, 40, 51, 198, 258; strategic complimentarities and, 17–18; strength of democratic state and, 1–2, 50–51; symbiosis and, 8; varieties of advanced capitalism and, 38–40; weakened democratic state and, 1 Glyn, Andrew, 282n22 Google, 175, 262, 265, 287n1 Gordon, Robert, 260–61 Governments, Growth, and Markets (Zysman), 181 Great Depression, 45, 99, 214, 218, 247 Great Gatsby Curve (GGC), 220–23, 227–28, 247, 259, 275–76 Great Inversion, 224 Great Moderation, 151, 207 Great Recession, 206, 214, 247, 250, 276 Grey, Lord, 86 growth: capitalism and, 2–3, 8, 13, 16, 30–32, 38, 79, 97, 125, 156, 163, 218, 247, 261; competition and, 16, 31, 115, 162–63, 170, 177, 218, 261, 285n9; democracy and, 8, 68, 78–79, 92, 97, 261, 267, 276; economic geography and, 3, 31, 116; Fordism and, 109–16, 125, 133, 135; GDP, 38, 133, 261; industrialization and, 68, 92, 111, 115, 177, 181, 194; knowledge economies and, 51, 142, 156, 162–64, 168, 170–71, 177, 179, 181, 192, 194, 218, 221, 226, 237, 247–48, 285n8, 285n9; mobility and, 13, 30, 247, 276; populism and, 218, 221, 226, 237, 247–48; recession and, 5, 206, 214, 247–50, 276; skilled labor and, 8, 13, 31, 68, 97, 110, 115–16, 218, 261; social networks and, 51, 92; technology and, 3, 5, 13, 38, 162, 194, 226, 261; voters and, 2, 13, 23, 32, 111, 113, 164, 168, 247 guild systems, 59, 63–64, 69–70, 90–91, 93, 96, 98 Hacker, Jacob, 282n22 Hall, Peter A., 129, 216, 251 Hallerberg, Mark, 121, 151 Häusermann, Silja, 234 Hayek, Friedrich A., 5–6, 9, 11, 279n4 Healthcare NeXT, 262 health issues, 32, 79, 82–84, 86, 110, 198, 204–5, 262, 275 Hechter, Michael, 93 hegemony, 8, 113, 137 Helpman-Melitz model, 284n3 Herrigel, Gary, 93–94 heterogeneity, 17–20, 54, 133 highly leveraged financial institutions (HLFIs), 207–13 Hitler, Adolf, 77, 99, 219 Hochschild, Arlie R., 223, 226 Hong Kong, 4, 26, 279n3 housing, 41, 79, 177, 197, 200, 201, 203, 206, 225–26, 231, 275 Hovenkamp, Herbert, 153 human capital, 3, 53, 58, 101, 206, 229, 281n18 IBM, 175, 186 immigrants: closing access to, 43; democracy and, 88–89, 275; education and, 45, 89, 194, 217, 223, 226, 283n13; knowledge economies and, 136, 160, 193–94, 206, 215–17, 223, 226–27, 234, 237, 249; outsourcing and, 118, 193–94, 222; populism and, 45, 216–17, 223, 226–27, 234, 237, 239, 249; squattocracy and, 88 income distribution, 21, 25, 56, 116, 181, 221, 252, 274 industrialization: capitalism and, 4, 37–38, 53, 58, 60, 101, 124, 203; deindustrialization and, 18, 43, 103, 117–20, 124, 134–35, 180, 203, 224; democracy and, 4, 37, 53–62, 65–66, 79, 83, 88–92, 98, 101; feeder towns and, 108–9, 224; Fordism and, 103, 108, 117–20, 124, 134–35; growth and, 68, 92, 111, 115, 177, 181; knowledge economies and, 180–81, 203, 224; Nazism and, 75, 77; populism and, 224; protocorporatist countries and, 60–62, 65, 79, 89–90, 98, 101; urban issues from, 83–84 Industrial Relations and European State Traditions (Crouch), 58 industrial revolution, 5, 12, 58, 293, 295 inequality: capitalism and, 1, 5, 9, 20, 22, 24–26, 40–41, 125, 139, 261, 268, 273–74, 282n22; fall in, 5, 35; Fordism and, 107, 116–20, 125, 213; globalization and, 1, 3, 22, 26; Italy and, 36; knowledge economies and, 41–45, 139–41, 192, 197, 219–23, 228; majoritarianism and, 22; middle class and, 3, 20, 22–23, 41–43, 140, 222–23, 228, 273, 281; populism and, 219–23, 228; poverty and, 3, 5, 18–19, 25, 43, 47, 109, 117, 142, 221, 237; redistribution and, 1, 3, 20, 40–46, 140, 220, 222, 273; rise in, 1, 3, 9, 23, 40–46, 282n25; Robin Hood Paradox and, 220; undeserving poor and, 43, 142, 160, 216, 222, 227; United Kingdom and, 36; upper class and, 41, 158, 261; welfare and, 3, 8, 18–21, 31, 39–40, 42, 43, 115, 123–25, 128, 131, 137, 223, 261, 273, 282n22 inflation: capitalism and, 253, 285n9; Fordism and, 120–21; knowledge economies and, 151–52, 153, 163, 168–73, 176, 178, 202, 207, 234 Information and Communication Technology (ICT): capitalism and, 261, 266, 276; decentralization and, 3, 163, 186, 190, 276; democracy and, 261, 266, 276; Denmark and, 175; Fordism and, 102, 118; France and, 182; Germany and, 176, 180; globalization and, 198; knowledge economies and, 136–44, 156, 163, 171, 175–76, 180–90, 193, 195, 198, 214, 238, 249; outsourcing and, 118, 193–94, 222; physical skills and, 193; populism and, 238, 249; revolution of, 3, 5, 102, 136–43, 156, 163, 171, 176, 182–88, 193, 195, 198, 214, 238, 249, 276; routine tasks and, 193; shocks and, 136, 138, 214; skilled labor and, 41, 102, 185–86, 190, 193, 195, 198, 218, 276; smart cities and, 194–95; societal transformation and, 138–43 Inglehart, Ronald, 235, 246, 287n1 innovation: assembly lines and, 104, 108; capitalism and, 2, 6–12, 19, 31–34, 47, 128, 131, 157, 206, 258, 281n18; competition and, 6, 10–12, 31–35, 47, 128, 131, 173, 182–83, 258, 285; democracy and, 87, 258, 262, 267, 271; Fordism and, 104, 128, 131; knowledge economies and, 141, 152, 157–58, 173–75, 180–83, 196, 198, 205–7; manufacturing and, 33; middle-income trap and, 27; multinational enterprises (MNEs) and, 2, 40, 279n1; patents and, 7, 12–15, 26, 27, 145, 201, 281n15, 285n6; political economy and, 2, 7–8, 34, 183; production and, 10, 40, 262, 271; productivity and, 19, 34; public goods and, 35, 258; research and, 2, 12, 40; skilled labor and, 2, 6–12, 19, 27, 31–34, 104, 128, 141, 174, 196, 198, 258, 262, 271, 281n18; specialization and, 8, 14, 198, 267, 271 institutional frameworks: capitalism and, 31–34, 47–49, 128–29, 131, 146; comparative advantage and, 31, 33, 49, 51, 131; democracy and, 97; Fordism and, 128–31; knowledge economies and, 138, 146, 150, 156; unions and, 32–33 intellectual property, 31, 128, 131, 145 Internal Revenue Service (IRS), 42 International Accounting Standards Board (IASB), 208 International Monetary Fund (IMF), 38, 149–50 Ireland: capitalism and, 4; democracy and, 62, 282n2; Fordism and, 106, 121; Gini coefficients and, 36; knowledge economies and, 147–48, 150, 154, 166, 170, 230, 233; laborist unionism and, 62; middle-income trap and, 26; patents and, 27; taxes and, 17 Israel, 4, 25, 26, 28, 36, 81, 85, 96, 166 ISSP data, 165, 168 Italy: capitalism and, 4, 77, 148; democracy and, 77, 91, 99, 276, 282n2; education and, 166, 248; Five Star Movement and, 248, 276; Fordism and, 106, 120–21, 132; Gini coefficents for, 25, 36; inequality and, 36; knowledge economies and, 147–48, 150, 154, 166, 221, 233, 236, 242, 245, 248; Lega and, 248, 276; median income and, 25; Mussolini and, 77; populism and, 221, 233, 236, 242, 245, 248; postwar, 4; taxes and, 17 Iversen, Torben, 124, 135, 168, 211, 229, 251, 281n14 Japan: Abe and, 218; authoritarianism and, 279n2; capitalism and, 4, 11, 49, 55, 148, 282n2; education and, 166, 232, 241, 284n4; Fordism and, 106, 109, 284n4; Gini coefficients and, 25, 36; Keiretsu and, 182; knowledge economies and, 147–48, 150, 154, 166, 182, 207, 209, 218, 221, 232, 233, 236, 239, 241, 242, 244, 284n4; LDP and, 218; median income and, 25; populism and, 218, 221, 232, 233, 236, 239, 241, 242, 244; postwar, 4; tertiary educational spending and, 231–32 Johnson, Simon, 282n22 journeymen, 61, 65 Kalyvas, Stathis N., 92, 95 Katz, Jonathan N., 133 Katznelson, Ira, 62–63, 70, 283n13 Kees Koedijk, Jeroen Kremers, 154–55 Keynesianism, 115, 121, 145, 201, 207, 286n12 Kitschelt, Herbert, 234 knowledge economies: analytic skills and, 186; Asia and, 142, 144, 222, 229, 235, 241, 243; Australia and, 147–48, 150, 153, 166, 221, 233, 236, 242; Austria and, 230, 233, 245; Belgium and, 147–48, 150, 154, 233, 245; big-city agglomerations and, 194–200; Canada and, 147–48, 150, 154, 166, 221, 233, 236, 242, 245; centralization and, 146, 151–52, 156, 173, 186, 202, 209, 231, 243, 252; changing skill sets and, 184–94; colocation and, 159, 185–88; competition and, 139, 146, 149, 152–56, 162–63, 166–69, 173, 177, 181–82, 186, 194, 198, 208, 218, 222–23, 226, 236, 285n5, 285n6, 285n9; conservatism and, 169–72, 218–19; cooperative labor and, 152–56; Coordinated Market Economies (CMEs) and, 152, 169, 171–81, 198, 232; decentralization and, 3, 18, 138, 144, 146–52, 156, 163, 172–74, 180, 183–84, 186, 190, 193, 196, 212, 217, 225, 234, 275; Denmark and, 147–48, 150, 154, 166, 169, 171–76, 181, 203, 221, 233, 245; deregulation and, 145, 173, 183; economic geography and, 138, 140, 144–47, 159, 161, 185, 188, 191–92, 195–97, 200–6; education and, 138–48, 156–68, 174–81, 184–86, 191–200, 204, 214, 217, 219, 222–25, 228–47, 250–52, 255–56, 284n2, 284n4, 285n9, 286n11, 286n12, 287n1; electoral systems and, 163–68, 212, 217–18, 228; elitism and, 9, 141, 158, 179, 184, 214, 216, 226, 235, 243–44, 248–51, 287n3; embedded, 137–38, 143–56, 161–83, 185, 188, 191–92, 195, 205, 214, 225, 251; financial crisis and, 177, 206–14; financialization and, 149–51; Finland and, 147–48, 150, 154, 166, 221, 233, 236, 241, 242, 245; first-order effects and, 120, 129, 132–33, 216; Fordism and, 140, 142–43, 146–49, 152, 154, 160, 169, 181–82, 189, 192, 194, 200–1, 214, 216, 219–25, 237–38, 240, 248–49, 277; foreign direct investment (FDI) and, 139, 145, 147, 148, 154, 163, 193, 198–99, 200, 284n3, 285n5, 285n9; France and, 147–48, 150, 154, 166, 169, 177, 181–83, 202, 221, 233, 236, 239, 242, 245, 248; Germany and, 142, 147–48, 150, 154, 166, 169, 176–81, 191, 207, 209, 219, 221, 230, 232, 233, 236, 242, 245; globalization and, 137, 142–44, 148–49, 151, 156, 198, 206, 234, 245; Great Gatsby Curve (GGC) and, 220–23, 227–28, 247, 259, 275–76; growth and, 51, 142, 156, 162–64, 168, 170–71, 177, 179, 181, 192, 194, 218, 221, 226, 237, 247–48, 285n8, 285n9; human capital and, 206, 229; immigrants and, 136, 160, 193–94, 206, 215–17, 223, 226–27, 234, 237, 249; industrialization and, 180–81, 203, 224; inequality and, 41–45, 139–41, 192, 197, 219–23, 228; inflation and, 151–52, 153, 163, 168–73, 176, 178, 202, 207, 234; Information and Communication Technology (ICT) and, 3, 5, 136–43, 156, 163, 171, 175–76, 180–90, 193, 195, 198, 214, 238, 249; innovation and, 141, 152, 157–58, 173–75, 180–83, 196, 198, 205–7; institutional frameworks and, 138, 146, 150, 156; Ireland and, 147–48, 150, 154, 166, 170, 230, 233; Italy and, 147–48, 150, 154, 166, 221, 233, 236, 242, 245, 248; Japan and, 147–48, 150, 154, 166, 182, 207, 209, 218, 221, 232, 233, 236, 239, 241, 242, 244, 284n4; Korea and, 284n4; labor market and, 140, 152, 173–78, 183, 186, 190, 223, 229; liberalism and, 137–38, 141–56, 159, 161–83, 207–14, 228–29, 232, 241, 243, 250, 284n3, 286n11; Liberal Market Economies (LMEs) and, 152, 169, 181, 198, 230, 232; low-skilled labor and, 180, 194, 200, 212–13, 218, 223, 238, 249; macroeconomic management and, 151–52; majoritarianism and, 213, 217, 243–44, 251; manufacturing and, 142, 169, 182, 194, 197, 200–3, 224, 241; middle class and, 140, 142, 158, 163, 168, 201, 203, 218–28, 234–51; mobility and, 145, 207, 214, 217–23, 227–32, 239–42, 247, 249; modernization and, 174; multinational companies (MNCs) and, 7, 145, 147, 193, 200, 267–68, 271; multinational enterprises (MNEs) and, 2–3, 15, 40, 139, 154, 192; nation-states and, 139, 159, 161, 206, 213, 215; Netherlands and, 147–48, 150, 154, 166, 230, 232, 233, 236, 242, 245; Norway and, 147–48, 150, 154, 166, 221, 233, 236, 242, 245; OECD countries and, 153–54, 175, 196, 230–32, 233, 250; open financial markets and, 152; outsourcing and, 118, 193–94, 222; party system and, 21, 44, 51–52; physical skills and, 193; political construction of, 161–83; political decisions leading to, 156–61; political economy and, 51, 164–68, 181, 220, 226, 235; populism and, 136, 138, 140–42, 146, 161, 171, 175, 181–85, 195, 202, 205, 214–23, 226–28, 235–53, 254–56; privatization and, 154, 173; production and, 143, 152, 161, 180, 183, 224–25, 234–35, 247, 249; proportional representation (PR) systems and, 132–34, 135, 212, 217, 229, 251; public goods and, 52, 143–48, 152, 157, 167, 225; reconfigurability and, 185, 191, 214, 224; redistribution and, 48, 137, 140, 158, 168, 220, 222, 225, 234–37, 241; regulation index and, 285n5; relational skills and, 187; reputation and, 158, 163–64, 182–83, 188, 190–91; research and, 139, 146, 159, 164–65, 179, 187, 189, 196, 200, 204, 234, 285n9; routine tasks and, 193; second-order effects of, 129, 216; segregation and, 43, 107, 140, 161, 185, 192, 195, 197, 200–6, 214, 231; semiskilled labor and, 142, 172–73, 212, 238–40; shocks and, 136–40, 143, 156–59, 181, 185, 194, 214; skill clusters and, 139, 141, 144–48, 183, 185, 190–98, 200, 223; skilled labor and, 137–49, 157–58, 172–200, 211–13, 217–35, 238–41, 246, 249–52, 255–56; smart cities and, 194–95; socialism and, 137, 181–82, 215, 218; social networks and, 139, 145, 185, 188, 191–92, 195–97, 200, 204–6, 217, 225, 246; societal transformation from, 138–43; socioeconomic construction of, 183–99; South Korea and, 147–48, 150, 154, 156, 166, 232, 233, 236, 239, 241, 242; Spain and, 154, 166, 201, 221, 233, 236, 242, 248; specialization and, 139, 144–47, 161, 190–93, 198, 200, 281n21; Sweden and, 147–48, 150, 153–54, 166, 173, 221, 233, 236, 242, 245; Switzerland and, 147–48, 150, 154, 166, 221, 233, 236, 242, 245; tacit knowledge and, 2, 39, 145, 263; taxes and, 141, 157–58, 165, 167, 172, 206, 221–22, 225, 231, 281n21; technology and, 138–44, 147, 154–62, 175–76, 184–86, 192–94, 198–99, 214, 222, 226, 232, 234, 238, 246, 249, 284n1, 284n3, 285n6; trade and, 142, 145, 153–55, 163, 172–73, 180, 211–13, 218, 250; unemployment and, 170–72, 174, 178, 180, 207, 248–49, 255–56, 285n8; unions and, 152, 169–83, 212, 228, 251; United Kingdom and, 142, 147–48, 150, 152, 154, 161–63, 166, 169–77, 180–81, 194, 200–1, 204, 206, 209, 218, 232, 233, 236, 242, 245, 250; United States and, 141–42, 147–56, 162, 166, 169, 171, 177, 186, 194–95, 198, 202, 209, 215, 218–23, 230, 232, 236, 241, 244, 277; unskilled workers and, 193, 246, 255; voters and, 24, 138, 140, 158–59, 163–64, 167–68, 183, 213–19, 234–36, 245, 247; wages and, 151, 160, 172–76, 181, 196, 211–12, 219, 222–23, 227, 229; welfare and, 137, 146, 167, 176, 214, 223, 234, 249, 285n6, 285n8, 287n1; women and, 141, 151, 174, 176, 184, 195, 238; working class and, 201, 225, 231, 239, 251; World Values Survey (WVS) and, 168, 235–36, 245 knowledge-intensive businesses (KIBs), 187–90, 190 Kristal, Tali, 119 Krueger, Alan B., 220 Kulturkampf, 94–95 Kurzweil, Raymond, 264 Labor and Monopoly Capitalism: The Degradation of Work in the Twentieth Century (Braverman), 186 labor market: active labor market programs (ALMPs) and, 126–27, 135, 284n1; analytic skills and, 186; apprentices and, 61, 64–65, 68, 71, 104, 110, 127, 179–80, 230; artificial intelligence (AI) and, 260–72; artisans and, 61, 63–65, 70, 79, 94–95, 98; assembly lines and, 104, 108; big-city agglomerations and, 194–200; capitalism and, 1, 6, 12, 31, 38, 46–47, 122, 125, 128, 152, 186, 229, 258; Catholicism and, 56, 61, 63, 68, 77, 83, 87, 92, 94–95; collective bargaining and, 67, 69, 73, 92, 103, 107, 137, 176, 179; comparative advantage and, 31, 49, 51, 128, 131, 268; competition and, 12 (see also competition); craft skills and, 32, 53, 61–71, 79, 82, 90–91, 96, 98, 101, 104, 172; democracy and, 64, 66, 96–98, 260, 266, 268, 273; deregulation and, 1, 96, 122, 183; dualism and, 282n25; education and, 12, 28, 31, 41, 53–54, 60, 70, 72, 83, 89–90, 96, 98, 104, 128, 165, 174, 177, 191, 223, 225, 229, 260; flexicurity and, 174; Fordism and, 103, 118, 122–28; globalization and, 162–63 (see also globalization); guild systems and, 59, 63–64, 69–70, 90–91, 93, 96, 98; immigrants and, 45, 88–89, 136, 160, 193–94, 206, 215–17, 223, 226–27, 234, 237, 249, 275, 283n13; journeymen and, 61, 65; knowledge economies and, 140, 152, 173–78, 183, 186–90, 223, 229; laziness and, 222, 237, 254; manual jobs and, 76, 78, 226, 238–40, 246, 255–56, 264–65; mobility and, 8, 13, 59 (see also mobility); monopolies and, 6, 24, 47, 54, 64, 68, 87, 99, 114, 155, 186; outsourcing and, 118, 193–94, 222; pensions and, 41, 92, 178–79; politics of future and, 272–77; populism and, 223, 229; relational skills and, 187; retirement and, 110, 151, 201; revisionist history and, 283n9; robots and, 18, 141, 143, 184, 193, 260–66, 273; rules for, 6, 10, 12, 28, 38; semiskilled labor and, 12 (see also semiskilled labor); September Compromise and, 66; skilled labor and, 2–3, 12 (see also skilled labor); strikes and, 73, 75, 108, 116; tacit knowledge and, 2, 39, 145, 263; trade and, 17, 155 (see also trade); training and, 7, 10, 14, 31, 44, 82, 89–90, 101, 104, 109, 111, 128, 131, 174, 176, 179, 181, 204, 223, 228–29, 232–33, 241–43, 252, 257, 275, 277, 280n10; undeserving poor and, 43, 142, 160, 216, 222, 227; unemployment and, 16, 282n22, 284n2, 285n8 (see also unemployment); unions and, 6 (see also unions); vocational learning and, 31, 44, 68, 82, 89, 92, 104, 109, 113, 127–28, 131, 174, 176, 179, 228–30, 233, 242–43, 251–52, 257; welfare and, 31, 46, 96, 118, 120, 122–23, 125, 128, 176, 223, 279n5; women and, 5, 174, 176 Labour Party, 68, 169, 171 Landesbanken, 176–77 landowners, 38, 57, 80–89, 95, 98, 158 Lange, David, 171 Lapavitsas, Costas, 150 Latin America, 29, 56, 257 laziness, 222, 237, 254 Lega, 248, 276 Lehmann Brothers, 210 Le Pen, Marine, 183 Lewis-Black, Michael S., 164, 167, 285n8 liberalism: capitalism and, 1–2, 32, 49, 60, 97, 100–1, 137, 143, 213–14, 228; democracy and, 56–62, 67–71, 79–90, 96–101, 282n3, 283n14; education and, 45, 60, 71, 79, 82–83, 89–90, 101, 104, 138, 143, 156, 175, 208, 212–14, 228–29, 232, 241, 243, 284n3, 286n11; embedded, 51, 97, 137–38, 143–56, 159–83, 214; financial crisis and, 207–13; Fordism and, 103–5, 115, 125, 127; globalization and, 1, 51, 142, 155, 162–63, 208, 213; knowledge economies and, 137–38, 141–56, 159, 161–83, 207–14, 228–29, 232, 241, 243, 250, 284n3, 286n11; majoritarianism and, 33, 49, 60, 71, 97, 100–3, 125, 213, 243; middle class and, 2, 60, 71–72, 90, 96–97, 100–1, 115, 286n11; neoliberalism and, 1–2, 286n11; populism and, 228–29, 232, 241, 243, 250; protoliberal countries and, 59–61, 68, 90, 97, 100–1, 228; public goods and, 79–90; regulated, 143, 149; trade, 51, 62, 142, 155, 163, 173, 213, 250, 284n3; United Kingdom and, 32 Liberal Market Economies (LMEs): Fordism and, 103, 112, 125, 127–29; knowledge economies and, 152, 169, 181, 198, 230, 232; populism and, 230, 232 libertarians, 45, 225, 234, 237, 240, 249 Lib-Lab political parties, 62–63 Lindblom, Charles, 5–6, 11, 19, 34, 280n9 Lindert, Peter H., 81, 220, 283n11 Lipset, Seymour Martin, 4, 37, 55, 71–72, 79, 113 Lizzeri, A., 79–80, 86 LO, 19, 66, 108 loans, 110, 148, 173, 209–11 Local Government Act, 86 Louca, Francisco, 5 low-skilled labor: capitalism and, 265–66; democracy and, 97–98, 265–66; Fordism and, 119–20, 126; knowledge economies and, 180, 194, 200, 212–13, 218, 223, 238, 249; populism and, 218, 223, 238, 249; robots and, 18; unions and, 19, 47, 50, 66, 70–71, 96, 98–99, 119, 127, 181 low-wage countries, 18–19, 28 Luddites, 226 Luebbert, Gregory, 62, 69, 282n3 Lutheran Church, 72 Maastricht Treaty, 122 McAfee, A., 260 machine-based technological change (MBTC), 262 Macron, Emmanuel, 183 majoritarianism: capitalism and, 22; cross-class parties and, 125; decommodification and, 9; democracy and, 60, 71, 91–93, 97–98, 100–1; Fordism and, 103, 112–13, 124–32; inequality and, 22; institutional patterns and, 33, 49, 132, 251; knowledge economies and, 213, 217, 243–44, 251; liberalism and, 33, 49, 60, 71, 97, 100–3, 125, 213, 243; populism and, 217, 243–44, 251; proportional representation (PR) systems and, 19, 44–45, 60, 93, 100–1, 124–26, 128, 132, 217, 251; taxes and, 24, 44, 113, 124; Westminster systems and, 19 Manning, Alan, 193 Manow, Philip, 44, 92–93, 95–96, 124 manual labor, 76, 78, 226, 238–40, 246, 255–56, 264–65 manufacturing: Asian, 5, 14, 241; capitalism and, 2, 14, 33, 142, 203; democracy and, 80; feeder towns and, 108–9, 224; Fordism and, 103, 108–9, 118; innovation and, 33; knowledge economies and, 142, 169, 182, 194, 197, 200–3, 224, 241; populism and, 200–3, 224, 241; research and, 15, 200; skilled labor and, 15, 33, 44–45, 109, 118, 194, 224 Marketcraft: How Governments Make Markets Work (Vogel), 11 Marks, Gary, 68 Martin, Cathie Joe, 63 Marxism, 11, 34, 46, 62, 279n4, 280n8, 280n9 materialism, 217, 234–35, 238 median income, 23, 25 Medicare, 24, 42 Melitz model, 211–12 Meltzer-Richard model, 3 Mezzogiorno, 93 microprocessors, 14, 140, 284n1 Microsoft, 155, 186, 262 middle class: capitalism and, 2–3, 20, 22, 41, 53, 97, 101, 162, 225, 227, 257–58, 273; democracy and, 3, 20, 22–23, 35, 44, 53–55, 60, 63, 71–74, 84–85, 90, 96–101, 115, 158, 163, 168, 257–58, 273–74; education and, 3, 20, 24, 41–43, 53–55, 60, 71, 84, 90, 98, 101, 128, 158, 168, 203, 222–25, 235, 238–40, 243–44, 249, 251, 257–58, 273–74, 286n11, 287n1; encapsulation and, 227, 243, 249; Fordism and, 43, 112, 115, 117, 123, 125, 128, 142, 160, 201, 219, 222–25, 238, 248; Gini coefficients and, 23; Great Gatsby Curve (GGC) and, 220, 221, 227–28, 247, 259, 275–76; growth and, 2–3, 97, 115, 163, 168, 226; hollowing out of, 160, 219, 222, 238; inequality and, 3, 20, 22–23, 41–43, 140, 222–23, 228, 273, 281; knowledge economies and, 24, 140, 142, 158, 163, 168, 201, 203, 218–28, 234–51; liberalism and, 2, 60, 71–72, 90, 96–97, 100–1, 115, 286n11; lower, 22, 35, 42, 63, 72, 90, 98, 124, 128, 142, 158, 201, 223, 235, 238, 244, 248, 251, 273; Medicare and, 42; middle-income trap puzzle and, 8, 26–30; neoliberalism and, 2; new, 3, 43, 218, 222, 224–27, 234, 238–41, 246, 247; old, 3, 43, 140, 142, 203, 219, 222–28, 234, 237–40, 243–44, 247, 249, 287n1; populism and, 218–28, 234–51; rebirth of cities and, 224–27; redistribution and, 3, 20, 35, 42, 60, 71, 90, 98, 100, 112, 115, 123–25, 140, 158, 168, 220, 222, 225, 234, 237, 241, 273–74; skilled labor and, 3, 20, 27, 30, 35, 41–44, 71, 85, 90, 96–101, 112, 115, 123, 125, 142, 158, 193, 222, 224, 235, 239–41, 249; Social Security and, 42; taxes and, 21, 42, 124, 158, 222, 225; technology and, 3, 21, 29–30, 41, 117, 139, 222, 226, 249; upper, 2, 41–44, 72, 125, 158, 168; voters and, 2–3, 20–22, 44, 90, 96–100, 125, 140, 158, 168, 273 military, 8, 28, 33, 73, 75, 86–87, 279n2, 281n18 Mittelstand, 68, 92, 95, 179, 191 Mitterrand, François, 182 mobility: capital, 8, 16, 30, 35, 50, 145, 280n11; democracy and, 59, 258, 275–76; economic geography and, 2, 8, 18, 20, 39–40; Fordism and, 16, 118, 124, 221; France and, 59; Great Gatsby Curve (GGC), 220–23, 227–28, 247, 259, 275–76; growth and, 13, 30, 247, 276; implicit social contract and, 221–22; income classes and, 220–22; intergenerational, 13, 21, 124, 219–22, 228, 230, 232, 241–42, 275–76; knowledge economies and, 145, 207, 214, 217–23, 227–32, 239–42, 247, 249; populism and, 217–32, 239–42, 247, 249; skilled labor and, 8, 13, 20–21, 39, 124, 217, 222, 228, 232, 239, 249; as strengthening state, 50–51; taxes and, 221 modernization, 19; democracy and, 55, 57, 66, 70, 79–83, 87, 89, 98; elitism and, 38, 57, 79–80, 83, 89, 98; Fordism and, 104, 109, 114; knowledge economies and, 174; protocorporatist countries and, 79, 83; Whigs and, 80 monarchies, 72–73, 81, 87 monopolies, 6, 24, 47, 54, 64, 68, 87, 99, 114, 155, 186 Morrison, Bruce, 80 mortgages, 151, 173, 209 Muldon, Rob “Piggy”, 171 multinational companies (MNCs): artificial intelligence (AI) and, 267–68, 271; democracy and, 267–68, 271; knowledge economies and, 7, 145, 147, 193, 200, 267–68, 271; technology and, 48 multinational enterprises (MNEs): changing roles of, 279n1; competition and, 154; economic geography and, 2–3, 40, 192, 279n1; globalization and, 2–3, 15, 18, 25, 28, 40, 139, 154, 192, 279n1; immobility of, 2; innovation and, 1, 40, 279n1; knowledge economies and, 2–3, 15, 40, 139, 154, 192; skill clusters and, 192–93; skilled labor and, 28; specialization and, 192–93 Municipal Corporations Act, 86 Mussolini, Benito, 77 Nannestad, Peter, 164 nanotechnology, 141, 184 nationalism, 216, 218, 227 National Reform League, 86 nation-states: advanced capitalist democracies (ACD) and, 9–11; capitalism and, 4–13, 30, 46–50, 77, 136, 139, 159, 161, 206, 249, 261, 267–68, 272, 279n4; democracy and, 4–5, 8, 13, 46, 136, 159, 161, 213, 215, 249, 261, 267–68, 272, 279; FDI globalization and, 40; knowledge economies and, 139, 159, 161, 206, 213, 215; skilled labor and, 8, 30, 48, 139, 261; strong role of, 9–11; symbiotic forces and, 5–9, 20, 32, 53–54, 130–31, 159, 206, 249–53, 259 Nazism, 75, 77, 99, 219, 279n2 neoliberalism, 1–2, 286n11 Netherlands: democracy and, 56, 57, 61, 62–63; Fordism and, 106, 121; Gini coefficients and, 25, 36; knowledge economies and, 147–48, 150, 154, 166, 230, 232, 233, 236, 242, 245; median income and, 25; populism and, 230, 232, 233, 236, 242, 245; protocorporatist countries and, 62–63; taxes and, 17; tertiary educational spending and, 231–32 New South Wales, 94–95 New Zealand: Acts of Parliament and, 88; democracy and, 38, 56–57, 61, 62, 87–89, 283n8; Douglas and, 171; Education Act and, 89; Fordism and, 106, 132; Gini coefficients and, 25, 36; knowledge economies and, 147–48, 150, 153, 166, 171, 221, 233, 236, 242; Lange and, 171; male suffrage and, 89; Muldoon and, 171; as outlier, 23; patents in, 27 Nolan, Mary, 65–66 Nord, Philip, 59 Norris, Pippa, 235, 246, 287n1 North American Free Trade Agreement (NAFTA), 155 Norway: democracy and, 56, 57, 61, 62, 282n3; Fordism and, 106, 130; Gini coefficients and, 25, 36; knowledge economies and, 147–48, 150, 154, 166, 221, 233, 236, 242, 245; median income and, 25; populism and, 221, 233, 236, 242, 245; taxes and, 17 October Revolution, 75–76 OECD countries, 25, 38; education and, 14; Fordism and, 107, 117, 125, 133; knowledge economies and, 153–54, 175, 196, 230–32, 233, 250, 286n13; populism and, 230–32, 233, 250; taxes and, 17, 280n13 Oesch, Daniel, 234 oil crisis, 120, 171, 181 ordinary least squares (OLS) regression, 132 Osborne, Michael A., 260 outliers, 23, 232, 241 outsourcing, 118, 193–94, 222 overlapping generation (OLG) logic, 7 Paldam, Martin, 164 Panduro, Frank, 203 Paris Commune, 86 parliamentarianism, 58 partisanship, 32, 47, 91, 112, 129, 164, 171, 174 party system: democracy and, 93, 101; Fordism and, 113, 123–24; knowledge economies and, 21, 44, 51, 51–52; voters and, 21 (see also voters) patents, 7, 12–15, 26, 27, 145, 201, 281n15, 285n6 pegging, 121 pensions, 41, 92, 178–79 Persico, N., 80, 86 physical skills, 193 Pierson, Paul, 282n22 Piketty, Thomas, 1, 16, 20, 22, 30, 41–42, 117, 137, 139, 141, 163, 261, 273, 280n11, 282n22 PISA scores, 196 plantations, 38, 84 police, 96, 173–75 political economy: broad concepts of markets and, 46; capitalism and, 2–9, 12, 17, 24, 34, 45–48, 97, 112, 129, 131, 137, 160, 167, 214, 227, 251, 275; democracy and, 59, 97; economic geography and, 2–3, 8, 48–49, 140; innovation and, 2, 7–8, 34, 183; knowledge economies and, 51, 164–68, 181, 220, 226, 235; literature on, 2, 4, 6–8, 48, 114, 164, 167, 281n19; populism and, 45; spatial anchors and, 48–49 Politics Against Markets (Esping-Andersen), 30 populism: Austria and, 230, 233, 245; Belgium and, 233, 245; centralization and, 231, 243, 252; competition and, 218, 222–23, 226, 236; conservatism and, 218–19; Coordinated Market Economies (CMEs) and, 232; cross-national variance and, 241–44; decentralization and, 217, 225, 234; democracy and, 13, 45, 129, 136, 215, 217, 226, 228, 248–51, 275; Denmark and, 221, 233, 245; economic geography and, 224; education and, 217, 219, 222–25, 228–47, 250–52, 287n1; electoral systems and, 217–18, 228, 251; elitism and, 216, 226, 235, 243–44, 248–51, 287n3; Fordism and, 113, 130, 216, 218–25, 237–40, 248–49; France and, 183, 221, 233, 236, 239, 242, 245, 248; Germany and, 181, 219, 221, 230, 232, 233, 236, 242, 245; globalization and, 234, 245; Great Gatsby Curve (GGC) and, 220–23, 227–28, 247, 259, 275–76; growth and, 218, 221, 226, 237, 247–48; immigrants and, 45, 216–17, 223, 226–27, 234, 237, 239, 249; importance of economic progress and, 247–48; industrialization and, 224; inequality and, 219–23, 228; Information and Communication Technology (ICT) and, 238, 249; Italy and, 221, 233, 236, 242, 245, 248; Japan and, 218, 221, 232, 233, 236, 239, 241, 242, 244; knowledge economies