negative equity

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pages: 202 words: 72,857

The Wealth Dragon Way: The Why, the When and the How to Become Infinitely Wealthy by John Lee

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8-hour work day, Albert Einstein, barriers to entry, Bernie Madoff, butterfly effect, buy low sell high, California gold rush, Donald Trump, financial independence, high net worth, intangible asset, Mark Zuckerberg, negative equity, passive income, payday loans, self-driving car, Snapchat, Stephen Hawking, Steve Jobs, Tony Hsieh, Y2K

Even when there is a slump in the property market, you are better off investing in property than stocks. When the property market slows down people start to rent rather than buy, and the average price of rent goes up. It becomes a landlord's market. It doesn't even matter if you're temporarily in negative equity, because your rental income will still be coming in. (A note about negative equity: In the case of a residential property the bank cannot force you to sell the property as long as you keep paying the mortgage repayments, even if you are in negative equity. The rules are slightly different for a commercial property; if you are in negative equity, the bank will ask you to increase your equity to maintain your loan-to-value ratio. Your loan can only represent a maximum percentage of the value of the property [usually 80 percent]. For instance, if you bought the property for £100,000 with a £20,000 deposit, you'll have a mortgage of £80,000.

Li Ka-shing Limitations Lincoln, Abraham Lloyd, Alan Loans deal making process and as property investment strategy Vince’s stories See also Mortgages Lockout agreements Lopez, Steve Los Angeles Times Lotteries Luck Malaysia, off-plan property investment in Marketing Market niches Market positioning Market value Marley, Bob Marlow, Ben Marriage Maslow, Abraham The Matrix Mayer, Bob Media Mentors Meritocracy Messiah-Harlock, Rosie Microsoft Mindsets abundant fear miserly See also More money mindset Miserly mindset Monetary wealth, relationship with moral wealth Money happiness and need money to make a lot of money myth as power spending to make money undesirable truths about value of See also Wealth Moral wealth, relationship with monetary wealth More money mindset infinite amount of money assurance key concepts life goal planning taking control over own money wealth education Mortgages Golden Rules for John’s stories negative equity impact strategies for truth about Vince’s stories Motivational tools Needs, Maslow’s hierarchy of Negative equity Negative people Negotiation Net asset value (NAV) Networking Network Property Buyers Net worth A New Earth (Tolle) Nietzsche, Friedrich Off-plan property Opportunities, becoming aware of Osbourne, George Outliers (Gladwell) Parallel universe perspective characteristics of wealthy people excuses failure getting and spending money higher education learning curve limits to achievement money and happiness overview of savings taking action Paranoid sellers Parenting Passive income generation Pensions People skills Perspective Philanthropy.

Value investing (and all we are doing here is applying value investing to property) is simple: Buy low, sell high. But people fail because they let their emotions get in the way: for example, they'll get a big tip about a stock and buy it despite the fact that it is overvalued, then become distraught when the tip doesn't pay off. Similarly, in the property market people get seduced by pretty houses and spend too much, then balk as the market dips a bit and they slip into negative equity. It's actually one of the biggest mistakes people make when getting into the property business: living vicariously through their business. They shop for pretty properties and fall in love with these properties. The property is not important; the deal is important. If it's a good deal (i.e., you are able to buy it at a decent percentage below its market value), then buy the property. If it's not a good deal, then don't.


pages: 346 words: 90,371

Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd, Laurie Macfarlane, John Muellbauer

agricultural Revolution, asset-backed security, balance sheet recession, bank run, banking crisis, barriers to entry, basic income, Bretton Woods, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, debt deflation, deindustrialization, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, garden city movement, George Akerlof, ghettoisation, Gini coefficient, Hernando de Soto, housing crisis, Hyman Minsky, income inequality, information asymmetry, knowledge worker, labour market flexibility, labour mobility, land reform, land tenure, land value tax, Landlord’s Game, low skilled workers, market bubble, market clearing, Martin Wolf, means of production, money market fund, mortgage debt, negative equity, Network effects, new economy, New Urbanism, Northern Rock, offshore financial centre, Pareto efficiency, place-making, price stability, profit maximization, quantitative easing, rent control, rent-seeking, Richard Florida, Right to Buy, rising living standards, risk tolerance, Second Machine Age, secular stagnation, shareholder value, the built environment, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, universal basic income, urban planning, urban sprawl, working poor, working-age population

As house prices rise, so does their ‘net wealth’ – that is, the paper value of homes and the land beneath them, once mortgage debt has been subtracted. This can make households feel that they are in position to continue spending, even if their debts are increasing in ratio to their incomes. However, if there is a serious economic shock to the economy or a rise in interest rates, households may struggle to keep up with the repayments. This may lead to both a fall in consumption and negative equity and defaults. The latter will most likely lead to a fall in domestic and commercial property prices, bank lending contracting, recession and, potentially, a financial crisis as the feedback cycle goes into reverse. Just as house prices can rise more quickly than the rest of the economy, so they can fall, particularly where more speculative investors engage in firesales of property with distressed debt (Shleifer and Vishny, 2011).

Secondly, interest rates were progressively lowered by the government during the period. Thirdly, the cost of interest was being subsidised as tax relief on mortgage interest was granted at the borrower’s marginal, i.e. highest, rate up to a £30,000 limit. Between the late 1970s and the mid-1980s, the tax relief per mortgagor in real terms rose by 50% (Davies, 2002, p. 438). The bubble eventually burst in the house price crash of 1990. This left many borrowers in ‘negative equity’ – around 20% at its peak according to a recent estimate (Aron and Muellbauer, 2016) – where the price of their houses was below what they owed on their mortgage. This amplified and prolonged the severe recession of the following three years, which involved many more job losses than the 2007–8 crisis. The collapse in the housing market in the early 1990s led to a large number of repossessions and a collapse in business lending.

In the EU all mortgage loans are ‘full recourse’ loans, which means that, following a default, the lender can foreclose the secured asset and also has recourse to the borrower, meaning that the lender can also collect the debt from the borrower’s unsecured personal assets and from their future income. In contrast, in many US states mortgage loans are ‘non-recourse’ loans, which means that, following a default, the lender can foreclose and sell the property, but has no recourse to the borrower’s personal assets or future income. If the property is in negative equity at the point of default, the shortfall between the mortgage and the property value is borne by the lender (Harris and Meir, 2015). This difference has a crucial impact on the incentives facing borrowers who are struggling to make repayments. As Harvard economist Martin Feldstein points out: The ‘no recourse’ mortgage is virtually unique to the United States. That’s why falling house prices in Europe do not trigger defaults, since the creditors’ potential to go beyond the house to other assets or to a portion of payroll earnings is enough to deter defaults.


pages: 249 words: 66,383

House of Debt: How They (And You) Caused the Great Recession, and How We Can Prevent It From Happening Again by Atif Mian, Amir Sufi

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Andrei Shleifer, asset-backed security, balance sheet recession, bank run, banking crisis, Ben Bernanke: helicopter money, break the buck, Carmen Reinhart, collapse of Lehman Brothers, creative destruction, debt deflation, Edward Glaeser, en.wikipedia.org, financial innovation, full employment, high net worth, Home mortgage interest deduction, housing crisis, Joseph Schumpeter, Kenneth Rogoff, liquidity trap, Long Term Capital Management, market bubble, Martin Wolf, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, quantitative easing, Robert Shiller, Robert Shiller, school choice, shareholder value, the payments system, the scientific method, tulip mania, young professional, zero-sum game

For many households during the Great Recession, the value of their homes dropped below the amount still owed on the mortgage. Home owners then became “underwater” or “upside-down” on their mortgage and actually had negative equity in their home. If they chose to sell, they had to pay the difference between the mortgage and the sale price to the bank. Faced with this dire circumstance, home owners could either stay in their homes and owe the bank more than their homes were worth, or walk away and let the bank foreclose. Many chose to stay. In 2011, 11 million properties—23 percent of all properties with a mortgage—had negative equity.4 Even though we know these numbers well, we are still shocked as we write them. They are truly stunning and worth repeating: home owners in 1 out of every 4 residential properties with a mortgage in the United States were underwater.

Mortgage Default Crisis,” Quarterly Journal of Economics 124 (2009): 1449–96; Atif Mian and Amir Sufi, “Household Leverage and the Recession of 2007–2009,” IMF Economic Review 58 (2010): 74–117; and Atif Mian, Kamelesh Rao, and Amir Sufi, “Household Balance Sheets, Consumption, and the Economic Slump,” Quarterly Journal of Economics, forthcoming. 4. CoreLogic Press Release, “CoreLogic Third Quarter 2011 Negative Equity Data Shows Slight Decline but Remains Elevated,” November 29, 2011, http://www.corelogic.com/about-us/news/corelogic-third-quarter-2011-negative-equity-data-shows-slight-decline-but-remains-elevated.aspx. 5. Daniel Hartley, “Distressed Sales and Housing Prices,” Federal Reserve Bank of Cleveland Economic Trends, February 24, 2012. 6. Atif Mian, Amir Sufi, and Francesco Trebbi, “Foreclosures, House Prices, and the Real Economy” (working paper no. 16685, NBER, May 2012). 7.

If the mortgage payment were linked to the exact value of Jane’s house, she would have a perverse incentive to hurt the home’s value through neglect in order to reduce the payment. This moral hazard problem is important and explains why equity-like contracts should be made contingent on a measure of asset performance outside the control of the borrower. 14. CoreLogic estimates $822 billion in negative equity of 12.1 million home owners in the first quarter of 2010. Our debt write-off is significantly less because the decline in house prices is less severe in the SRM scenario with the avoidance of foreclosures. 15. See also Xia Zhou and Christopher Carroll, “Dynamics of Wealth and Consumption: New and Improved Measures for U.S. States,” B.E. Journal of Macroeconomics 12, no. 2 (2012). 16.


pages: 393 words: 115,263

Planet Ponzi by Mitch Feierstein

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Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Bernie Madoff, break the buck, centre right, collapse of Lehman Brothers, collateralized debt obligation, commoditize, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, disintermediation, diversification, Donald Trump, energy security, eurozone crisis, financial innovation, financial intermediation, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, high net worth, High speed trading, illegal immigration, income inequality, interest rate swap, invention of agriculture, light touch regulation, Long Term Capital Management, mega-rich, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, obamacare, offshore financial centre, oil shock, pensions crisis, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, purchasing power parity, quantitative easing, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, too big to fail, trickle-down economics, value at risk, yield curve

The 2,000,000 construction workers who lost their jobs were among those injured by the popping.7 Meanwhile, despite a collapse in the number of new houses being built,8 the stock of homes available for sale is still well above its historical average.9 In America, in 2010, some 23.1% of homes were in negative equity,10 and more than a quarter are currently in negative equity or near-negative equity.11 Every tick downwards in house prices will drag ever greater tranches of the US population into that frightening and unwanted position. Perhaps most scary of all, there are between 1.5 and 2 million homes not yet on the market but where the mortgages are delinquent or foreclosure proceedings have taken place. Those homes will, one day, need to be sold.12 When that great dam of selling activity finally bursts, the effect on house prices will be catastrophic. Finally, all this‌—‌the negative equity, the distressed sales, the unsold homes, the falling prices‌—‌is happening while the Fed desperately attempts to keep the great American Ponzi scheme alive for as long as possible.

To date, there has been carnage in the subprime market, but relatively little blood spilled in the prime or commercial markets. That precarious calm, however, is unlikely to last. Further dips in the price of housing will start to generate huge cracks even in the prime market. Those cracks will, in turn, cause a wave of distress sales‌—‌foreclosures, and homeowners seeking to escape the burden of negative equity‌—‌and those sales will force prices lower still. In short, though the government’s housing debts are unquestionably real, the associated assets are anything but. So we should strike out $75 trillion and replace the figure with something over $80 trillion … but even this total still represents only actual liabilities, not contingent ones. A contingent liability is one that may or may not be incurred, depending on how things pan out.

Subprime mortgages have turned delinquent in huge numbers. Prime mortgages have remained relatively unaffected.13 I’m not certain that it will happen‌—‌no one can predict the future with perfect accuracy‌—‌but the likelihood is that gathering economic pressures will start to place the prime housing market under pressure. Delinquencies will rise. Distressed sales will rise. Prices will fall. Negative equity will become even more common. As interest rates increase from their historic lows and as ‘teaser rate’ mortgages click through to their full-price level, things will only get worse. In more and more households across the country, wives and husbands will look at each other across the dinner table, asking why the heck they’re struggling to pay the mortgage when the loan is worth tens of thousands more than the house.


pages: 299 words: 83,854

Shortchanged: Life and Debt in the Fringe Economy by Howard Karger

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big-box store, blue-collar work, corporate social responsibility, credit crunch, delayed gratification, financial deregulation, fixed income, illegal immigration, labor-force participation, late fees, London Interbank Offered Rate, low skilled workers, microcredit, mortgage debt, negative equity, New Journalism, New Urbanism, offshore financial centre, payday loans, predatory finance, race to the bottom, Silicon Valley, Telecommunications Act of 1996, telemarketer, underbanked, working poor

Or it may require a cosigner, to create the impression that monthly payments will be made, even though the lender knows that the cosigner will not help. In other cases, a borrower may be required to sign a blank loan application into which the lender inserts false information, such as a nonexistent job. In more extreme cases, predatory lenders have forged loan documents.37126 NEGATIVE EQUITYNegative equity” is a relatively new financial ploy that allows homeowners to borrow up to 125% of the loan value of their home. For example, if a property is appraised at $100,000, the homeowner can borrow 125% of the value of the home, giving him a mortgage balance of $125,000, or $25,000 more than the property is worth. If a homeowner is forced to move because of a job, health problems, or other reasons, he won’t be able to sell the home without adding money to pay off the existing loan.

However, the foreclosure of a 125% LTV home will not generate sufficient funds to pay off the loan, and the homeowner will remain legally liable for the shortfall. For example, if a home sells for $100,000, the seller’s costs at closing might include $7,000 for real estate broker fees (calculated at 7%); approximately $3,000 in sundry closing costs; and an unknown amount for repairs resulting from a home inspection. At most, the seller’s proceeds will total $90,000. If the seller has a negative-equity loan of $125,000, he will be forced to pay the extra $35,000 out of pocket. A HUD-endorsed variation of refinancing is a reverse mortgage for senior citizens, called a Home Equity Conversion Mortgage (HECM). This option allows the elderly to unlock the equity they have in their property by borrowing against it. Elderly homeowners receive payments from lenders monthly, all at once in a lump sum, or as a line of credit.

