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Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe by Gillian Tett
accounting loophole / creative accounting, asset-backed security, bank run, banking crisis, Black-Scholes formula, Blythe Masters, break the buck, Bretton Woods, business climate, business cycle, buy and hold, collateralized debt obligation, commoditize, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, easy for humans, difficult for computers, financial innovation, fixed income, housing crisis, interest rate derivative, interest rate swap, Kickstarter, locking in a profit, Long Term Capital Management, McMansion, money market fund, mortgage debt, North Sea oil, Northern Rock, Renaissance Technologies, risk tolerance, Robert Shiller, Robert Shiller, Satyajit Das, short selling, sovereign wealth fund, statistical model, The Great Moderation, too big to fail, value at risk, yield curve
“What we think of as the traditional hedge fund will shrink”: Freeland, Chrystia, and MacIntosh, Julie, “View from the Top—Andrew Feldstein, Chief Executive of BlueMountain Capital,” Financial Times (December 19, 2008). One British newspaper dubbed her the woman: Teather, David, “Blythe Masters: The Woman Who Built Financial ‘Weapon of Mass Destruction,’” The Guardian (September 20, 2008). Angry postings on the internet: see http://www.blogher.com/blame-game-global-financial-collapse-fingers-are-pointing-one-woman-blythe-masters#comments; http://zionistgoldreport.wordpress.com/2008/11/10/scam-artist-blythe-masters-speaks. When she addressed a meeting of SIFMA in New York in late 2008: Masters, Blythe, opening comments; “Through the Turmoil,” Address to SIFMA annual meeting, New York City, October 28, 2008, at http://events.sifma.org/2008/292/event.aspx?
Morgan’s international tradition, Demchak also recruited a clutch of non-Americans to his cause, some of whom were officially placed in the IDM team, while others were merely affiliated. One of those was Krishna Varikooty, a diligent young Indian, who was a talented mathematical modeler. Demchak would come to respect Varikooty deeply, impressed not only by his quantitative skills but also by his strong ethics and stubborn stance when fighting for something he believed to be right. “Krishna is like my conscience!” Demchak liked to joke. A particularly notable hire was Blythe Masters, a young British woman. She was a pretty blonde with a slim frame and porcelain face, who spoke with a so-called BBC accent. She had grown up in Kent, a corner of southern Britain so verdant that it’s dubbed “the garden of England,” where she studied at a prestigious private school and developed an abiding passion for horseback riding. From an early age, she displayed a stubborn, driven streak, which helped her to win a coveted place to study economics at Cambridge University.
Moreover, the team knew that if they “cracked” the credit derivatives puzzle, they would solve a big problem for the bank, which would win them considerable acclaim, thereby boosting their careers. “They say necessity is the mother of invention,” Feldstein later said, smiling. “In the case of credit derivatives, we all knew there was a real need, a problem that had to be solved. So we all looked for ways to do that.” Blythe Masters fervently hunted for a way to make credit derivatives work, and eventually she spotted an opportunity at Exxon. In 1993, after Exxon was threatened with a $5 billion fine as a result of the Valdez oil tanker spill, the company had taken out a $4.8 billion credit line from J.P. Morgan and Barclays. When Exxon first asked for the credit line—which is a commitment to provide a loan, if needed—J.P.
Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World by Don Tapscott, Alex Tapscott
Airbnb, altcoin, asset-backed security, autonomous vehicles, barriers to entry, bitcoin, blockchain, Blythe Masters, Bretton Woods, business process, buy and hold, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, clean water, cloud computing, cognitive dissonance, commoditize, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, crowdsourcing, cryptocurrency, disintermediation, disruptive innovation, distributed ledger, Donald Trump, double entry bookkeeping, Edward Snowden, Elon Musk, Erik Brynjolfsson, Ethereum, ethereum blockchain, failed state, fiat currency, financial innovation, Firefox, first square of the chessboard, first square of the chessboard / second half of the chessboard, future of work, Galaxy Zoo, George Gilder, glass ceiling, Google bus, Hernando de Soto, income inequality, informal economy, information asymmetry, intangible asset, interest rate swap, Internet of things, Jeff Bezos, jimmy wales, Kickstarter, knowledge worker, Kodak vs Instagram, Lean Startup, litecoin, Lyft, M-Pesa, Marc Andreessen, Mark Zuckerberg, Marshall McLuhan, means of production, microcredit, mobile money, money market fund, Network effects, new economy, Oculus Rift, off grid, pattern recognition, peer-to-peer, peer-to-peer lending, peer-to-peer model, performance metric, Peter Thiel, planetary scale, Ponzi scheme, prediction markets, price mechanism, Productivity paradox, QR code, quantitative easing, ransomware, Ray Kurzweil, renewable energy credits, rent-seeking, ride hailing / ride sharing, Ronald Coase, Ronald Reagan, Satoshi Nakamoto, Second Machine Age, seigniorage, self-driving car, sharing economy, Silicon Valley, Skype, smart contracts, smart grid, social graph, social intelligence, social software, standardized shipping container, Stephen Hawking, Steve Jobs, Steve Wozniak, Stewart Brand, supply-chain management, TaskRabbit, The Fortune at the Bottom of the Pyramid, The Nature of the Firm, The Wisdom of Crowds, transaction costs, Turing complete, Turing test, Uber and Lyft, uber lyft, unbanked and underbanked, underbanked, unorthodox policies, wealth creators, X Prize, Y2K, Zipcar
Joseph Stiglitz, “Lessons from the Global Financial Crisis,” revised version of a lecture presented at Seoul National University, October 27, 2009. 12. www.finextra.com/finextra-downloads/newsdocs/The%20Fintech%202%200%20Paper.pdf. 13. www.bloomberg.com/news/articles/2015-07-22/the-blockchain-revolution-gets-endorsement-in-wall-street-survey. 14. www.swift.com/assets/swift_com/documents/about_swift/SIF_201501.pdf. 15. https://lightning.network/. 16. Interview with Chris Larsen, July 27, 2015. 17. Interview with Austin Hill, July 22, 2015. 18. Interview with Blythe Masters, July 27, 2015. 19. Ibid. 20. Ibid. 21. Ibid. 22. https://bitcoinmagazine.com/21007/nasdaq-selects-bitcoin-startup-chain-run-pilot-private-market-arm/. 23. Interview with Austin Hill, July 22, 2015. 24. July 2015 by Greenwich Associates; www.bloomberg.com/news/articles/2015-07-22/the-blockchain-revolution-gets-endorsement-in-wall-street-survey. 25. Blythe Masters, from Exponential Finance keynote presentation: www.youtube.com/watch?v=PZ6WR2R1MnM. 26. https://bitcoinmagazine.com/21007/nasdaq-selects-bitcoin-startup-chain-run-pilot-private-market-arm/. 27.