and, 136, 138, 140–42, 146, 161, 171, 175, 181–85, 195, 202, 205, 214–23, 226–28, 235–53, 254–56; labor market and, 223, 229; laziness and, 222, 237, 254; liberalism and, 228–29, 232, 241, 243, 250; Liberal Market Economies (LMEs) and, 230, 232; libertarians and, 45, 225, 234, 237, 240, 249; low-skilled labor and, 218, 223, 238, 249; majoritarianism and, 217, 243–44, 251; manufacturing and, 200–3, 224, 241; materialism and, 217, 234–35, 238; middle class and, 218–28, 234–51; mobility and, 217–23, 227–32, 239–42, 247, 249; nationalism and, 216, 218, 227; national variation and, 228–34; Netherlands and, 230, 232, 233, 236, 242, 245; new materialism and, 234–35; Norway and, 221, 233, 236, 242, 245; OECD countries and, 230–32, 233, 250; political alignment and, 219–27; political cleavage and, 146, 181, 183, 228, 236–39, 241; political economy and, 45; postmaterialism and, 234–35; proportional representation (PR) systems and, 217, 229, 251; public goods and, 225; rebirth of cities and, 224–27; redistribution and, 220, 222, 225, 234–37, 241; regression analysis and, 236, 239–40, 246, 254–55; Republicans and, 218, 244–45; research and, 234; Robin Hood Paradox and, 220; root cause of, 13; rural areas and, 218, 224, 238–41, 287n1; semiskilled labor and, 238–40; sexuality and, 216–18, 225, 237, 243, 249, 254; skilled labor and, 52, 217–35, 238–41, 246, 249–52, 255–56; social contract and, 221–27; socialism and, 218; social networks and, 217, 225, 246; South Korea and, 232, 233, 236, 239, 241, 242; Sweden and, 221, 233, 236, 242, 245; Switzerland and, 221, 233, 236, 242, 245; symbiotic forces and, 249–53; taxes and, 221–22, 225, 231; technology and, 222, 226, 232, 234, 238, 246, 249; trade and, 218, 250; Trump and, 215, 218–20, 237, 243–45, 248; undeserving poor and, 43, 142, 160, 216, 222, 227; unemployment and, 248–49, 255–56; unions and, 228, 251; United Kingdom and, 13, 218, 232, 233, 236, 242, 245, 250; United States and, 13, 130, 171, 195, 215, 218–23, 230, 232, 236, 241, 244, 275; unskilled workers and, 246, 255–56; upper class and, 222, 227, 237, 253; values and, 239–41; voters and, 217–19, 234–36, 244–47, 250, 256; wages and, 219, 222–23, 227, 229; welfare and, 45, 223, 234, 249, 287n1; women and, 238; working class and, 225, 231, 239, 251; World Values Survey (WVS) and, 235–36, 245 postmaterialism, 234–35 Poulantzas, Nicos, 6, 9, 11, 19, 39, 279n4 poverty, 3, 5, 18–19, 25, 43, 47, 109, 117, 142, 221, 237 Power, Anne, 200 privatization, 1, 18, 154, 173 production: artificial intelligence (AI) and, 263; assembly lines and, 104, 108; broad market notions and, 46; clusters and, 40, 49, 183, 270–71; democracy and, 54, 60, 64–66, 69, 72–73, 83, 93–94, 258, 262–63, 267–71; feeder towns and, 108–9, 224; Fordism and, 43, 103–4, 108–11, 115–17, 123, 127; globalization and, 5, 40, 51, 258; innovation and, 10, 40, 262, 271; knowledge economies and, 143, 152, 161, 180, 183, 224–25, 234–35, 247, 249; skilled labor and, 10, 18, 35, 43, 49–50, 60, 64–65, 69, 104–5, 115, 123, 127, 180, 183, 225, 249, 258, 262, 267, 271; specialization and, 51, 108, 161, 258, 267–71; Vernon’s life-cycle and, 18 productivity, 19, 34, 118–19, 247, 261, 272 proportional representation (PR) systems: Christian democratic parties and, 44; democracy and, 19, 34, 44–45, 60–61, 91, 93, 97, 100–1, 112–13, 125–28, 132, 134, 135, 212, 217, 229, 251; Fordism and, 112–13, 124–28; green parties and, 45; knowledge economies and, 132–34, 135, 212, 217, 229, 251; liberalism and, 97; majoritarianism and, 19, 101; multiparty, 34, 44; negotiation-based environment and, 93; populism and, 217, 229, 251; redistribution and, 91; Westminster system and, 19 protectionism, 28, 41, 169 Protestantism, 61, 68 protocorporatist countries: Austria, 59, 62–63, 77, 99; Belgium, 62–63; Catholicism and, 56, 61, 63, 68, 77, 83, 87, 92, 94–95; democracy and, 59–72, 74, 77, 79, 82–83, 89–92, 98–101, 228, 283n11; entrepreneurs and, 65; France and, 59, 62; Germany and, 62–63, 65, 68 71, 74, 77, 99, 238n11; industrialization and, 60–62, 65, 79, 89–90, 98, 101; Marx and, 62; modernization and, 79, 83; Netherlands, 62–63; skilled labor and, 60, 64–66, 79, 90, 98, 101; Ständestaat group and, 59–60, 65–66, 70, 90–91, 93; Switzerland, 62–63; working class and, 60–79 protoliberal countries, 59–61, 68, 90, 97, 100–1, 228 Prussia, 72, 93 public goods: democracy and, 54, 60, 79–90, 98, 258, 275; Fordism and, 113; innovation and, 35, 258; knowledge economies and, 52, 143–48, 152, 157, 167, 225; liberalism and, 79–90; populism and, 225; role of state and, 10 Public Health Acts, 86 race to the bottom, 51, 122 Rasmussen, Poul Nyrup, 173 recession, 5, 206, 214, 247–50, 276 reconfigurability, 185, 191, 214, 224 redistribution: capitalism and, 1, 18–20, 31–32, 35, 37, 39–40, 47, 51, 55, 124, 128–31, 137, 261, 273; democracy and, 1, 8, 18–20, 32, 35, 37, 40, 55–56, 60, 69–71, 74–79, 90–91, 95–100, 115, 124, 158, 221, 259–62, 273–74, 282n3, 284n2; Fordism and, 103, 111–12, 115, 123–25, 128–29; Gini coefficients and, 22–23, 25, 36, 117, 118, 141, 221; inequality and, 1, 3, 20, 40–46, 140, 220, 222, 273; knowledge economies and, 48, 137, 140, 158, 168, 220, 222, 225, 234–37, 241; middle class and, 3, 20, 35, 42, 60, 71, 90, 98, 100, 112, 115, 123–25, 140, 158, 168, 220, 222, 225, 234, 237, 241, 273–74; populism and, 220, 222, 225, 234–37, 241; proportional representation (PR) systems and, 91; skilled labor and, 8, 20, 31, 35, 37, 47, 71, 90, 98–100, 103, 115, 123, 125, 128, 158, 220, 222, 241, 259, 261; social insurance and, 8; taxes and, 35, 40, 51, 124, 158, 221–22, 225; voters and, 3, 19–21, 32, 43, 90, 98, 100, 125, 140, 158, 273; welfare and, 3, 8, 18–21, 31, 39–40, 43, 115, 123–24, 128, 131, 137, 261, 273 Reform Acts, 56, 80–81, 85–86 Reform Crisis 1865–7, The (Searle), 85 Reform League, 86 Reform Party, 88 regional theory, 11 regression, 99–100, 132–35, 236, 239–40, 246, 254–55 Rehn-Meidner model, 19 relational skills, 187 Republicans, 38, 57, 59, 87, 218, 244–45, 282n24 reputation: colocation and, 267; consultants and, 286n15; Fordism and, 112–13; knowledge economies and, 158, 163–64, 182–83, 188, 190–91; Liberal Market Economies (LMEs) and, 112; political, 4, 12, 29, 32, 34, 112–13, 158, 163–64, 182–83, 188, 190, 258, 259, 280n9; skill clusters and, 190–91; social networks and, 191; subconscious signals and, 190 research: capitalism and, 2, 10, 12, 37, 48, 139, 159, 165, 234; democracy and, 55, 66–67, 72, 262, 264, 268, 287n1; education and, 10, 12, 20–21, 28, 48, 55, 72, 146, 159, 165, 234, 262; Fordism and, 103, 108, 110; innovation and, 2, 12, 40; knowledge economies and, 139, 146, 159, 164–65, 179, 187, 189, 196, 200, 204, 234, 285n9; manufacturing and, 15, 200; populism and, 234; skilled labor and, 2, 12, 21, 28, 37, 39, 48, 66–67, 139, 179, 187, 196, 268 retirement, 110, 151, 201 Robin Hood Paradox, 220 Robinson, James, 9, 35, 37, 56, 58, 71–72, 74, 76, 85–86, 99, 282n3 robots, 18; artificial intelligence (AI) and, 260–62; great technology debate and, 260–66; knowledge economies and, 141, 143, 184, 193; politics of future and, 273 Rodrik, Dani, 16, 22, 128 Rokkan, Stein, 66, 94, 97, 100, 113 Rueda, D., 45, 282n25 Rueschemeyer, Dieter, 56, 72–73, 75, 77, 280n6, 283n7 Ruggie, John G., 51, 143 rust belt, 224 Scheve, Kenneth, 221 Schlüter, Poul, 172 Schumpter, Joseph A., 6, 9, 11, 279n4 Scotland, 283n12 Searle, G., 85 segregation: centripetal and centrifugal forces in, 200–6; cultural choices and, 205–6; educational, 43, 119, 140, 161, 192, 195, 197, 200–6, 214, 231; Fordism and, 109, 119; geographic, 109, 140, 161, 185, 195, 197, 200–6; health and, 204–5; knowledge economies and, 43, 140, 161, 185, 195, 197, 200–6, 214, 231; private services and, 203–4; social networks and, 205–6; transport systems and, 201–3 semiskilled labor: capitalism and, 261; democracy and, 61, 64–65, 68–69, 261; Fordism and, 12, 102–5, 112, 115, 118–20, 123–24, 127, 129; knowledge economies and, 142, 172–73, 212, 238–40; populism and, 238–40; segmentation of, 43–44; technology and, 41, 43, 65, 102–5, 118–19, 127, 238, 261; undeserving poor and, 43; unions and, 61, 64–65, 68–69, 105, 119–20, 123, 172–73 September Compromise, 66 service sectors, 16, 31, 44, 51, 119, 157, 194, 200, 204, 219, 285n5 settler colonies, 84–90 sexuality, 52, 216–18, 225, 237, 243, 249, 254, 269 Sherman Act, 153 shocks: capitalism and, 6, 10, 30, 54, 125, 136, 138, 140, 156, 159, 214; democracy and, 54; Fordism and, 125–27, 132–35; Information and Communication Technology (ICT) and, 136, 138, 214; knowledge economies and, 136–40, 143, 156–59, 181, 185, 194, 214; supply, 30; technology and, 6, 30, 136, 138, 140, 143, 159, 185, 194 Simmons, Beth, 161 Singapore, 4, 26–28, 221, 282n3 Single European Act, 145, 170–71 Single Market, 122 skill-biased technological change (SBTC), 41, 238, 262, 265–66 skill clusters: big-city agglomerations and, 194–200; capitalism and, 2, 7, 49, 145, 185, 192, 261; colocation and, 2–3, 7, 15–16, 185, 261; democracy and, 261; education and, 2–3, 7, 139, 141, 145, 148, 185, 190–95, 198, 223, 261; knowledge economies and, 139, 141, 144–48, 183, 185, 190–98, 200, 223; multinational enterprises (MNEs) and, 2, 192–93; reputation and, 190–91; social networks and, 28, 139, 191–92; specialization and, 190–91; sub-urbanization and, 141 skilled labor: analytic skills and, 186; artificial intelligence (AI) and, 261–62, 265–68, 271–72; capitalism and, 2–3, 6–8, 12–15, 19–20, 30–34, 37–38, 47–50, 53–54, 58, 60, 97, 101–2, 128, 137, 139, 144–47, 157–58, 172, 185–86, 192, 218, 250–51, 258, 261, 280n6; centralization and, 53, 58, 67, 69, 96, 99, 101, 110, 119–20, 173, 186, 279n1; colocation and, 2, 7, 261, 272; competition and, 6, 12, 18, 21, 30–34, 66, 96, 119, 128, 146, 157, 181, 186, 194, 198, 218, 222–23, 258; cospecificity and, 7–15, 20, 37, 47–50, 69, 99, 101, 115, 123, 196, 259, 261; craft skills and, 32, 53, 61–71, 79, 82, 90–91, 96, 98, 101, 104, 172; decentralization and, 96, 123, 138, 144, 146, 148, 172, 183–86, 190, 193, 212, 225, 262, 276; democracy and, 3, 6, 8, 12, 20, 31, 37–38, 44, 53–54, 58–71, 79, 84–85, 90, 96–101, 115, 158, 185–86, 250, 258–62, 265–68, 271–72, 276–77; economic geography and, 2–3, 7–8, 15, 20, 31, 48, 109, 116, 144–47, 185, 191–92, 195–96, 276–77; education and, 7, 12, 20–21, 31, 37–38, 41, 54, 60, 70–71, 79, 84, 90, 101–4, 119, 127–30, 139, 142, 158, 174–76, 179–81, 184–85, 191–95, 198, 217, 222–25, 228–35, 238–40, 246, 250–52, 266; Fordism and, 12, 14, 16, 102–5, 109–12, 115–30, 222–25, 277; foreign direct investment (FDI) and, 3, 139, 145, 147, 193, 198; growth and, 8, 13, 31, 68, 97, 110, 115–16, 218, 261; Information and Communication Technology (ICT) and, 41, 102, 185–86, 190, 193, 195, 198, 218, 276; innovation and, 2, 6–12, 19, 27, 31–34, 104, 128, 141, 174, 196, 198, 258, 262, 271, 281n18; knowledge economies and, 137–49, 157–58, 172–200, 211–13, 217–35, 238–41, 246, 249–52, 255–56; manufacturing and, 15, 33, 44–45, 109, 118, 194, 224; middle class and, 3, 20, 27, 30, 35, 41–44, 71, 85, 90, 96–101, 112, 115, 123, 125, 142, 158, 193, 222, 224, 235, 239–41, 249; mobility and, 8, 13, 20–21, 39, 124, 217, 222, 228, 232, 239, 249; nation-states and, 8, 30, 48, 139, 261; overlapping generation (OLG) logic and, 7; physical skills and, 193; politics of future and, 272–77; populism and, 52, 217–35, 238–41, 246, 249–52, 255–56; production and, 10, 18, 35, 43, 49–50, 60, 64–65, 69, 104–5, 115, 123, 127, 180, 183, 225, 249, 258, 262, 267, 271; protocorporatist countries and, 60, 64–66, 79, 90, 98, 101; rebirth of cities and, 224–27; redistribution and, 8, 20, 31, 35, 37, 47, 71, 90, 98–100, 103, 115, 123, 125, 128, 158, 220, 222, 241, 259, 261; relational skills and, 187; research and, 2, 12, 21, 28, 37, 39, 48, 66–67, 139, 179, 187, 196, 268; social insurance and, 8, 35, 50, 67, 123, 125, 127, 192; social networks and, 2, 28, 48, 139, 145, 185, 191–92, 195, 197, 225, 258, 261, 267–68, 271; specialization and, 14 (see also specialization); tacit knowledge and, 2, 39, 145, 263; technology and, 3, 7, 10–14, 20, 30–31, 37, 41, 43, 48, 50, 70, 96, 102–5, 118–19, 127–28, 138–40, 144, 147, 157, 175–76, 185–86, 192–94, 198–99, 222, 232, 238, 261, 268, 277; unions and, 6, 19, 33, 47, 50, 53, 58, 60–71, 96–101, 105, 110, 119–20, 123, 127, 172–73, 176, 181, 186, 251; upper class and, 43–44, 125; upskilling and, 102, 123, 129, 174–75, 178, 228, 232, 250–51; wages and, 6, 18, 33, 41, 50, 61, 64, 67, 104–5, 110, 115, 118–24, 127, 172–76, 181, 212, 222–23, 229, 266 Slomp, Hans, 62 smart cities, 194–95 social contract, 161, 221–27 social democratic parties: Denmark and, 76–77, 181; Germany and, 62–63, 68, 72–77, 181; Norway and, 282n3; Sweden and, 19, 72, 74, 76; unions and, 6, 19, 61–63, 67–68, 72, 74, 76, 114, 181, 282n3 Social Democratic Party (SPD) [Germany], 68, 74, 76–77, 78 Social Democratic Party (Sweden), 19 social insurance, 21; democracy and, 67; Fordism and, 111; skilled labor and, 8, 35, 50, 67, 123–25, 127, 192 socialism: competition and, 11; democracy and, 11, 56, 61–63, 68, 71, 75, 94, 97, 100, 137, 181–82, 215, 218; knowledge economies and, 137, 181–82, 215, 218; populism and, 218 social justice, 115, 237 social networks: cultural choices and, 205–6; democracy and, 258, 261, 268, 270–71, 274–75; economic geography and, 48–49, 185, 195, 274; education and, 2, 51–52, 139, 145, 185, 191–99, 204–5, 217, 225, 234, 261, 270–71, 274–75; growth and, 51, 92; knowledge economies and, 139, 145, 185, 188, 191–92, 195–97, 200, 204–6, 217, 225, 246; populism and, 217, 225, 246; reputation and, 191; segregation and, 205–6; skilled labor and, 2, 28, 48, 139, 145, 185, 191–92, 195, 197, 225, 258, 261, 267–68, 271 Social Security, 24, 42, 50, 118, 174, 184 socio-optimists, 260, 266, 275 socio-pessimists, 260, 266 Sokoloff, Kenneth L., 80, 84, 89 Soskice, David, 124, 135, 211 South Korea: capitalism and, 4, 26, 148; democracy and, 78; education and, 26, 28, 166, 231–32, 241, 284n4; Gini coefficients and, 36; knowledge economies and, 147–48, 150, 154, 156, 166, 232, 233, 236, 239, 241, 242, 284n4; middle-income trap and, 26; military and, 28; patents and, 27; populism and, 232, 233, 236, 239, 241, 242; skilled labor and, 28 Soviet Union, 139, 142, 156, 186, 241, 285n7 Spain: Gini coefficients and, 36; knowledge economies and, 154, 166, 201, 221, 233, 236, 242, 248; patents and, 27; taxes and, 17 Sparkassen, 176–77 specialization: advanced capitalist democracies (ACD) and, 14–17; Asia and, 267; capitalism and, 2, 6, 8, 17, 40, 139, 145, 147, 161, 192, 258, 267, 270–71, 276–77; cospecificity and, 14–17; cross-country comparison and, 39; democracy and, 67, 258, 267, 270–71, 276–77; economic geography and, 8, 14–17, 39, 144, 146–47, 192, 276–77; education and, 14, 191, 271; Fordism and, 108; globalization and, 3, 8, 17, 40, 51, 198, 258; heterogenous institutions and, 6; innovation and, 8, 14, 198, 267, 271; knowledge economies and, 2–3, 139, 144–47, 161, 190–93, 198, 200, 281n21; location cospecificity and, 14–17; multinational enterprises (MNEs) and, 192–93; patterns of, 192–93; production and, 51, 108, 161, 258, 267–71; skill clusters and, 190–91; as strengthening state, 50–51 Ständestaat group, 59–60, 65–66, 70, 90–91, 93 Standing, Guy, 142 Stasavage, David, 221 Stegmaier, Mary, 164, 167, 285n8 Steinmo, Sven, 16 Stephens, Evelyne Huber, 56, 229 Stephens, John, 56, 229, 280n6 Streeck, Wolfgang, 1, 16, 22, 30, 137, 163, 206, 281n17, 282n22 strikes, 73, 75, 108, 116 suffrage, 72–74, 76, 80, 87–89 Susskind, Daniel, 260 Susskind, Richard, 260 Swank, Duane, 16, 39, 101 Sweden: capitalism and, 19, 39, 49, 148; democracy and, 56, 57, 61, 62, 67, 71–76, 78; Fordism and, 106, 107, 117, 120, 129; Gini coefficients and, 25, 36; knowledge economies and, 147–48, 150, 153–54, 166, 173, 221, 233, 236, 242, 245; median income and, 25; populism and, 221, 233, 236, 242, 245; Social Democratic Party and, 19; taxes and, 17 Swenson, Peter, 108 Switzerland: democracy and, 56, 57, 61, 62–63, 282n3; Gini coefficient of, 36; knowledge economies and, 147–48, 150, 154, 166, 221, 233, 236, 242, 245; populism and, 221, 233, 236, 242, 245; protocorporatist countries and, 62–63; taxes and, 280n13; unions and, 106 symbiotic forces: democracy and, 5–9, 14, 20, 32, 53–54, 102, 130–31, 159, 165, 206, 249–53, 258, 259, 270, 272; Fordism and, 102, 130–31; knowledge economies and, 159, 165, 206, 249–53; populism and, 249–53 tacit knowledge, 2, 39, 145, 263 Taiwan, 4, 26–28, 78, 156 tariffs, 89, 114, 285n5 taxes: capitalism and, 16–17, 24, 34–35, 40, 51, 73, 167, 206, 261, 280n12; democracy and, 73, 261, 267–68, 271; Fordism and, 110–13, 124; Gini coefficients and, 22, 141; government concessions and, 18; Internal Revenue Service and, 42; knowledge economies and, 141, 157–58, 165, 167, 172, 206, 221–22, 225, 231, 281n21; majoritarianism and, 24, 44, 113, 124; middle class and, 21, 42, 124, 158, 222, 225; mobility and, 221; populism and, 221–22, 225, 231; redistribution and, 35, 40, 51, 124, 158, 221–22, 225; Republican reform and, 282n24; rich and, 22, 24, 261, 280n13; shelters and, 280n13; transfer systems and, 21–22, 112, 158; United Kingdom and, 17, 141, 206; United States and, 16–17, 24, 42, 141; upper class and, 42; value added, 34, 206; welfare and, 16–17, 21, 40, 42, 167 technology: artificial intelligence (AI) and, 260–72; assembly lines and, 104, 108; biotechnology and, 141, 175, 184; change and, 5, 13, 40–45, 50, 124, 138–41, 155, 162, 192, 199, 222, 232, 246, 249, 259, 262; codifiable, 7, 12, 14–15, 238; colocation and, 261, 266–72; cospecificity and, 7, 12, 14, 20, 37, 48, 50, 103, 159, 261–66; debates over future, 259–72; democracy and, 70, 92, 259–63, 267–72, 277; Fordism and, 5, 7, 14–15, 50, 102–6, 109, 117–19, 124, 127–28, 131, 140–43, 154, 192, 194, 222, 277; growth and, 3, 5, 13, 38, 162, 194, 226, 261; ICT and, 3 (see also Information and Communication Technology (ICT)); income distribution and, 21, 40; industrial revolution and, 5, 12, 58, 293, 295; investment in, 3, 20, 30, 37–38, 50, 109, 142, 147, 156, 175, 272; knowledge economies and, 138–44, 147, 154–62, 175–76, 184–86, 192–94, 198–99, 214, 222, 226, 232, 234, 238, 246, 249, 284n1, 284n3, 285n6; Luddites and, 226; manual jobs and, 264–65; microprocessors and, 14, 140, 284n1; middle class and, 3, 21, 29–30, 41, 117, 139, 222, 226, 249; multinational companies (MNCs) and, 48; nanotechnology, 141, 184; outsourcing and, 118, 193–94, 222; overlapping generation (OLG) logic and, 7; patents and, 7, 12–15, 26, 27, 145, 201, 281n15, 285n6; populism and, 222, 226, 232, 234, 238, 246, 249; robots and, 18, 141, 143, 184, 193, 260–66, 273; self-driving vehicles and, 265; semiskilled labor and, 41, 43, 65, 102–5, 118–19, 127, 238, 261; shocks and, 6, 30, 136, 138, 140, 143, 159, 185, 194; skilled labor and, 3, 7, 10–14, 20, 30–31, 37, 41, 43, 48, 50, 70, 96, 102–5, 118–19, 127–28, 138–40, 144, 147, 157, 175–76, 185–86, 192–94, 198–99, 222, 232, 238, 261, 268, 277; smart cities and, 194–95; trade and, 3, 7, 31, 50, 128, 131, 142, 284n3; transfer and, 18, 31, 38, 48, 128, 131; vocational training and, 31, 44, 68, 82, 89, 92, 104, 109, 113, 127–28, 131, 174, 176, 179, 228–30, 233, 242–43, 251–52, 257; voters and, 6, 13, 20, 159, 234, 260, 272 techno-optimists, 260, 269–70, 275, 277 techno-pessimists, 260–61 Teece, David J., 7, 12 Thatcher, Margaret, 33, 149, 163, 169–71, 182, 209 Thelen, Kathleen, 62–64, 219 Third Republic, 57, 81, 86–87 Tiebout, Charles M., 252 Tories, 87 trade: barriers to, 50, 114, 154, 285n5; competition and, 26, 31, 128, 131, 153–55, 218, 285n5, 285n9; democracy and, 258, 267; FDI and, 154, 163, 284n3, 285n5, 285n9; Fordism and, 114, 128, 131; free, 17, 155; knowledge economies and, 142, 145, 153–55, 163, 172–73, 180, 211–13, 218, 250; liberalism and, 51, 62, 142, 155, 163, 173, 213, 250, 284n3; NAFTA and, 155; open, 27, 154; populism and, 218, 250; protectionism and, 28, 41, 169; technology and, 3, 7, 31, 50, 128, 131, 142, 284n3 Trans-Pacific Partnership Agreement (TPP), 155–56 transport systems, 201–3 Trump, Donald, 130, 156, 211, 215, 218–20, 237, 243–45, 248, 276 Über, 265 undeserving poor, 43, 142, 160, 216, 222, 227 unemployment: automatic disbursements and, 133, 284n2; capitalism and, 51, 117, 172, 282n22; countercyclical policies and, 16; democracy and, 74–77, 92, 96; Fordism and, 105, 107, 110, 117, 120–21, 124–27, 133, 135, 284n2; knowledge economies and, 170–72, 174, 178, 180, 207, 248–49, 255–56, 285n8; social protection and, 51 unions: centralization and, 49, 53, 58, 63, 67, 69–70, 73, 96, 99, 101, 105, 107–10, 113, 116, 119, 122–23, 152, 156, 172, 174, 283n8; centralization/decentralization issues and, 49–50, 53, 58, 63, 67–70, 73, 96, 99, 101, 105–10, 113, 116, 119, 122–23, 152, 172, 174, 186, 283n8; competition and, 6, 33, 66, 68, 80, 96, 119, 152, 169–72, 177, 181, 186; craft, 61, 63, 67–71, 101, 172; democracy and, 53, 58–80, 90–92, 95–101, 274, 282n3, 283n8; exclusion of, 67, 70, 98; Fordism and, 105–16, 119–23, 127, 284n3; hostile takeovers and, 33; institutional frameworks and, 32–33; knowledge economies and, 152, 169–83, 212, 228, 251; laborist unionism and, 62; low-skilled labor and, 19, 47, 50, 66, 70–71, 96, 98–99, 119, 127, 181; polarized unionism and, 62; populism and, 228, 251; power and, 32, 66–67, 69, 73–76, 99, 105, 108, 112–13, 119, 169, 172, 186; predatory, 6; Rehn-Meidner model and, 19; segmented, 62, 105, 113; semiskilled labor and, 61, 64–65, 68–69, 105, 119–20, 123, 172–73; September Compromise and, 66; skilled labor and, 6, 19, 33, 47, 50, 53, 58, 60–71, 96–101, 105, 110, 119–20, 123, 127, 172–73, 176, 181, 186, 251; social democratic parties and, 6, 19, 61–63, 67–68, 72, 74, 76, 114, 181, 282n3; solidaristic, 62, 105, 172; strikes and, 73, 75, 108, 116; trade, 62–64, 170 United Kingdom: Blair and, 33, 171, 209; Brexit and, 130, 245, 248, 250, 276; British disease and, 172; British North American Act and, 87–88; Callaghan and, 169, 171; capitalism and, 10, 13, 19, 32, 38, 148, 152, 172, 206, 209; centralization and, 49; Confederation of British Industry (CBI) and, 169–70; Conservative Party and, 32, 81, 85, 88, 169, 218–19; democracy and, 38, 54–65, 73, 80–90, 277, 283n9; Disraeli and, 81, 85, 96; education and, 38, 130, 166, 177, 231–32, 277; enfranchisement and, 84–90; Fordism and, 105–8, 120, 123, 130; Forster Elementary Education Act and, 86; Gini coefficents for, 25, 36; Healey and, 169; health and, 204–5; Hyde Park Riots and, 85; inequality and, 36; knowledge economies and, 142, 147–48, 150, 152, 154, 161–63, 166, 169–77, 180–81, 194, 200–1, 204, 206, 209, 218, 232, 233, 236, 242, 245, 250; labor co-operation and, 152; laborist unionism and, 62; Labour Party and, 68, 169, 171; Liberals and, 32; Local Government Act and, 86; median income and, 25; modernization and, 19; Municipal Corporations Act and, 86; patents and, 27; populism and, 13, 218, 232, 233, 236, 242, 245, 250; postwar, 11; Prior and, 169–70; Public Health Acts and, 86; Reform Acts and, 56, 80–81, 85–86; Reform Party and, 88; segregation and, 200–3; settler colonies and, 84–90; taxes and, 17, 141, 206; Thatcher and, 33, 149, 163, 169–71, 182, 209; Tories and, 87; Victorian reformers and, 82; Whigs and, 80 United States: capitalism and, 13, 16–17, 24–25, 38, 47, 148, 152, 186, 209, 275, 277; Civil War and, 57; Clayton Act and, 153; Cold War and, 78, 111; decentralization and, 49; democracy and, 13, 24, 38, 55–57, 59, 62–64, 70, 83, 88, 96, 107, 147–48, 186, 215, 220, 275, 277; education and, 24, 38, 55, 70, 83, 109, 127, 130, 166, 177, 195, 223, 230–32, 241, 275; Fordism and, 105–9, 117–20, 123, 127, 130; inequality and, 24, 36, 42, 107, 117, 118, 123, 220, 282n22; knowledge economies and, 141–42, 147–56, 162, 166, 169, 171, 177, 186, 194–95, 198, 202, 209, 215, 218–23, 230, 232, 236, 241, 244, 277; labor market and, 56 (see also labor market); NAFTA and, 155; populism and, 13, 130, 171, 195, 215, 218–23, 230, 232, 236, 241, 244, 275; Sherman Act and, 153; taxes and, 16–17, 24, 42, 141; Trans-Pacific Partnership Agreement (TPP) and, 155–56 unskilled workers: democracy and, 62–63, 67–71, 96–97, 101; Fordism and, 104–5, 118; knowledge economies and, 193, 246, 255; populism and, 246, 255–56 upper class: capitalism and, 4, 6; democracy and, 35; education and, 43; as gaming the system, 222; global distribution and, 27–29; Great Gatsby Curve (GGC) and, 220, 221, 227–28, 247, 259, 275–76; inequality and, 41, 158, 261; political influence of, 24, 41–43, 253; populism and, 222, 227, 237, 253; skilled labor and, 43–44, 125; taxes and, 22, 42, 261, 280n13; voters and, 2 upskilling, 102, 123, 129, 174–75, 178, 228, 232, 250–51 urbanization, 37, 92; big-city agglomerations and, 194–200; effects of, 83–84; feeder towns and, 108–9, 224; knowledge economies and, 141, 194–95, 201–3, 224–27, 239, 241; rebirth of cities and, 224–27; segregation and, 200–6 (see also segregation); smart cities and, 194–95; transport systems and, 201–3 US Patent and Trademark Office, 26–27 value-added sectors, 206–9 Van Kersbergen, Kees, 44, 92, 95, 124 Verily Life Sciences, 262 Vernon, Raymond, 18 VET system, 176, 179–80 Vliet, Olaf van, 133 Vogel, Steven, 11 Von Hagen, Jürgen, 121, 151 Von Papen, Franz, 77 voters: advanced capitalism and, 2, 6, 11–14, 19–22, 30–32, 38, 46–47, 112, 158–59, 167, 215, 247, 273; aspirational, 6, 12–13, 20–21, 32, 167, 214, 219, 272; decisive, 2–3, 6, 11–14, 19–23, 32, 38, 43, 158–59; democracy and, 75, 81, 90, 96–100, 111–13, 125, 129–30, 133, 260, 272–73; economic, 164; education and, 12–13, 21, 38, 45, 90, 158, 164, 167–68, 219, 234, 247, 273; electoral politics and, 21–22, 46, 100, 111, 158, 183, 217, 272; growth and, 2, 13, 23, 32, 111, 113, 164, 168, 247; knowledge economies and, 24, 138, 140, 158–59, 163–64, 167–68, 183, 213–19, 234–36, 245, 247; median, 3, 21, 23, 44, 96–97, 100, 125, 168, 213; Meltzer-Richard model and, 3; middle class, 2–3, 20–22, 44, 90, 96–100, 125, 140, 158, 168, 273; mobilizing, 75; neoliberalism and, 2; politics of the future and, 272–73; populism and, 217–19, 234–36, 244–47, 250, 256; prospective, 164; PR systems and, 19, 34, 100, 217; redistribution and, 3, 19–21, 32, 43, 90, 98, 100, 125, 140, 158, 273; retrospective, 164; suffrage and, 72–74, 76, 80, 87–89; technology and, 6, 13, 20, 159, 234, 260, 272; upper class and, 2; welfare and, 3, 21–22, 43, 45–46, 111, 167, 214, 234, 273 wages: bargaining and, 49–50, 61, 105–10, 119–21, 127, 151, 172, 176; coordination and, 49–50, 106–7, 120, 123, 172, 229; cospecificity and, 49–50; democracy and, 266, 268, 273; Fordism and, 104–24, 127, 284n2; Great Gatsby Curve (GGC) and, 220, 221, 227–28, 247, 259, 275–76; knowledge economies and, 151, 160, 172–76, 181, 196, 211–12, 219, 222–23, 227, 229; monopoly, 6; populism and, 219, 222–23, 227, 229; restraint and, 18, 110, 113, 120–21, 151, 176, 211–12; skilled labor and, 6, 18, 33, 41, 50, 61, 64, 67, 104–5, 110, 115, 118–24, 127, 172–76, 181, 212, 222–23, 229, 266 Wajcman, Judy, 260 Wallerstein, Michael, 105 Washington Consensus, 38 Waymo, 265 Weimar Republic, 75–77 welfare: Bismarckian, 176; capitalism and, 8, 16–19, 31, 39–40, 46, 122, 125, 128, 131, 137, 167, 234, 261, 279n5, 282n22; cash transfers and, 21; competition and, 31, 40, 52, 122, 128, 131, 223, 285n6; cospecificity and, 49–50; democracy and, 94, 96, 261, 273; education and, 31, 42, 45, 52, 94, 96, 116, 128, 131, 146, 167, 223, 234, 261, 287n1; Fordism and, 110–11, 115–28, 131; free riders and, 127; Golden Age of, 127; inequality and, 3, 42, 125, 223, 282n22; Keynesianism and, 115; knowledge economies and, 137, 146, 167, 176, 214, 223, 234, 249, 285n6, 285n8, 287n1; labor market and, 31, 46, 96, 118, 120, 122–23, 125, 128, 176, 223, 279n5; populism and, 45, 223, 234, 249, 287n1; power resources theory and, 280n6; public services and, 21; redistribution and, 3, 8, 18–21, 31, 39–40, 43, 115, 123–24, 128, 131, 137, 261, 273; skilled labor and, 45; social insurance and, 21; taxes and, 16–17, 21, 40, 42, 167; trade protectionism and, 51; undeserving poor and, 43; voters and, 3, 21–22, 43, 45–46, 111, 167, 214, 234, 273; wage coordination and, 49–50 Westminster systems, 19 Whigs, 80 Winters, J.