(foreclosure scam), 140–141 Department of Justice (DOJ), 49 Direct Telephone Company, 101 discounting practices (auto loans), 151–152, 153 Discount Tire, 165 Discover, 48 discrimination, 56, 89 disputes, arbitration, 119–120 Dollar Financial Corporation, 8, 88 downstreaming, 123 DPI Teleconnect, 101 Driven to Succeed, 171 DriveTime, 157 Earned Income Tax Credit (EITC), 23, 24, 80–81, 209 e-commerce, 26 economic phases (1989–1993), 21240 Economic Policy Institute, 22 economic stratification theory, 36–37 educating consumers, 202–204 electronic bill paying, 92 Employer Identification Number (EIN), 189 Engelkins, Lisa, 75 Equifax, 189 equity HELOCs (home equity lines of credit), 122 home equity, 120–127 Home Equity Conversion Mortgage (HECM), 126–127 Home Ownership and Equity Protection Act (HOEPA), 5 negative equity, 126–132 shared (SAM loans), 117–118 stripping, 123–126 upside down, 30–31, 121 European markets for fringe economy, 213–214 evolution of fringe economy, 103–105 Experian, 189 exportation of America’s fringe economy, 213–214 Express Cash, 67 EZCORP, 213 EZ Pawn, 8, 67 Fair Share plans, 175, 176, 178, 181–182, 191 Famous Pawn, 67 Fannie CLAC, 170 Fannie Mae (Federal National Mortgage Association), 113, 125, 211 Fast Cash pawnshop, 69–70 Federal Deposit Insurance Corporation (FDIC), 7, 78, 85, 202, 206–207 federal regulations, 200–202 Federal Reserve Bank, 14, 91, 93, 111–112 Federal Reserve Board (FRB), 5, 202 Federal Trade Commission (FTC), 202 Feehan, Daniel, 9–10 fees alternative phone market companies, 101–102 bounced-check/overdraft, 78, 207–208 check-cashing outlets, 90, 91 credit cards, 52, 57–58, 58–59, 61 debt settlement, 187–188 Get-A-Fone, 100–101 inequality of, 106–107 mortgage, 115–116, 119, 123 pawnbrokers, 67–68 payday loans, 73–74 post-paid cell phone service, 102–103 refinancing/home equity, 120 regulating, 142 FICO (Fair Isaac Company) score, 46–48, 115 file segregation, 189–190 financial institutions, mainstream, 12–15 Financial Liberty accounts (Legacy Bank), 209 Financial Service Centers of America (FiSCA), 14–15, 104 financing used cars, 148–154 First Accounts program (U.S.


pages: 93 words: 24,584

Walk Away by Douglas E. French

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Elliott wave, forensic accounting, full employment, Home mortgage interest deduction, loss aversion, McMansion, mental accounting, mortgage debt, mortgage tax deduction, negative equity, New Journalism, Own Your Own Home, Richard Thaler, Robert Shiller, Robert Shiller, the market place, transaction costs, unbiased observer, wealth creators

And if mortgagees walk away en masse, will they be responsible for destroying modern American society? Despite the millions of homeowners whose primary asset is now a debilitating liability, the number of foreclosures doesn’t match the under-water estimates. First American Core Logic estimated that nearly a third of all mortgages (32.3% exactly) were under water in June of 2009.... That’s 15.2 million loans, and the negative equity position totaled $3.4 trillion. A Deutsche Bank report predicted that by 2011 nearly half of all mortgaged Americans, or 25 million homeowners, would be “under water.” In a number of former boom cities, the vast majority of homeowners are already under water. A number of towns, primarily in the central valley of California, have current percentage of underwater homeowners exceeding 80%. Eighty-one (81) percent of all homeowners in Las Vegas were estimated to be under water, 70% of those in the Miami Beach area and 68% of homeowners in Phoenix owe more than their homes are worth.

* * * CHAPTER TEN * * * Conclusion “Economic interventionism is a self-defeating policy,” Ludwig von Mises wrote in Bureaucracy. “The individual measures that it implies do not achieve the results sought. They bring about a state of affairs, which—from the viewpoint of its advocates themselves—is much more undesirable than the previous state they intended to alter.” Professor White argues that the current negative equity problem is “market failure,” but of course this isn’t a market failure at all, but the result of decades of continuous government intervention to promote individual home ownership and the financing of those homes. These policies have led to government standardization of neighborhoods and virtually a complete government takeover of the financing of homes. Government guarantees have become the entire secondary mortgage market and gave birth to the securitization of mortgages that provided the incentive for lenders to relax underwriting guidelines going into mortgage transactions and the disincentive for lenders to negotiate with borrowers as market conditions and circumstances changed.


pages: 322 words: 77,341

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

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asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black-Scholes formula, 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, 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, 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

., in which case you might well be under a legal obligation to go into receivership—would be to simply ignore the question and keep going. You’d hope to be able to pay your bills as they fell due and hang on for grim life until your house price recovered. As we speak, hundreds of thousands of people across the United Kingdom—around the world—are doing precisely that. The current estimate of the number of people in the United Kingdom with “negative equity” is 900,000. A business can’t have negative equity; if it does, it is insolvent. But businesses can and do have considerably different levels of equity, and it often makes their businesses look different in an instantly recognizable, at-a-glance way. At business school, they play a game—sorry, “undertake an exercise”—in which students are given balance sheets and asked to determine what type of business the company is in.

Credit is the air that financial markets breathe, and when the air is poisoned, there’s no place to hide.”10 What the banks want to be able to do is what most of us would do in comparable circumstances. Indeed, it’s what a good few of us, myself included, have done in the past, during previous busts in the property market. When that happens, you just wait. Perhaps some of us are in the dreaded position of having the famous “negative equity,” as described above. In their case they can sell and take a loss, if they can afford to—or they can just wait. Carry on living, and wait for prices to recover, and even if they don’t they still have somewhere to live. That’s what the banks would like to do about their toxic prices: wait for them to become nontoxic. If they were forced to value their assets today for the prices they could get today—a practice known as “mark to market,” which is supposedly enforced on most kinds of assets—some of them would be insolvent.


pages: 280 words: 79,029

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

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Affordable Care Act / Obamacare, algorithmic trading, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Black-Scholes formula, bonus culture, break the buck, Bretton Woods, call centre, Carmen Reinhart, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Graeber, diversification, diversified portfolio, Edmond Halley, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, family office, financial deregulation, financial innovation, fixed income, Flash crash, Google Glasses, Gordon Gekko, high net worth, housing crisis, Hyman Minsky, implied volatility, income inequality, index fund, information asymmetry, Innovator's Dilemma, interest rate swap, Kenneth Rogoff, Kickstarter, late fees, London Interbank Offered Rate, Long Term Capital Management, loss aversion, margin call, Mark Zuckerberg, McMansion, money market fund, mortgage debt, mortgage tax deduction, Myron Scholes, negative equity, Network effects, Northern Rock, obamacare, payday loans, peer-to-peer lending, Peter Thiel, principal–agent problem, profit maximization, quantitative trading / quantitative finance, railway mania, randomized controlled trial, Richard Feynman, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, short selling, Silicon Valley, Silicon Valley startup, Skype, South Sea Bubble, sovereign wealth fund, statistical model, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application

Oldfield abandoned his Russian adventure and headed back to London. That first abrupt experience gave him a feel for his own levels of risk tolerance. It also educated him on how mortgage markets in general work. One feature of the housing-finance market in particular bothered him: home ownership requires both the borrowers and the lenders to take on an awful lot of risk. Borrowers must face up to the possibility of unemployment, negative equity, and rising interest rates; lenders must cope with the threat of defaulting borrowers and declining asset values. It so happened that a friend of Oldfield’s had written a report in the mid-2000s for the Australian government on mortgage markets, which contained ideas on how to address that problem. And what Oldfield has been trying to do in the years since—first in Australia and then in Britain with a new venture called Castle Trust that is backed by J.

He can sell the house, pay off the debt, and still walk away with 50 percent of his initial deposit. But in the second example, the same downward move in prices wipes out the entire deposit. In the run-up to the crisis, of course, people were often putting down much less than a 10 percent deposit. With only a tiny sliver of their own capital to protect them, and in some cases not even that, many American home owners were quickly pushed into negative equity when property prices fell: in other words, the amount they owed the bank was more than the value of their own home. Being under water on other financial assets is not pleasant, but it is at least possible to calibrate a response. When stock prices fall, for instance, borrowers can sell some of the shares to raise whatever is needed to keep their heads above water. There is no equivalent with property: you can’t decide to sell off your spare bedroom and keep the rest of the house.

But this issue does help to explain the value of collateral in resolving many of the hurdles that financial instruments face, especially ones that stretch over many years. It is much easier for mortgage providers to bet on someone’s future earnings when there is an immovable bit of security (a house) on hand to provide backup in the event of default. Collateral can also help the borrower, and not just by reducing the cost of borrowing. Provided he is not in negative equity, a mortgage holder has the option of getting rid of his debts by selling his property and paying back the bank. Collateral offers the borrower an exit route. Human capital, the economic value embodied in each of us, is the ultimate illiquid asset. It will clearly take a lot of time for the concept of human-­capital contracts to become a routine part of the financing landscape. It is easier to make this model work for people who have already graduated and want to raise money for the next stage of their careers than to extend it to the financing of undergraduate degrees, where the amount of data that can be drawn on to predict future income is necessarily lower.


pages: 270 words: 73,485

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

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3D printing, bank run, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, 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

Recession and the Prospect of Recovery The latest recession has been characterized by certain features that set it apart from previous recessions. The US and the UK, as well as many of the eurozone countries, have a high debt to GDP ratio, as well as large current budget deficits. Households have also been highly indebted, with their principal asset – houses – depreciating in value and thus facing negative equity. Banks required recapitalization in the US and the UK. It looks likely that this experience will be repeated in the eurozone countries. There are also global imbalances at play, with many “emerging” economies having large surplus foreign exchange reserves and the developed countries, especially the US, indebted to them. The lackluster recovery has become a contentious issue, with some arguing that its fragility is a result of the cautious fiscal response by governments wedded to cutting budget deficits rather than boosting fiscal spending.

The argument that the recession would have been much worse had there not been a sustained policy of keeping interest rates low is a counterfactual which is difficult to disprove. The low interest rates which have persisted have given households room to deleverage slowly rather than being forced into mortgage foreclosures, as has happened in earlier recessions. This may have eased the pain of holding negative equity. Many firms – Zombie firms, as they are called – have avoided bankruptcy thanks to the historically low interest rates. But then, at the same time, it has also postponed the required adjustment to correct the core problem of too much debt. This leads to the problem of a stock disequilibrium. Let me explain. If I borrow, my borrowing is a flow which adds to my stock of debt. Budget deficit is a flow while public debt is a stock.

Joseph (i) Meade, James (i) mean (i) measurement of capital debate (i) mechanization, of weaving (i) Meiselman, David (i) Menger, Carl (i) mercantilism (i), (ii), (iii) Mexico see crises, Mexican microeconomics (i) Middle East, post-World War I (i) Mill, John Stuart (i) Mitchell, Wesley Clair (i) Mitterand, François (i) modeling (i), (ii) macro-200 new classical economics (i) see also econometric modeling Modigliani, Franco (i) monetarism (i) control of money supply (i) deficit reduction demands (i) effects of (i) political support (i) monetarists (i) monetary policy Bundesbank (i) role of (i) as tool for recovery (i), (ii) monetary theory (i) money circulation (i) effect on economic system (i) motives for demand (i) role of (i) as scaling variable (i) money balances (i), (ii) money changers (i) money cranks (i) money price level (i) money problem (i) money supply (i), (ii) money wages flexibility/rigidity (i) and inflation (i) rates of increase (i) and unemployment (i), (ii) see also real wages; wages monopolies, grants of (i) monopoly power (i) Moore, Henry (i) mortgages (i), (ii), (iii) securitization (i) subprime (i), (ii) moving data, and unique static equilibrium (i) “Mr Keynes and the ‘Classics’: A Suggested Interpretation” (Hicks) (i) multiplier-accelerator model (i) multiplier process (i), (ii) Friedman’s challenge (i) Myrdal, Gunnar (i), (ii) Monetary Equilibrium (i) national data (i) National Debt (i) natural rate of interest (i) natural rate of unemployment (i) negative equity (i) neoclassical economics (i) neoclassical-Keynesian synthesis (i) new classical economics (i) attitude to modeling (i) modeling (i) time series data (i) new classical macro model (i) new classical model (i) aggregate demand and aggregate supply (i) policy implications (i) new normality (i) Newcomb, Simon (i) newly-industrialized economies (i) Newton, Isaac (i), (ii), (iii) Nixon, Richard (i), (ii), (iii) Nobel Prize (i), (ii), (iii), (iv), (v), (vi) nominal level (i) non-inflationary continuous expansion (NICE) (i), (ii) normal distribution (i) North America, Declaration of Independence (i) Northern Rock (i) oil shock (i) “On the High Price of Bullion’’ (Ricardo) (i) one-to-one jobs (i) O’Neill, Jim (i) open economy (i) opportunity cost (i) optimism/pessimism (i) options (i) Osborne, George (i) Ottoman Empire (i) Overend & Gurney (i) oversaving (i), (ii), (iii), (iv), (v), (vi) Overstone, Lord (i) Paish, Frank (i) paper currency, withdrawal (i) parameters (i) partial equilibrium theory (i), (ii) Paterson, William (i) Pax Britannica (i) per capita incomes (i) perfect markets see under markets Phillips, A.


pages: 593 words: 189,857

Stress Test: Reflections on Financial Crises by Timothy F. Geithner

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Affordable Care Act / Obamacare, asset-backed security, Atul Gawande, bank run, banking crisis, Basel III, Bernie Madoff, Bernie Sanders, break the buck, Buckminster Fuller, Carmen Reinhart, central bank independence, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, David Brooks, Doomsday Book, eurozone crisis, financial innovation, Flash crash, Goldman Sachs: Vampire Squid, housing crisis, Hyman Minsky, illegal immigration, implied volatility, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, Nate Silver, negative equity, Northern Rock, obamacare, paradox of thrift, pets.com, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, RAND corporation, regulatory arbitrage, reserve currency, Saturday Night Live, savings glut, selection bias, short selling, sovereign wealth fund, The Great Moderation, The Signal and the Noise by Nate Silver, Tobin tax, too big to fail, working poor

Maiden Lane II and III addressed these issues, respectively, by purchasing the underlying collateral from AIG and its counterparties and canceling the CDS contracts that AIG owed against them. This eliminated the risk that these contracts would continue to result in additional margin calls that would further drain AIG’s cash. Seven: Into the Fire 1 hardworking homeowners who were underwater: A home is “underwater” or has “negative equity” when the mortgage debt on the home exceeds its value. Thus, a $100,000 home with a $120,000 mortgage would have negative equity of $20,000. 2 Bank shareholders had no idea whether they would face substantial dilution: When a firm increases its number of shares of common stock, existing shareholders are “diluted,” meaning they own a smaller percentage of the future profits of the company. For example, if a firm with one million shares outstanding needs to raise $1 million at $1 per share, it would issue one million additional shares.