—Dave McKay, President and CEO, Royal Bank of Canada “Deconstructs the promise and peril of the blockchain in a way that is at once accessible and erudite. Blockchain Revolution gives readers a privileged sneak peak at the future.” —Alec Ross, author, The Industries of the Future “If ever there was a topic for demystification, blockchain is it. Together, the Tapscotts have achieved this comprehensively and in doing so have captured the excitement, the potential, and the importance of this topic to everyone.” —Blythe Masters, CEO, Digital Asset Holdings “This is a book with the predictive quality of Orwell’s 1984 and the vision of Elon Musk. Read it or become extinct.” —Tim Draper, Founder, Draper Associates, DFJ, and Draper University “Blockchain is a radical technological wave and, as he has done so often, Tapscott is out there, now with son Alex, surfing at dawn. It’s quite a ride.” —Yochai Benkler, Berkman Professor of Entrepreneurial Legal Studies, Harvard Law School “If you work in business or government, you need to understand the blockchain revolution.
Clippinger, CEO, ID3, Research Scientist, MIT Media Lab Bram Cohen, Creator, BitTorrent Amy Cortese, Journalist, Founder, Locavest J-F Courville, Chief Operating Officer, RBC Wealth Management Patrick Deegan, CTO, Personal BlackBox Primavera De Filippi, Permanent Researcher, CNRS and Faculty Associate at the Berkman Center for Internet and Society at Harvard Law School Hernando de Soto, President, Institute for Liberty and Democracy Peronet Despeignes, Special Ops, Augur Jacob Dienelt, Blockchain Architect and CFO, itBit and Factom Joel Dietz, Swarm Corp Helen Disney, (formerly) Bitcoin Foundation Adam Draper, CEO and Founder, Boost VC Timothy Cook Draper, Venture Capitalist; Founder, Draper Fisher Jurvetson Andrew Dudley, Founder and CEO, Earth Observation Joshua Fairfield, Professor of Law, Washington and Lee University Grant Fondo, Partner, Securities Litigation and White Collar Defense Group, Privacy and Data Security Practice, Goodwin Procter LLP Brian Forde, Former Senior Adviser, The White House; Director, Digital Currency, MIT Media Lab Mike Gault, CEO, Guardtime George Gilder, Founder and Partner, Gilder Technology Fund Geoff Gordon, CEO, Vogogo Vinay Gupta, Release Coordinator, Ethereum James Hazard, Founder, Common Accord Imogen Heap, Grammy-Winning Musician and Songwriter Mike Hearn, Former Google Engineer, Vinumeris/Lighthouse Austin Hill, Cofounder and Chief Instigator, Blockstream Toomas Hendrik Ilves, President of Estonia Joichi Ito, Director, MIT Media Lab Eric Jennings, Cofounder and CEO, Filament Izabella Kaminska, Financial Reporter, Financial Times Paul Kemp-Robertson, Cofounder and Editorial Director, Contagious Communications Andrew Keys, Consensus Systems Joyce Kim, Executive Director, Stellar Development Foundation Peter Kirby, CEO and Cofounder, Factom Joey Krug, Core Developer, Augur Haluk Kulin, CEO, Personal BlackBox Chris Larsen, CEO, Ripple Labs Benjamin Lawsky, Former Superintendent of Financial Services for the State of New York; CEO, The Lawsky Group Charlie Lee, Creator, CTO; Former Engineering Manager, Litecoin Matthew Leibowitz, Partner, Plaza Ventures Vinny Lingham, CEO, Gyft Juan Llanos, EVP of Strategic Partnerships and Chief Transparency Officer, Bitreserve.org Joseph Lubin, CEO, Consensus Systems Adam Ludwin, Founder, Chain.com Christian Lundkvist, Balanc3 David McKay, President and Chief Executive Officer, RBC Janna McManus, Global PR Director, BitFury Mickey McManus, Maya Institute Jesse McWaters, Financial Innovation Specialist, World Economic Forum Blythe Masters, CEO, Digital Asset Holdings Alistair Mitchell, Managing Partner, Generation Ventures Carlos Moreira, Founder, Chairman, and CEO, WISeKey Tom Mornini, Founder and Customer Advocate, Subledger Ethan Nadelmann, Executive Director, Drug Policy Alliance Adam Nanjee, Head of Fintech Cluster, MaRS Daniel Neis, CEO and Cofounder, KOINA Kelly Olson, New Business Initiative, Intel Steve Omohundro, President, Self-Aware Systems Jim Orlando, Managing Director, OMERS Ventures Lawrence Orsini, Cofounder and Principal, LO3 Energy Paul Pacifico, CEO, Featured Artists Coalition Jose Pagliery, Staff Reporter, CNNMoney Stephen Pair, Cofounder and CEO, BitPay Inc.