., 80, 84, 89 Entrepreneurial Politics in Mid-Victorian England (Searle), 85 entrepreneurs, 42, 65, 85, 183, 217, 275 Esping-Andersen, Gösta, 1, 30, 93–94, 124–25, 128 ethnic issues, 52, 91, 160, 205, 275, 277, 280n8 European Central Bank, 122 European Monetary System (EMS), 122 European Union (EU), 51, 122, 145, 153, 170–71, 177, 245, 248, 250 exchange rates, 121–22, 148, 152, 209, 212 Facebook, 155 factory workers, 61, 65–66, 70 feeder towns, 108–9, 224 Ferry reforms, 87 financial crisis: collateral debt obligations (CDOs) and, 209–10; credit default swaps (CDSs) and, 209–10; export-oriented economies and, 211–12; Great Depression and, 45, 99, 214, 218, 247; Great Moderation and, 151, 207; Great Recession and, 206, 214, 247, 250, 276; high leveraged financial institutions (HLFIs) and, 207–13; Keynesianism and, 207; knowledge economies and, 177, 206–14; liberalism and, 207–13; value-added sectors and, 206–9 financialization, 149–51 Finland: Fordism and, 106; Gini coefficients and, 36; knowledge economies and, 147–48, 150, 154, 166, 221, 233, 236, 241, 242, 245; median income and, 25; taxes and, 17 Fioretos, Orfeo, 10–11 Five Star Movement, 248, 276 flexicurity, 174 Foot, Michael, 169 Ford, Martin, 260 Fordism: advanced sector and, 130–31; assembly lines and, 104, 108; Austria and, 106; Belgium and, 106, 121; big-city agglomerations and, 194; centralization and, 103–10, 113, 116–21; Chandlerian corporations and, 5, 7, 15, 17, 103, 267; compensation and, 123–29; competition and, 115, 119, 122, 128, 131; conservatism and, 115, 121, 124, 128, 134; Coordinated Market Economies (CMEs) and, 102–4, 123, 125, 127; decentralization and, 122–23; democracy and, 274, 277; Denmark and, 106, 120, 129; deregulation and, 120, 122; economy of, 103–17; education and, 104, 109–11, 118–19, 127–31, 143; electoral systems and, 103, 111, 124–25; elitism and, 111; fall of, 117–30, 277; Finland and, 106; France and, 104–5, 106, 181–82; Germany and, 106, 107, 121, 129; growth and, 109–16, 125, 133, 135; industrialization and, 103, 108, 117–20, 124, 134–35; inequality and, 107, 116–20, 125, 213; inflation and, 120–21; Information and Communication Technology (ICT) and, 102; innovation and, 104, 128, 131; institutional frameworks and, 128–31; Ireland and, 106, 121; Italy and, 106, 120–21, 132; Japan and, 106, 109, 284n4; knowledge economies and, 140–43, 146–49, 152, 154, 160, 169, 181–82, 189, 192, 194, 200–1, 214–25, 237–40, 248–49, 277; labor market and, 103, 118, 122–28, 152; liberalism and, 103–5, 115, 125, 127; Liberal Market Economies (LMEs) and, 103, 112, 125, 127–29; low-skilled labor and, 119–20, 126; macroeconomic policies and, 120–23; majoritarianism and, 103, 112–13, 124–32; manufacturing and, 103, 108–9, 118; mass production and, 43, 104, 108; middle class and, 43, 112, 115, 117, 123, 125, 128, 142, 160, 201, 219, 222–25, 238, 248; mobility and, 16, 118, 124, 221; modernization and, 104, 109, 114; national champions and, 154; Netherlands and, 106, 121; Norway and, 106, 130; OECD countries and, 107, 117, 125, 133; party system and, 113, 123–24; populism and, 113, 130, 216, 218–25, 237–40, 248–49; production and, 43, 103–4, 108–11, 115–17, 123, 127; proportional representation (PR) systems and, 112–13, 124–28; public goods and, 113; redistribution and, 103, 111–12, 115, 123–25, 128–29; reputation and, 112–13; research and, 103, 108, 110; second-order effects and, 129–30; segmentation and, 123–24; segregation and, 109, 119; semiskilled labor and, 12, 102–5, 112, 115, 118–20, 123–24, 127, 129; shocks and, 125–27, 132–35; skilled labor and, 12, 14, 16, 102–5, 109–12, 115–30, 222–25, 277; social protection and, 123–29; specialization and, 108; Sweden and, 106, 107, 117, 120, 129; symbiotic forces and, 102, 130–31; taxes and, 110–13, 124; technology and, 5, 7, 14–15, 50, 102–6, 109, 117–19, 124, 127–28, 131, 140–43, 154, 192, 194, 222, 277; trade and, 114, 128, 131; unemployment and, 105, 107, 110, 117, 120–21, 124–27, 133, 135, 284n2; unions and, 105–16, 119–23, 127, 284n3; United Kingdom and, 105–8, 120, 123, 130; United States and, 105–9, 117–20, 123, 127, 130; unskilled workers and, 104–5, 118; wages and, 104–24, 127, 284n2; welfare and, 110–11, 115–28, 131; women and, 116–17; working class and, 109, 115, 129, 131 foreign direct investment (FDI): globalization and, 40, 198; Helpman-Melitz model and, 284n3; knowledge economies and, 139, 145, 147, 148, 154, 163, 193, 198–99, 200, 284n3, 285n5, 285n9; skilled labor and, 3, 139, 145, 147, 193, 198; trade and, 154, 163, 285n5, 285n9 Forster Elementary Education Act, 86 France: capitalism and, 17, 148, 182; Chirac and, 183; democracy and, 54, 56, 57, 59, 61, 62–63, 70, 81, 83, 87, 94–95, 283n9; education and, 70, 81, 83, 94, 104, 166, 177, 233; Fordism and, 104–5, 106, 181–82; Gini coefficient for, 36; guild system and, 59, 63; Information and Communication Technology (ICT) and, 182; knowledge economies and, 147–48, 150, 154, 166, 169, 177, 181–83, 202, 221, 233, 236, 239, 242, 245, 248; Le Chapelier laws and, 59; Legitimists and, 86; Macron and, 183; Mitterrand and, 182; mobility and, 59; Orleanists and, 86; Paris Commune and, 86; polarized unionism and, 62; populism and, 183, 221, 233, 236, 239, 242, 245, 248; postwar, 11; protocorporatist countries and, 59, 62; Third Republic and, 57, 81, 86–87 Freeman, Christopher, 5 free riders, 127 free trade, 17, 155 Frey, Carl Benedikt, 260 Friedman, Thomas, 145, 188 Galenson, Walter, 63–65, 73 game theory, 188–89, 222–23 gender, 116–17, 129, 192, 225, 238, 255–56, 280n8, 287n1 General Agreement on Tariffs and Trade (GATT), 114 geographic segregation, 109, 140, 161, 185, 195, 197, 200–6 German Democratic Party (DDP), 77 German People’s Party (DVP), 77 Germany: authoritarianism and, 4, 74, 99, 279n1; banking sector of, 176–77; Bismarkian welfare state and, 176; capitalism and, 4, 10–11, 17, 49, 55, 77; Coordinated Market Economies (CMEs) and, 176–81; decentralization and, 94, 283n11; democracy and, 55–56, 57, 61, 62–68, 71–91, 94, 99, 382n11; education and, 80, 82, 87, 89, 166, 179, 181, 231–32, 283n11; electoral system and, 91; Fordism and, 106, 107, 121, 129; Gini coefficents for, 25, 36; Grand Coalition governments of, 177; Harz reforms and, 178–79; Hitler and, 77, 99, 219; Information and Communication Technology (ICT) and, 176, 180; knowledge economies and, 142, 147–48, 150, 154, 166, 169, 176–81, 191, 207, 209, 219, 221, 230, 232, 233, 236, 242, 245; Kohl government and, 178; Kulturkampf and, 94–95; Landesbanken and, 176–77; median income and, 23, 25; Mittelstand and, 68, 92, 95, 179, 191; Nazism and, 75, 77, 99, 219, 279n2; October Revolution and, 75–76; populism and, 181, 219, 221, 230, 232, 233, 236, 242, 245; protocorporatist countries and, 62–63, 65, 68, 71, 74, 77, 99, 238n11; Schroeder government and, 178; Social Democratic Party (SDP) and, 68, 74, 76–77, 78; Socialist Republic of Bavaria and, 75; Sparkassen and, 176–77; VET system and, 176, 179–80; Weimar Republic and, 75–77; working class pressure in, 74–79; World War I and, 4, 56; World War II and, 4, 55–56, 76 Ghent system, 78 Gilens, Martin, 22, 24, 167–68 Gini coefficients: Australia and, 36; Austria and, 36; Belgium and, 36; Denmark and, 25, 36; disposable income and, 22–23, 25; Finland and, 36; Ireland and, 36; Netherlands and, 25, 36; Norway and, 25, 36; redistribution and, 22–23, 25, 36, 117, 118, 141, 221; South Korea and, 36; Spain and, 36; Sweden and, 25, 36; taxes and, 22, 141; United Kingdom and, 25, 36 globalization: advanced capitalist democracies (ACD) and, 38–40; capitalism and, 2–3, 7–8, 18, 20, 31, 48, 147, 159, 185, 192; competition and, 1, 28, 50, 156; democracy and, 258, 267, 272; deregulation and, 1; foreign direct investment (FDI) and, 40, 198; inequality and, 1, 3, 22, 26; Information and Communication Technology (ICT) and, 3, 143, 156, 175, 198; knowledge economies and, 137, 142–44, 148–49, 151, 156, 198, 206, 234, 245; liberalism and, 1, 51, 142–43, 155, 162–63, 208, 213; liberalization and, 1; multinational enterprises (MNEs) and, 2–3, 15, 18, 25, 28, 40, 139, 154, 192, 279n1; populism and, 234, 245; privatization and, 1; production and, 5, 40, 51, 258; Rodrik on, 22; specialization and, 3, 8, 17, 40, 51, 198, 258; strategic complimentarities and, 17–18; strength of democratic state and, 1–2, 50–51; symbiosis and, 8; varieties of advanced capitalism and, 38–40; weakened democratic state and, 1 Glyn, Andrew, 282n22 Google, 175, 262, 265, 287n1 Gordon, Robert, 260–61 Governments, Growth, and Markets (Zysman), 181 Great Depression, 45, 99, 214, 218, 247 Great Gatsby Curve (GGC), 220–23, 227–28, 247, 259, 275–76 Great Inversion, 224 Great Moderation, 151, 207 Great Recession, 206, 214, 247, 250, 276 Grey, Lord, 86 growth: capitalism and, 2–3, 8, 13, 16, 30–32, 38, 79, 97, 125, 156, 163, 218, 247, 261; competition and, 16, 31, 115, 162–63, 170, 177, 218, 261, 285n9; democracy and, 8, 68, 78–79, 92, 97, 261, 267, 276; economic geography and, 3, 31, 116; Fordism and, 109–16, 125, 133, 135; GDP, 38, 133, 261; industrialization and, 68, 92, 111, 115, 177, 181, 194; knowledge economies and, 51, 142, 156, 162–64, 168, 170–71, 177, 179, 181, 192, 194, 218, 221, 226, 237, 247–48, 285n8, 285n9; mobility and, 13, 30, 247, 276; populism and, 218, 221, 226, 237, 247–48; recession and, 5, 206, 214, 247–50, 276; skilled labor and, 8, 13, 31, 68, 97, 110, 115–16, 218, 261; social networks and, 51, 92; technology and, 3, 5, 13, 38, 162, 194, 226, 261; voters and, 2, 13, 23, 32, 111, 113, 164, 168, 247 guild systems, 59, 63–64, 69–70, 90–91, 93, 96, 98 Hacker, Jacob, 282n22 Hall, Peter A., 129, 216, 251 Hallerberg, Mark, 121, 151 Häusermann, Silja, 234 Hayek, Friedrich A., 5–6, 9, 11, 279n4 Healthcare NeXT, 262 health issues, 32, 79, 82–84, 86, 110, 198, 204–5, 262, 275 Hechter, Michael, 93 hegemony, 8, 113, 137 Helpman-Melitz model, 284n3 Herrigel, Gary, 93–94 heterogeneity, 17–20, 54, 133 highly leveraged financial institutions (HLFIs), 207–13 Hitler, Adolf, 77, 99, 219 Hochschild, Arlie R., 223, 226 Hong Kong, 4, 26, 279n3 housing, 41, 79, 177, 197, 200, 201, 203, 206, 225–26, 231, 275 Hovenkamp, Herbert, 153 human capital, 3, 53, 58, 101, 206, 229, 281n18 IBM, 175, 186 immigrants: closing access to, 43; democracy and, 88–89, 275; education and, 45, 89, 194, 217, 223, 226, 283n13; knowledge economies and, 136, 160, 193–94, 206, 215–17, 223, 226–27, 234, 237, 249; outsourcing and, 118, 193–94, 222; populism and, 45, 216–17, 223, 226–27, 234, 237, 239, 249; squattocracy and, 88 income distribution, 21, 25, 56, 116, 181, 221, 252, 274 industrialization: capitalism and, 4, 37–38, 53, 58, 60, 101, 124, 203; deindustrialization and, 18, 43, 103, 117–20, 124, 134–35, 180, 203, 224; democracy and, 4, 37, 53–62, 65–66, 79, 83, 88–92, 98, 101; feeder towns and, 108–9, 224; Fordism and, 103, 108, 117–20, 124, 134–35; growth and, 68, 92, 111, 115, 177, 181; knowledge economies and, 180–81, 203, 224; Nazism and, 75, 77; populism and, 224; protocorporatist countries and, 60–62, 65, 79, 89–90, 98, 101; urban issues from, 83–84 Industrial Relations and European State Traditions (Crouch), 58 industrial revolution, 5, 12, 58, 293, 295 inequality: capitalism and, 1, 5, 9, 20, 22, 24–26, 40–41, 125, 139, 261, 268, 273–74, 282n22; fall in, 5, 35; Fordism and, 107, 116–20, 125, 213; globalization and, 1, 3, 22, 26; Italy and, 36; knowledge economies and, 41–45, 139–41, 192, 197, 219–23, 228; majoritarianism and, 22; middle class and, 3, 20, 22–23, 41–43, 140, 222–23, 228, 273, 281; populism and, 219–23, 228; poverty and, 3, 5, 18–19, 25, 43, 47, 109, 117, 142, 221, 237; redistribution and, 1, 3, 20, 40–46, 140, 220, 222, 273; rise in, 1, 3, 9, 23, 40–46, 282n25; Robin Hood Paradox and, 220; undeserving poor and, 43, 142, 160, 216, 222, 227; United Kingdom and, 36; upper class and, 41, 158, 261; welfare and, 3, 8, 18–21, 31, 39–40, 42, 43, 115, 123–25, 128, 131, 137, 223, 261, 273, 282n22 inflation: capitalism and, 253, 285n9; Fordism and, 120–21; knowledge economies and, 151–52, 153, 163, 168–73, 176, 178, 202, 207, 234 Information and Communication Technology (ICT): capitalism and, 261, 266, 276; decentralization and, 3, 163, 186, 190, 276; democracy and, 261, 266, 276; Denmark and, 175; Fordism and, 102, 118; France and, 182; Germany and, 176, 180; globalization and, 198; knowledge economies and, 136–44, 156, 163, 171, 175–76, 180–90, 193, 195, 198, 214, 238, 249; outsourcing and, 118, 193–94, 222; physical skills and, 193; populism and, 238, 249; revolution of, 3, 5, 102, 136–43, 156, 163, 171, 176, 182–88, 193, 195, 198, 214, 238, 249, 276; routine tasks and, 193; shocks and, 136, 138, 214; skilled labor and, 41, 102, 185–86, 190, 193, 195, 198, 218, 276; smart cities and, 194–95; societal transformation and, 138–43 Inglehart, Ronald, 235, 246, 287n1 innovation: assembly lines and, 104, 108; capitalism and, 2, 6–12, 19, 31–34, 47, 128, 131, 157, 206, 258, 281n18; competition and, 6, 10–12, 31–35, 47, 128, 131, 173, 182–83, 258, 285; democracy and, 87, 258, 262, 267, 271; Fordism and, 104, 128, 131; knowledge economies and, 141, 152, 157–58, 173–75, 180–83, 196, 198, 205–7; manufacturing and, 33; middle-income trap and, 27; multinational enterprises (MNEs) and, 2, 40, 279n1; patents and, 7, 12–15, 26, 27, 145, 201, 281n15, 285n6; political economy and, 2, 7–8, 34, 183; production and, 10, 40, 262, 271; productivity and, 19, 34; public goods and, 35, 258; research and, 2, 12, 40; skilled labor and, 2, 6–12, 19, 27, 31–34, 104, 128, 141, 174, 196, 198, 258, 262, 271, 281n18; specialization and, 8, 14, 198, 267, 271 institutional frameworks: capitalism and, 31–34, 47–49, 128–29, 131, 146; comparative advantage and, 31, 33, 49, 51, 131; democracy and, 97; Fordism and, 128–31; knowledge economies and, 138, 146, 150, 156; unions and, 32–33 intellectual property, 31, 128, 131, 145 Internal Revenue Service (IRS), 42 International Accounting Standards Board (IASB), 208 International Monetary Fund (IMF), 38, 149–50 Ireland: capitalism and, 4; democracy and, 62, 282n2; Fordism and, 106, 121; Gini coefficients and, 36; knowledge economies and, 147–48, 150, 154, 166, 170, 230, 233; laborist unionism and, 62; middle-income trap and, 26; patents and, 27; taxes and, 17 Israel, 4, 25, 26, 28, 36, 81, 85, 96, 166 ISSP data, 165, 168 Italy: capitalism and, 4, 77, 148; democracy and, 77, 91, 99, 276, 282n2; education and, 166, 248; Five Star Movement and, 248, 276; Fordism and, 106, 120–21, 132; Gini coefficents for, 25, 36; inequality and, 36; knowledge economies and, 147–48, 150, 154, 166, 221, 233, 236, 242, 245, 248; Lega and, 248, 276; median income and, 25; Mussolini and, 77; populism and, 221, 233, 236, 242, 245, 248; postwar, 4; taxes and, 17 Iversen, Torben, 124, 135, 168, 211, 229, 251, 281n14 Japan: Abe and, 218; authoritarianism and, 279n2; capitalism and, 4, 11, 49, 55, 148, 282n2; education and, 166, 232, 241, 284n4; Fordism and, 106, 109, 284n4; Gini coefficients and, 25, 36; Keiretsu and, 182; knowledge economies and, 147–48, 150, 154, 166, 182, 207, 209, 218, 221, 232, 233, 236, 239, 241, 242, 244, 284n4; LDP and, 218; median income and, 25; populism and, 218, 221, 232, 233, 236, 239, 241, 242, 244; postwar, 4; tertiary educational spending and, 231–32 Johnson, Simon, 282n22 journeymen, 61, 65 Kalyvas, Stathis N., 92, 95 Katz, Jonathan N., 133 Katznelson, Ira, 62–63, 70, 283n13 Kees Koedijk, Jeroen Kremers, 154–55 Keynesianism, 115, 121, 145, 201, 207, 286n12 Kitschelt, Herbert, 234 knowledge economies: analytic skills and, 186; Asia and, 142, 144, 222, 229, 235, 241, 243; Australia and, 147–48, 150, 153, 166, 221, 233, 236, 242; Austria and, 230, 233, 245; Belgium and, 147–48, 150, 154, 233, 245; big-city agglomerations and, 194–200; Canada and, 147–48, 150, 154, 166, 221, 233, 236, 242, 245; centralization and, 146, 151–52, 156, 173, 186, 202, 209, 231, 243, 252; changing skill sets and, 184–94; colocation and, 159, 185–88; competition and, 139, 146, 149, 152–56, 162–63, 166–69, 173, 177, 181–82, 186, 194, 198, 208, 218, 222–23, 226, 236, 285n5, 285n6, 285n9; conservatism and, 169–72, 218–19; cooperative labor and, 152–56; Coordinated Market Economies (CMEs) and, 152, 169, 171–81, 198, 232; decentralization and, 3, 18, 138, 144, 146–52, 156, 163, 172–74, 180, 183–84, 186, 190, 193, 196, 212, 217, 225, 234, 275; Denmark and, 147–48, 150, 154, 166, 169, 171–76, 181, 203, 221, 233, 245; deregulation and, 145, 173, 183; economic geography and, 138, 140, 144–47, 159, 161, 185, 188, 191–92, 195–97, 200–6; education and, 138–48, 156–68, 174–81, 184–86, 191–200, 204, 214, 217, 219, 222–25, 228–47, 250–52, 255–56, 284n2, 284n4, 285n9, 286n11, 286n12, 287n1; electoral systems and, 163–68, 212, 217–18, 228; elitism and, 9, 141, 158, 179, 184, 214, 216, 226, 235, 243–44, 248–51, 287n3; embedded, 137–38, 143–56, 161–83, 185, 188, 191–92, 195, 205, 214, 225, 251; financial crisis and, 177, 206–14; financialization and, 149–51; Finland and, 147–48, 150, 154, 166, 221, 233, 236, 241, 242, 245; first-order effects and, 120, 129, 132–33, 216; Fordism and, 140, 142–43, 146–49, 152, 154, 160, 169, 181–82, 189, 192, 194, 200–1, 214, 216, 219–25, 237–38, 240, 248–49, 277; foreign direct investment (FDI) and, 139, 145, 147, 148, 154, 163, 193, 198–99, 200, 284n3, 285n5, 285n9; France and, 147–48, 150, 154, 166, 169, 177, 181–83, 202, 221, 233, 236, 239, 242, 245, 248; Germany and, 142, 147–48, 150, 154, 166, 169, 176–81, 191, 207, 209, 219, 221, 230, 232, 233, 236, 242, 245; globalization and, 137, 142–44, 148–49, 151, 156, 198, 206, 234, 245; Great Gatsby Curve (GGC) and, 220–23, 227–28, 247, 259, 275–76; growth and, 51, 142, 156, 162–64, 168, 170–71, 177, 179, 181, 192, 194, 218, 221, 226, 237, 247–48, 285n8, 285n9; human capital and, 206, 229; immigrants and, 136, 160, 193–94, 206, 215–17, 223, 226–27, 234, 237, 249; industrialization and, 180–81, 203, 224; inequality and, 41–45, 139–41, 192, 197, 219–23, 228; inflation and, 151–52, 153, 163, 168–73, 176, 178, 202, 207, 234; Information and Communication Technology (ICT) and, 3, 5, 136–43, 156, 163, 171, 175–76, 180–90, 193, 195, 198, 214, 238, 249; innovation and, 141, 152, 157–58, 173–75, 180–83, 196, 198, 205–7; institutional frameworks and, 138, 146, 150, 156; Ireland and, 147–48, 150, 154, 166, 170, 230, 233; Italy and, 147–48, 150, 154, 166, 221, 233, 236, 242, 245, 248; Japan and, 147–48, 150, 154, 166, 182, 207, 209, 218, 221, 232, 233, 236, 239, 241, 242, 244, 284n4; Korea and, 284n4; labor market and, 140, 152, 173–78, 183, 186, 190, 223, 229; liberalism and, 137–38, 141–56, 159, 161–83, 207–14, 228–29, 232, 241, 243, 250, 284n3, 286n11; Liberal Market Economies (LMEs) and, 152, 169, 181, 198, 230, 232; low-skilled labor and, 180, 194, 200, 212–13, 218, 223, 238, 249; macroeconomic management and, 151–52; majoritarianism and, 213, 217, 243–44, 251; manufacturing and, 142, 169, 182, 194, 197, 200–3, 224, 241; middle class and, 140, 142, 158, 163, 168, 201, 203, 218–28, 234–51; mobility and, 145, 207, 214, 217–23, 227–32, 239–42, 247, 249; modernization and, 174; multinational companies (MNCs) and, 7, 145, 147, 193, 200, 267–68, 271; multinational enterprises (MNEs) and, 2–3, 15, 40, 139, 154, 192; nation-states and, 139, 159, 161, 206, 213, 215; Netherlands and, 147–48, 150, 154, 166, 230, 232, 233, 236, 242, 245; Norway and, 147–48, 150, 154, 166, 221, 233, 236, 242, 245; OECD countries and, 153–54, 175, 196, 230–32, 233, 250; open financial markets and, 152; outsourcing and, 118, 193–94, 222; party system and, 21, 44, 51–52; physical skills and, 193; political construction of, 161–83; political decisions leading to, 156–61; political economy and, 51, 164–68, 181, 220, 226, 235; populism and, 136, 138, 140–42, 146, 161, 171, 175, 181–85, 195, 202, 205, 214–23, 226–28, 235–53, 254–56; privatization and, 154, 173; production and, 143, 152, 161, 180, 183, 224–25, 234–35, 247, 249; proportional representation (PR) systems and, 132–34, 135, 212, 217, 229, 251; public goods and, 52, 143–48, 152, 157, 167, 225; reconfigurability and, 185, 191, 214, 224; redistribution and, 48, 137, 140, 158, 168, 220, 222, 225, 234–37, 241; regulation index and, 285n5; relational skills and, 187; reputation and, 158, 163–64, 182–83, 188, 190–91; research and, 139, 146, 159, 164–65, 179, 187, 189, 196, 200, 204, 234, 285n9; routine tasks and, 193; second-order effects of, 129, 216; segregation and, 43, 107, 140, 161, 185, 192, 195, 197, 200–6, 214, 231; semiskilled labor and, 142, 172–73, 212, 238–40; shocks and, 136–40, 143, 156–59, 181, 185, 194, 214; skill clusters and, 139, 141, 144–48, 183, 185, 190–98, 200, 223; skilled labor and, 137–49, 157–58, 172–200, 211–13, 217–35, 238–41, 246, 249–52, 255–56; smart cities and, 194–95; socialism and, 137, 181–82, 215, 218; social networks and, 139, 145, 185, 188, 191–92, 195–97, 200, 204–6, 217, 225, 246; societal transformation from, 138–43; socioeconomic construction of, 183–99; South Korea and, 147–48, 150, 154, 156, 166, 232, 233, 236, 239, 241, 242; Spain and, 154, 166, 201, 221, 233, 236, 242, 248; specialization and, 139, 144–47, 161, 190–93, 198, 200, 281n21; Sweden and, 147–48, 150, 153–54, 166, 173, 221, 233, 236, 242, 245; Switzerland and, 147–48, 150, 154, 166, 221, 233, 236, 242, 245; tacit knowledge and, 2, 39, 145, 263; taxes and, 141, 157–58, 165, 167, 172, 206, 221–22, 225, 231, 281n21; technology and, 138–44, 147, 154–62, 175–76, 184–86, 192–94, 198–99, 214, 222, 226, 232, 234, 238, 246, 249, 284n1, 284n3, 285n6; trade and, 142, 145, 153–55, 163, 172–73, 180, 211–13, 218, 250; unemployment and, 170–72, 174, 178, 180, 207, 248–49, 255–56, 285n8; unions and, 152, 169–83, 212, 228, 251; United Kingdom and, 142, 147–48, 150, 152, 154, 