Treasury Department (Treasury) includes TARP, temporary guarantee program for money market funds, agency MBS purchase program, and gross draws under GSE preferred stock purchase agreements. 3 changed the trajectory of the recovery: 11 million households—22 percent of mortgage borrowers—were underwater, of which three quarters were current on their mortgage payments. A large share of the money spent to eliminate negative equity would have been directed to current borrowers, and as a result the overall economic impact of that would be very small. My economics team figured that increases to wealth from the reduction of negative equity would result in only an annual three- to five-cent increase in GDP for every dollar spent on debt reduction; by contrast, a dollar of stimulus used to increase income would have at least ten times that effect in the year it was received. Ten: The Fight for Reform 1 This was a necessary condition, though not a sufficient condition: As discussed in chapter 3, low interest rates were only partly a function of monetary policy.

That was short of the program’s initial target, but by 2014, another twenty-three million U.S. homeowners would refinance their mortgages outside of HARP, a huge though unheralded stimulus. Our final goal, helping vulnerable families stay in their homes, was more complicated. By the fall of 2009, two million U.S. mortgages were in foreclosure and another seven million were at serious risk of foreclosure. About eleven million homeowners were underwater—one in every five mortgages—with a total of about $700 billion in negative equity. Our resources could make an important difference in the lives of some vulnerable families, but they were far too limited to fix America’s housing problems, much less its larger economic problems. It was also going to be extremely difficult to decide whom to help and how to help them. Even after the horrific recession, roughly nine out of ten homeowners were still paying their mortgages on time, often at significant hardship and sacrifice.


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The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal by Ludwig B. Chincarini

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affirmative action, asset-backed security, automated trading system, bank run, banking crisis, Basel III, Bernie Madoff, Black-Scholes formula, buttonwood tree, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, discounted cash flows, diversification, diversified portfolio, family office, financial innovation, financial intermediation, fixed income, Flash crash, full employment, Gini coefficient, high net worth, hindsight bias, housing crisis, implied volatility, income inequality, interest rate derivative, interest rate swap, John Meriwether, labour mobility, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low skilled workers, margin call, market design, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Northern Rock, Occupy movement, oil shock, price stability, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Waldo Emerson, regulatory arbitrage, Renaissance Technologies, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Sharpe ratio, short selling, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, survivorship bias, systematic trading, The Great Moderation, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond

Theoretically, it could cost a tremendous amount of money, on the order of $2 trillion. This is much larger than the entire TARP fund allocation. Based on the amount of negative equity in the U.S. housing market as of 2010, the estimated cost would be around $751 billion.6 This is comprised of 11.1 million residential properties or 23.1% of the entire residential property market. The majority of these home owners have negative equity of greater than 25% (about $600 billion). Another problem with this solution is that if there are further house price declines, it would still not solve the problem entirely. Also, there may be many responsible home owners who have negative equity but would not leave their house anyway. That is, they would continue to pay the mortgage. Thus, by bailing these people out, the government would be giving up money unnecessarily.

This would reduce the burden for home owners, but the implied depreciation in the value a single house would be $230,103 (dropping from $600,000 to $369,897). This represents a decline of about 38%. Someone has to pay the cost, because it will be a direct loss to the banks. Thus, the government would have to absorb these losses. If the government considered everyone with these problems and others with negative equity in their home, the costs might be enormous. As of December 2010, the total negative equity of home owners in the United States has been estimated at $751 billion.11 The cost of bringing everyone to zero equity is large. But it is not only the cost that is perturbing. There are two further issues that are perturbing. First, many of these home owners will not default on their loans. Thus, recognizing this loss would be simply a transfer of wealth from the government to these households, which might be unnecessary.

By the end of 2010, the fund was down to –$7 billion, and at one point during the year, it was as far down as –$21 billion. Just a few years prior, in the second quarter of 2008, it was positive at $53 billion. The latest number for the 1st quarter of 2011 has the fund at –$1 billion. Thus, the fund is recovering as the number of bank failures have slowed down. How could the FDIC have survived with a negative balance to bail out banks? When other firms have a negative equity balance, don’t they go into bankruptcy? Isn’t that why LTCM was close to bankruptcy? Isn’t that why Lehman Brothers went into banktuptcy? Rudiger Dornbusch used to say “What’s true for the Gods isn’t true for the Cows.” By this Dornbusch meant that some institutions get special privileges, or you might say they are “too big to fail” or “too connected to the government to fail.” In fact, this is partly true.


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

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

Ordinary Icelanders tended to take out mortgage loans that were indexed against inflation or in another currency entirely. It was a disaster in the crisis as the value of debts shot up while the króna dived and inflation surged. Property prices typically fell too. The end result was that a 90 per cent loan-to-value loan ended up at 140 or 150 per cent, leaving homeowners stranded in massive negative equity. Some argued for an across-the-board debt write-down of 20 per cent, but that was too unfocused for the new government. Instead, Iceland targeted householder debt relief to write off everything above 110 per cent of the value of the property. The IMF called it the most effective debt-relief programme since US president Roosevelt’s plan in 1933 kept 800,000 Americans in their homes at an eventual profit to his government.

She’d had to give up her local job and find higher-paid employment further afield. The result? Four hours’ commuting per day. ‘I don’t want to have my home repossessed or for Northern Rock to say I haven’t been making my payments,’ she told me. ‘I will do whatever I have to do, even if it means I have to get out and get a second job. I will definitely make these payments.’ At that point, however, she was in negative equity – not surprising, given that she had been lent over 100 per cent of the value of her home. And her new mortgage was eating up two-thirds of her new take-home pay. ‘They lent me too much. It was a time when everything was wonderful. There was a great big property boom, the prices went through the roof. You were encouraged to go out and buy.’ Now she had boxed up her children’s teddy bears after a charging order arrived in the post.

Insurance companies, bond investors, even charities like the Bill Gates Foundation poured money into Adam Applegarth’s Newcastle bank, which in turn focused this money like a laser beam on British property. The Rock was offering returns above Libor (the inter-bank lending rate), at a time when the interest rate on US credit cards was below Libor. Amazingly, in November 2006, on behalf of the mortgage-seekers of Britain, the Northern Rock roadshow reached Africa. Scarce African liquidity, which could have funded local infrastructure, was instead diverted into Northern Rock to fund instant negative-equity mortgages at the very top of the UK housing bubble. For half a century the ‘efficient markets hypothesis’ conquered all in financial thinking. Of the many refutations of the hypothesis since the crisis, this African investment in Northern Rock stands out as one of the most egregious examples. Northern Rock did not itself slice up all the risk into CDOs. The Rock’s methods were relatively simple.


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The Global Minotaur by Yanis Varoufakis, Paul Mason

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active measures, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business climate, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, correlation coefficient, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, declining real wages, deindustrialization, endogenous growth, eurozone crisis, financial innovation, first-past-the-post, full employment, Hyman Minsky, industrial robot, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, light touch regulation, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market fundamentalism, Mexican peso crisis / tequila crisis, money market fund, mortgage debt, Myron Scholes, negative equity, new economy, Northern Rock, paper trading, Paul Samuelson, planetary scale, post-oil, price stability, quantitative easing, reserve currency, rising living standards, Ronald Reagan, special economic zone, Steve Jobs, structural adjustment programs, systematic trading, too big to fail, trickle-down economics, urban renewal, War on Poverty, Yom Kippur War

Suppose Bank B owns a CDO (let’s call it c) that B bought for $100. Of this, $40 was B’s own money and the remaining $60 was leverage (i.e. a sum that B somehow borrowed in order to purchase c). B’s problem is that, after 2008, it cannot sell c for more than $5. Given that its vaults are full of such CDOs, if it sells each below $60, it will have to file for bankruptcy, as the sale will not even yield enough to pay its debt of $60 per CDO (i.e. a case of negative equity). Thus, B does nothing, holds on to c and faces a slow death by a thousand cuts, as investors, deterred by B’s inability to rid itself of the toxic CDOs, dump B’s shares, the value of which on the stock exchange falls and falls and falls. Every penny the state throws at it to keep it alive, B hoards in desperation. Thus, the great bail-out sums given to the banks never find their way to businesses, which need loans to buy machinery, or to customers who want to finance the purchase of a new home.

Mr Bernanke’s stated purpose is that the Fed’s purchases of MBS will increase their price, setting off the following chain reaction: • increased MBS prices will push down the interest rates people demand from them before purchasing MBS paper (since they will now sport more attractive price-growth potential); • the lower interest rates associated with MBS paper will translate into lower interest rates for new mortgages; • the lower interest rates on mortgages will boost the demand for new homes; • the extra demand for housing will push up house prices; • the increasing house prices will reduce the number of American families whose home is worth less than the mortgage that they have on it, turning them into mortgage slaves. If all this transpires, the next hope is that a reduction in the incidence of mortgage bondage in American society (‘negative equity’ in the parlance of financiers) will cause more families to spend more readily, many to sell up and move to an area where they can find work more easily, others to slow down the rate at which they pay down existing debt (and spend some more) and, importantly, shift investors from MBS paper purchases to corporate bonds (i.e. more lending directly to corporations). This is, dear reader, Mr Bernanke’s heroic theory of how his QE3 will deliver the nation from recession.