Sabotage: The Financial System's Nasty Business by Anastasia Nesvetailova, Ronen Palan
algorithmic trading, bank run, banking crisis, barriers to entry, Basel III, Bernie Sanders, big-box store, bitcoin, Black-Scholes formula, blockchain, Blythe Masters, bonus culture, Bretton Woods, business process, collateralized debt obligation, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, distributed ledger, diversification, Double Irish / Dutch Sandwich, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, financial repression, fixed income, gig economy, Gordon Gekko, high net worth, Hyman Minsky, information asymmetry, interest rate derivative, interest rate swap, Joseph Schumpeter, Kenneth Arrow, litecoin, London Interbank Offered Rate, London Whale, Long Term Capital Management, margin call, market fundamentalism, mortgage debt, new economy, Northern Rock, offshore financial centre, Paul Samuelson, peer-to-peer lending, plutocrats, Plutocrats, Ponzi scheme, price mechanism, regulatory arbitrage, rent-seeking, reserve currency, Ross Ulbricht, shareholder value, short selling, smart contracts, sovereign wealth fund, Thorstein Veblen, too big to fail
In 2017 the volume of MBSs in the US bond market alone was just over $9tn, the second-largest segment of the bond market after US Treasuries.17 MBSs continue to be widely recognized as safe investables by institutions around the world. Securitization, too, remains standard practice in the financial industry, with the European Union actively encouraging the creation of the European capital market, with ‘high quality and liquid’ securitization deemed its main driver. BLYTHE MASTERS AND THE CDS18 Shortly after the revolutions launched by Milken and Ranieri, another visionary in another legendary institution would come across another opportunity. Blythe Masters and her team at J. P. Morgan would create and finesse a product which would spur the credit boom of 2002–7 and, employed as a weapon of sabotage, eventually precipitate its implosion. Traditionally, banks made money by issuing loans to the corporate sector. The problem, however, was that because of the risk of default of the borrowers, banks were required to hold on to capital as a reserve, to hedge against that risk.
The problem, however, was that because of the risk of default of the borrowers, banks were required to hold on to capital as a reserve, to hedge against that risk. If only banks could find a way to get rid of the risk of a default by a corporate client! This would free a lot of capital which could then be directed to other ventures and types of lending. Masters’ idea was ingenious and simple: why not insure the bank against those risks and pass them on to the insurer, thus freeing capital for other investment? Blythe Masters and her team at J. P. Morgan set off to seek such an insurer, and soon found one. American Insurance Group (AIG) was happy to provide such an insurance to J. P. Morgan, for a fee. The deal was formalized in a financial instrument which would later become known as a credit default swap (CDS). The formula devised at J. P. Morgan proved highly popular. Soon other banks and hedge funds joined the business of selling and buying the CDSs.
Weeks later AIG told investors that ‘the vast majority’ of taxpayer funds were simply ‘passed through AIG to other financial institutions’ as it unwound transactions. Between September and December 2008 more than $50bn of payments went to counterparty banks. Goldman and Deutsche Bank AG were the largest trading parties, each receiving about $6bn.26 Could the original team at J. P. Morgan have envisaged the fall of their main insurer and a system-wide application of the security as tool of sabotage? Even in the wake of the crisis Blythe Masters would continue to defend her innovation, admitting nonetheless that ‘tools that transfer risk can also increase systemic risk if major counterparties fail to manage their exposures properly’.27 But clearly both in the design of the security itself – misnamed as a derivative – and in the way it was adopted by the market, the CDSs were used extensively to sabotage parties by allowing the banks to gamble on companies’ failure.
All the Devils Are Here by Bethany McLean
Asian financial crisis, asset-backed security, bank run, Black-Scholes formula, Blythe Masters, break the buck, buy and hold, call centre, collateralized debt obligation, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Exxon Valdez, fear of failure, financial innovation, fixed income, high net worth, Home mortgage interest deduction, interest rate swap, laissez-faire capitalism, Long Term Capital Management, margin call, market bubble, market fundamentalism, Maui Hawaii, money market fund, moral hazard, mortgage debt, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative trading / quantitative ﬁnance, race to the bottom, risk/return, Ronald Reagan, Rosa Parks, shareholder value, short selling, South Sea Bubble, statistical model, telemarketer, too big to fail, value at risk, zero-sum game
Fabrice Tourre Mortgage trader under Sparks. Later named as a defendant in the SEC’s suit against the company. David Viniar CFO. J.P. Morgan Mark Brickell Lobbyist who fought derivatives regulation on behalf of J.P. Morgan and the International Swaps and Derivatives Association. President of ISDA from 1988 to 1992. Till Guldimann Executive who led the development of Value at Risk modeling and shared VaR with other banks. Blythe Masters Derivatives saleswoman who put together J.P. Morgan’s first credit default swap in 1994. Sir Dennis Weatherstone Chairman and CEO from 1990 to 1994. Merrill Lynch Michael Blum Executive charged with purchasing a mortgage company, First Franklin, in 2006. Served on Ownit’s board. John Breit Longtime Merrill Lynch risk manager who specialized in evaluating derivatives risk. Ahmass Fakahany Co-president and COO under CEO Stanley O’Neal.
This put the bank in exactly the kind of position it didn’t want to be in. It couldn’t say no, because that would alienate Exxon. Yet the loan wasn’t going to make the bank much money, and it was going to tie up hundreds of millions of dollars in capital that would have to be placed in reserve. The woman who came up with the idea of using a credit default swap to deal with this situation was Blythe Masters. Though she was not the head of the derivatives group, she was a key member of the team, a superb saleswoman who in later years would become the person most closely associated with J.P. Morgan’s entrée into swaps. After Exxon drew down its $4.8 billion line of credit, she convinced the European Bank for Reconstruction and Development (EBRD) in London to participate in a swap deal where it assumed the default risk for the loan, with J.P.
Second, if a tradable market existed for credit derivatives, the market itself could be used to establish a company’s default risk. This would give J.P. Morgan a better way of measuring the risks in its own commercial loan portfolio, while also giving speculators the means to bet on the possibility of a company’s default, even if they had no economic interest in the company. In the late 1990s, the bank—again, with Blythe Masters leading the way—found a way to create a credit product that investors loved. It did so by ingeniously combining credit derivatives with securitization. Instead of having a credit default swap reference a single company like Exxon, J.P. Morgan bundled together a large, diversified basket of credit derivatives that referenced hundreds of corporate credits. It was different from other kinds of securitizations in one critical way.