161–63, 166, 169–77, 180–81, 194, 200–1, 204, 206, 209, 218, 232, 233, 236, 242, 245, 250; United States and, 141–42, 147–56, 162, 166, 169, 171, 177, 186, 194–95, 198, 202, 209, 215, 218–23, 230, 232, 236, 241, 244, 277; unskilled workers and, 193, 246, 255; voters and, 24, 138, 140, 158–59, 163–64, 167–68, 183, 213–19, 234–36, 245, 247; wages and, 151, 160, 172–76, 181, 196, 211–12, 219, 222–23, 227, 229; welfare and, 137, 146, 167, 176, 214, 223, 234, 249, 285n6, 285n8, 287n1; women and, 141, 151, 174, 176, 184, 195, 238; working class and, 201, 225, 231, 239, 251; World Values Survey (WVS) and, 168, 235–36, 245 knowledge-intensive businesses (KIBs), 187–90, 190 Kristal, Tali, 119 Krueger, Alan B., 220 Kulturkampf, 94–95 Kurzweil, Raymond, 264 Labor and Monopoly Capitalism: The Degradation of Work in the Twentieth Century (Braverman), 186 labor market: active labor market programs (ALMPs) and, 126–27, 135, 284n1; analytic skills and, 186; apprentices and, 61, 64–65, 68, 71, 104, 110, 127, 179–80, 230; artificial intelligence (AI) and, 260–72; artisans and, 61, 63–65, 70, 79, 94–95, 98; assembly lines and, 104, 108; big-city agglomerations and, 194–200; capitalism and, 1, 6, 12, 31, 38, 46–47, 122, 125, 128, 152, 186, 229, 258; Catholicism and, 56, 61, 63, 68, 77, 83, 87, 92, 94–95; collective bargaining and, 67, 69, 73, 92, 103, 107, 137, 176, 179; comparative advantage and, 31, 49, 51, 128, 131, 268; competition and, 12 (see also competition); craft skills and, 32, 53, 61–71, 79, 82, 90–91, 96, 98, 101, 104, 172; democracy and, 64, 66, 96–98, 260, 266, 268, 273; deregulation and, 1, 96, 122, 183; dualism and, 282n25; education and, 12, 28, 31, 41, 53–54, 60, 70, 72, 83, 89–90, 96, 98, 104, 128, 165, 174, 177, 191, 223, 225, 229, 260; flexicurity and, 174; Fordism and, 103, 118, 122–28; globalization and, 162–63 (see also globalization); guild systems and, 59, 63–64, 69–70, 90–91, 93, 96, 98; immigrants and, 45, 88–89, 136, 160, 193–94, 206, 215–17, 223, 226–27, 234, 237, 249, 275, 283n13; journeymen and, 61, 65; knowledge economies and, 140, 152, 173–78, 183, 186–90, 223, 229; laziness and, 222, 237, 254; manual jobs and, 76, 78, 226, 238–40, 246, 255–56, 264–65; mobility and, 8, 13, 59 (see also mobility); monopolies and, 6, 24, 47, 54, 64, 68, 87, 99, 114, 155, 186; outsourcing and, 118, 193–94, 222; pensions and, 41, 92, 178–79; politics of future and, 272–77; populism and, 223, 229; relational skills and, 187; retirement and, 110, 151, 201; revisionist history and, 283n9; robots and, 18, 141, 143, 184, 193, 260–66, 273; rules for, 6, 10, 12, 28, 38; semiskilled labor and, 12 (see also semiskilled labor); September Compromise and, 66; skilled labor and, 2–3, 12 (see also skilled labor); strikes and, 73, 75, 108, 116; tacit knowledge and, 2, 39, 145, 263; trade and, 17, 155 (see also trade); training and, 7, 10, 14, 31, 44, 82, 89–90, 101, 104, 109, 111, 128, 131, 174, 176, 179, 181, 204, 223, 228–29, 232–33, 241–43, 252, 257, 275, 277, 280n10; undeserving poor and, 43, 142, 160, 216, 222, 227; unemployment and, 16, 282n22, 284n2, 285n8 (see also unemployment); unions and, 6 (see also unions); vocational learning and, 31, 44, 68, 82, 89, 92, 104, 109, 113, 127–28, 131, 174, 176, 179, 228–30, 233, 242–43, 251–52, 257; welfare and, 31, 46, 96, 118, 120, 122–23, 125, 128, 176, 223, 279n5; women and, 5, 174, 176 Labour Party, 68, 169, 171 Landesbanken, 176–77 landowners, 38, 57, 80–89, 95, 98, 158 Lange, David, 171 Lapavitsas, Costas, 150 Latin America, 29, 56, 257 laziness, 222, 237, 254 Lega, 248, 276 Lehmann Brothers, 210 Le Pen, Marine, 183 Lewis-Black, Michael S., 164, 167, 285n8 liberalism: capitalism and, 1–2, 32, 49, 60, 97, 100–1, 137, 143, 213–14, 228; democracy and, 56–62, 67–71, 79–90, 96–101, 282n3, 283n14; education and, 45, 60, 71, 79, 82–83, 89–90, 101, 104, 138, 143, 156, 175, 208, 212–14, 228–29, 232, 241, 243, 284n3, 286n11; embedded, 51, 97, 137–38, 143–56, 159–83, 214; financial crisis and, 207–13; Fordism and, 103–5, 115, 125, 127; globalization and, 1, 51, 142, 155, 162–63, 208, 213; knowledge economies and, 137–38, 141–56, 159, 161–83, 207–14, 228–29, 232, 241, 243, 250, 284n3, 286n11; majoritarianism and, 33, 49, 60, 71, 97, 100–3, 125, 213, 243; middle class and, 2, 60, 71–72, 90, 96–97, 100–1, 115, 286n11; neoliberalism and, 1–2, 286n11; populism and, 228–29, 232, 241, 243, 250; protoliberal countries and, 59–61, 68, 90, 97, 100–1, 228; public goods and, 79–90; regulated, 143, 149; trade, 51, 62, 142, 155, 163, 173, 213, 250, 284n3; United Kingdom and, 32 Liberal Market Economies (LMEs): Fordism and, 103, 112, 125, 127–29; knowledge economies and, 152, 169, 181, 198, 230, 232; populism and, 230, 232 libertarians, 45, 225, 234, 237, 240, 249 Lib-Lab political parties, 62–63 Lindblom, Charles, 5–6, 11, 19, 34, 280n9 Lindert, Peter H., 81, 220, 283n11 Lipset, Seymour Martin, 4, 37, 55, 71–72, 79, 113 Lizzeri, A., 79–80, 86 LO, 19, 66, 108 loans, 110, 148, 173, 209–11 Local Government Act, 86 Louca, Francisco, 5 low-skilled labor: capitalism and, 265–66; democracy and, 97–98, 265–66; Fordism and, 119–20, 126; knowledge economies and, 180, 194, 200, 212–13, 218, 223, 238, 249; populism and, 218, 223, 238, 249; robots and, 18; unions and, 19, 47, 50, 66, 70–71, 96, 98–99, 119, 127, 181 low-wage countries, 18–19, 28 Luddites, 226 Luebbert, Gregory, 62, 69, 282n3 Lutheran Church, 72 Maastricht Treaty, 122 McAfee, A., 260 machine-based technological change (MBTC), 262 Macron, Emmanuel, 183 majoritarianism: capitalism and, 22; cross-class parties and, 125; decommodification and, 9; democracy and, 60, 71, 91–93, 97–98, 100–1; Fordism and, 103, 112–13, 124–32; inequality and, 22; institutional patterns and, 33, 49, 132, 251; knowledge economies and, 213, 217, 243–44, 251; liberalism and, 33, 49, 60, 71, 97, 100–3, 125, 213, 243; populism and, 217, 243–44, 251; proportional representation (PR) systems and, 19, 44–45, 60, 93, 100–1, 124–26, 128, 132, 217, 251; taxes and, 24, 44, 113, 124; Westminster systems and, 19 Manning, Alan, 193 Manow, Philip, 44, 92–93, 95–96, 124 manual labor, 76, 78, 226, 238–40, 246, 255–56, 264–65 manufacturing: Asian, 5, 14, 241; capitalism and, 2, 14, 33, 142, 203; democracy and, 80; feeder towns and, 108–9, 224; Fordism and, 103, 108–9, 118; innovation and, 33; knowledge economies and, 142, 169, 182, 194, 197, 200–3, 224, 241; populism and, 200–3, 224, 241; research and, 15, 200; skilled labor and, 15, 33, 44–45, 109, 118, 194, 224 Marketcraft: How Governments Make Markets Work (Vogel), 11 Marks, Gary, 68 Martin, Cathie Joe, 63 Marxism, 11, 34, 46, 62, 279n4, 280n8, 280n9 materialism, 217, 234–35, 238 median income, 23, 25 Medicare, 24, 42 Melitz model, 211–12 Meltzer-Richard model, 3 Mezzogiorno, 93 microprocessors, 14, 140, 284n1 Microsoft, 155, 186, 262 middle class: capitalism and, 2–3, 20, 22, 41, 53, 97, 101, 162, 225, 227, 257–58, 273; democracy and, 3, 20, 22–23, 35, 44, 53–55, 60, 63, 71–74, 84–85, 90, 96–101, 115, 158, 163, 168, 257–58, 273–74; education and, 3, 20, 24, 41–43, 53–55, 60, 71, 84, 90, 98, 101, 128, 158, 168, 203, 222–25, 235, 238–40, 243–44, 249, 251, 257–58, 273–74, 286n11, 287n1; encapsulation and, 227, 243, 249; Fordism and, 43, 112, 115, 117, 123, 125, 128, 142, 160, 201, 219, 222–25, 238, 248; Gini coefficients and, 23; Great Gatsby Curve (GGC) and, 220, 221, 227–28, 247, 259, 275–76; growth and, 2–3, 97, 115, 163, 168, 226; hollowing out of, 160, 219, 222, 238; inequality and, 3, 20, 22–23, 41–43, 140, 222–23, 228, 273, 281; knowledge economies and, 24, 140, 142, 158, 163, 168, 201, 203, 218–28, 234–51; liberalism and, 2, 60, 71–72, 90, 96–97, 100–1, 115, 286n11; lower, 22, 35, 42, 63, 72, 90, 98, 124, 128, 142, 158, 201, 223, 235, 238, 244, 248, 251, 273; Medicare and, 42; middle-income trap puzzle and, 8, 26–30; neoliberalism and, 2; new, 3, 43, 218, 222, 224–27, 234, 238–41, 246, 247; old, 3, 43, 140, 142, 203, 219, 222–28, 234, 237–40, 243–44, 247, 249, 287n1; populism and, 218–28, 234–51; rebirth of cities and, 224–27; redistribution and, 3, 20, 35, 42, 60, 71, 90, 98, 100, 112, 115, 123–25, 140, 158, 168, 220, 222, 225, 234, 237, 241, 273–74; skilled labor and, 3, 20, 27, 30, 35, 41–44, 71, 85, 90, 96–101, 112, 115, 123, 125, 142, 158, 193, 222, 224, 235, 239–41, 249; Social Security and, 42; taxes and, 21, 42, 124, 158, 222, 225; technology and, 3, 21, 29–30, 41, 117, 139, 222, 226, 249; upper, 2, 41–44, 72, 125, 158, 168; voters and, 2–3, 20–22, 44, 90, 96–100, 125, 140, 158, 168, 273 military, 8, 28, 33, 73, 75, 86–87, 279n2, 281n18 Mittelstand, 68, 92, 95, 179, 191 Mitterrand, François, 182 mobility: capital, 8, 16, 30, 35, 50, 145, 280n11; democracy and, 59, 258, 275–76; economic geography and, 2, 8, 18, 20, 39–40; Fordism and, 16, 118, 124, 221; France and, 59; Great Gatsby Curve (GGC), 220–23, 227–28, 247, 259, 275–76; growth and, 13, 30, 247, 276; implicit social contract and, 221–22; income classes and, 220–22; intergenerational, 13, 21, 124, 219–22, 228, 230, 232, 241–42, 275–76; knowledge economies and, 145, 207, 214, 217–23, 227–32, 239–42, 247, 249; populism and, 217–32, 239–42, 247, 249; skilled labor and, 8, 13, 20–21, 39, 124, 217, 222, 228, 232, 239, 249; as strengthening state, 50–51; taxes and, 221 modernization, 19; democracy and, 55, 57, 66, 70, 79–83, 87, 89, 98; elitism and, 38, 57, 79–80, 83, 89, 98; Fordism and, 104, 109, 114; knowledge economies and, 174; protocorporatist countries and, 79, 83; Whigs and, 80 monarchies, 72–73, 81, 87 monopolies, 6, 24, 47, 54, 64, 68, 87, 99, 114, 155, 186 Morrison, Bruce, 80 mortgages, 151, 173, 209 Muldon, Rob “Piggy”, 171 multinational companies (MNCs): artificial intelligence (AI) and, 267–68, 271; democracy and, 267–68, 271; knowledge economies and, 7, 145, 147, 193, 200, 267–68, 271; technology and, 48 multinational enterprises (MNEs): changing roles of, 279n1; competition and, 154; economic geography and, 2–3, 40, 192, 279n1; globalization and, 2–3, 15, 18, 25, 28, 40, 139, 154, 192, 279n1; immobility of, 2; innovation and, 1, 40, 279n1; knowledge economies and, 2–3, 15, 40, 139, 154, 192; skill clusters and, 192–93; skilled labor and, 28; specialization and, 192–93 Municipal Corporations Act, 86 Mussolini, Benito, 77 Nannestad, Peter, 164 nanotechnology, 141, 184 nationalism, 216, 218, 227 National Reform League, 86 nation-states: advanced capitalist democracies (ACD) and, 9–11; capitalism and, 4–13, 30, 46–50, 77, 136, 139, 159, 161, 206, 249, 261, 267–68, 272, 279n4; democracy and, 4–5, 8, 13, 46, 136, 159, 161, 213, 215, 249, 261, 267–68, 272, 279; FDI globalization and, 40; knowledge economies and, 139, 159, 161, 206, 213, 215; skilled labor and, 8, 30, 48, 139, 261; strong role of, 9–11; symbiotic forces and, 5–9, 20, 32, 53–54, 130–31, 159, 206, 249–53, 259 Nazism, 75, 77, 99, 219, 279n2 neoliberalism, 1–2, 286n11 Netherlands: democracy and, 56, 57, 61, 62–63; Fordism and, 106, 121; Gini coefficients and, 25, 36; knowledge economies and, 147–48, 150, 154, 166, 230, 232, 233, 236, 242, 245; median income and, 25; populism and, 230, 232, 233, 236, 242, 245; protocorporatist countries and, 62–63; taxes and, 17; tertiary educational spending and, 231–32 New South Wales, 94–95 New Zealand: Acts of Parliament and, 88; democracy and, 38, 56–57, 61, 62, 87–89, 283n8; Douglas and, 171; Education Act and, 89; Fordism and, 106, 132; Gini coefficients and, 25, 36; knowledge economies and, 147–48, 150, 153, 166, 171, 221, 233, 236, 242; Lange and, 171; male suffrage and, 89; Muldoon and, 171; as outlier, 23; patents in, 27 Nolan, Mary, 65–66 Nord, Philip, 59 Norris, Pippa, 235, 246, 287n1 North American Free Trade Agreement (NAFTA), 155 Norway: democracy and, 56, 57, 61, 62, 282n3; Fordism and, 106, 130; Gini coefficients and, 25, 36; knowledge economies and, 147–48, 150, 154, 166, 221, 233, 236, 242, 245; median income and, 25; populism and, 221, 233, 236, 242, 245; taxes and, 17 October Revolution, 75–76 OECD countries, 25, 38; education and, 14; Fordism and, 107, 117, 125, 133; knowledge economies and, 153–54, 175, 196, 230–32, 233, 250, 286n13; populism and, 230–32, 233, 250; taxes and, 17, 280n13 Oesch, Daniel, 234 oil crisis, 120, 171, 181 ordinary least squares (OLS) regression, 132 Osborne, Michael A., 260 outliers, 23, 232, 241 outsourcing, 118, 193–94, 222 overlapping generation (OLG) logic, 7 Paldam, Martin, 164 Panduro, Frank, 203 Paris Commune, 86 parliamentarianism, 58 partisanship, 32, 47, 91, 112, 129, 164, 171, 174 party system: democracy and, 93, 101; Fordism and, 113, 123–24; knowledge economies and, 21, 44, 51, 51–52; voters and, 21 (see also voters) patents, 7, 12–15, 26, 27, 145, 201, 281n15, 285n6 pegging, 121 pensions, 41, 92, 178–79 Persico, N., 80, 86 physical skills, 193 Pierson, Paul, 282n22 Piketty, Thomas, 1, 16, 20, 22, 30, 41–42, 117, 137, 139, 141, 163, 261, 273, 280n11, 282n22 PISA scores, 196 plantations, 38, 84 police, 96, 173–75 political economy: broad concepts of markets and, 46; capitalism and, 2–9, 12, 17, 24, 34, 45–48, 97, 112, 129, 131, 137, 160, 167, 214, 227, 251, 275; democracy and, 59, 97; economic geography and, 2–3, 8, 48–49, 140; innovation and, 2, 7–8, 34, 183; knowledge economies and, 51, 164–68, 181, 220, 226, 235; literature on, 2, 4, 6–8, 48, 114, 164, 167, 281n19; populism and, 45; spatial anchors and, 48–49 Politics Against Markets (Esping-Andersen), 30 populism: Austria and, 230, 233, 245; Belgium and, 233, 245; centralization and, 231, 243, 252; competition and, 218, 222–23, 226, 236; conservatism and, 218–19; Coordinated Market Economies (CMEs) and, 232; cross-national variance and, 241–44; decentralization and, 217, 225, 234; democracy and, 13, 45, 129, 136, 215, 217, 226, 228, 248–51, 275; Denmark and, 221, 233, 245; economic geography and, 224; education and, 217, 219, 222–25, 228–47, 250–52, 287n1; electoral systems and, 217–18, 228, 251; elitism and, 216, 226, 235, 243–44, 248–51, 287n3; Fordism and, 113, 130, 216, 218–25, 237–40, 248–49; France and, 183, 221, 233, 236, 239, 242, 245, 248; Germany and, 181, 219, 221, 230, 232, 233, 236, 242, 245; globalization and, 234, 245; Great Gatsby Curve (GGC) and, 220–23, 227–28, 247, 259, 275–76; growth and, 218, 221, 226, 237, 247–48; immigrants and, 45, 216–17, 223, 226–27, 234, 237, 239, 249; importance of economic progress and, 247–48; industrialization and, 224; inequality and, 219–23, 228; Information and Communication Technology (ICT) and, 238, 249; Italy and, 221, 233, 236, 242, 245, 248; Japan and, 218, 221, 232, 233, 236, 239, 241, 242, 244; knowledge economies and, 136, 138, 140–42, 146, 161, 171, 175, 181–85, 195, 202, 205, 214–23, 226–28, 235–53, 254–56; labor market and, 223, 229; laziness and, 222, 237, 254; liberalism and, 228–29, 232, 241, 243, 250; Liberal Market Economies (LMEs) and, 230, 232; libertarians and, 45, 225, 234, 237, 240, 249; low-skilled labor and, 218, 223, 238, 249; majoritarianism and, 217, 243–44, 251; manufacturing and, 200–3, 224, 241; materialism and, 217, 234–35, 238; middle class and, 218–28, 234–51; mobility and, 217–23, 227–32, 239–42, 247, 249; nationalism and, 216, 218, 227; national variation and, 228–34; Netherlands and, 230, 232, 233, 236, 242, 245; new materialism and, 234–35; Norway and, 221, 233, 236, 242, 245; OECD countries and, 230–32, 233, 250; political alignment and, 219–27; political cleavage and, 146, 181, 183, 228, 236–39, 241; political economy and, 45; postmaterialism and, 234–35; proportional representation (PR) systems and, 217, 229, 251; public goods and, 225; rebirth of cities and, 224–27; redistribution and, 220, 222, 225, 234–37, 241; regression analysis and, 236, 239–40, 246, 254–55; Republicans and, 218, 244–45; research and, 234; Robin Hood Paradox and, 220; root cause of, 13; rural areas and, 218, 224, 238–41, 287n1; semiskilled labor and, 238–40; sexuality and, 216–18, 225, 237, 243, 249, 254; skilled labor and, 52, 217–35, 238–41, 246, 249–52, 255–56; social contract and, 221–27; socialism and, 218; social networks and, 217, 225, 246; South Korea and, 232, 233, 236, 239, 241, 242; Sweden and, 221, 233, 236, 242, 245; Switzerland and, 221, 233, 236, 242, 245; symbiotic forces and, 249–53; taxes and, 221–22, 225, 231; technology and, 222, 226, 232, 234, 238, 246, 249; trade and, 218, 250; Trump and, 215, 218–20, 237, 243–45, 248; undeserving poor and, 43, 142, 160, 216, 222, 227; unemployment and, 248–49, 255–56; unions and, 228, 251; United Kingdom and, 13, 218, 232, 233, 236, 242, 245, 250; United States and, 13, 130, 171, 195, 215, 218–23, 230, 232, 236, 241, 244, 275; unskilled workers and, 246, 255–56; upper class and, 222, 227, 237, 253; values and, 239–41; voters and, 217–19, 234–36, 244–47, 250, 256; wages and, 219, 222–23, 227, 229; welfare and, 45, 223, 234, 249, 287n1; women and, 238; working class and, 225, 231, 239, 251; World Values Survey (WVS) and, 235–36, 245 postmaterialism, 234–35 Poulantzas, Nicos, 6, 9, 11, 19, 39, 279n4 poverty, 3, 5, 18–19, 25, 43, 47, 109, 117, 142, 221, 237 Power, Anne, 200 privatization, 1, 18, 154, 173 production: artificial intelligence (AI) and, 263; assembly lines and, 104, 108; broad market notions and, 46; clusters and, 40, 49, 183, 270–71; democracy and, 54, 60, 64–66, 69, 72–73, 83, 93–94, 258, 262–63, 267–71; feeder towns and, 108–9, 224; Fordism and, 43, 103–4, 108–11, 115–17, 123, 127; globalization and, 5, 40, 51, 258; innovation and, 10, 40, 262, 271; knowledge economies and, 143, 152, 161, 180, 183, 224–25, 234–35, 247, 249; skilled labor and, 10, 18, 35, 43, 49–50, 60, 64–65, 69, 104–5, 115, 123, 127, 180, 183, 225, 249, 258, 262, 267, 271; specialization and, 51, 108, 161, 258, 267–71; Vernon’s life-cycle and, 18 productivity, 19, 34, 118–19, 247, 261, 272 proportional representation (PR) systems: Christian democratic parties and, 44; democracy and, 19, 34, 44–45, 60–61, 91, 93, 97, 100–1, 112–13, 125–28, 132, 134, 135, 212, 217, 229, 251; Fordism and, 112–13, 124–28; green parties and, 45; knowledge economies and, 132–34, 135, 212, 217, 229, 251; liberalism and, 97; majoritarianism and, 19, 101; multiparty, 34, 44; negotiation-based environment and, 93; populism and, 217, 229, 251; redistribution and, 91; Westminster system and, 19 protectionism, 28, 41, 169 Protestantism, 61, 68 protocorporatist countries: Austria, 59, 62–63, 77, 99; Belgium, 62–63; Catholicism and, 56, 61, 63, 68, 77, 83, 87, 92, 94–95; democracy and, 59–72, 74, 77, 79, 82–83, 89–92, 98–101, 228, 283n11; entrepreneurs and, 65; France and, 59, 62; Germany and, 62–63, 65, 68 71, 74, 77, 99, 238n11; industrialization and, 60–62, 65, 79, 89–90, 98, 101; Marx and, 62; modernization and, 79, 83; Netherlands, 62–63; skilled labor and, 60, 64–66, 79, 90, 98, 101; Ständestaat group and, 59–60, 65–66, 70, 90–91, 93; Switzerland, 62–63; working class and, 60–79 protoliberal countries, 59–61, 68, 90, 97, 100–1, 228 Prussia, 72, 93 public goods: democracy and, 54, 60, 79–90, 98, 258, 275; Fordism and, 113; innovation and, 35, 258; knowledge economies and, 52, 143–48, 152, 157, 167, 225; liberalism and, 79–90; populism and, 225; role of state and, 10 Public Health Acts, 86 race to the bottom, 51, 122 Rasmussen, Poul Nyrup, 173 recession, 5, 206, 214, 247–50, 276 reconfigurability, 185, 191, 214, 224 redistribution: capitalism and, 1, 18–20, 31–32, 35, 37, 39–40, 47, 51, 55, 124, 128–31, 137, 261, 273; democracy and, 1, 8, 18–20, 32, 35, 37, 40, 55–56, 60, 69–71, 74–79, 90–91, 95–100, 115, 124, 158, 221, 259–62, 273–74, 282n3, 284n2; Fordism and, 103, 111–12, 115, 123–25, 128–29; Gini coefficients and, 22–23, 25, 36, 117, 118, 141, 221; inequality and, 1, 3, 20, 40–46, 140, 220, 222, 273; knowledge economies and, 48, 137, 140, 158, 168, 220, 222, 225, 234–37, 241; middle class and, 3, 20, 35, 42, 60, 71, 90, 98, 100, 112, 115, 123–25, 140, 158, 168, 220, 222, 225, 234, 237, 241, 273–74; populism and, 220, 222, 225, 234–37, 241; proportional representation (PR) systems and, 91; skilled labor and, 8, 20, 31, 35, 37, 47, 71, 90, 98–100, 103, 115, 123, 125, 128, 158, 220, 222, 241, 259, 261; social insurance and, 8; taxes and, 35, 40, 51, 124, 158, 221–22, 225; voters and, 3, 19–21, 32, 43, 90, 98, 100, 125, 140, 158, 273; welfare and, 3, 8, 18–21, 31, 39–40, 43, 115, 123–24, 128, 131, 137, 261, 273 Reform Acts, 56, 80–81, 85–86 Reform Crisis 1865–7, The (Searle), 85 Reform League, 86 Reform Party, 88 regional theory, 11 regression, 99–100, 132–35, 236, 239–40, 246, 254–55 Rehn-Meidner model, 19 relational skills, 187 Republicans, 38, 57, 59, 87, 218, 244–45, 282n24 reputation: colocation and, 267; consultants and, 286n15; Fordism and, 112–13; knowledge economies and, 158, 163–64, 182–83, 188, 190–91; Liberal Market Economies (LMEs) and, 112; political, 4, 12, 29, 32, 34, 112–13, 158, 163–64, 182–83, 188, 190, 258, 259, 280n9; skill clusters and, 190–91; social networks and, 191; subconscious signals and, 190 research: capitalism and, 2, 10, 12, 37, 48, 139, 159, 165, 234; democracy and, 55, 66–67, 72, 262, 264, 268, 287n1; education and, 10, 12, 20–21, 28, 48, 55, 72, 146, 159, 165, 234, 262; Fordism and, 103, 108, 110; innovation and, 2, 12, 40; knowledge economies and, 139, 146, 159, 164–65, 179, 187, 189, 196, 200, 204, 234, 285n9; manufacturing and, 15, 200; populism and, 234; skilled labor and, 2, 12, 21, 28, 37, 39, 48, 66–67, 139, 179, 187, 196, 268 retirement, 110, 151, 201 Robin Hood Paradox, 220 Robinson, James, 9, 35, 37, 56, 58, 71–72, 74, 76, 85–86, 99, 282n3 robots, 18; artificial intelligence (AI) and, 260–62; great technology debate and, 260–66; knowledge economies and, 141, 143, 184, 193; politics of future and, 273 Rodrik, Dani, 16, 22, 128 Rokkan, Stein, 66, 94, 97, 100, 113 