., New Frontier social programmes, 83, 84 Keynes, John Maynard: Bretton Woods conference, 59, 60, 62, 109; General Theory, 37; ICU proposal, 60, 66, 90, 109, 254, 255; influence on New Dealers, 81; on investment decisions, 48; on liquidity, 160–1; trade imbalances, 62–6 Keynsianism, 157 Kim Il Sung, 77 Kissinger, Henry, 94, 98, 106 Kohl, Helmut, 201 Korea, 91, 191, 192 Korean War, 77, 86 labour: as a commodity, 28; costs, 104–5, 104, 105, 106, 137; hired, 31, 45, 46, 53, 64; scarcity of, 34–5; value of, 50–2 labour markets, 12, 202 Labour Party (British), 69 labourers, 32 land: as a commodity, 28; enclosure, 64 Landesbanken, 203 Latin America: effect of China on, 215, 218; European banks’ exposure to, 203; financial crisis, 190 see also specific countries lead, prices, 96 Lebensraum, 67 Left-Right divide, 167 Lehman Brothers, 150, 152–3 leverage, 121–2 leveraging, 37 Liberal Democratic Party (Japan), 187 liberation movements, 79, 107 LIBOR (London Interbank Offered Rate), 148 liquidity traps, 157, 190 Lloyds TSB, 153, 156 loans: and CDOs, 7–8, 129–31; defaults on, 37 London School of Economics, 4, 66 Long-Term Capital Management (LTCM) hedge fund collapse, 13 LTCM (Long-Term Capital Management) hedge fund collapse, 2, 13 Luxembourg, support for Dexia, 154 Maastricht Treaty, 199–200, 202 MacArthur, Douglas, 70–1, 76, 77 machines, and humans, 50–2 Malaysia, 91, 191 Mao, Chairman, 76, 86, 91 Maresca, John, 106–7 Marjolin, Robert, 73 Marshall, George, 72 Marshall Plan, 71–4 Marx, Karl: and capitalism, 17–18, 19, 34; Das Kapital, 49; on history, 178 Marxism, 181, 182 Matrix, The (film), 50–2 MBIA, 149, 150 McCarthy, Senator Joseph, 73 mercantilism, in Germany, 251 merchant class, 27–8 Merkel, Angela, 158, 206 Merrill Lynch, 149, 153, 157 Merton, Robert, 13 Mexico: effect of China on, 214; peso crisis, 190 Middle East, oil, 69 MIE (military-industrial establishment), 82–3 migration, Crash of 2008, 3 military-industrial complex mechanism, 65, 81, 182 Ministry for International Trade and Industry (Japan), 78 Ministry of Finance (Japan), 187 Minotaur legend, 24–5, 25 Minsky, Hyman, 37 money markets, 45–6, 53, 153 moneylenders, 31, 32 mortgage backed securities (MBS) 232, 233, 234 NAFTA (North American Free Trade Agreement), 214 National Bureau of Economic Research (US), 157 National Economic Council (US), 3 national income see GDP National Security Council (US), 94 National Security Study Memorandum 200 (US), 106 nationalization: Anglo Irish Bank, 158; Bradford and Bingley, 154; Fortis, 153; Geithner–Summers Plan, 179; General Motors, 160; Icelandic banks, 154, 155; Northern Rock, 151 NATO (North Atlantic Treaty Organization), 76, 253 negative engineering, 110 negative equity 234 neoliberalism, 139, 142; and greed, 10 New Century Financial, 147 New Deal: beginnings, 45; Bretton Woods conference, 57–9; China, 76; Global Plan, 67–71, 68; Japan, 77; President Kennedy, 84; support for the Deutschmark, 74; transfer union, 65 New Dealers: corporate power, 81; criticism of European colonizers, 79 ‘new economy’, 5–6 New York stock exchange, 40, 158 Nietzsche, Friedrich, 19 Nixon, Richard, 94, 95–6 Nobel Prize for Economics, 13 North American Free Trade Agreement (NAFTA), 214 North Atlantic Treaty Organization (NATO), 76 North Korea see Korea Northern Rock, 148, 151 Obama administration, 164, 178 Obama, Barack, 158, 159, 169, 180, 230, 231 OECD (Organisation for Economic Co-operation and Development), 73 OEEC (Organisation for European Economic Co-operation), 73, 74 oil: global consumption, 160; imports, 102–3; prices, 96, 97–9 OPEC (Organization of the Petroleum Exporting Countries), 96, 97 paradox of success, 249 parallax challenge, 20–1 Paulson, Henry, 152, 154, 170 Paulson Plan, 154, 173 Penn Bank, 40 Pentagon, the, 73 Plaza Accord (1985), 188, 192, 213 Pompidou, Georges, 94, 95–6 pound sterling, devaluing, 93 poverty: capitalism as a supposed cure for, 41–2; in China, 162; reduction in the US, 84; reports on global, 125 predatory governance, 181 prey–predator dynamic, 33–5 prices, flexible, 40–1 private money, 147, 177; Geithner–Summers Plan, 178; toxic, 132–3, 136, 179 privatization, of surpluses, 29 probability, estimating, 13–14 production: cars, 70, 103, 116, 157–8; coal, 73, 75; costs, 96, 104; cuts in, 41; in Japan, 185–6; processes, 30, 31, 64; steel, 70, 75 production–distribution cycle, 54 property see real estate prophecy paradox, 46, 47, 53 psychology, mass, 14 public debt crisis, 205 quantitative easing, 164, 231–6 railway bubbles, 40 Rational Expectations Hypothesis (REH), 15–16 RBS (Royal Bank of Scotland), 6, 151, 156; takeover of ABN-Amro, 119–20 Reagan, Ronald, 10, 99, 133–5, 182–3 Real Business Cycle Theory (RBCT), 15, 16–17 real estate, bubbles, 8–9, 188, 190, 192–3 reason, deferring to expectation, 47 recession predictions, 152 recessions, US, 40, 157 recycling mechanisms, 200 regulation, of banking system, 10, 122 relabelling, 14 religion, organized, 27 renminbi (RMB), 213, 214, 217, 218, 253 rentiers, 165, 187, 188 representative agents, 140 Reserve Bank of Australia, 148 reserve currency status, 101–2 risk: capitalists and, 31; riskless, 5, 6–9, 14 Roach, Stephen, 145 Robbins, Lionel, 66 Roosevelt, Franklin D., 165; attitude towards Britain, 69; and bank regulation, 10; New Deal, 45, 58–9 Roosevelt, Theodore (‘Teddy’), 180 Royal Bank of Scotland (RBS), 6, 151, 156; takeover of ABN-Amro, 119–20 Rudd, Kevin, 212 Russia, financial crisis, 190 Saudi Arabia, oil prices, 98 Scandinavia, Gold Standard, 44 Scholes, Myron, 13 Schopenhauer, Arthur, 19 Schuman, Robert, 75 Schumpter, Joseph, 34 Second World War, 45, 55–6; aftermath, 87–8; effect on the US, 57–8 seeds, commodification of, 163 shares, in privatized companies, 137, 138 silver, prices, 96 simulated markets, 170 simulated prices, 170 Singapore, 91 single currencies, ICU, 60–1 slave trade, 28 SMEs (small and medium-sized enterprises), 186 social welfare, 12 solidarity (asabiyyah), 33–4 South East Asia, 91; financial crisis, 190, 191–5, 213; industrialization, 86, 87 South Korea see Korea sovereign debt crisis, 205 Soviet Union: Africa, 79; disintegration, 201; Marshall Plan, 72–3; Marxism, 181, 182; relations with the US, 71 SPV (Special Purpose Vehicle), 174 see also EFSF stagflation, 97 stagnation, 37 Stalin, Joseph, 72–3 steel production, in Germany, 70 Strauss-Kahn, Dominique, 60, 254, 255 Summers, Larry, 230 strikes, 40 sub-prime mortgages, 2, 5, 6, 130–1, 147, 149, 151, 166 success, paradox of, 33–5, 53 Suez Canal trauma, 69 Suharto, President of Indonesia, 97 Summers, Larry, 3, 132, 170, 173, 180 see also Geithner–Summers Plan supply and demand, 11 surpluses: under capitalism, 31–2; currency unions, 61; under feudalism, 30; generation in the EU, 196; manufacturing, 30; origin of, 26–7; privatization of, 29; recycling mechanisms, 64–5, 109–10 Sweden, Crash of 2008, 155 Sweezy, Paul, 73 Switzerland: Crash of 2008, 155; UBS, 148–9, 151 systemic failure, Crash of 2008, 17–19 Taiwan, 191, 192 Tea Party (US), 162, 230, 231, 281 technology, and globalization, 28 Thailand, 91 Thatcher, Margaret, 117–18, 136–7 Third World: Crash of 2008, 162; debt crisis, 108, 219; interest rate rises, 108; mineral wealth, 106; production of goods for Walmart, 125 tiger economies, 87 see also South East Asia Tillman Act (1907), 180 time, and economic models, 139–40 Time Warner, 117 tin, prices, 96 toxic theory, 13–17, 115, 133–9, 139–42 trade: balance of, 61, 62, 64–5; deficits (US), 111, 243; global, 27, 90; surpluses, 158 trades unions, 124, 137, 202 transfer unions, New Deal, 65 Treasury Bills (US), 7 Treaty of Rome, 237 Treaty of Versailles, 237 Treaty of Westphalia, 237 trickle-down, 115, 135 trickle-up, 135 Truman Doctrine, 71, 71–2, 77 Truman, Harry, 73 tsunami, effects of, 194 UBS, 148–9, 151 Ukraine, and the Crash of 2008, 156 UN Security Council, 253 unemployment: Britain, 160; Global Plan, 96–7; rate of, 14; US, 152, 158, 164 United States see US Unocal, 106 US economy, twin deficits, 22–3, 25 US government, and South East Asia, 192 US Mortgage Bankers Association, 161 US Supreme Court, 180 US Treasury, 153–4, 156, 157, 159; aftermath of the Crash of 2008, 160; Geithner–Summers Plan, 171–2, 173; bonds, 227 US Treasury Bills, 109 US (United States): aftermath of the Crash of 2008, 161–2; assets owned by foreign state institutions, 216; attitude towards oil price rises, 97–8; China, 213–14; corporate bond purchases, 228; as a creditor nation, 57; domestic policies during the Global Plan, 82–5; economy at present, 184; economy praised, 113–14; effects of the Crash of 2008, 2, 183; foreign-owned assets, 225; Greek Civil War, 71; labour costs, 105; Plaza Accord, 188; profit rates, 106; proposed invasion of Afghanistan, 106–7; role in the ECSC, 75; South East Asia, 192 value, costing, 50–1 VAT, reduced, 156 Venezuela, oil prices, 97 Vietnamese War, 86, 91–2 vital spaces, 192, 195, 196 Volcker, Paul: 2009 address to Wall Street, 122; demand for dollars, 102; and gold convertibility, 94; interest rate rises, 99; replaced by Greenspan, 10; warning of the Crash of 2008, 144–5; on the world economy, 22, 100–1, 139 Volcker Rule, 180–1 Wachowski, Larry and Andy, 50 wage share, 34–5 wages: British workers, 137; Japanese workers, 185; productivity, 104; prophecy paradox, 48; US workers, 124, 161 Wal-Mart: The High Cost of Low Price (documentary, Greenwald), 125–6 Wall Street: Anglo-Celtic model, 12; Crash of 2008, 11–12, 152; current importance, 251; Geithner–Summers Plan, 178; global profits, 23; misplaced confidence in, 41; private money, 136; profiting from sub-prime mortgages, 131; takeovers and mergers, 115–17, 115, 118–19; toxic theory, 15 Wallace, Harry, 72–3 Walmart, 115, 123–7, 126; current importance, 251 War of the Currents, 39 Washington Mutual, 153 weapons of mass destruction, 27 West Germany: labour costs, 105; Plaza Accord, 188 Westinghouse, George, 39 White, Harry Dexter, 59, 70, 109 Wikileaks, 212 wool, as a global commodity, 28 working class: in Britain, 136; development of, 28 working conditions, at Walmart, 124–5 World Bank, 253; origins, 59; recession prediction, 149; and South East Asia, 192 World Trade Organization, 78, 215 written word, 27 yen, value against dollar, 96, 188, 193–4 Yom Kippur War, 96 zombie banks, 190–1


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

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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, 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, 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, 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, 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

The second and fourth factors, in particular, can be motivated by covariance with bad times, while the first and third factors are related to bonds’ standalone risks. In my opinion, long-run variation in the BRP has been primarily driven by a level-dependent inflation premium. This is the only premium that can move yields by several percentage points; the yield impact of other factors amounts at most to 1%. Over the past decade, given stable inflation expectations and near-zero inflation premia, real factors have mattered more: negative equity beta (the safe haven role), supply–demand factors, and perhaps cyclical factors. The countercyclical pattern in the predictable component of bond returns has dominated the academic literature but it might reflect systematic forecast errors as much as it does a time-varying BRP. Figure 9.7. Comparing various bond risk premium measures (smoothed) Sources: Bloomberg, Federal Reserve Board, Blue Chip Economic Indicators, own calculations.

Indeed, expected long-term inflation and bond market volatility have high predictive correlations over the 5-year horizon (0.31 and 0.64, respectively), consistent with the idea that high expected inflation and related uncertainty make the ex ante BRP high. Over short horizons the correlations are low. Safe haven influences. These influences should be observed best at short horizons, perhaps even shorter than one quarter if they are related to brief flight-to-quality episodes and wealth-dependent risk aversion. Negative-equity returns and high equity market volatility are bullish news for bonds both contemporaneously and predictively (with—0.15 and +0.11 predictive correlations to bonds for equity returns and volatility, respectively, over a one-quarter horizon). The negative coefficient on equity returns may also reflect an underreaction effect for growth news and not just risk aversion news. However, the absolute values of the correlations are not high, so the evidence on stock–bond correlation is weak.

Interestingly, Erb–Harvey (2006) document a strong cross-sectional relation between average roll returns and sensitivities to unexpected inflation. That is, commodity sectors that have been the best inflation hedges—notably energy—have also produced the highest roll returns (and, over many time periods, the highest realized returns). Perhaps because of its inflation-hedging ability, energy (with negative equity and bond betas) also has been a better diversifier against equities and bonds than other commodity sectors. This confluence of desirable characteristics seems too good to be true. I suspect that a fortuitously benign sample is part of the story—the increasing scarcity of oil and the growing demand from China and other emerging markets have boosted oil prices, resulting in persistent upside surprises.

The Handbook of Personal Wealth Management by Reuvid, Jonathan.

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asset allocation, banking crisis, BRICs, collapse of Lehman Brothers, correlation coefficient, credit crunch, cross-subsidies, diversification, diversified portfolio, estate planning, financial deregulation, fixed income, high net worth, income per capita, index fund, interest rate swap, laissez-faire capitalism, land tenure, market bubble, merger arbitrage, negative equity, new economy, Northern Rock, pattern recognition, Ponzi scheme, prediction markets, Right to Buy, risk tolerance, risk-adjusted returns, risk/return, short selling, side project, sovereign wealth fund, statistical arbitrage, systematic trading, transaction costs, yield curve

Figure 2.1.2 Investor flow 2004 2005 2006 2007 ឣ 66 REAL ESTATE AND FORESTRY ______________________________________________ The third cause is existing debt. This factor will rumble on for some time to come. According to De Montfort University some 50 per cent of the current £202 billion could be in negative equity which as much as £22 billion could be due for refinancing in 2009. Most of this will have to be restructured on less attractive terms: higher margin costs and lower LTVs. Furthermore, many of these investors will be in negative equity due to falling values. This has already led to banks taking control of assets and an increase in sales volumes. So what next and where do the opportunities lie for HNW investors? In a rapidly changing market it seems unwise to try and predict too much. It is fair to say that many experts agree that the market has further to fall.


pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

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Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, negative equity, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, value at risk, Washington Consensus, Yom Kippur War

As early as March 2007, about one in three subprime mortgages in the 48235 ZIP code were more than sixty days in arrears, effectively on the verge of foreclosure. The effect was to burst the real estate bubble, causing house prices to start falling for the first time since the early 1990s. As soon as this began to happen, those who had taken out 100 per cent mortgages found their debts worth more than their homes. The further house prices fell, the more homeowners found themselves with negative equity, a term familiar in Britain since the early 1990s. In this respect, West Outer Drive was a harbinger of a wider crisis of the American real estate market, the ramifications of which would rock the financial system of the Western world to its foundations. On a sultry Friday afternoon, shortly after arriving in Memphis from Detroit, I watched more than fifty homes being sold off on the steps of the Memphis courthouse.

What I was witnessing was just the beginning of a flood of foreclosures. In March 2007 the Center for Responsible Lending predicted that the number of foreclosures could reach 2.4 million.61 This may turn out to have been an underestimate. At the time of writing (May 2008), around 1.8 million mortgages are in default, but an estimated 9 million American households, or the occupants of one in every ten single-family homes, have already fallen into negative equity. About 11 per cent of subprime ARMs are already in foreclosure. According to Crédit Suisse, the total number of foreclosures on all types of mortgages could end up being 6.5 million over the next five years. That could put 8.4 per cent of all American homeowners, or 12.7 per cent of those with mortgages, out of their homes.62 Since the subprime mortgage market began to turn sour in the early summer of 2007, shockwaves have been spreading through all the world’s credit markets, wiping out some hedge funds and costing hundreds of billions of dollars to banks and other financial companies.

securitization see securitization subprime see subprime lending and US economic triumph 3 Motown 250 Mullins, David 322 mutations (in economies) 349 mutual associations 247. see also building societies; Savings & Loan Nairobi 280 Nanking, Treaty of 291 Naples 86 Napoleon Bonaparte 3 Napoleonic Wars 80-86 National Bank Act 57 national debts 80 National Health Service see Britain (welfare state) nationalization see banks National Provincial Bank 56 Nationwide house price index 261 natural and market selection 350-51 natural resources see resources Nazis 80 Neal, Larry 343n. Nearing, Scott 231 negative equity 270-71 neo-imperialism 309-14 Netherlands, The: financial and commercial success 3 Holland (province) 74 pension fund 222 property price bubble 233 see also United Provinces network externalities 135 New Deal 246-8 New Orleans 96 . see also Katrina New York 101. New York Stock Exchange 300 Nicaragua 296 Nicholas II, tsar 107n. Nigeria 26 9/11 attack 6 NINJA (No Income No Job or Assets) 269 Nixon, Richard 58 Northern Rock 7 North Korea 18 Norway 292 property prices 233 and subprime loans 8 nuclear attacks 223 Nukak-Makoe people 17-18 number systems 31-3 OECD see Organization for Economic Cooperation and Development off-balance-sheet entities 5 Office of Federal Housing Enterprise Oversight 261 offshore markets 308 oil 26 O’Neill, Jim 283-4 Open Market Operations 161 opium 289-92 options/option contracts 149 . see also call options; put options options pricing see Black-Scholes model Organization for Economic Cooperation and Development 233 Oriental influences 3 Orleans, Duke of (Regent) 139 OTC contracts see derivatives Ottoman Empire 303 collapse 303 Jews in 36 and Venice 36 see also Turkey outsiders 161 Overend Gurney bank 55 Overstone, Baron 55 ‘over-the-counter’ contracts see derivatives overtrading 121 Pacific Investment Management Company see PIMCO Pacific islands 135 Padua 70 Palmer, J.


pages: 460 words: 122,556

The End of Wall Street by Roger Lowenstein

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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

Geithner continued to prod, but stopped short of taking remedial action.7 Even as Citi was adding CDOs, the housing market was weakening. In certain cities—Boston and San Diego in the fall of ’05, San Francisco in May of ’06—housing prices had peaked. With prices starting to fall, homeowners had less equity. Nationwide, one-third of borrowers who had gotten adjustable mortgages in 2005 entered the next year with zero or negative equity in their homes—an alarming figure, for if home prices were to cool further, many more homeowners would find themselves underwater.8 On a national basis, prices kept rising, but the increase from April to June of ’06, less than 1 percent, was the smallest of any quarter during the boom. Also, inventories of newly built homes were rising and prices of newly built homes were actually falling—a dark omen for the overall market.9 Clouds were also gathering on the financial horizon.

Buyers were halting payments within months of closing loans (or never paying at all). Zandi correctly suspected that many had lied about intending to move in and, with the market turning, abandoned their speculations. 26 Nationwide, in the third quarter, real estate prices fell—the first such drop in thirteen years. Knowing full well that if the trend continued, millions of homeowners faced the prospect of negative equity, a CDO analyst at Standard & Poor’s—which, of course, had been affixing triple-A ratings to mortgage securities—blithely e-mailed his colleagues, “Let’s hope we are all wealthy and retired by the time this house of cards falters.”27 Yet even as banks reported sharply higher totals of past-due loans and restructured loans, they were pouring capital into risky assets—real estate and, in no small measure, highly leveraged corporate loans.28 Lehman, pushing its commercial property franchise, lent more than $2 billion to a land developer in California.