I.O.U.: Why Everyone Owes Everyone and No One Can Pay by John Lanchester
asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black-Scholes formula, Blythe Masters, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, George Akerlof, greed is good, hedonic treadmill, hindsight bias, housing crisis, Hyman Minsky, intangible asset, interest rate swap, invisible hand, Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Kickstarter, laissez-faire capitalism, light touch regulation, liquidity trap, Long Term Capital Management, loss aversion, Martin Wolf, money market fund, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, new economy, Nick Leeson, Norman Mailer, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, South Sea Bubble, statistical model, The Great Moderation, the payments system, too big to fail, tulip mania, value at risk
For the bankers, that was a drag. It limited the amount of lending they could make, the amount of risk they could take on, and therefore the level of profit they could achieve. If they lent the money to Exxon, they would have to keep an amount equivalent to 8 percent of it in reserve, just sitting there, instead of going out into the markets and making more money. At which thought, a lightbulb went on. Blythe Masters, one of the Boca Raton swaps team, came up with the idea of selling the credit line to the European Bank for Reconstruction and Development, in return for a fee. So if Exxon asked for the money, the EBRD would cough it up—and in return, it would pocket a fee from J.P. Morgan for taking on the risk. Exxon would get its credit line, J.P. Morgan would get to honor its client relationship but also to keep its capital reserves intact for sexier activities, and EBRD would get the fees.
Morgan team, which had pretty much invented the entire CDS and CDO industry. They could see how profitable the new mortgage-backed versions of their CDOs were. But after taking a long, hard look at the new business, they took a pass. They simply didn’t see how the risks were being engineered down to a safe level. The other banks must be seeing some way of doing it which they couldn’t work out. Blythe Masters, the woman in charge of the Exxon Valdez deal and of selling the very first BISTRO bonds, and thus one of the creators of the entire CDS industry, was baffled by the CDO boom. “How are the other banks doing it?” she asked. “How are they making so much money?”3 According to Gillian Tett in Fool’s Gold, “she was so steeped in the ways of J.P. Morgan that it never occurred to her that the other banks might simply ignore all the risk controls J.P.
Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase by Duff McDonald
bank run, Blythe Masters, 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, G4S, housing crisis, interest rate swap, Jeff Bezos, John Meriwether, Kickstarter, laissez-faire capitalism, Long Term Capital Management, margin call, market bubble, money market fund, moral hazard, negative equity, Nelson Mandela, 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
Nearly five years later, in the midst of the credit crisis, the stock was treading water at $35 a share. “I didn’t say I’d eat my hat if it didn’t get to $100,” he recalls. “But that’s taken on a life of its own.” Sitting on a bookshelf in his office was an Australian leather hat under glass. Beneath it, a clock was counting down to zero, with only 150 days remaining—a gift from the JPMorgan Chase executive Blythe Masters. “That’s going to be hard to chew,” he laughs. Dimon stepped down from the board of Yum! Brands when he became president of JPMorgan Chase. At the time, corporate governance experts and the media had begun shining a spotlight on the issue of interlocking directorates—evidence of the clubbiness atop large American companies—and both Dimon and David Novak—the CEO of Yum!—decided they didn’t need the trouble.
The bank had suffered a large brain drain after the merger with Chase; according to one estimate, 80 of the top 100 people at the firm were gone within 18 months of the deal. But Black and Winters were rebuilding, and put together a revamped management team—hiring a trading standout, Matt Zames, from Credit Suisse; putting Carlos Hernandez in charge of equities; and moving the J.P. Morgan veteran Blythe Masters from the position of chief financial officer to overseeing commodities trading. They removed a number of management layers to enhance decision making and also revamped the company’s credit systems in the hope of more effectively controlling their exposures. Winters focused primarily on the company’s credit and trading businesses out of the London office, while Black oversaw investment banking efforts from New York.
He had been part of the J.P. Morgan team that had revolutionized credit derivatives in the late 1990s. The first innovation came to be known as a “credit default swap” (CDS). In looking for a way to reduce exposure to their client Exxon—which had recently tapped a multibillion-dollar credit line with the bank in anticipation of having to pay substantial fines for the Exxon Valdez’s oil spill—Winters’s colleague Blythe Masters had found another investor willing to insure the debt for the bank in exchange for an annual fee. In the process, J.P. Morgan was able to reduce its exposure to Exxon without having to sell the loan, thereby keeping client relations strong. (No corporate borrowers want to see their bank unloading their loans.) It was nothing short of revolutionary. What the J.P. Morgan team had done, writes Gillian Tett in Fool’s Gold, was to “overturn one of the fundamental rules of banking: that default risk is an inevitable liability of the business.”
Tailspin: The People and Forces Behind America's Fifty-Year Fall--And Those Fighting to Reverse It by Steven Brill
2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, activist fund / activist shareholder / activist investor, affirmative action, Affordable Care Act / Obamacare, airport security, American Society of Civil Engineers: Report Card, asset allocation, Bernie Madoff, Bernie Sanders, Blythe Masters, Bretton Woods, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, carried interest, clean water, collapse of Lehman Brothers, collective bargaining, computerized trading, corporate governance, corporate raider, corporate social responsibility, Credit Default Swap, currency manipulation / currency intervention, Donald Trump, ending welfare as we know it, failed state, financial deregulation, financial innovation, future of work, ghettoisation, Gordon Gekko, hiring and firing, Home mortgage interest deduction, immigration reform, income inequality, invention of radio, job automation, knowledge economy, knowledge worker, labor-force participation, laissez-faire capitalism, Mahatma Gandhi, Mark Zuckerberg, mortgage tax deduction, new economy, obamacare, old-boy network, paper trading, performance metric, post-work, Potemkin village, Powell Memorandum, quantitative hedge fund, Ralph Nader, ride hailing / ride sharing, Robert Bork, Robert Gordon, Robert Mercer, Ronald Reagan, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, telemarketer, too big to fail, trade liberalization, union organizing, Unsafe at Any Speed, War on Poverty, women in the workforce, working poor
INSURING AGAINST RECKLESS GAMBLES Two toxic ingredients that would be key factors in America’s tailspin had come together: A preoccupation with financial engineering aimed at enabling ever more aggressive betting on paper instruments had combined with still more engineering that allowed for those facilitating the bets to avoid accountability for the risks they were creating—risks whose consequences would ultimately be suffered far beyond the financial community. In fact, there would soon be a way for wary buyers of mortgage-backed securities to pass off their own risk completely. The financial engineering hero this time was Blythe Masters, a twenty-five-year-old, Cambridge-educated banker in JPMorgan’s London office. In 1994, Masters invented the credit default swap, or CDS.* A CDS is a derivative—a security that derives its value from the value of something else. For example, if Jones runs an airline and is worried that the price of $100 million worth of jet fuel will go up 10 percent or more next year, he might spend a million dollars to buy a derivative that gives him the right to buy the fuel next year at today’s price.