Rueda, D., 45, 282n25 Rueschemeyer, Dieter, 56, 72–73, 75, 77, 280n6, 283n7 Ruggie, John G., 51, 143 rust belt, 224 Scheve, Kenneth, 221 Schlüter, Poul, 172 Schumpter, Joseph A., 6, 9, 11, 279n4 Scotland, 283n12 Searle, G., 85 segregation: centripetal and centrifugal forces in, 200–6; cultural choices and, 205–6; educational, 43, 119, 140, 161, 192, 195, 197, 200–6, 214, 231; Fordism and, 109, 119; geographic, 109, 140, 161, 185, 195, 197, 200–6; health and, 204–5; knowledge economies and, 43, 140, 161, 185, 195, 197, 200–6, 214, 231; private services and, 203–4; social networks and, 205–6; transport systems and, 201–3 semiskilled labor: capitalism and, 261; democracy and, 61, 64–65, 68–69, 261; Fordism and, 12, 102–5, 112, 115, 118–20, 123–24, 127, 129; knowledge economies and, 142, 172–73, 212, 238–40; populism and, 238–40; segmentation of, 43–44; technology and, 41, 43, 65, 102–5, 118–19, 127, 238, 261; undeserving poor and, 43; unions and, 61, 64–65, 68–69, 105, 119–20, 123, 172–73 September Compromise, 66 service sectors, 16, 31, 44, 51, 119, 157, 194, 200, 204, 219, 285n5 settler colonies, 84–90 sexuality, 52, 216–18, 225, 237, 243, 249, 254, 269 Sherman Act, 153 shocks: capitalism and, 6, 10, 30, 54, 125, 136, 138, 140, 156, 159, 214; democracy and, 54; Fordism and, 125–27, 132–35; Information and Communication Technology (ICT) and, 136, 138, 214; knowledge economies and, 136–40, 143, 156–59, 181, 185, 194, 214; supply, 30; technology and, 6, 30, 136, 138, 140, 143, 159, 185, 194 Simmons, Beth, 161 Singapore, 4, 26–28, 221, 282n3 Single European Act, 145, 170–71 Single Market, 122 skill-biased technological change (SBTC), 41, 238, 262, 265–66 skill clusters: big-city agglomerations and, 194–200; capitalism and, 2, 7, 49, 145, 185, 192, 261; colocation and, 2–3, 7, 15–16, 185, 261; democracy and, 261; education and, 2–3, 7, 139, 141, 145, 148, 185, 190–95, 198, 223, 261; knowledge economies and, 139, 141, 144–48, 183, 185, 190–98, 200, 223; multinational enterprises (MNEs) and, 2, 192–93; reputation and, 190–91; social networks and, 28, 139, 191–92; specialization and, 190–91; sub-urbanization and, 141 skilled labor: analytic skills and, 186; artificial intelligence (AI) and, 261–62, 265–68, 271–72; capitalism and, 2–3, 6–8, 12–15, 19–20, 30–34, 37–38, 47–50, 53–54, 58, 60, 97, 101–2, 128, 137, 139, 144–47, 157–58, 172, 185–86, 192, 218, 250–51, 258, 261, 280n6; centralization and, 53, 58, 67, 69, 96, 99, 101, 110, 119–20, 173, 186, 279n1; colocation and, 2, 7, 261, 272; competition and, 6, 12, 18, 21, 30–34, 66, 96, 119, 128, 146, 157, 181, 186, 194, 198, 218, 222–23, 258; cospecificity and, 7–15, 20, 37, 47–50, 69, 99, 101, 115, 123, 196, 259, 261; craft skills and, 32, 53, 61–71, 79, 82, 90–91, 96, 98, 101, 104, 172; decentralization and, 96, 123, 138, 144, 146, 148, 172, 183–86, 190, 193, 212, 225, 262, 276; democracy and, 3, 6, 8, 12, 20, 31, 37–38, 44, 53–54, 58–71, 79, 84–85, 90, 96–101, 115, 158, 185–86, 250, 258–62, 265–68, 271–72, 276–77; economic geography and, 2–3, 7–8, 15, 20, 31, 48, 109, 116, 144–47, 185, 191–92, 195–96, 276–77; education and, 7, 12, 20–21, 31, 37–38, 41, 54, 60, 70–71, 79, 84, 90, 101–4, 119, 127–30, 139, 142, 158, 174–76, 179–81, 184–85, 191–95, 198, 217, 222–25, 228–35, 238–40, 246, 250–52, 266; Fordism and, 12, 14, 16, 102–5, 109–12, 115–30, 222–25, 277; foreign direct investment (FDI) and, 3, 139, 145, 147, 193, 198; growth and, 8, 13, 31, 68, 97, 110, 115–16, 218, 261; Information and Communication Technology (ICT) and, 41, 102, 185–86, 190, 193, 195, 198, 218, 276; innovation and, 2, 6–12, 19, 27, 31–34, 104, 128, 141, 174, 196, 198, 258, 262, 271, 281n18; knowledge economies and, 137–49, 157–58, 172–200, 211–13, 217–35, 238–41, 246, 249–52, 255–56; manufacturing and, 15, 33, 44–45, 109, 118, 194, 224; middle class and, 3, 20, 27, 30, 35, 41–44, 71, 85, 90, 96–101, 112, 115, 123, 125, 142, 158, 193, 222, 224, 235, 239–41, 249; mobility and, 8, 13, 20–21, 39, 124, 217, 222, 228, 232, 239, 249; nation-states and, 8, 30, 48, 139, 261; overlapping generation (OLG) logic and, 7; physical skills and, 193; politics of future and, 272–77; populism and, 52, 217–35, 238–41, 246, 249–52, 255–56; production and, 10, 18, 35, 43, 49–50, 60, 64–65, 69, 104–5, 115, 123, 127, 180, 183, 225, 249, 258, 262, 267, 271; protocorporatist countries and, 60, 64–66, 79, 90, 98, 101; rebirth of cities and, 224–27; redistribution and, 8, 20, 31, 35, 37, 47, 71, 90, 98–100, 103, 115, 123, 125, 128, 158, 220, 222, 241, 259, 261; relational skills and, 187; research and, 2, 12, 21, 28, 37, 39, 48, 66–67, 139, 179, 187, 196, 268; social insurance and, 8, 35, 50, 67, 123, 125, 127, 192; social networks and, 2, 28, 48, 139, 145, 185, 191–92, 195, 197, 225, 258, 261, 267–68, 271; specialization and, 14 (see also specialization); tacit knowledge and, 2, 39, 145, 263; technology and, 3, 7, 10–14, 20, 30–31, 37, 41, 43, 48, 50, 70, 96, 102–5, 118–19, 127–28, 138–40, 144, 147, 157, 175–76, 185–86, 192–94, 198–99, 222, 232, 238, 261, 268, 277; unions and, 6, 19, 33, 47, 50, 53, 58, 60–71, 96–101, 105, 110, 119–20, 123, 127, 172–73, 176, 181, 186, 251; upper class and, 43–44, 125; upskilling and, 102, 123, 129, 174–75, 178, 228, 232, 250–51; wages and, 6, 18, 33, 41, 50, 61, 64, 67, 104–5, 110, 115, 118–24, 127, 172–76, 181, 212, 222–23, 229, 266 Slomp, Hans, 62 smart cities, 194–95 social contract, 161, 221–27 social democratic parties: Denmark and, 76–77, 181; Germany and, 62–63, 68, 72–77, 181; Norway and, 282n3; Sweden and, 19, 72, 74, 76; unions and, 6, 19, 61–63, 67–68, 72, 74, 76, 114, 181, 282n3 Social Democratic Party (SPD) [Germany], 68, 74, 76–77, 78 Social Democratic Party (Sweden), 19 social insurance, 21; democracy and, 67; Fordism and, 111; skilled labor and, 8, 35, 50, 67, 123–25, 127, 192 socialism: competition and, 11; democracy and, 11, 56, 61–63, 68, 71, 75, 94, 97, 100, 137, 181–82, 215, 218; knowledge economies and, 137, 181–82, 215, 218; populism and, 218 social justice, 115, 237 social networks: cultural choices and, 205–6; democracy and, 258, 261, 268, 270–71, 274–75; economic geography and, 48–49, 185, 195, 274; education and, 2, 51–52, 139, 145, 185, 191–99, 204–5, 217, 225, 234, 261, 270–71, 274–75; growth and, 51, 92; knowledge economies and, 139, 145, 185, 188, 191–92, 195–97, 200, 204–6, 217, 225, 246; populism and, 217, 225, 246; reputation and, 191; segregation and, 205–6; skilled labor and, 2, 28, 48, 139, 145, 185, 191–92, 195, 197, 225, 258, 261, 267–68, 271 Social Security, 24, 42, 50, 118, 174, 184 socio-optimists, 260, 266, 275 socio-pessimists, 260, 266 Sokoloff, Kenneth L., 80, 84, 89 Soskice, David, 124, 135, 211 South Korea: capitalism and, 4, 26, 148; democracy and, 78; education and, 26, 28, 166, 231–32, 241, 284n4; Gini coefficients and, 36; knowledge economies and, 147–48, 150, 154, 156, 166, 232, 233, 236, 239, 241, 242, 284n4; middle-income trap and, 26; military and, 28; patents and, 27; populism and, 232, 233, 236, 239, 241, 242; skilled labor and, 28 Soviet Union, 139, 142, 156, 186, 241, 285n7 Spain: Gini coefficients and, 36; knowledge economies and, 154, 166, 201, 221, 233, 236, 242, 248; patents and, 27; taxes and, 17 Sparkassen, 176–77 specialization: advanced capitalist democracies (ACD) and, 14–17; Asia and, 267; capitalism and, 2, 6, 8, 17, 40, 139, 145, 147, 161, 192, 258, 267, 270–71, 276–77; cospecificity and, 14–17; cross-country comparison and, 39; democracy and, 67, 258, 267, 270–71, 276–77; economic geography and, 8, 14–17, 39, 144, 146–47, 192, 276–77; education and, 14, 191, 271; Fordism and, 108; globalization and, 3, 8, 17, 40, 51, 198, 258; heterogenous institutions and, 6; innovation and, 8, 14, 198, 267, 271; knowledge economies and, 2–3, 139, 144–47, 161, 190–93, 198, 200, 281n21; location cospecificity and, 14–17; multinational enterprises (MNEs) and, 192–93; patterns of, 192–93; production and, 51, 108, 161, 258, 267–71; skill clusters and, 190–91; as strengthening state, 50–51 Ständestaat group, 59–60, 65–66, 70, 90–91, 93 Standing, Guy, 142 Stasavage, David, 221 Stegmaier, Mary, 164, 167, 285n8 Steinmo, Sven, 16 Stephens, Evelyne Huber, 56, 229 Stephens, John, 56, 229, 280n6 Streeck, Wolfgang, 1, 16, 22, 30, 137, 163, 206, 281n17, 282n22 strikes, 73, 75, 108, 116 suffrage, 72–74, 76, 80, 87–89 Susskind, Daniel, 260 Susskind, Richard, 260 Swank, Duane, 16, 39, 101 Sweden: capitalism and, 19, 39, 49, 148; democracy and, 56, 57, 61, 62, 67, 71–76, 78; Fordism and, 106, 107, 117, 120, 129; Gini coefficients and, 25, 36; knowledge economies and, 147–48, 150, 153–54, 166, 173, 221, 233, 236, 242, 245; median income and, 25; populism and, 221, 233, 236, 242, 245; Social Democratic Party and, 19; taxes and, 17 Swenson, Peter, 108 Switzerland: democracy and, 56, 57, 61, 62–63, 282n3; Gini coefficient of, 36; knowledge economies and, 147–48, 150, 154, 166, 221, 233, 236, 242, 245; populism and, 221, 233, 236, 242, 245; protocorporatist countries and, 62–63; taxes and, 280n13; unions and, 106 symbiotic forces: democracy and, 5–9, 14, 20, 32, 53–54, 102, 130–31, 159, 165, 206, 249–53, 258, 259, 270, 272; Fordism and, 102, 130–31; knowledge economies and, 159, 165, 206, 249–53; populism and, 249–53 tacit knowledge, 2, 39, 145, 263 Taiwan, 4, 26–28, 78, 156 tariffs, 89, 114, 285n5 taxes: capitalism and, 16–17, 24, 34–35, 40, 51, 73, 167, 206, 261, 280n12; democracy and, 73, 261, 267–68, 271; Fordism and, 110–13, 124; Gini coefficients and, 22, 141; government concessions and, 18; Internal Revenue Service and, 42; knowledge economies and, 141, 157–58, 165, 167, 172, 206, 221–22, 225, 231, 281n21; majoritarianism and, 24, 44, 113, 124; middle class and, 21, 42, 124, 158, 222, 225; mobility and, 221; populism and, 221–22, 225, 231; redistribution and, 35, 40, 51, 124, 158, 221–22, 225; Republican reform and, 282n24; rich and, 22, 24, 261, 280n13; shelters and, 280n13; transfer systems and, 21–22, 112, 158; United Kingdom and, 17, 141, 206; United States and, 16–17, 24, 42, 141; upper class and, 42; value added, 34, 206; welfare and, 16–17, 21, 40, 42, 167 technology: artificial intelligence (AI) and, 260–72; assembly lines and, 104, 108; biotechnology and, 141, 175, 184; change and, 5, 13, 40–45, 50, 124, 138–41, 155, 162, 192, 199, 222, 232, 246, 249, 259, 262; codifiable, 7, 12, 14–15, 238; colocation and, 261, 266–72; cospecificity and, 7, 12, 14, 20, 37, 48, 50, 103, 159, 261–66; debates over future, 259–72; democracy and, 70, 92, 259–63, 267–72, 277; Fordism and, 5, 7, 14–15, 50, 102–6, 109, 117–19, 124, 127–28, 131, 140–43, 154, 192, 194, 222, 277; growth and, 3, 5, 13, 38, 162, 194, 226, 261; ICT and, 3 (see also Information and Communication Technology (ICT)); income distribution and, 21, 40; industrial revolution and, 5, 12, 58, 293, 295; investment in, 3, 20, 30, 37–38, 50, 109, 142, 147, 156, 175, 272; knowledge economies and, 138–44, 147, 154–62, 175–76, 184–86, 192–94, 198–99, 214, 222, 226, 232, 234, 238, 246, 249, 284n1, 284n3, 285n6; Luddites and, 226; manual jobs and, 264–65; microprocessors and, 14, 140, 284n1; middle class and, 3, 21, 29–30, 41, 117, 139, 222, 226, 249; multinational companies (MNCs) and, 48; nanotechnology, 141, 184; outsourcing and, 118, 193–94, 222; overlapping generation (OLG) logic and, 7; patents and, 7, 12–15, 26, 27, 145, 201, 281n15, 285n6; populism and, 222, 226, 232, 234, 238, 246, 249; robots and, 18, 141, 143, 184, 193, 260–66, 273; self-driving vehicles and, 265; semiskilled labor and, 41, 43, 65, 102–5, 118–19, 127, 238, 261; shocks and, 6, 30, 136, 138, 140, 143, 159, 185, 194; skilled labor and, 3, 7, 10–14, 20, 30–31, 37, 41, 43, 48, 50, 70, 96, 102–5, 118–19, 127–28, 138–40, 144, 147, 157, 175–76, 185–86, 192–94, 198–99, 222, 232, 238, 261, 268, 277; smart cities and, 194–95; trade and, 3, 7, 31, 50, 128, 131, 142, 284n3; transfer and, 18, 31, 38, 48, 128, 131; vocational training and, 31, 44, 68, 82, 89, 92, 104, 109, 113, 127–28, 131, 174, 176, 179, 228–30, 233, 242–43, 251–52, 257; voters and, 6, 13, 20, 159, 234, 260, 272 techno-optimists, 260, 269–70, 275, 277 techno-pessimists, 260–61 Teece, David J., 7, 12 Thatcher, Margaret, 33, 149, 163, 169–71, 182, 209 Thelen, Kathleen, 62–64, 219 Third Republic, 57, 81, 86–87 Tiebout, Charles M., 252 Tories, 87 trade: barriers to, 50, 114, 154, 285n5; competition and, 26, 31, 128, 131, 153–55, 218, 285n5, 285n9; democracy and, 258, 267; FDI and, 154, 163, 284n3, 285n5, 285n9; Fordism and, 114, 128, 131; free, 17, 155; knowledge economies and, 142, 145, 153–55, 163, 172–73, 180, 211–13, 218, 250; liberalism and, 51, 62, 142, 155, 163, 173, 213, 250, 284n3; NAFTA and, 155; open, 27, 154; populism and, 218, 250; protectionism and, 28, 41, 169; technology and, 3, 7, 31, 50, 128, 131, 142, 284n3 Trans-Pacific Partnership Agreement (TPP), 155–56 transport systems, 201–3 Trump, Donald, 130, 156, 211, 215, 218–20, 237, 243–45, 248, 276 Über, 265 undeserving poor, 43, 142, 160, 216, 222, 227 unemployment: automatic disbursements and, 133, 284n2; capitalism and, 51, 117, 172, 282n22; countercyclical policies and, 16; democracy and, 74–77, 92, 96; Fordism and, 105, 107, 110, 117, 120–21, 124–27, 133, 135, 284n2; knowledge economies and, 170–72, 174, 178, 180, 207, 248–49, 255–56, 285n8; social protection and, 51 unions: centralization and, 49, 53, 58, 63, 67, 69–70, 73, 96, 99, 101, 105, 107–10, 113, 116, 119, 122–23, 152, 156, 172, 174, 283n8; centralization/decentralization issues and, 49–50, 53, 58, 63, 67–70, 73, 96, 99, 101, 105–10, 113, 116, 119, 122–23, 152, 172, 174, 186, 283n8; competition and, 6, 33, 66, 68, 80, 96, 119, 152, 169–72, 177, 181, 186; craft, 61, 63, 67–71, 101, 172; democracy and, 53, 58–80, 90–92, 95–101, 274, 282n3, 283n8; exclusion of, 67, 70, 98; Fordism and, 105–16, 119–23, 127, 284n3; hostile takeovers and, 33; institutional frameworks and, 32–33; knowledge economies and, 152, 169–83, 212, 228, 251; laborist unionism and, 62; low-skilled labor and, 19, 47, 50, 66, 70–71, 96, 98–99, 119, 127, 181; polarized unionism and, 62; populism and, 228, 251; power and, 32, 66–67, 69, 73–76, 99, 105, 108, 112–13, 119, 169, 172, 186; predatory, 6; Rehn-Meidner model and, 19; segmented, 62, 105, 113; semiskilled labor and, 61, 64–65, 68–69, 105, 119–20, 123, 172–73; September Compromise and, 66; skilled labor and, 6, 19, 33, 47, 50, 53, 58, 60–71, 96–101, 105, 110, 119–20, 123, 127, 172–73, 176, 181, 186, 251; social democratic parties and, 6, 19, 61–63, 67–68, 72, 74, 76, 114, 181, 282n3; solidaristic, 62, 105, 172; strikes and, 73, 75, 108, 116; trade, 62–64, 170 United Kingdom: Blair and, 33, 171, 209; Brexit and, 130, 245, 248, 250, 276; British disease and, 172; British North American Act and, 87–88; Callaghan and, 169, 171; capitalism and, 10, 13, 19, 32, 38, 148, 152, 172, 206, 209; centralization and, 49; Confederation of British Industry (CBI) and, 169–70; Conservative Party and, 32, 81, 85, 88, 169, 218–19; democracy and, 38, 54–65, 73, 80–90, 277, 283n9; Disraeli and, 81, 85, 96; education and, 38, 130, 166, 177, 231–32, 277; enfranchisement and, 84–90; Fordism and, 105–8, 120, 123, 130; Forster Elementary Education Act and, 86; Gini coefficents for, 25, 36; Healey and, 169; health and, 204–5; Hyde Park Riots and, 85; inequality and, 36; knowledge economies and, 142, 147–48, 150, 152, 154, 161–63, 166, 169–77, 180–81, 194, 200–1, 204, 206, 209, 218, 232, 233, 236, 242, 245, 250; labor co-operation and, 152; laborist unionism and, 62; Labour Party and, 68, 169, 171; Liberals and, 32; Local Government Act and, 86; median income and, 25; modernization and, 19; Municipal Corporations Act and, 86; patents and, 27; populism and, 13, 218, 232, 233, 236, 242, 245, 250; postwar, 11; Prior and, 169–70; Public Health Acts and, 86; Reform Acts and, 56, 80–81, 85–86; Reform Party and, 88; segregation and, 200–3; settler colonies and, 84–90; taxes and, 17, 141, 206; Thatcher and, 33, 149, 163, 169–71, 182, 209; Tories and, 87; Victorian reformers and, 82; Whigs and, 80 United States: capitalism and, 13, 16–17, 24–25, 38, 47, 148, 152, 186, 209, 275, 277; Civil War and, 57; Clayton Act and, 153; Cold War and, 78, 111; decentralization and, 49; democracy and, 13, 24, 38, 55–57, 59, 62–64, 70, 83, 88, 96, 107, 147–48, 186, 215, 220, 275, 277; education and, 24, 38, 55, 70, 83, 109, 127, 130, 166, 177, 195, 223, 230–32, 241, 275; Fordism and, 105–9, 117–20, 123, 127, 130; inequality and, 24, 36, 42, 107, 117, 118, 123, 220, 282n22; knowledge economies and, 141–42, 147–56, 162, 166, 169, 171, 177, 186, 194–95, 198, 202, 209, 215, 218–23, 230, 232, 236, 241, 244, 277; labor market and, 56 (see also labor market); NAFTA and, 155; populism and, 13, 130, 171, 195, 215, 218–23, 230, 232, 236, 241, 244, 275; Sherman Act and, 153; taxes and, 16–17, 24, 42, 141; Trans-Pacific Partnership Agreement (TPP) and, 155–56 unskilled workers: democracy and, 62–63, 67–71, 96–97, 101; Fordism and, 104–5, 118; knowledge economies and, 193, 246, 255; populism and, 246, 255–56 upper class: capitalism and, 4, 6; democracy and, 35; education and, 43; as gaming the system, 222; global distribution and, 27–29; Great Gatsby Curve (GGC) and, 220, 221, 227–28, 247, 259, 275–76; inequality and, 41, 158, 261; political influence of, 24, 41–43, 253; populism and, 222, 227, 237, 253; skilled labor and, 43–44, 125; taxes and, 22, 42, 261, 280n13; voters and, 2 upskilling, 102, 123, 129, 174–75, 178, 228, 232, 250–51 urbanization, 37, 92; big-city agglomerations and, 194–200; effects of, 83–84; feeder towns and, 108–9, 224; knowledge economies and, 141, 194–95, 201–3, 224–27, 239, 241; rebirth of cities and, 224–27; segregation and, 200–6 (see also segregation); smart cities and, 194–95; transport systems and, 201–3 US Patent and Trademark Office, 26–27 value-added sectors, 206–9 Van Kersbergen, Kees, 44, 92, 95, 124 Verily Life Sciences, 262 Vernon, Raymond, 18 VET system, 176, 179–80 Vliet, Olaf van, 133 Vogel, Steven, 11 Von Hagen, Jürgen, 121, 151 Von Papen, Franz, 77 voters: advanced capitalism and, 2, 6, 11–14, 19–22, 30–32, 38, 46–47, 112, 158–59, 167, 215, 247, 273; aspirational, 6, 12–13, 20–21, 32, 167, 214, 219, 272; decisive, 2–3, 6, 11–14, 19–23, 32, 38, 43, 158–59; democracy and, 75, 81, 90, 96–100, 111–13, 125, 129–30, 133, 260, 272–73; economic, 164; education and, 12–13, 21, 38, 45, 90, 158, 164, 167–68, 219, 234, 247, 273; electoral politics and, 21–22, 46, 100, 111, 158, 183, 217, 272; growth and, 2, 13, 23, 32, 111, 113, 164, 168, 247; knowledge economies and, 24, 138, 140, 158–59, 163–64, 167–68, 183, 213–19, 234–36, 245, 247; median, 3, 21, 23, 44, 96–97, 100, 125, 168, 213; Meltzer-Richard model and, 3; middle class, 2–3, 20–22, 44, 90, 96–100, 125, 140, 158, 168, 273; mobilizing, 75; neoliberalism and, 2; politics of the future and, 272–73; populism and, 217–19, 234–36, 244–47, 250, 256; prospective, 164; PR systems and, 19, 34, 100, 217; redistribution and, 3, 19–21, 32, 43, 90, 98, 100, 125, 140, 158, 273; retrospective, 164; suffrage and, 72–74, 76, 80, 87–89; technology and, 6, 13, 20, 159, 234, 260, 272; upper class and, 2; welfare and, 3, 21–22, 43, 45–46, 111, 167, 214, 234, 273 wages: bargaining and, 49–50, 61, 105–10, 119–21, 127, 151, 172, 176; coordination and, 49–50, 106–7, 120, 123, 172, 229; cospecificity and, 49–50; democracy and, 266, 268, 273; Fordism and, 104–24, 127, 284n2; Great Gatsby Curve (GGC) and, 220, 221, 227–28, 247, 259, 275–76; knowledge economies and, 151, 160, 172–76, 181, 196, 211–12, 219, 222–23, 227, 229; monopoly, 6; populism and, 219, 222–23, 227, 229; restraint and, 18, 110, 113, 120–21, 151, 176, 211–12; skilled labor and, 6, 18, 33, 41, 50, 61, 64, 67, 104–5, 110, 115, 118–24, 127, 172–76, 181, 212, 222–23, 229, 266 Wajcman, Judy, 260 Wallerstein, Michael, 105 Washington Consensus, 38 Waymo, 265 Weimar Republic, 75–77 welfare: Bismarckian, 176; capitalism and, 8, 16–19, 31, 39–40, 46, 122, 125, 128, 131, 137, 167, 234, 261, 279n5, 282n22; cash transfers and, 21; competition and, 31, 40, 52, 122, 128, 131, 223, 285n6; cospecificity and, 49–50; democracy and, 94, 96, 261, 273; education and, 31, 42, 45, 52, 94, 96, 116, 128, 131, 146, 167, 223, 234, 261, 287n1; Fordism and, 110–11, 115–28, 131; free riders and, 127; Golden Age of, 127; inequality and, 3, 42, 125, 223, 282n22; Keynesianism and, 115; knowledge economies and, 137, 146, 167, 176, 214, 223, 234, 249, 285n6, 285n8, 287n1; labor market and, 31, 46, 96, 118, 120, 122–23, 125, 128, 176, 223, 279n5; populism and, 45, 223, 234, 249, 287n1; power resources theory and, 280n6; public services and, 21; redistribution and, 3, 8, 18–21, 31, 39–40, 43, 115, 123–24, 128, 131, 137, 261, 273; skilled labor and, 45; social insurance and, 21; taxes and, 16–17, 21, 40, 42, 167; trade protectionism and, 51; undeserving poor and, 43; voters and, 3, 21–22, 43, 45–46, 111, 167, 214, 234, 273; wage coordination and, 49–50 Westminster systems, 19 Whigs, 80 Winters, J.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, business cycle, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Fall of the Berlin Wall, financial independence, financial innovation, financial thriller, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, John Meriwether, joint-stock company, Jones Act, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Mikhail Gorbachev, Milgram experiment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, negative equity, NetJets, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, plutocrats, Plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Thaler, Right to Buy, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, survivorship bias, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