See also specific funds Goldman Sachs and Lehman Brothers and Morgan Stanley and regulation of servicing for Wall Street, war with Herlihy, Edward Hogan, John home equity loans home foreclosure(s) Dodd’s position on number of Bush administration and, Obama administration and repercussions of suspension of at IndyMac homeowners government help for shift in mentality of home(s) building foreclosure. See home foreclosure(s) as investment assets median value of negative equity in ownership rate, U.S. Hoover, Herbert Housing and Economic Recovery Act of 2008 Housing and Urban Development (HUD) housing market affordable bubble. See also mortgage bubble flipping properties government role in as risk free game weakening of housing prices correlations in fall of gains in rate of increase subprime mortgages and HUD. See Housing and Urban Development (HUD) Iceland Immelt, Jeffrey IndyMac Bank inflation insurance.


pages: 419 words: 130,627

Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase by Duff McDonald

bank run, Bonfire of the Vanities, centralized clearinghouse, collateralized debt obligation, conceptual framework, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Exxon Valdez, financial innovation, fixed income, housing crisis, interest rate swap, Jeff Bezos, John Meriwether, laissez-faire capitalism, Long Term Capital Management, margin call, market bubble, money market fund, moral hazard, negative equity, Northern Rock, profit motive, Renaissance Technologies, risk/return, Rod Stewart played at Stephen Schwarzman birthday party, Saturday Night Live, sovereign wealth fund, statistical model, Steve Ballmer, Steve Jobs, technology bubble, The Chicago School, too big to fail, Vanguard fund, zero-coupon bond, zero-sum game

The bank had instituted several rounds of credit changes that tightened underwriting standards in 2007 and 2008, but it was too late. At the end of 2008, JPMorgan Chase estimated that about $25.6 billion of its home equity portfolio was extended to households where borrowing exceeded household value, the so-called state of “negative equity.” The percentage of the portfolio where households were sitting on negative equity nearly doubled during the year, from 15 percent in January to 27 percent at the end of the year. Much of that negative equity came from California, Florida, Arizona, and Michigan. Along with its competitors, JPMorgan Chase got smashed by the housing collapse. Citigroup had written down about $101.8 billion in assets from the beginning of the crisis through May 2009, Bank of America about $56.6 billion, and JPMorgan Chase $41.1 billion.


pages: 251 words: 88,754

The politics of London: governing an ungovernable city by Tony Travers

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active transport: walking or cycling, congestion charging, first-past-the-post, full employment, job satisfaction, negative equity, Neil Kinnock, new economy, urban sprawl

From then on, there was a good working relationship. After 1990, the situation changed again. The impact of the deep property recession altered attitudes. Social housing began to be seen as a problem. This was driven by two specific local factors. First, there were large numbers of owner-occupied households in negative equity in Beckton, which was blamed to some degree on the presence of social housing nearby. Secondly, with an increase in homelessness, many owners with negative equity leased their properties to homeless families via the council’s PSL (private sector leasing) scheme. Homeless families from several boroughs were then placed in this accommodation. This led to some social tension and conflict in Beckton. In Tower Hamlets, the relationship with the LDDC was conditioned in part by the way the borough was administered and also by its political control.


pages: 363 words: 107,817

Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed by Andrew Jackson (economist), Ben Dyson (economist)

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bank run, banking crisis, banks create money, Basel III, Bretton Woods, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial exclusion, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, informal economy, information asymmetry, intangible asset, land reform, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, negative equity, Northern Rock, price stability, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, risk-adjusted returns, seigniorage, shareholder value, short selling, South Sea Bubble, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, unorthodox policies

Equity is simply the difference between assets and liabilities, and represents what would be left over for the shareholders (owners) of the bank if all the assets were sold and the proceeds used to settle the bank’s liabilities (i.e. pay off the creditors). Equity is calculated by subtracting liabilities from assets. A positive net equity indicates that a bank’s assets are worth more than its liabilities. On the other hand a negative equity shows that its liabilities are worth more than its assets - in other words, that the bank is insolvent. fig. 2.2 - Assets and liabilities Presenting balance sheets diagrammatically On official annual accounts, assets are typically presented first, followed by liabilities underneath, with equity coming last, as shown below: However, it can help to present the balance sheet diagrammatically with assets on one side, and liabilities and equity on the opposite side.

Their underinvestment in other assets may be compounded if/when the bubble in the UK housing market bursts – they may find their savings (in the form of property) insufficient to cover their outgoings. An increase in the future poverty of pensioners is the likely result. In addition, the bursting of the housing bubble will leave many with properties that are worth less than the mortgage that they took out to buy them (i.e. negative equity). Consequently, house price bubbles fuelled by banks have the effect of misleading people about their long-term interests and diverting savings away from pensions provision, with people slow to revise their beliefs appropriately when the bubbles collapses. Finally, excess returns in the financial sector resulting from the design of the monetary system bids resources away from other, productive enterprises.


pages: 323 words: 95,939

Present Shock: When Everything Happens Now by Douglas Rushkoff

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algorithmic trading, Andrew Keen, bank run, Benoit Mandelbrot, big-box store, Black Swan, British Empire, Buckminster Fuller, cashless society, citizen journalism, clockwork universe, cognitive dissonance, Credit Default Swap, crowdsourcing, Danny Hillis, disintermediation, Donald Trump, double helix, East Village, Elliott wave, European colonialism, Extropian, facts on the ground, Flash crash, game design, global supply chain, global village, Howard Rheingold, hypertext link, Inbox Zero, invention of agriculture, invention of hypertext, invisible hand, iterative process, John Nash: game theory, Kevin Kelly, laissez-faire capitalism, Law of Accelerating Returns, loss aversion, mandelbrot fractal, Marshall McLuhan, Merlin Mann, Milgram experiment, mutually assured destruction, negative equity, Network effects, New Urbanism, Nicholas Carr, Norbert Wiener, Occupy movement, passive investing, pattern recognition, peak oil, price mechanism, prisoner's dilemma, Ralph Nelson Elliott, RAND corporation, Ray Kurzweil, recommendation engine, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, Skype, social graph, South Sea Bubble, Steve Jobs, Steve Wozniak, Steven Pinker, Stewart Brand, supply-chain management, the medium is the message, The Wisdom of Crowds, theory of mind, Turing test, upwardly mobile, Whole Earth Catalog, WikiLeaks, Y2K, zero-sum game

Luckily for me I didn’t buy the apartment (or, rather, I didn’t buy the mortgage for that apartment). But the hundreds of thousands of Americans who did accept similar bargains ended up in big trouble. Instead of increasing, the value of the homes sunk below the amount that was owed on them. As of this writing, 31 percent of all residential properties with mortgages are under water, or what industry analysts call negative equity.26 Owing more on a thirty-year mortgage than one’s house is currently worth is just another way of saying present shock. A few traders did see the writing on the wall and understood that the housing market had become too dependent on these temporally compressed lending instruments. Famously, even though they were selling packaged loans to investors and pension funds, Goldman Sachs determined that the financing craze was unsustainable and began betting against the mortgages through even more derivative derivatives called credit default swaps.

(New York: Random House, 2009), 120. 23. Liz Moyer, “Fund Uses Behavioral Finance to Find Value Plays,” CBS MarketWatch, June 28, 2011, www.marketwatch.com. 24. Uttara Choudhury, “Behavioral Economics has Never Been Hotter,” Braingainmag.com. 25. Robert D. Manning, Credit Card Nation: The Consequences of America’s Addiction to Credit (New York: Basic Books, 2000). 26. “Corelogic Reports Negative Equity Increase in Q4 2011,” BizJournals, March 1, 2012, http://assets.bizjournals.com/orlando/pdf/CoreLogic%20underwater%20mortgage%20list.pdf. Also: “Despite Home Value Gains, Underwater Homeowners Owe $1.2 Trillion More than Homes’ Worth,” Zillow Real Estate Research, May 24, 2012, www.zillow.com/blog/research/2012/05/24/despite-home-value-gains-underwater-homeowners-owe-1-2-trillion-more-than-homes-worth. 27.


pages: 261 words: 86,905

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

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asset allocation, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamonds, Bretton Woods, BRICs, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, commoditize, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, financial innovation, Flash crash, forward guidance, Gini coefficient, global reserve currency, high net worth, High speed trading, hindsight bias, income inequality, inflation targeting, interest rate swap, Isaac Newton, Jaron Lanier, joint-stock company, joint-stock limited liability company, Kodak vs Instagram, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, negative equity, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Plutocrats, plutocrats, Ponzi scheme, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, trickle-down economics, Washington Consensus, wealth creators, working poor, yield curve

This means that when interest rates go up, 1. life is harder for businesses, because money is more expensive, and 2. people will tend not to invest in companies, preferring to invest in risk-free bonds, and 3. the stock market will fall for that reason, so 4. confidence in general will fall. In addition, 5. people with mortgages will find it harder to make their repayments, and those who are coming off fixed-rate deals may suddenly see a dramatic increase in their monthly repayments. 6. That means mortgage defaults will rise, so 7. there will be downward pressure on house prices, and 8. some people will be in negative equity, which will stop them from spending money, 9. the currency will rise, because higher guaranteed rates of investment will attract money into buying the country’s debt, so 10. life will become harder for manufacturing businesses, because their exports will be more expensive. Also, 11. inflation will fall—remember, inflation means that money is worth less, whereas a rise in interest rates means that money is more expensive.

no-recourse loans Loans in which the person who has borrowed the money can stop paying the loan, forfeit the asset against which the loan was made, and walk away. The textbook example involves mortgages that go wrong: the borrower, realizing that the math has gone against him or her, decides to stop paying the mortgage and to give up the house. This is something that you would do only if the loan was for a large part of the value of the house—or even, in many cases, when the mortgage was actually for more than the house is worth. (That’s called negative equity: when the mortgage is for more than the property.) No-recourse loans have been denounced as a ridiculous cosseting of feckless borrowers, but one of the ironies of the Great Recession is that no-recourse loans helped the US economy in an unexpected way: by forcing banks to admit to bad property debts, they’ve helped bank balance sheets to stay honest and have helped avoid the Japanese and European curse of zombie banks.


pages: 160 words: 6,876

Shaky Ground: The Strange Saga of the U.S. Mortgage Giants by Bethany McLean

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activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, collateralized debt obligation, housing crisis, mortgage debt, negative equity, obamacare, race to the bottom

There were bitter battles over these programs. The biggest one was over “principal reduction,” or whether the administration should enable the write-down of mortgages that were larger than the value of the homes. By the fourth quarter of 2009, according to research firm CoreLogic, 24 percent of borrowers, or 11.3 million mortgages, owed more than their homes were worth, for a total of around $700 billion in negative equity. The numbers would get worse before they got better. Many BETHANY McLEAN COLUMBIA GLOBAL REPORTS borrowers will walk away from their mortgage in such circumstances; the default hurts the borrower, the lender, and everyone else in the neighborhood when the now-empty house gets trashed. So why not have a program that forgave the amount of the loan that was greater than the value of the house?


pages: 580 words: 168,476

The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

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affirmative action, Affordable Care Act / Obamacare, airline deregulation, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, income inequality, income per capita, indoor plumbing, inflation targeting, information asymmetry, invisible hand, jobless men, John Harrison: Longitude, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, London Interbank Offered Rate, lone genius, low skilled workers, Marc Andreessen, Mark Zuckerberg, market bubble, market fundamentalism, mass incarceration, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, negative equity, obamacare, offshore financial centre, paper trading, Pareto efficiency, patent troll, Paul Samuelson, payday loans, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, wealth creators, women in the workforce, zero-sum game

There are still many foreclosures in the pipeline—some 5.9 million properties are 30 or more days delinquent or in foreclosure; see Mortgage Monitor Report, Lender Processing Services (March 2012), available at http://www.lpsvcs.com/LPSCorporateInformation/NewsRoom/Pages/20120321.aspx (accessed March 28, 2012). Additionally, 11.1 million, or 22.8 percent, of all residential properties with a mortgage in the United States were underwater (had negative equity at the end of the fourth quarter of 2011); see “Negative Equity Report,” Corelogic (Q4, 2011), available at http://www.corelogic.com/about-us/researchtrends/asset_upload_file360_14435.pdf (accessed March 28, 2012). 2. The exact amount varies from year to year. For data on income inequality, I rely heavily on the work of Emmanuel Saez and Thomas Piketty. The important initial work is T. Piketty and E. Saez, “Income Inequality in the United States, 1913–1998,” Quarterly Journal of Economics 118, no. 1 (2003): 1–39.

Kahn, “The Long-Term Labor Market Consequences of Graduating from College in a Bad Economy,” Labour Economics 12, no. 2 (April 2010): 303–16. 49. A point explained in Domenico Delli Gatti, Mauro Gallegati, Bruce C. Green-wald, Alberto Russo, and Joseph E. Stiglitz, “Sectoral Imbalances and Long Run Crises,” proceedings of the Beijing 2012 World Congress of the International Economic Association. 50. One in four mortgage owners, some 14 million Americans, are underwater, for a net negative equity total of $700 billion. M. Zandi, “To Shore Up the Recovery, Help Housing,” Special Report, Moody’s Analytics, May 25, 2011. 51. Those receiving mortgages between 2004 and 2008 were particularly hard hit; of those receiving loans in this period, 2.7 million households have already been foreclosed upon, and another 3.6 million are at serious risk. D. Gruenstein Bocian, W. Li, and C. Reid, “Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures,” Center for Responsible Lending, November 2011, available at http://www.responsiblelending.org/mortgage-lending/research-analysis/Lost-Ground-2011.pdf. 52.


pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

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air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy, zero-sum game

If it did not, she would be no worse off than if she sank the money into her house, since this would only benefit her creditor: it does not matter to her, after all, whether her creditor loses $120,000 or $70,000. Her loss is still limited to the initial $30,000 she invested. So Kate would chose ‘gambling for resurrection’. It is what one would expect anybody with negative equity to do. This is also relevant to banks. These are businesses with next to no equity in good times whose shareholders enjoy the benefits of limited liability: in other words, loans to banks (or any other company) are non-recourse. If the bank were to fall into negative equity – extremely likely to happen, in fact, given how leveraged they are – the downside would no longer matter to shareholders, since the losses fall on creditors or the government. So it would make sense to gamble on ‘resurrection’ or ‘go for broke’. They can do this quite easily by taking on riskier loans and adopting riskier trading strategies.


pages: 422 words: 131,666

Life Inc.: How the World Became a Corporation and How to Take It Back by Douglas Rushkoff

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affirmative action, Amazon Mechanical Turk, banks create money, big-box store, Bretton Woods, car-free, colonial exploitation, Community Supported Agriculture, complexity theory, computer age, corporate governance, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, death of newspapers, don't be evil, Donald Trump, double entry bookkeeping, easy for humans, difficult for computers, financial innovation, Firefox, full employment, global village, Google Earth, greed is good, Howard Rheingold, income per capita, invention of the printing press, invisible hand, Jane Jacobs, John Nash: game theory, joint-stock company, Kevin Kelly, laissez-faire capitalism, loss aversion, market bubble, market design, Marshall McLuhan, Milgram experiment, moral hazard, mutually assured destruction, Naomi Klein, negative equity, new economy, New Urbanism, Norbert Wiener, peak oil, peer-to-peer, place-making, placebo effect, Ponzi scheme, price mechanism, price stability, principal–agent problem, private military company, profit maximization, profit motive, race to the bottom, RAND corporation, rent-seeking, RFID, road to serfdom, Ronald Reagan, short selling, Silicon Valley, Simon Kuznets, social software, Steve Jobs, Telecommunications Act of 1996, telemarketer, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, trade route, trickle-down economics, union organizing, urban decay, urban planning, urban renewal, Vannevar Bush, Victor Gruen, white flight, working poor, Works Progress Administration, Y2K, young professional, zero-sum game

Of course, freezing a mortgage rate may help an individual stay in his house, but it won’t help the pension fund or municipal project depending on that interest to stay solvent. Selling their homes now won’t even help. Thirty-nine percent of Americans who bought homes in 2006 owe more on their mortgages than the homes are worth. By contrast, of those who purchased their homes in 2003, only 3 percent now have “negative equity.” The government’s cure for what is being called a “liquidity crisis” is to add liquidity to the system. Through lower interest rates or direct bailouts, the Fed gives more money to the lending institutions, recreating the problem that got us here in the first place: a supply-side glut of money. This may calm Wall Street (long enough for institutional investors to sell their assets, anyway) but it has no positive effect on Main Street, where homes are still going into foreclosure at record numbers.