As explained, Ranieri’s introduction of securitization began a process by which investors who were buying his mortgage-backed securities, or MBSs, and were counting on borrowers not to default had no relation to those borrowers, much less any direct knowledge of their ability to pay or of the value of the home involved. And the banks or non-bank mortgage companies—a new industry that had emerged to make home loans from funds reaped by securitizing the mortgages they sold—did not have much incentive to worry about the loans they were making, because they were going to sell the mortgages in giant tranches to those investors. Blythe Masters then made it so that the MBS investors didn’t have to care either; they could buy her credit default swaps, which were sold by banks and AIG. Those selling the default swaps assumed they were taking in pure profit, because thousands of mortgages put together in one package had no chance of experiencing so many failures that the packages themselves would ever lose significant value requiring that this insurance be paid out.
They understand that worrying about carbon or income inequality or innovation is their responsibility and that, whether investors like it or not, the world is going to force that responsibility on them.” We should remember that the innovators of what became the short-term-obsessed, casino economy were not villains. With some exceptions, the world does not divide that simply into black and white. Joe Flom, his raider-clients, the stock buyback engineers, Lew Ranieri and Blythe Masters, even Angelo Mozilo, didn’t set out to do harm, let alone create a crash that cost America $20 trillion in lost gross domestic product and boosted the have-a-lots far above everyone else. Even those who broke the law didn’t wake up in the morning determined to destroy the economy so they could make money. They simply responded—many with trailblazing ingenuity—to the incentives put in front of them and the culture of the times.
The Truth Machine: The Blockchain and the Future of Everything by Paul Vigna, Michael J. Casey
3D printing, additive manufacturing, Airbnb, altcoin, Amazon Web Services, barriers to entry, basic income, Berlin Wall, Bernie Madoff, bitcoin, blockchain, blood diamonds, Blythe Masters, business process, buy and hold, carbon footprint, cashless society, cloud computing, computer age, computerized trading, conceptual framework, Credit Default Swap, crowdsourcing, cryptocurrency, cyber-physical system, dematerialisation, disintermediation, distributed ledger, Donald Trump, double entry bookkeeping, Edward Snowden, Elon Musk, Ethereum, ethereum blockchain, failed state, fault tolerance, fiat currency, financial innovation, financial intermediation, global supply chain, Hernando de Soto, hive mind, informal economy, intangible asset, Internet of things, Joi Ito, Kickstarter, linked data, litecoin, longitudinal study, Lyft, M-Pesa, Marc Andreessen, market clearing, mobile money, money: store of value / unit of account / medium of exchange, Network effects, off grid, pets.com, prediction markets, pre–internet, price mechanism, profit maximization, profit motive, ransomware, rent-seeking, RFID, ride hailing / ride sharing, Ross Ulbricht, Satoshi Nakamoto, self-driving car, sharing economy, Silicon Valley, smart contracts, smart meter, Snapchat, social web, software is eating the world, supply-chain management, Ted Nelson, the market place, too big to fail, trade route, transaction costs, Travis Kalanick, Turing complete, Uber and Lyft, uber lyft, unbanked and underbanked, underbanked, universal basic income, web of trust, zero-sum game
The non-finance corporate world is also getting engaged. Hyperledger is a distributed ledger/blockchain-design consortium looking to develop standardized, open-source versions of the technology for businesses to use in areas such as supply-chain management. Coordinated by the Linux Foundation, it brings together the likes of IBM, Cisco, Intel, and Digital Asset Holdings, a digital ledger startup led by former J.P. Morgan powerhouse Blythe Masters. One mark of the business world’s enthusiasm is seen in the trajectory of media company CoinDesk’s Consensus conference, the marquee annual event for businesses interested in blockchain technology. It went from a turnout of 600 at the inaugural conference in 2015 to 1,500 attendees in 2016 to 2,800 in 2017 with a further 10,500 registered viewers of an online livecast. The attendees in 2017 came from ninety-six countries, and a cross-section of more than ninety sponsors and exhibitors was broad enough to include consulting firm Deloitte, the research arm of Toyota, the Australian government’s trade office, and Cryptonomos, a startup marketplace for digital tokens.
The settlement time is also a factor in a financial crisis, and it contributed to the global panic of 2008. Uncertainty over whether counterparty institutions will make good on their promise to deliver either money or securities always gives investors pause. But when the market turns bearish, when fear outruns greed, that nervousness can prompt a cascade of risk-averting actions that evolve into a self-perpetuating process of wanton wealth destruction. This systemic risk problem is what drew Blythe Masters, one of the key figures behind blockchain innovation on Wall Street, into digital ledger technology; she joined Digital Asset Holdings, a blockchain service provider for the financial system’s back-office processing tasks, as CEO in 2014. Masters is best known for one of the most contentious financial innovations of our time, the credit default swap (CDS), a financial derivative contract in which one institution agrees to pay another if a particular bond or loan goes into default.
Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond: The Innovative Investor's Guide to Bitcoin and Beyond by Chris Burniske, Jack Tatar
Airbnb, altcoin, asset allocation, asset-backed security, autonomous vehicles, bitcoin, blockchain, Blythe Masters, business cycle, business process, buy and hold, capital controls, Carmen Reinhart, Clayton Christensen, clean water, cloud computing, collateralized debt obligation, commoditize, correlation coefficient, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, disintermediation, distributed ledger, diversification, diversified portfolio, Donald Trump, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, fiat currency, financial innovation, fixed income, George Gilder, Google Hangouts, high net worth, Jeff Bezos, Kenneth Rogoff, Kickstarter, Leonard Kleinrock, litecoin, Marc Andreessen, Mark Zuckerberg, market bubble, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, packet switching, passive investing, peer-to-peer, peer-to-peer lending, Peter Thiel, pets.com, Ponzi scheme, prediction markets, quantitative easing, RAND corporation, random walk, Renaissance Technologies, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ross Ulbricht, Satoshi Nakamoto, Sharpe ratio, Silicon Valley, Simon Singh, Skype, smart contracts, social web, South Sea Bubble, Steve Jobs, transaction costs, tulip mania, Turing complete, Uber for X, Vanguard fund, WikiLeaks, Y2K
At the Inside Bitcoins conference in April 2015,12 many longtime Bitcoiners commented on how many Wall Street suits were in attendance. While Bitcoin was still king, there were growing whispers of “blockchain not bitcoin,” which was heresy to Bitcoiners. The term blockchain, independent of Bitcoin, began to be used more widely in North America in the fall of 2015 when two prominent financial magazines catalyzed awareness of the concept. First, Bloomberg Markets published an article titled “Blythe Masters Tells Banks the Blockchain Changes Everything: The banker who helped give the world credit-default swaps wants to upend finance again—this time with the code that powers bitcoin.”13 In emphasizing “the code that powers bitcoin,” this article quietly questioned the need for the native asset, instead emphasizing the underlying technology. Masters was a well-known and respected figure in financial services, one that people associated with financial innovation.
iid=EL. 5. http://www.nytimes.com/2013/12/06/business/international/china-bars-banks-from-using-bitcoin.html. 6. https://www.fbi.gov/contact-us/field-offices/newyork/news/press-releases/ross-ulbricht-aka-dread-pirate-roberts-sentenced-in-manhattan-federal-court-to-life-in-prison. 7. https://www.theguardian.com/money/us-money-blog/2014/feb/25/bitcoin-mt-gox-scandal-reputation-crime. 8. http://www.bbc.com/news/technology-24371894. 9. Bitcoiner refers to an advocate of Bitcoin. 10. We’ll describe wallets in detail in Chapter 14. 11. http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q3digitalcurrenciesbitcoin1.pdf. 12. http://insidebitcoins.com/new-york/2015. 13. https://www.bloomberg.com/news/features/2015-09-01/blythe-masters-tells-banks-the-blockchain-changes-everything. 14. http://www.economist.com/news/leaders/21677198-technology-behind-bitcoin-could-transform-how-economy-works-trust-machine. 15. The computers are not technically miners because they are not minting any new assets and they are not paid directly for their work. 16. http://www.nyu.edu/econ/user/jovanovi/JovRousseauGPT.pdf. 17. http://www.gartner.com/newsroom/id/3412017. 18. http://www.gartner.com/technology/research/methodologies/hype-cycle.jsp.
Why Wall Street Matters by William D. Cohan
Apple II, asset-backed security, bank run, Bernie Sanders, Blythe Masters, bonus culture, break the buck, buttonwood tree, corporate governance, corporate raider, creative destruction, Credit Default Swap, Donald Trump, Exxon Valdez, financial innovation, financial repression, Fractional reserve banking, Gordon Gekko, greed is good, income inequality, Joseph Schumpeter, London Interbank Offered Rate, margin call, money market fund, moral hazard, Potemkin village, quantitative easing, secular stagnation, Snapchat, South Sea Bubble, Steve Jobs, Steve Wozniak, too big to fail, WikiLeaks
One of the final innovations to emerge from this period of remarkable financial alchemy came in 1994, at the still venerable, if not nearly so powerful as it once was, J.P. Morgan & Co. Exxon, a longtime client, wanted a $5 billion line of credit to cover potential liabilities related to the massive 1989 oil spill from the Exxon Valdez oil tanker in Prince William Sound, Alaska. The conundrum? The bank did not want to disappoint Exxon, but neither did it want to tie up so much capital in one marginally profitable, very risky loan. That’s when the British-born Blythe Masters, then twenty-five years old, came up with the idea of off-loading the risk of the loan to a third party, in exchange for a fee, thus skirting the regulatory requirement that J.P. Morgan tie up capital against the risk posed by the Exxon loan. In short order, a new industry was born: the buying and selling of risk in what became known as “credit default swaps,” a form of insurance policy that allowed creditors to buy insurance against the chance that a given loan or bond would default.
Attack of the 50 Foot Blockchain: Bitcoin, Blockchain, Ethereum & Smart Contracts by David Gerard
altcoin, Amazon Web Services, augmented reality, Bernie Madoff, bitcoin, blockchain, Blythe Masters, Bretton Woods, clean water, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, distributed ledger, Ethereum, ethereum blockchain, Extropian, fiat currency, financial innovation, Firefox, Flash crash, Fractional reserve banking, index fund, Internet Archive, Internet of things, Kickstarter, litecoin, M-Pesa, margin call, Network effects, peer-to-peer, Peter Thiel, pets.com, Ponzi scheme, Potemkin village, prediction markets, quantitative easing, RAND corporation, ransomware, Ray Kurzweil, Ross Ulbricht, Ruby on Rails, Satoshi Nakamoto, short selling, Silicon Valley, Silicon Valley ideology, Singularitarianism, slashdot, smart contracts, South Sea Bubble, tulip mania, Turing complete, Turing machine, WikiLeaks
Even Bitcoin blog CoinDesk notes: “Among the doubts facing Hyperledger is a perceived lack of clarity on what might be ultimately produced by the initiative.”391 If you click long enough, you’ll find a page where the participating companies have dumped their unfinished blockchain experiments.392 The main code contributor is Digital Asset Holdings; their joining announcement (on their own site, not hyperledger.org) gives as technical details only that Hyperledger is an append-only ledger and has an actual Bitcoin-style blockchain in it.393 (Digital Asset Holdings was founded by Blythe Masters, pioneer of the credit default swap, the financial instrument behind the global financial crisis of 2008 that may have provoked Nakamoto to finally release Bitcoin.) Sawtooth Lake: Intel’s contribution to Hyperledger.org replaces the blitheringly stupid and wasteful Proof of Work with something equally stupid but less wasteful, Proof of Elapsed Time,394 which might as well be called Proof of Buying An Intel CPU.