Mirroring Anthony Trollope’s 1867 novel Last Chronicle of Barset, whose characters invest in mortgages, investors purchased MBSs as low risk and secure investments paying regular income. The higher return available on securitized bonds relative to ordinary securities of similar quality was attractive. Synthetic Stuff In the 1990s, securitization underwent a makeover, being rebranded CDOs (collateralized debt obligations), a term subsuming various types of underlying loans and securitization formats. In 1997 JP Morgan introduced synthetic securitization, overcoming the unwieldy need to transfer the underlying loans to the SPV and also lowering the cost of transferring the risk. Instead of selling the loans, the lender now purchased credit insurance against the risk of loss using a credit default swap (CDS).

In practice, risk was spreading like a virulent virus through the financial system, ending up in unknown places in the hands of investors, who did not understand the complex risks that they assumed. As Iceland imploded during the financial crisis, traders speculated that the Icelandic banks’ fatal dalliance with structured finance was simply confusion between the word c-o-d (an area of Icelandic expertise) and the non-piscine c-d-o (collateralized debt obligations). Get Copula-ed Assorted statisticians, mathematicians, scientists, and MBAs with little knowledge of banking now shaped packages of loans into complicated objets d’art. They built simplified models to predict patterns of cash flows from the underlying loans. In the ultra-rational world of efficient markets, prepayments were assumed to be linked to interest rates adjusted for behavioral nuances.