Gans, The Levittowners: Ways of Life and Politics in a New Suburban Community (New York: Columbia University Press, 1982). 66 “This particular problem” Daniel Gross and Jon Meacham, “The Oracle Reveals All: A Candid Conversation with Greenspan,” Newsweek, Web Exclusive, September 24, 2007, http://www.newsweek.com/id/41390 (accessed September 25, 2007). 66 Banks found willing customers Julia Werdigier, “Debt-Gorged British Start to Worry That Party Is Ending,” The New York Times, March 22, 2008, Business section. 67 As of this writing, 6 percent Peter Gumbel, “The $915B Bomb in Consumers’ Wallets,” Fortune, October 30, 2007. 68 But credit-rating agencies Mark Pittman, “Moody’s, S&P Defer Cuts on AAA Subprime, Hiding Loss,” Bloomberg.com, posted on March 11, 2008, http://wwwbloomberg.com/apps/news?pid=20601109&sid=aRLWzHsF16lY&refer=home (accessed March 20, 2008). 68 Goldman Sachs and other Ben Stein, “Tattered Standard of Duty on Wall Street,” The New York Times, December 23, 2007, Business section. 69 Thirty-nine percent of Americans “30% of Recent U.S. Homebuyers Have Negative Equity: Report,” CBC News, posted on February 12, 2008, www.cbc.ca/money/story/2008/ 02/12/homeequity.html (accessed February 14, 2008). 70 Mr. Greenspan and the federal government Edmund L. Andrews, “Fed and Regulators Shrugged as the Subprime Crisis Spread,” The New York Times, December 18, 2007, front page. 71 While Goldman Sachs was underwriting The Daily Reckoning website has the best narrative accounts of Goldman Sachs’s short-selling strategy during the subprime-mortgage meltdown: Adrian Ash, “Goldman Sachs Escaped Subprime Collapse by Selling Subprime Bonds Short,” Daily Reckoning, October 19, 2007, http://www.dailyreckoning.com.au/goldman-sachs-2/2007/10/19. 71 For help predicting the extent Gregory Zuckerman covered the Paulson-Greenspan relationship for The Wall Street Journal.

Investment: A History by Norton Reamer, Jesse Downing

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activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Berlin Wall, Bernie Madoff, break the buck, Brownian motion, buttonwood tree, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, Gordon Gekko, Henri Poincaré, high net worth, index fund, information asymmetry, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, means of production, Menlo Park, merger arbitrage, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Network effects, new economy, Nick Leeson, Own Your Own Home, Paul Samuelson, pension reform, Ponzi scheme, price mechanism, principal–agent problem, profit maximization, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sand Hill Road, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, survivorship bias, technology bubble, The Wealth of Nations by Adam Smith, time value of money, too big to fail, transaction costs, underbanked, Vanguard fund, working poor, yield curve

The second is that regulators may be in a position where they hope that the insolvency is transitory. In other words, when the assets of the bank are studied, it may be that there is negative equity in the company but regulators believe there is a good chance of asset reflation that returns the institution to solvency in the near future. Simon Johnson, former chief economist at the IMF, makes the point that the experience of many banks in the crisis was, in fact, an issue of solvency but that many hoped that asset prices would rise again to reverse the issue.47 As such, regulators will be forced to think through the question of solvency based on liquidation value as well as potentially transitory insolvency for banks that have slightly negative equity but have a chance of becoming positive in an improved fiscal environment. One of the most promising ways of providing more stability to the banking system was the Volcker Rule, named after Paul Volcker, a previous chairman of the Federal Reserve.


pages: 160 words: 46,449

The Extreme Centre: A Warning by Tariq Ali

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Affordable Care Act / Obamacare, Berlin Wall, bonus culture, BRICs, British Empire, centre right, deindustrialization, Edward Snowden, Fall of the Berlin Wall, financial deregulation, first-past-the-post, full employment, labour market flexibility, land reform, light touch regulation, means of production, Mikhail Gorbachev, Monroe Doctrine, mortgage debt, negative equity, Neil Kinnock, North Sea oil, obamacare, offshore financial centre, popular capitalism, reserve currency, Ronald Reagan, South China Sea, The Chicago School, The Wealth of Nations by Adam Smith, trade route, trickle-down economics, Washington Consensus, Westphalian system, Wolfgang Streeck

Individual greed was beginning to turn to anger as people realized that they had been cheated (many had believed that Blair needed to make concessions in order to win and that once victory had been achieved it would be back to traditional social democracy). Nothing was being done to alleviate their suffering. New Labour enthusiasts do not like to be reminded that between 1990 and 1996, a million people lost their homes through repossession by the mortgage companies, while 390,000 homes, once publicly owned, were seized by those companies. Come 2009 almost one million properties were estimated to be in ‘negative equity’: the homeowners had paid too much for them in the first instance and could not get their money back. Thatcher had resolved to make Britain a nation of small businesses. This was the much vaunted ‘popular capitalism’. Yet by 1997, the year of Labour’s victory, personal bankruptcies had ‘stabilized’ at 22,000 a year; 30,000 companies had become insolvent between 1990 and 1997. The ‘flexible labour market’ so beloved by Thatcher, Blair, and the transnationals had, in reality, made unemployment a mainstream experience.


pages: 267 words: 71,123

End This Depression Now! by Paul Krugman

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airline deregulation, Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, capital asset pricing model, Carmen Reinhart, centre right, correlation does not imply causation, credit crunch, Credit Default Swap, currency manipulation / currency intervention, debt deflation, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, full employment, German hyperinflation, Gordon Gekko, Hyman Minsky, income inequality, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low skilled workers, Mark Zuckerberg, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, Paul Samuelson, price stability, quantitative easing, rent-seeking, Robert Gordon, Ronald Reagan, Upton Sinclair, We are the 99%, working poor, Works Progress Administration

For the depressed economy has led to depressed interest rates, including mortgage rates: conventional mortgages taken out at the height of the mortgage boom often had rates above 6 percent, but those rates are now below 4 percent. Ordinarily, homeowners would take advantage of this fall in rates to refinance, reducing their interest payments and freeing up funds that could be spent on other things, boosting the economy. But the legacy of the bubble is a large number of homeowners with very little equity in their homes, or in quite a few cases negative equity—their mortgages are larger than the market value of their houses. And in general lenders won’t approve a refinancing unless the borrower has sufficient home equity or is able to put up an additional down payment. The solution would seem to be obvious: find a way to waive or at least soften these rules. And the Obama administration has in fact had a program, the Home Affordable Refinance Program, with that goal.


pages: 183 words: 17,571

Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

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banking crisis, banks create money, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, labor-force participation, labour market flexibility, light touch regulation, liquidity trap, London Interbank Offered Rate, lump of labour, market bubble, market clearing, Martin Wolf, means of production, mobile money, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Ponzi scheme, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, seigniorage, shareholder value, Silicon Valley, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra, zero-sum game

The sum sought and eventually settled upon—over $20 billion—bears no resemblance to any demonstrable harm, but was intended to provide a source of funds to “keep people in their homes.” This raises a politically impossible-to-ask question: is it really good for financially distressed households to be kept in homes they can’t afford? The first requirement for a real estate market to recover is that it “clear”—that is, find a bottom at which qualified purchasers will emerge to pick up bargains. This means that the millions of “homeowners” who have zero or negative equity in the homes (so of course do not in any real sense own them) need to revert to being renters sooner or later. The politics of preventing this are irresistible and self-defeating in equal measure. We can confidently expect decades of litigation against the banking industry, some merited and some meritless, but none of it will make it easier to get a loan or buy a house. Broken Markets Dodd-Frank There is no scope in this book to examine in any detail Dodd-Frank, as the 848-page Wall Street Reform and Consumer Protection Act is known.


pages: 296 words: 76,284

The End of the Suburbs: Where the American Dream Is Moving by Leigh Gallagher

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Airbnb, big-box store, Burning Man, call centre, car-free, Celebration, Florida, clean water, collaborative consumption, Columbine, commoditize, crack epidemic, East Village, edge city, Edward Glaeser, extreme commuting, helicopter parent, Home mortgage interest deduction, housing crisis, Jane Jacobs, low skilled workers, Mark Zuckerberg, McMansion, Menlo Park, mortgage tax deduction, negative equity, New Urbanism, peak oil, Ponzi scheme, Richard Florida, Robert Shiller, Robert Shiller, Sand Hill Road, Seaside, Florida, Silicon Valley, Steve Jobs, Stewart Brand, the built environment, The Death and Life of Great American Cities, Tony Hsieh, transit-oriented development, upwardly mobile, urban planning, urban sprawl, Victor Gruen, walkable city, white flight, white picket fence, young professional, Zipcar

For more, see www.winstonchurchill.org. single-family housing starts . . . and new home sales each hit new lows: U.S. Census Bureau, new residential construction and sales monthly and annual data. prices that dropped 34 percent nationwide: S&P/Case-Shiller U.S. National Home Price Index, April 30, 2006, to January 31, 2012. here in February 2012: CoreLogic, number of residential properties in negative equity, first quarter, 2012. 312 million people: US Census Bureau, 2011, U.S. population estimate. builders erected: U.S. Census Bureau, new residential construction statistics. record amounts of farmland: American Farmland Trust, www.farmland.org. statistics and articles about the pain: Christopher Leinberger, “The Death of the Fringe Suburb,” New York Times, November 25, 2011; “Struggling in the Suburbs,” New York Times editorial page, July 7, 2012; Steve Yoder, “Housing Crisis Could End Suburbia as We Know It,” Fiscal Times, July 5, 2012.


pages: 598 words: 172,137

Who Stole the American Dream? by Hedrick Smith

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Affordable Care Act / Obamacare, Airbus A320, airline deregulation, anti-communist, asset allocation, banking crisis, Bonfire of the Vanities, British Empire, business process, clean water, cloud computing, collateralized debt obligation, collective bargaining, commoditize, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, David Brooks, Deng Xiaoping, desegregation, Double Irish / Dutch Sandwich, family office, full employment, global supply chain, Gordon Gekko, guest worker program, hiring and firing, housing crisis, Howard Zinn, income inequality, index fund, industrial cluster, informal economy, invisible hand, Joseph Schumpeter, Kenneth Rogoff, Kitchen Debate, knowledge economy, knowledge worker, laissez-faire capitalism, late fees, Long Term Capital Management, low cost carrier, manufacturing employment, market fundamentalism, Maui Hawaii, mega-rich, mortgage debt, negative equity, new economy, Occupy movement, Own Your Own Home, Paul Samuelson, Peter Thiel, Plutonomy: Buying Luxury, Explaining Global Imbalances, Ponzi scheme, Powell Memorandum, Ralph Nader, RAND corporation, Renaissance Technologies, reshoring, rising living standards, Robert Bork, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Steve Jobs, The Chicago School, The Spirit Level, too big to fail, transaction costs, transcontinental railway, union organizing, Unsafe at Any Speed, Vanguard fund, We are the 99%, women in the workforce, working poor, Y2K

Bush, remarks on home ownership, Atlanta, GA, June 17, 2002, http://​georgewbush-​whitehouse.​archives.​gov. 2 “I didn’t think I made enough money” Eliseo Guardado, interview, October 3, 2010. 3 “The banks are playing to brokers” Kathryn Keller, interview, August 9, 2010. 4 Even so, she got stung Bre Heller, interview, August 4, 2010. 5 “I am a victim” Bre Heller, email to Florida Attorney General’s Office, October 22, 2008. 6 Bre Heller figured her loan Heller, interview, August 4, 2010. 7 Was deep “under water” CoreLogic reported that 11.2 million homes, 24 percent of residential properties with mortgages, were in negative equity on March 31, 2010; CoreLogic, “Real Estate News and Trends: New Core-Logic Data Shows Decline in Negative Equity,” media alert, May 10, 2010, www.​corelogic.​com/​about-​us/​researchtrends/​asset_​upload_​file155_​1435.​pdf. 8 “Considering that I lost $250,000” Heller, interview, August 4, 2010. 9 The irony in that episode Robin Updike, “ ‘Friend of the Family’—Washington Mutual New TV Ads Focus on ‘The Little Guy,’ ” Seattle Times, September 3, 1991. 10 Killinger was warned in advance Lee Lannoye, interviews, August 27, 2010, and September 27, 2010.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

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accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial exclusion, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, German hyperinflation, Goldman Sachs: Vampire Squid, Hyman Minsky, illegal immigration, informal economy, interest rate swap, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liberal capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, negative equity, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer, peer-to-peer lending, Ponzi scheme, post scarcity, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative finance, remote working, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Satoshi Nakamoto, Scientific racism, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Veblen good, Wave and Pay, Westphalian system, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

The only “plan” for achieving this growth appears to be for the government to provide the banks with almost-interest-free credit so that they can lend while exploiting huge margins. This policy has nothing to do with growing the economy; it is a “financial rake-off.” Meanwhile, the Fed faces an interest rate quandary: if it keeps rates low, the financial sector will be forced to gamble to achieve the growth in asset values it needs; if rates rise, real estate values will fall and the banks and pension funds will be forced even further into negative equity. If Hudson is right, we ought to be witnessing the end of two myths. The first is about free markets. We cannot continue to believe that they are free when they support rent seeking rather than real GDP, reward banks for pushing junk mortgages, and use credit rating agencies to make predatory finance look like sound wealth creation. Free markets need to be protected from fraud and rent seeking.