SUPERHUBS: How the Financial Elite and Their Networks Rule Our World by Sandra Navidi
activist fund / activist shareholder / activist investor, assortative mating, bank run, barriers to entry, Bernie Sanders, Black Swan, Blythe Masters, Bretton Woods, butterfly effect, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, commoditize, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversification, East Village, Elon Musk, eurozone crisis, family office, financial repression, Gini coefficient, glass ceiling, Goldman Sachs: Vampire Squid, Google bus, Gordon Gekko, haute cuisine, high net worth, hindsight bias, income inequality, index fund, intangible asset, Jaron Lanier, John Meriwether, Kenneth Arrow, Kenneth Rogoff, knowledge economy, London Whale, Long Term Capital Management, longitudinal study, Mark Zuckerberg, mass immigration, McMansion, mittelstand, money market fund, Myron Scholes, NetJets, Network effects, offshore financial centre, old-boy network, Parag Khanna, Paul Samuelson, peer-to-peer, performance metric, Peter Thiel, plutocrats, Plutocrats, Ponzi scheme, quantitative easing, Renaissance Technologies, rent-seeking, reserve currency, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, rolodex, Satyajit Das, shareholder value, Silicon Valley, social intelligence, sovereign wealth fund, Stephen Hawking, Steve Jobs, The Future of Employment, The Predators' Ball, The Rise and Fall of American Growth, too big to fail, women in the workforce, young professional
It accuses the bank of a macho culture in which the marginalization of women was endorsed and males received preferential and disproportionate promotions and pay.35 Many financial institutions settle lawsuits with multimillion-dollar payouts to avoid publicity-ridden trials that would uncover other injustices, such as lower compensation for the same type, amount, and success of work.36 At the time of the book’s completion the lawsuit was still ongoing. Blythe Masters, one of Wall Street’s top female executives, ended her twenty-seven-year career at JPMorgan after the bank reported the sale of the global commodities unit she had led to record revenues of close to $3 billion. She was previously the CEO of JPMorgan’s investment bank, and when the crisis erupted in 2007 she became the subject of public abuse, presumably at least partially because she stood out as being capable as well as noticeably attractive and feminine.37 The realities of the contemporary workplace are sobering and frustrating for a generation of women raised to believe that if they had an excellent education they’d have a merit-based career.
Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff by Christine S. Richard
activist fund / activist shareholder / activist investor, Asian financial crisis, asset-backed security, banking crisis, Bernie Madoff, Blythe Masters, buy and hold, cognitive dissonance, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, family office, financial innovation, fixed income, forensic accounting, glass ceiling, Long Term Capital Management, market bubble, money market fund, moral hazard, old-boy network, Ponzi scheme, profit motive, short selling, statistical model, white flight, zero-sum game
The protection buyer—in Wall Street parlance—makes regular payments over the life of the contract to the protection seller, who promises to make a lump sum payment to the insurance buyer if a security defaults. The cost of the insurance rises and falls minute by minute based on the market’s perception of the company’s credit quality. Default protection on a company with a triple-A rating, which MBIA had in 2002, could be purchased cheaply because the risk of default was perceived to be de minimus. Blythe Masters, a 26-year-old Trinity College graduate working at JPMorgan in 1995, is often credited with having invented CDS contracts. The contracts were created as a way for commercial banks to reduce their exposure to corporate borrowers. By purchasing protection against a default, the bank took on a position that would offset losses if a borrower defaulted. The market for CDS contracts, which didn’t exist before the mid-1990s, totaled $2.2 trillion by the end of 2002.
The Quants by Scott Patterson
Albert Einstein, asset allocation, automated trading system, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, Black Swan, Black-Scholes formula, Blythe Masters, Bonfire of the Vanities, Brownian motion, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, centralized clearinghouse, Claude Shannon: information theory, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, Doomsday Clock, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, fixed income, Gordon Gekko, greed is good, Haight Ashbury, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, index fund, invention of the telegraph, invisible hand, Isaac Newton, job automation, John Meriwether, John Nash: game theory, Kickstarter, law of one price, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, merger arbitrage, money market fund, Myron Scholes, NetJets, new economy, offshore financial centre, old-boy network, Paul Lévy, Paul Samuelson, Ponzi scheme, quantitative hedge fund, quantitative trading / quantitative ﬁnance, race to the bottom, random walk, Renaissance Technologies, risk-adjusted returns, Robert Mercer, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Sergey Aleynikov, short selling, South Sea Bubble, speech recognition, statistical arbitrage, The Chicago School, The Great Moderation, The Predators' Ball, too big to fail, transaction costs, value at risk, volatility smile, yield curve, éminence grise
Some incidental details, such as Muller’s victory and the amount bet, were created to add verisimilitude to the account. Muller is known to be the ace of the group, Asness the rookie. Other fund managers not named also frequently played in the game. 9 “I KEEP MY FINGERS CROSSED FOR THE FUTURE” Growing up in Seattle, Brown had: Interviews with Aaron Brown. Enter the credit default swap: “The $12 Trillion Idea: How Blythe Masters and the ‘Morgan Mafia’ Changed the World of Finance,” by Gillian Tett, FTMagazine, March 25–26, 2006. The first Bistro deal: “Credit Derivatives: An Overview,” by David Mengle, International Swaps and Derivatives Association, published for the 2007 Financial Markets Conference held by the Federal Reserve Bank of Atlanta, May 15, 2007. That solution came from a Chinese-born quant: “Slices of Risk: How a Formula Ignited Markets That Burned Some Big Investors,” by Mark Whitehouse, Wall Street Journal, September 12, 2005.