., 44, 341, 346 2001 tax cuts, 298 business schools, 308-313 bonuses, 317-318 compensation, 313-320 BusinessWeek, 170 buy and flick, 139 Byrd, Richard Evelyn, 256 Byrne, David, 46 Byrne, Rhonda, 45 C Caesar, 295 calculators, 122 call options, 209 Volkswagen (VW), 257 Callan, Erin, 288, 329 Calomiris, Charles, 273 Canadian dollars, 21 Canary Wharf, 79 Cantor, Eddie, 338 capital definition of, 280 flows, 205 gains, 160 injections into banks, 348-350 introductions, 247 leveraged, 244 Modigliani-Miller propositions, 119 structure arbitrage, 242 velocity of, 69 capital asset pricing model (CAPM), 117 capitalism, 102 Capitalism: A Love Story, 165 Capitalism: The Unknown Ideal, 297 CAPM (capital asset pricing model), 173 Capra, Frank, 65 carceral continuum, 312 careers certifications, 309-310 finance, 308-313 bonuses, 317-318 compensation, 313-320 Carlyle Group, The, 154, 163, 318 Carlyle, Thomas, 102 Carnegie Mellon University, 119 Carr, Fred, 145 Carroll, Lewis, 31 CARS (certificate for automobile receivables), 173 Carter, Jimmy, 74, 364 Caruso-Cabrera, Michelle, 95 Casablanca, 77, 311 Case, Steve, 58 cash flow, 138 forecasting, 160 General Electric (GE), 61 cash for clunkers, 348 Cassano, Joseph, 232 Cat’s Cradle, 339 catastrophe risk, 232 Catillo, Bernal Díaz del, 131 Cavendish Laboratory (Cambridge, England), 101 Cayman Islands, 220 Cayne, James, 318 CBOs (collateralized bond obligations), 173 CDOs (collateralized debt obligations), 173, 176 defaults of, 284 celebrity central bankers, age of, 297-300 celebrity financiers, 324-326 Celtic tiger, 83. See also Ireland Centaurus Energy, 319 Center for Research in Security Prices (CRSP), 131 Centlivre, Susannah, 75 central banks, 309 age of celebrity central bankers, 297-300 dissenters, 300-302 regulations, 279-281 risk transfers, 281-282 Central Intelligence Agency (CIA), 310 CEOs (chief executive officers) earnings, 323-324 knowledge of business operations, 292-293 Cerberus, 162 certifications, finance, 309-310 CFA (certified financial analyst), 309 Chains or Chain Link, 269 chains, mortgage, 183 Chancellor, Edward, 161 Chanos, Jim, 161 chaos theory, 274 Chase Manhattan Bank, 79 Chassagne-Montrachet, 304 Cheney, Dick, 265 Chesterton, G.K., 226 Chettle, Geoff, 228 Chicago, 104-105 Chicago Board of Option Exchange (CBOE), 122 Chicago Interpretation, the, 104, 130 Chicxulub crater, 339 Chiemgauer, 35 China, 82 Chinese Communist Party, 350 Chinese paper, 144 Chinese renminbi, 21 Chinese walls, 66 debt, purchase of American dollars, 87 as a financial center, 84-85 global credit process, 88 growth of, 86 relationship with America, 87 slowdown in economic activity, 350-351 China Aviation Oil (Singapore) Corporation, 56 Chinalco, 59 chits, 22 A Chorus Line, 164 Christianity, 65 Christie’s, 323 Chrysler, 162 Building, 79 purchase by Fiat, 344 Cioffi, Ralph, 191, 365 circulation of money, 32 Citadel Funds, 196, 241, 256 Citibank, 71 Citicorp Venture Capital, 154 Citicorp, merger of with Travelers, 75 Cities Services, 137 CitiGroup, 41, 75-77, 165, 290, 315 Center, 79 Todd Thompson, 93 City, the (London), 79 CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa), 91 civilization, 38 Clarke, David, 159 Clarkson, Brian, 284 clickety-clicks, 39.