Gox, 366, 367, 369 multitude, and money, 77, 268; and finance, 248; in Hardt and Negri, 238, 239, 246, 247–49, 351; versus society, 293; in Spinoza, 77 Mundell, Robert, 253 Munn, Nancy, 215 mutualism, 353, 354, 357, 360, 363, 372, 382 mutuality, 101 myth, 16–17, 47 Nakamoto, Satoshi, 364, 381, 382 Namecoin, 370n40 Nantes, 165 narrow banking, 133 nationalism, 240 nation-state, 8 natural money, 361 nature, 155, 185, 188, 189, 232, 311, 328; in Bashō, 331; in Bataille, 196; in Baudrillard, 196; in Benjamin, 331; versus civilization, 283; in Fromm, 334–35, 337; in Goethe, 331; immortality of, 141; irrationality of, 77n; in Marx, 58; in Nietzsche, 141, 154; in Polanyi, 280, 311; in Proudhon, 354; and sacrifice, 168; state of, 223; in Tennyson, 331 negative equity, 132 Negri, Antonio, 13, 77, 237–51, 293; on bare life, 249–50; on biopower, 239–40; on the commons, 249, 380; Commonwealth, 237, 245, 250; on desire, 241; Empire, 237, 250; on empire, 238–41, 260, 263; on finance, 249–50; on globalization, 237–38; on imperialism, 237–38; on money, 241–42, 244, 245–46, 250–1; on money and community, 250; Multitude, 237; on the multitude, 238, 239, 246, 247–49, 351; on reterritorialization, 241; on the society of control, 239–40; on sovereignty, 238, 239, 244, 245, 247; Time for Revolution, 266; on time, 251 neochartalism, 103, 106–11, 1, 12n, 254, 359.


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

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Affordable Care Act / Obamacare, bank run, banking crisis, Bernie Madoff, 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

In addition, most of the mortgages had provisions that the borrower’s payment would increase to at least the interest cost ($1,000) if the amount of the loan relative to the value of the house rose above a certain percentage, such as 95 percent. Of course, in a falling house-price environment, this provision magnified the problems. In southern California, for example, as house prices started to fall, the pick-a-payment mortgage borrowers were faced with significant percentage increases in their mortgage payments at the same time that their home values were collapsing. In addition, most of these borrowers had negative equity in their houses, that is, they owed more on the mortgage than the house was worth. They were already overleveraged relative to their income, so they had a double problem. Default rates for these borrowers (who typically were not subprime borrowers) have turned out to be extremely high. One of the reasons is the economic double leverage just described. The other reason, which may be more significant, is the psychology of the borrowers.


pages: 387 words: 105,250

The Caryatids by Bruce Sterling

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carbon footprint, clean water, failed state, impulse control, negative equity, new economy, nuclear winter, semantic web, sexual politics, social software, stem cell, supervolcano, urban renewal, Whole Earth Review

When the last generators failed and the last light winked out there was nothing human on the island, nothing but the cries of birds. John Montgomery Montalban clearly knew this dreadful subject very well, since he had made this careful pilgrimage to see the island’s worst ruins firsthand. The California real-estate mogul calmly assessed the drowned wreckage through his tinted spex. He told her it was “negative equity.” Montalban, her strange brother-in-law, was a Dispensation policy wonk. He was cram-full of crisp, net-gathered, due-diligence knowledge. He was tall and elegant and persuasively talkative, with wavy black hair, suntanned olive skin, and sharp, polished teeth: big Hollywood film-star teeth like elephant ivory. His floral tourist shirt, his outdoor sandals, his multipocketed tourist pants: they were rugged and yet scarily clean.


pages: 311 words: 94,732

The Rapture of the Nerds by Cory Doctorow, Charles Stross

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3D printing, Ayatollah Khomeini, butterfly effect, cognitive dissonance, combinatorial explosion, complexity theory, Credit Default Swap, dematerialisation, Drosophila, epigenetics, Extropian, gravity well, greed is good, haute couture, hive mind, margin call, negative equity, phenotype, Plutocrats, plutocrats, rent-seeking, Richard Feynman, Richard Feynman, telepresence, Turing machine, Turing test, union organizing

The djinni holds up a finger the size of a chipolata. It cocks its head this way and that, causing its topknot to flop from side to side, its expression blank. Huw remembers this gesture from “her” djinni, the meatspace cousin of this one, back in Tripoli—it’s hourglassing, timing out while it thinks. “Collection protocol,” he says. “639,219 is trying to foreclose on you. She argues that your debts are so huge, they put my whole sim into negative equity, which means that unless I turn you over, she owns my sim too. It looks like she’s bought into a financial engineering clade and laid a whole whack of side-bets on your repayment schedule, hedging the crap out of herself so she’ll come out ahead no matter what happens. Wonder where she found the sucker who’d take the other side of that contract?” He was muttering to himself now, all the while zipping around the tiny volume inside the lamp, chalking magic sigils over the doorways and scattering herbs and yarrow stalks in complex patterns.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

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accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, Kenneth Rogoff, labour market flexibility, light touch regulation, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, Plutocrats, plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, 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, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce, zero-sum game

But in the past, the selling generation has been smaller than the buying generation. This has allowed the elderly to realize their assets at a higher price than they bought them. But with more people in the retired category than in the peak earning age category, asset sales will drive prices down. That will be a great disappointment for the elderly, of course. But it will also be a problem for those of working age who have mortgages; more of them will end up in negative equity. Demand for housing as an investment (second homes, buy-to-let) will surely decline. Over the long term, one would expect the value of houses to rise in line with GDP. During the boom years, they rose considerably faster. So house prices will face a double whammy from the older generation’s asset sales. The natural rate of house price rises will slow, as GDP growth slows. And the average value of houses should, at least, fall back to its historic relationship with GDP, as the elderly fund their retirements.

I, Partridge: We Need to Talk About Alan by Steve Coogan

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call centre, Celtic Tiger, citation needed, cuban missile crisis, late fees, means of production, negative equity, University of East Anglia, young professional

Don’t get me wrong, I knew that there’d be the odd snide comment from people who think that a two-and-a-half-hour radio show five days a week is – I’m laughing as I write this – somehow a step down from presenting a half-hour TV talk show once a week (12.5 hours of weekly output, versus 0.5 hours). But there are idiots in all walks of life. No, I wasn’t worried about being welcomed back into the fold. Employees at a London station like LBC or Radio London or London FM might have been a bit sniffy about it, but people in Norwich are warmer-of-heart than their bitter London counterparts with their negative-equity and their stab wounds. No, I wasn’t worried about being welcomed back into the fold.142 I was fully prepared to be the big man and chat to each employee individually to ensure there were no hard feelings, so I made sure I sidled up to each member of the team – in the kitchenette, outside the lavs, jogging after them in the car park. I was making the effort and it paid off. At the end of each of these conversations, I said: ‘Right, point blank.


pages: 297 words: 91,141

Market Sense and Nonsense by Jack D. Schwager

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3Com Palm IPO, asset allocation, Bernie Madoff, Brownian motion, collateralized debt obligation, commodity trading advisor, computerized trading, conceptual framework, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, fixed income, high net worth, implied volatility, index arbitrage, index fund, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, market fundamentalism, merger arbitrage, negative equity, pattern recognition, performance metric, pets.com, Ponzi scheme, quantitative trading / quantitative finance, random walk, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, selection bias, Sharpe ratio, short selling, statistical arbitrage, statistical model, survivorship bias, transaction costs, two-sided market, value at risk, yield curve

But all else being equal, higher-risk investments should get proportionally smaller allocations. An equal allocation fund will tend to be more volatile as higher-risk holdings exert a disproportionate impact. In contrast, a risk-based allocation approach will mitigate portfolio volatility by holding proportionally smaller allocations in higher-risk investments. 8. Target a majority of positive months during negative equity months. If a fund of funds portfolio is intended to be used as a diversifier to traditional investments rather than just as a stand-alone investment, it should seek to be net profitable in the majority of bear market months. To enhance the likelihood of achieving this goal, seek managers who have been net profitable across the down market months that occurred during their track records. Correlation Matrix In comparing a portfolio of investments, it is highly useful to view correlations between the investments as a group rather than one pair at a time.


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

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asset-backed security, bank run, collateralized debt obligation, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, diversification, fixed income, high net worth, hiring and firing, if you build it, they will come, London Interbank Offered Rate, Long Term Capital Management, margin call, money market fund, moral hazard, mortgage debt, naked short selling, negative equity, new economy, Ronald Reagan, short selling, sovereign wealth fund, value at risk

The pain to so many people I know in the United States and abroad was horrific. People I knew well were selling their houses, changing their children’s schools, selling boats and SUVs. Even Joe Gregory had to sell his helicopter and his beachfront palace, and Dick Fuld’s wife was selling art. Staff members who had bought real estate at the top of the market were in desperate trouble in the negative equity trap. And the reputations of Dick and Joe took a merciless hammering, because everyone now knew the CEO should have accepted the $23-a-share offer from the Koreans, the one Hank Paulson had recommended all those months ago. And if not that, surely Fuld should have grabbed the $18-a-share offer later in the year. By now there were stories out in every financial publication that none of the Korean offers had even been taken before the board.


pages: 402 words: 110,972

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

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AI winter, algorithmic trading, asset allocation, banking crisis, barriers to entry, Big bang: deregulation of the City of London, butterfly effect, buttonwood tree, 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, Khan Academy, 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, Richard Stallman, 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 more due to the liquidity injections from the Federal Reserve, which has increased the size of its balance sheet by $800 billion relative to only a few months ago. This has nothing to do with the TARP and is an unsustainable situation. Some people have suggested that the larger banks will use the TARP equity injections to buy weaker banks. Doesn’t this solve the problem? Larger banks’ buying weaker banks just defers and worsens the problem. If the weaker bank is insolvent and has negative equity (likely), then the acquisition will just infect the balance sheet of the stronger bank (making it potentially insolvent). We will then be left with a more structurally important bank being at risk—a bank that is possibly considered too big to fail. Also, as the balance sheets are merged, asset values will become further muddled and opaque, which will only increase market uncertainty. Bottom line: this is akin to placing a burning match under a flammable carpet and pretending that it is not there.


pages: 613 words: 151,140

No Such Thing as Society by Andy McSmith

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anti-communist, Ayatollah Khomeini, Berlin Wall, Big bang: deregulation of the City of London, Bob Geldof, British Empire, Brixton riot, call centre, cuban missile crisis, Etonian, F. W. de Klerk, Farzad Bazoft, feminist movement, fixed income, Francis Fukuyama: the end of history, friendly fire, full employment, glass ceiling, God and Mammon, greed is good, illegal immigration, index card, John Bercow, liberal capitalism, light touch regulation, Live Aid, loadsamoney, long peace, means of production, Mikhail Gorbachev, mortgage debt, mutually assured destruction, negative equity, Neil Kinnock, North Sea oil, Northern Rock, old-boy network, popular capitalism, Right to Buy, Ronald Reagan, Rubik’s Cube, Sloane Ranger, South Sea Bubble, spread of share-ownership, strikebreaker, The Chicago School, union organizing, upwardly mobile, urban decay, Winter of Discontent, young professional

However, the Lawson boom, which made the government so popular and confident, and left the opposition floundering, proved to be unsustainable. After the fun came the long hangover. House prices, which went up and up until the 1 August deadline was reached, suddenly tumbled because everyone who had thought about buying their first home had now done so. Suddenly, young couples were introduced to a new and unpalatable phenomenon called ‘negative equity’, something that no one had ever experienced in the old days when building societies had refused to lend to anyone who had not saved up a substantial deposit on their first home. During 1988, many couples had borrowed 100 per cent of the cost of their first home, and as prices fell they owed more than their property was worth. To make it worse, all that spending money sloshing around in the economy had set off inflation.


pages: 545 words: 137,789

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

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Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Bretton Woods, British Empire, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

Between August 2007 and October 2008, according to Realty Trac, 936,439 homes were foreclosed on. An undetermined but significant number of mortgage holders left their homes willingly. Rather than continuing to make payments on loans that were now bigger than the properties’ values, they chose to hand over the keys. By the spring of 2008, according to Mark Zandi, of the Moody’s website Economy.com, about 8.5 million homeowners, or about one in seven mortgage holders, had “negative equity” in their homes, giving them an economic incentive to pack their bags and leave. Every time a homeowner did this, another property was left vacant, and the stock of unsold homes expanded, putting more pressure on sellers to reduce their prices. “The housing market was trapped in a self-reinforcing negative cycle,” Zandi noted. “This had occurred, briefly, in California and New England in the early 1990s but never in so many parts of the country.


pages: 504 words: 143,303

Why We Can't Afford the Rich by Andrew Sayer

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accounting loophole / creative accounting, Albert Einstein, asset-backed security, banking crisis, banks create money, basic income, Bretton Woods, British Empire, call centre, capital controls, carbon footprint, collective bargaining, corporate raider, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, declining real wages, deglobalization, deindustrialization, delayed gratification, demand response, don't be evil, Double Irish / Dutch Sandwich, en.wikipedia.org, Etonian, financial innovation, financial intermediation, Fractional reserve banking, full employment, G4S, Goldman Sachs: Vampire Squid, high net worth, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, Isaac Newton, James Dyson, job automation, Julian Assange, labour market flexibility, laissez-faire capitalism, land value tax, low skilled workers, Mark Zuckerberg, market fundamentalism, Martin Wolf, mass immigration, means of production, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, New Urbanism, Northern Rock, Occupy movement, offshore financial centre, oil shale / tar sands, patent troll, payday loans, Philip Mirowski, Plutocrats, plutocrats, popular capitalism, predatory finance, price stability, pushing on a string, quantitative easing, race to the bottom, rent-seeking, Ronald Reagan, shareholder value, short selling, sovereign wealth fund, Steve Jobs, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transfer pricing, trickle-down economics, universal basic income, unpaid internship, upwardly mobile, Washington Consensus, wealth creators, Winter of Discontent, working poor, Yom Kippur War, zero-sum game

But if too many others do this in the hope of realising their capital gains, it may swamp the market and send prices plummeting. The bubble can survive only as long as the number of houses actually up for sale remains smaller than the number of house hunters. But demand-side changes could burst the bubble too: it takes only a small disturbance, such as some house buyers losing their jobs, for the rising market to collapse. Some lose their homes, others end up finding themselves in ‘negative equity’ – with a house worth less than their debts but still having to repay them. Markets for assets, especially where credit plays a major role, are inherently unstable and prone to boom and bust cycles.108 How neoliberalism uses housing to support rentier interests Since neoliberalism took hold in Britain in the 1980s, governments have acted in ways that have produced massive house-price inflation and increases in unearned income for rentiers.