How Markets Fail: The Logic of Economic Calamities by John Cassidy
"Robert Solow", Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Blythe Masters, Bretton Woods, British Empire, business cycle, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, different worldview, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Kickstarter, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative ﬁnance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game
The 1997 deal accomplished several things: it removed $9.7 billion in credit risks from Morgan’s balance sheet, freeing up capital the firm could use elsewhere; it transferred these risks to other financial institutions that had more of an appetite for them; and it created securities that could be traded, thus allowing investors to get exposure to an asset class—bank loans—that they had previously been excluded from. To a traditional banker, the idea of separating risk from lending seemed revolutionary. In her informative account of the recent development of the credit markets, Fool’s Gold, Gillian Tett, a reporter at the Financial Times, describes the thinking of Blythe Masters, one of the members of the Morgan team. Separating lending and risk “would overturn one of the fundamental rules of banking: that default risk is an inevitable liability of the business . . . For the first time in history, banks would be able to make loans without carrying all, or perhaps even any, of the risk involved themselves.” Masters’s ingenuousness, as reported by Tett, is almost charming.
Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society by Will Hutton
Andrei Shleifer, asset-backed security, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Blythe Masters, Boris Johnson, Bretton Woods, business cycle, capital controls, carbon footprint, Carmen Reinhart, Cass Sunstein, centre right, choice architecture, cloud computing, collective bargaining, conceptual framework, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, debt deflation, decarbonisation, Deng Xiaoping, discovery of DNA, discovery of the americas, discrete time, diversification, double helix, Edward Glaeser, financial deregulation, financial innovation, financial intermediation, first-past-the-post, floating exchange rates, Francis Fukuyama: the end of history, Frank Levy and Richard Murnane: The New Division of Labor, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, Hyman Minsky, I think there is a world market for maybe five computers, income inequality, inflation targeting, interest rate swap, invisible hand, Isaac Newton, James Dyson, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, liberal capitalism, light touch regulation, Long Term Capital Management, Louis Pasteur, low cost airline, low-wage service sector, mandelbrot fractal, margin call, market fundamentalism, Martin Wolf, mass immigration, means of production, Mikhail Gorbachev, millennium bug, money market fund, moral hazard, moral panic, mortgage debt, Myron Scholes, Neil Kinnock, new economy, Northern Rock, offshore financial centre, open economy, plutocrats, Plutocrats, price discrimination, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, railway mania, random walk, rent-seeking, reserve currency, Richard Thaler, Right to Buy, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, Rory Sutherland, Satyajit Das, shareholder value, short selling, Silicon Valley, Skype, South Sea Bubble, Steve Jobs, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, unpaid internship, value at risk, Vilfredo Pareto, Washington Consensus, wealth creators, working poor, zero-sum game, éminence grise
Consequently, the team was much less confident about the nature of the risks it was buying or what would happen in different parts of the United States in the event of a house price downturn. One default could be correlated with another. But Bayerische demanded the deal, so Morgan reluctantly took it on – with an extra funding cushion and complex risk hedging. Nevertheless, ‘We just could not get comfortable,’ admitted Blythe Masters, the executive in charge. Over the next ten years Morgan, and Masters in particular, would wonder how other banks could make the securitised debt vehicles pay. The answer was that they dropped their internal controls, bent VaR and expanded their balance sheets at any price. They were aided and abetted by the credit-rating agencies offering spurious Triple A ratings using precisely the same risk-assessment techniques, having been paid by the institutions doing the issuing.
The Finance Curse: How Global Finance Is Making Us All Poorer by Nicholas Shaxson
activist fund / activist shareholder / activist investor, Airbnb, airline deregulation, anti-communist, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Blythe Masters, Boris Johnson, Bretton Woods, British Empire, business climate, business cycle, capital controls, carried interest, Cass Sunstein, Celtic Tiger, central bank independence, centre right, Clayton Christensen, cloud computing, corporate governance, corporate raider, creative destruction, Credit Default Swap, cross-subsidies, David Ricardo: comparative advantage, demographic dividend, Deng Xiaoping, desegregation, Donald Trump, Etonian, failed state, falling living standards, family office, financial deregulation, financial innovation, forensic accounting, Francis Fukuyama: the end of history, full employment, gig economy, Gini coefficient, global supply chain, high net worth, income inequality, index fund, invisible hand, Jeff Bezos, Kickstarter, land value tax, late capitalism, light touch regulation, London Whale, Long Term Capital Management, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, Mont Pelerin Society, moral hazard, neoliberal agenda, Network effects, new economy, Northern Rock, offshore financial centre, old-boy network, out of africa, Paul Samuelson, plutocrats, Plutocrats, Ponzi scheme, price mechanism, purchasing power parity, pushing on a string, race to the bottom, regulatory arbitrage, rent-seeking, road to serfdom, Robert Bork, Ronald Coase, Ronald Reagan, shareholder value, sharing economy, Silicon Valley, Skype, smart grid, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, special economic zone, Steve Ballmer, Steve Jobs, The Chicago School, Thorstein Veblen, too big to fail, transfer pricing, wealth creators, white picket fence, women in the workforce, zero-sum game
Credit default swaps weren’t insurance or bets, the obliging Potts opined, in the process rubber-stamping the non-regulation of CDSs in London, and opening the gates to unlimited, unregulated betting on the credit defaults – the life and death – of companies. This overturned one of the most fundamental rules of banking: that a bank should have ‘skin in the game’, carrying some of the default risk of a loan on its own shoulders. The implications were immense. ‘The business opportunities created by credit derivatives,’ purred Blythe Masters, a top member of the JP Morgan team, ‘is [sic] frankly staggering.’ In 1996, the year before Potts wrote his opinion, there were an estimated $150–200 billion worth of CDSs already out there, already a very large number. Ten years later, as the financial crisis began to bite, that number had risen three hundredfold to over $60 trillion – roughly equivalent to the gross domestic product of planet Earth.26 So the banks believed they had obtained an exemption from regulation for these exciting new instruments – at least in London.