pages: 272 words: 19,172

Hedge Fund Market Wizards by Jack D. Schwager

asset-backed security, backtesting, banking crisis, barriers to entry, beat the dealer, Bernie Madoff, Black-Scholes formula, British Empire, business cycle, buy and hold, Claude Shannon: information theory, cloud computing, collateralized debt obligation, commodity trading advisor, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, diversification, diversified portfolio, Edward Thorp, family office, financial independence, fixed income, Flash crash, hindsight bias, implied volatility, index fund, intangible asset, James Dyson, Jones Act, Long Term Capital Management, margin call, market bubble, market fundamentalism, merger arbitrage, money market fund, oil shock, pattern recognition, pets.com, Ponzi scheme, private sector deleveraging, quantitative easing, quantitative trading / quantitative finance, Right to Buy, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Rubik’s Cube, Sharpe ratio, short selling, statistical arbitrage, Steve Jobs, systematic trading, technology bubble, transaction costs, value at risk, yield curve

There was no historical precedent for such low-quality mortgages. It is easy to see how the BBB tranche of a bond formed from these low-quality mortgages would be extremely vulnerable to a complete loss. The story, however, does not end there. The BBB tranches were difficult to sell. Wall Street alchemists came up with a solution that magically transformed the BBB tranches into AAA. They created a new securitization called a collateralized debt obligation (CDO) that consisted entirely of the BBB tranches of many mortgage bonds.7 CDOs also employed a tranche structure. Typically 75 percent to 80 percent of a CDO was rated AAA, even though it consisted of 100 percent BBB tranches. Although the CDO tranche structure was similar to that employed by subprime mortgage bonds consisting of individual mortgages, there was an important difference.

How did you get involved in trading the subprime mortgage market? I first became aware of the opportunity in October 2006 when a friend sent us a write-up of a presentation made by Paul Singer of Elliot Associates. Singer walked through the sleight-of-hand that banks used to amalgamate the riskiest tranches of subprime mortgage-backed securitizations (MBS)—the BBB tranches that investors were starting to shy away from—into a new collateralized debt obligation (CDO), the majority of which was rated AA or higher. 9 Singer demonstrated that housing prices didn’t have to fall for the AA tranches of these CDOs to fail; they simply had to stop rising. The assertion that institutional investors were willing to accept the paltry returns associated with AA or higher rated securities for that kind of risk didn’t even seem plausible. If it hadn’t been someone with Singer’s reputation making these assertions, I would never have believed him.

Planet Money is a highly creative, entertaining, and insightful financial program. I have listened to every podcast since the program’s inception, and I highly recommend it. 4If this comment is unintelligible to you, don’t worry. A primer on mortgage-backed securities and their role in the financial crises is provided later in this chapter before our conversation related to Cornwall’s short trade in collaterized debt obligations (CDOs). 5Mai explained that the typical quoting convention for implied volatility in interest rate markets, known as “normalized volatility,” is the number of absolute basis points reflecting a one-standard-deviation event, as opposed to the standard convention of quoting implied volatility in other asset classes in terms of percentage changes in the underlying security. Normalized volatility of 100 basis points equals a much smaller volatility, as measured in “traditional” percentage terms, when rates are high than when they are low—a characteristic that may have been an additional factor amplifying the anomaly. 6The expected value is the sum of the probability of each outcome multiplied by its value.


Money and Government: The Past and Future of Economics by Robert Skidelsky

anti-globalists, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, Basel III, basic income, Ben Bernanke: helicopter money, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, constrained optimization, Corn Laws, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Graeber, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, Donald Trump, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, Financial Instability Hypothesis, forward guidance, Fractional reserve banking, full employment, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, incomplete markets, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, law of one price, liberal capitalism, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, market clearing, market friction, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, mobile money, Mont Pelerin Society, moral hazard, mortgage debt, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, placebo effect, price stability, profit maximization, quantitative easing, random walk, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, rising living standards, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, shareholder value, short selling, Simon Kuznets, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, value at risk, Washington Consensus, yield curve, zero-sum game

However, this relied on the assumption that defaults on mortgages are not highly correlated with each other, whereas at the time there was insufficient historical data on the rate of mortgage defaults, especially on sub-prime mortgages. It turned out that mortgage defaults were highly correlated, including geographically.* So in the run-up to the crisis, the risk of MBSS was significantly under-priced. Collateralized Debt Obligations (CDOs) Collateralized debt obligations form a distinct but overlapping category from MBSs. CDOs can be backed by any form of debt – mortgages, corporate bonds, even other ABSs – and are split into ‘tranches’ of varying risk and maturity, so as to offer investors more choice. The top tranche, called the ‘senior’ tranche, was entitled to the first payments, although it yielded the lowest returns for the investor, due to being low risk.

They lacked sufficient historical data, especially relating to mortgages. 329 M ac roe c onom ic s i n t h e C r a s h a n d A f t e r , 2 0 0 7 – 3. They under-estimated correlation in defaults. As a result, CRAs thought that securitized products (backed up by portfolios of loans) carried little risk, and indeed that they were less risky than these underlying loans considered individually. Many collateralized debt obligations were rated AAA when they were backed by a pool of only, say, BBB -rated loans; the strength of the CDO was supposed to come from its structure. Furthermore, the CRAs assumed a maximum 5 per cent decline in national housing prices. 4. Combined with the above, the use of normal distributions in VaR models privileged ‘thin tails’ (for which an extreme event is unlikely) over ‘fat’ ones (for which an extreme event is much more likely). 5.

., 59 Callaghan, James, 169–70, 197 Cameron, David, 221, 225, 227 Cannan, Edwin, 100 capital movements and banking crises, 331, 333, 333–43, 334, 335, 337 controls on in post-war era, 308, 332 hot money as main story, 318–19, 337, 382 Keynes on, 382 liberalization from 1970s, 17, 318–19, 332–3 post-war liberalization, 16 recycling of OPEC surpluses (1970s), 308, 332 regulated in Great Depression era, 16 see also global imbalances 464 i n de x Carney, Mark, 261–2, 273 central banks actions during 2008 crisis, 3, 217, 219, 234–5, 253–4, 254, 256–8, 359 forecasting models, 5, 197, 233, 310–11 ‘dual mandate’ proposal, 358 during Great Moderation, 215, 252–3, 310, 359, 360 independent, 1, 32, 43, 129, 140, 188, 198, 215, 249, 272–3 inflation targeting, 2, 101, 188–9, 189, 196, 215, 249–53, 347, 358 in Keynesian economics, 101, 102–4, 105, 115–16 need for revived regulatory tools, 361 in new macroeconomic constitution, 352, 355, 359–61 open-market operations, 71, 102–4, 105, 185–6, 257–8 in post-W W1 period, 100, 102–6 pre-crash models of 2000s, 197, 212–13, 233, 310–11 purchase of government debt, 234–5, 256–8, 260–61, 274 and quantity theory, 61, 69, 70, 71 ‘resolution regimes’, 364–5 ‘stress testing’ by, 364 Taylor Rule, 213, 251 and twentieth-century monetary reformers, 60, 61, 69, 70, 71, 99, 100, 101, 125, 129, 178, 200 see also Bank of England; Bank Rate; European Central Bank; Federal Reserve, US Chamberlain, Neville, 113 Chang, Ha-Joon, 378 Chartist movement, 48 Chi Lo, 381–2 Chicago School, 174, 194, 349, 350–51 see also Friedman, Milton China and 2008 crash, 217, 218 ancient, 33, 73 bank liquidity ratios, 364 current account surplus, 331, 333, 334, 336, 338–41, 342, 380, 381 Churchill, Winston, 99, 109, 110 City of London, xviii, 58, 113, 226, 328, 367 Clark, John Bates, 288 class business class as not monolithic, 7 creditors and debtors, 29–32, 37 growth of merchant class, 79 and ideas, 13–14 and Keynesian theory, 128–9, 130–31, 169–70, 386–7 and Marx, 6, 7, 14, 130, 131, 288, 296, 386 and neo-liberal model, 305, 374 rentier bourgeoisie, 31, 43, 288, 297 shift of power from labour to capital, 7, 32, 169–70, 187, 190, 192–3, 299–301, 304, 305–6 and theory of money, 27–8 under-consumption theory, 293–6, 297–8, 303–6, 370 see also distribution; inequality classical economics tradition, xviii abstraction from uncertainty, 385–6 ‘anti-state’ view as deception, 93 contrast with Keynesian-theory modelled, 132–3 ‘crowding out’ argument, 83–4, 109–11, 226, 233–5 government as problem not solution, 1, 3, 6, 9, 10, 29, 74–5, 76, 82–3, 85–7, 93, 347 and Keynes, 122–3, 128, 130, 175–6 and labour flexibility, 56, 245 money supply in, 1, 38–9, 47 no theory of output and employment, 96 465 i n de x classical economics tradition – (cont.) post-W W1 ‘back to normalcy’, 96–7, 102 and price of labour, 107, 108, 115, 121–2, 123, 128, 130, 132, 138, 172 ‘real’ analysis of money (‘money as veil’), 22, 24, 37, 45, 84–5, 121 repudiation of mercantilism, 74–5, 78, 79, 81–5, 93 and role of state, 73, 74–5, 76, 81–5, 109, 110 Smith’s ‘invisible hand’ metaphor, 10, 312, 385 and unemployment, 10, 37, 56, 96, 118, 121–2, 123, 128, 129, 130, 138, 172 wage-adjustment story, 107, 108, 115, 121–2, 123, 128, 130, 132, 172 Walras’ general equilibrium theory (1874), 10, 173, 181, 385 see also balanced budget theory; equilibrium, theory of; neoclassical economics tradition Clay, Henry, 115 climate change, 383 Clinton, Bill, 309, 319 Coalition government (2010–15), 227–8, 243–4, 265–6 Cochrane, John, 233–4 Coddington, Alan, 173 Colbert, Jean-Baptiste, 75, 140 Cold War, 140, 158, 159, 162–3, 186, 374 collateralized debt obligations (CDOs), 323–4, 327, 330 collateralized loan obligations (CLOs), 327 communism, xviii, 13, 16, 175 collapse of (1989–90), xviii, 16 see also Marx, Karl; Marxism Congdon, Tim, 40, 105, 185, 197, 258, 268–9, 276, 279–81 on free trade, 377 and monetarism, 279–85 Money in the Great Recession (2017), 281–2, 287 ‘real balance effect’ argument, 283–5 total rejection of fiscal policy, 280, 285–7 Conservative Party ‘Barber boom’, 167, 168 governments (1951–64), 142–3, 147, 150, 152 Howe’s 1981 budget, 186–7, 192 and Keynesian ascendancy, 138–9, 142–3, 147, 150, 152 Lawson’s counterrevolution, 185, 192–3, 222, 358 Maudling’s ‘dash for growth’, 150, 152 narrative of 2008 crash, 226–8, 229–31, 233, 234–5, 237–9 and orthodox Treasury view in 1920s/30s, 109–10, 112, 113 Osborne’s economic policy, 227–8, 229–30, 231, 233, 234–5, 237–9, 243–4, 244, 245 supply-side policies, 197 Constantini, Orsola, 171 Corn Laws, repeal of (1846), 15, 85 counter-orthodoxy to Keynesianism ‘Colloque Walter Lippmann’ conference (1938), 174–5 emergence of, 163, 170, 171–2, 174–8 Friedman’s onslaught, 177–83 Hayek’s Road to Serfdom , 16, 175–6 inflation as greatest evil for, 162 Mont Pelerin Society, 176–7 rooted in political ideology, 6, 93, 176–8, 183–4, 202–3, 245–6, 258, 287, 292, 354, 386 see also Friedman, Milton; monetarism; neo-liberal ideology 466 i n de x Crafts, Nicholas, 85, 111 credit and debt and anti-Semitism, 30–31 ‘bank lending channel’, 64 credit theory of money, 23, 24–7, 33, 34, 39, 100–101, 102–3 ‘debt forgiveness’, 30 derivation of word ‘credit’, 30 doctrine of ‘creditor adjustment’, 127–8, 139, 159 excess credit problem and 2007–8 crisis, 4, 104, 303, 366–7 and gold-standard, 53 ‘hoarding’ during Great Depression, 104, 127 and inflation/deflation, 37, 42, 47 Keynes and control of credit, 100–101, 102–3, 105, 115–16 Keynes’ Clearing Union plan (1941), 127–8, 139, 159, 380–81 loan sharks and ‘pay day loans’, 32 Locke’s social contract theory, 41–2 moral resistance to credit, 30–31 private debt and 2008 collapse, 3–4 prohibition of usury, 31 USA as post-W W1 creditor, 95, 103 and value of money, 27–8, 29–31 see also national debt credit default swaps (CDSs), 324–5 credit rating agencies (CR As), 320, 326–7, 329–30 Crimean War, 91 criminality, 3, 4, 5, 7, 328, 350, 366, 367 Cunliffe Report (1918), 54–5, 102, 145 Currency School, 49–50 current account imbalances see balance of payments; global imbalances Dale, Spencer, 275 Dante, Divine Comedy, 31 Darling, Alistair, 224, 225, 254 Dasgupta, Amir Kumar, 12–13 Davies, Howard, 253 de Grauwe, Paul, 341, 376, 377 debt see credit and debt; national debt deflation ‘Austrian’ explanation of recessions, 33, 104, 303 classical view of, 44 contemporary, 358, 360 and debtor class, 37 depressions in later nineteenthcentury, 9, 15, 51–2, 89 at end of Napoleonic wars, 48 and hoarding, 64, 104 in inter-war Britain, 107–8 and quantity theory, 32–3, 60, 65, 66 US ‘dollar gap’, 159 DeLong, Brad, 225 democratic politics Bretton Woods system, 16, 139, 374 corrupted capitalism as threat to, 351, 361 election finance, 7 EU ‘democratic deficit’, 376 extensions of franchise, 87, 96, 100 neo-liberal capture of, 6, 292 political left in 1960s, 148–9, 150 and ‘public choice’ theory, 198–9 Rodrik’s ‘impossible trinity’, 375 social democratic state, 16, 149, 176, 198, 292, 293, 303–4, 348, 373–4 structural power of finance, 6–7, 309 taboos against racism, 383 twentieth-century triumph of, 32, 96 unravelling of social democracy (1970s), 16, 304 467 i n de x Democrats, American, 151, 152 Descartes, Rene, 22 developing countries and 2008 crash, 217 Keynesian era growth, 162 in monetarist era, 186 ‘neo-liberal’ agenda of IMF, 139, 181, 318–19 ‘peripheries’ in gold standard era, 56–7 and promise of globalization, 17 and protectionism, xviii, 90, 378 World Bank loans to, 332 Devine, James, 298 Dicey, A.


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