How I Escaped My Certain Fate by Stewart Lee

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carbon footprint, Etonian, illegal immigration, negative equity, quantitative easing

I thought about the prophecy that Malcy had just made, And wondered what exactly he’d been doing while away. If he really had the power that he seemed to think he did, Then having him as my opening act might not be ideal. If Malcy had stumbled upon some comic formulae That unleashed the energies he had described Then if I had to follow him I would surely die, And with it being Bangor I needed to do the time Agreed, or with the petrol and the rooms I’d be in negative equity. I went into the hotel bar to get a drink and steady my nerves, And then I remembered I wasn’t well enough. But as I sat there smoking I realised there were two options. Either Malcolm was a superbeing, or he’d just flipped and lost it. Tragically it seemed to me the second was most likely. I resolved to get through the gig tonight, Then have a think in the cold hard light Of day as to whether my childhood hero really was going to pay his way.


pages: 444 words: 151,136

Endless Money: The Moral Hazards of Socialism by William Baker, Addison Wiggin

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Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, Branko Milanovic, break the buck, Bretton Woods, BRICs, business climate, capital asset pricing model, commoditize, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crony capitalism, cuban missile crisis, currency manipulation / currency intervention, debt deflation, Elliott wave, en.wikipedia.org, Fall of the Berlin Wall, feminist movement, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, laissez-faire capitalism, land reform, liquidity trap, Long Term Capital Management, McMansion, mega-rich, money market fund, moral hazard, mortgage tax deduction, naked short selling, negative equity, offshore financial centre, Ponzi scheme, price stability, pushing on a string, quantitative easing, RAND corporation, rent control, reserve currency, riskless arbitrage, Ronald Reagan, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, The Great Moderation, the scientific method, time value of money, too big to fail, upwardly mobile, War on Poverty, Yogi Berra, young professional

When house prices ran up sharply between 2001 and 2007, homeowners extracted a staggering $8 trillion of equity from their homes, all a tax-free stream of cash, which is now quite material relative to the overall value of residential real estate ($20 trillion). $8 trillion is a lot, more than half a year’s GDP, and it distorted signals to businesses, which expanded and repurchased shares. Individuals saw the rising fortunes and bullishly invested in the stock market. Sadly this withdrawal closes the gap between financing and the now reduced value of properties. As of 2008 it left some one-third of all homes with negative equity. A report issued by Harvard University’s Joint Center for Housing Studies in July 2008 documented that even if interest rates fell by 1 percent, the median home price in 18 major metro areas would need to fall another 25 percent to return affordability to 2003 levels.15 Interestingly, the problem is not as acute for flyover country, because if rates fell that much nationwide, only a 2 percent adjustment in price would be necessary.


pages: 479 words: 113,510

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

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

The so-called shadow unemployment rate: “John Williams’ Shadow Government Statistics: Analysis Behind and Beyond Government Economic Reporting,” shadowstats.com, last updated September 2, 2016, www.shadowstats.com/alter nate_data/unemployment-charts. Proof: a third of all cars: Wolf Richter, “What Will Sink the US Auto Boom?,” wolfstreet.com, May 24, 2016, wolfstreet.com/2016/05/24/this-sinks-auto-boom-negative-equity-loan-to-value-ratio-used/. In five thousand years: Matt O’Brien, “It’s the Best Time in 5,000 Years to Get Loan,” Dallas Morning News, September 28, 2015. The percentage of U.S. adults: Justin McCarthy, “Just Over Half of Americans Own Stocks, Matching Record Low,” Gallup, April 20, 2016 www.gallup.com/poll/190883/half-americans-own-stocks-matching-record-low.aspx. Inflows into U.S. stock mutual funds: Deener, “Many Shun the Bull.”


pages: 741 words: 179,454

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

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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, 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, 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, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, labour market flexibility, 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, 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 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

More risky than prime but less risky than subprime, Alt A (Alternative A) mortgages were for borrowers who did not meet normal criteria. As lenders decreased standards, there were increases in SIVA (stated income verified assets) loans, where borrowers stated their income without proof, such as income or tax receipts, and NIVA (no income verified assets), loans where no proof of employment was required. Traditional mortgages provide 70–80 percent of appraised value. More aggressive LVRs, including negative equity loans, where the lender lent more than the value of the house, became available. In the UK one lender offered loans for 125 percent of the value of the property. In the United States undisclosed piggyback loans and silent second mortgages meant that by 2005 the median down payment for first-time home buyers was only 2 percent, with more than 40 percent of buyers not making any down payment at all.


pages: 829 words: 186,976

The Signal and the Noise: Why So Many Predictions Fail-But Some Don't by Nate Silver

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airport security, availability heuristic, Bayesian statistics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, big-box store, Black Swan, Broken windows theory, Carmen Reinhart, Claude Shannon: information theory, Climategate, Climatic Research Unit, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, computer age, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, Daniel Kahneman / Amos Tversky, diversification, Donald Trump, Edmond Halley, Edward Lorenz: Chaos theory, en.wikipedia.org, equity premium, Eugene Fama: efficient market hypothesis, everywhere but in the productivity statistics, fear of failure, Fellow of the Royal Society, Freestyle chess, fudge factor, George Akerlof, haute cuisine, Henri Poincaré, high batting average, housing crisis, income per capita, index fund, Intergovernmental Panel on Climate Change (IPCC), Internet Archive, invention of the printing press, invisible hand, Isaac Newton, James Watt: steam engine, John Nash: game theory, John von Neumann, Kenneth Rogoff, knowledge economy, locking in a profit, Loma Prieta earthquake, market bubble, Mikhail Gorbachev, Moneyball by Michael Lewis explains big data, Monroe Doctrine, mortgage debt, Nate Silver, negative equity, new economy, Norbert Wiener, PageRank, pattern recognition, pets.com, Pierre-Simon Laplace, prediction markets, Productivity paradox, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Rodney Brooks, Ronald Reagan, Saturday Night Live, savings glut, security theater, short selling, Skype, statistical model, Steven Pinker, The Great Moderation, The Market for Lemons, the scientific method, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, transfer pricing, University of East Anglia, Watson beat the top human players on Jeopardy!, wikimedia commons

.* Likewise, it’s leverage when you borrow money to take out a mortgage—or when you borrow money to bet on a mortgage-backed security. Lehman Brothers, in 2007, had a leverage ratio of about 33 to 1,73 meaning that it had about $1 in capital for every $33 in financial positions that it held. This meant that if there was just a 3 to 4 percent decline in the value of its portfolio, Lehman Brothers would have negative equity and would potentially face bankruptcy.74 Lehman was not alone in being highly levered: the leverage ratio for other major U.S. banks was about 30 and had been increasing steadily in the run-up to the financial crisis.75 Although historical data on leverage ratios for U.S. banks is spotty, an analysis by the Bank of England on United Kingdom banks suggests that the overall degree of leverage in the system was either near its historical highs in 2007 or was perhaps altogether unprecedented.76 What particularly distinguished Lehman Brothers, however, was its voracious appetite for mortgage-backed securities.


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

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, break the buck, Carmen Reinhart, central bank independence, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversified portfolio, en.wikipedia.org, Exxon Valdez, financial deregulation, financial innovation, financial intermediation, fixed income, George Akerlof, Growth in a Time of Debt, income inequality, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Larry Wall, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nick Leeson, Northern Rock, open economy, peer-to-peer lending, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Satyajit Das, shareholder value, sovereign wealth fund, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra

New York: Portfolio Trade. Mehran, Hamid, and Anjan Thakor. 2010. “Bank Capital and Value in the Cross Section.” Review of Financial Studies 24 (4): 1019–1067. Mehrling, Perry. 2010. The New Lombard Street. Princeton, NJ: Princeton University Press. Meltzer, Allan. 2012. Why Capitalism? New York: Oxford University Press. Melzer, Brian T. 2012. “Mortgage Debt Overhang: Reduced Investment by Homeowners with Negative Equity.” Working paper. Northwestern University, Chicago. Merkley, Jeff, and Carl Levin. 2011. “The Dodd-Frank Act Restrictions on Proprietary Trading and Conflicts of Interest: New Tools to Address Evolving Threats.” Harvard Law and Policy Review 48: 515–553. Merton, Robert C. 1973. “Theory of Rational Option Pricing.” Bell Journal of Economics 4 (1): 141–183. Merton, Robert K. 1957. “The Self-Fulfilling Prophecy.”


pages: 892 words: 91,000

Valuation: Measuring and Managing the Value of Companies by Tim Koller, McKinsey, Company Inc., Marc Goedhart, David Wessels, Barbara Schwimmer, Franziska Manoury

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activist fund / activist shareholder / activist investor, air freight, barriers to entry, Basel III, BRICs, business climate, business process, capital asset pricing model, capital controls, Chuck Templeton: OpenTable, cloud computing, commoditize, compound rate of return, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, discounted cash flows, distributed generation, diversified portfolio, energy security, equity premium, fixed income, index fund, intangible asset, iterative process, Long Term Capital Management, market bubble, market friction, meta analysis, meta-analysis, Myron Scholes, negative equity, new economy, p-value, performance metric, Ponzi scheme, price anchoring, purchasing power parity, quantitative easing, risk/return, Robert Shiller, Robert Shiller, shareholder value, six sigma, sovereign wealth fund, speech recognition, survivorship bias, technology bubble, time value of money, too big to fail, transaction costs, transfer pricing, value at risk, yield curve, zero-coupon bond

When we convert accrual taxes to cash taxes, income is adjusted, and the difference becomes part of retained earnings, making it an equity equivalent.11 Exhibit 18.9 presents a reorganized balance sheet that includes the deferred-tax items for the current year from Exhibit 18.8. Equity equivalents, which are located in the equity section, include any accounts used to convert operating taxes to cash operating taxes, in this case, the accelerated depreciation DTL ($3,800 million) net of the warranty reserves DTA ($300 million). Since warranty reserves result in an operating DTA, they are treated as a negative equity equivalent (i.e., a reduction to retained earnings). With the exception of tax loss carryforwards and nondeductible intangibles, classify nonoperating 11 If mistakenly included as part of invested capital, operating DTAs and DTLs could be double-counted in free cash flow: once in NOPLAT via cash taxes and again when taking the change in invested capital. As discussed in Chapter 9, equity equivalents are not part of invested capital. 408 TAXES EXHIBIT 18.9 Reorganized Balance Sheet: Treatment of Deferred Taxes $ million Total funds invested: uses Operating assets Operating liabilities Invested capital without intangibles Total funds invested: sources 12,000 (3,000) 9,000 Short-term debt Long-term debt Unfunded pensions Debt and debt equivalents 300 1,800 2,200 4,300 3,500 Acquired intangibles 8,000 Less: Gross-up of intangibles (DTLs) (2,050) Operating DTLs, net operating DTAs1 Acquired intangibles, adjusted 5,950 Nonoperating DTLs, net nonoperating DTAs2 Owners' equity Equity and equity equivalents 950 6,800 11,250 Total funds invested 15,550 Invested capital with intangibles 14,950 Tax loss carry-forwards (DTAs) Total funds invested 600 15,550 1 Operating DTLs, net operating DTAs include accelerated depreciation and warranty reserves. 2 Nonoperating DTLs, net nonoperating DTAs include pension and postretirement benefits.


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A Classless Society: Britain in the 1990s by Alwyn W. Turner

Berlin Wall, Bob Geldof, British Empire, call centre, centre right, deindustrialization, demand response, Desert Island Discs, endogenous growth, Etonian, eurozone crisis, facts on the ground, Fall of the Berlin Wall, falling living standards, first-past-the-post, Francis Fukuyama: the end of history, friendly fire, full employment, global village, greed is good, inflation targeting, means of production, millennium bug, minimum wage unemployment, moral panic, negative equity, Neil Kinnock, offshore financial centre, old-boy network, period drama, Ronald Reagan, sexual politics, South Sea Bubble, Stephen Hawking, upwardly mobile, Winter of Discontent, women in the workforce

This time it was not just manufacturing that took the brunt of the slump, but commercial construction and the financial services industry, as the boom of the late 1980s juddered to a halt. Some forty million square feet of office space were said to be lying unoccupied in London, and even estate agents – those great symbols of the Thatcherite high noon – were suffering. The huge rises in house prices in affluent parts of the South went into reverse, provoking a wave of repossessions by mortgage companies and leaving many mired in a hitherto unknown state called negative equity, whereby the amount they owed exceeded their homes’ market valuations. ‘The politics of the property-owning democracy had come temporarily unstuck,’ admitted Michael Heseltine in later years, and for many who had bought into the dream, the comedown was especially bitter. Disillusion was everywhere apparent, as Major, a longstanding fan of Chelsea Football Club, discovered in late 1991 when he met Vinnie Jones, the club’s hard-man midfielder who also happened to be a Tory supporter.

Great Britain by David Else, Fionn Davenport

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active transport: walking or cycling, Albert Einstein, Beeching cuts, British Empire, call centre, car-free, carbon footprint, clean water, colonial rule, Columbine, congestion charging, credit crunch, David Attenborough, Etonian, food miles, glass ceiling, global village, haute cuisine, illegal immigration, Isaac Newton, James Watt: steam engine, land reform, Livingstone, I presume, Mahatma Gandhi, mass immigration, mega-rich, negative equity, new economy, North Sea oil, Northern Rock, offshore financial centre, period drama, place-making, Skype, Sloane Ranger, South of Market, San Francisco, Stephen Hawking, the market place, trade route, transatlantic slave trade, transatlantic slave trade, upwardly mobile, urban planning, urban renewal, urban sprawl, Winter of Discontent

But at the time of going to press, Britain was under a cloud in more ways than one, with recession looming on the horizon. The global credit crunch that began in late 2007 has seen interest rates rise, mortgages dry up and house prices tumble – possibly by as much as 30% by 2010. Those who bought into the get-rich-quick, property-owning dream in the last few years are feeling the clammy grip of negative equity, and tens of thousands of homes are being repossessed. * * * FAST FACTS Population: 59 million Area: 88,500 sq miles (230,000 sq km) Inflation: 5.2% (October 2008) Unemployment: 5.7% (August 2008) Head of State: Queen Elizabeth II Per capita GNP: approximately £23,500 (US$41,000) Average annual rainfall in southeast England: 550mm Average annual rainfall in northwest Highlands: 3000mm Male life expectancy (posh part of Glasgow): 82 Male life expectancy (poor part of Glasgow): 54 * * * The economic crisis has seen a backlash against the investment bankers, chief executives and hedge fund managers whose actions are seen by many as the cause of the credit crunch – ordinary people suffer while the ‘fat cats’ walk away with millions in their pockets.